Decumulation

The ultimate outcome for any member is a secure, long-term income stream, but there are risks to consider. 

Longevity

While many people concentrate on the unpredictability of their investments, the most significant risk lies in their time horizon, commonly known as longevity risk. By 2035, approximately 17 million people in the UK will be 65 or older,¹ and nearly 1 in 5 individuals expect to live to 100 by 2040.² Considering the ageing population and uncertainty surrounding life expectancy past 80 years, it is advisable to plan for an investment time horizon extending 30 or more years beyond retirement to help ensure financial sustainability.

Spending needs

Retirement planning poses challenges that extend beyond just accounting for the element of time; it also requires a thoughtful consideration of spending needs. Research conducted by the Pensions and Lifetime Savings Association sheds light on retirement living standards, indicating that pensioners should aim for a minimum annual income of £12,800 to maintain a basic standard of living and £23,300 for a more comfortable, moderate lifestyle.³ 

These living standards spiked by 20% in 2022 due to high inflation, adding pressure to retirement funds. Although inflation seems to be easing with a drop in the consumer price index to 4.6% from its 2022 peak, the food and nonalcoholic beverages category maintains an inflation rate over 10% as of October 2023.⁴ Given that this category represents the second-largest portion of a retiree's spending, retirement funds remain exposed to ongoing inflationary pressures.

Source: “Expenditure: Spending patterns of UK households,” Office for National Statistics, 2023. (ons.gov.uk)

Another consideration involves spending needs at various points in time. It was thought that retirement spending follows a 'U-shaped' trajectory, implying an initial surge, subsequent decrease, and a final uptick driven by mounting medical costs. However, a study by the Institute of Fiscal Studies challenges this, revealing that retirement spending tends to stay relatively stable in real terms.⁵ Findings show a modest increase in spending up to about age 80, followed by a plateau or decline. Despite the theoretical perspectives and assumptions, spending patterns in retirement ultimately come down to the individual, and their investment strategy must cater to these freedoms. 

How do we mitigate these risks?

To address the challenges of longevity risk and future spending requirements, SEI’s Flexi Default Strategy uses a goals-based approach—breaking down members’ anticipated spending needs into eight-year phases. 

Before delving into post-retirement considerations, it is crucial to recognise the significance of the growth phase. Instead of solely focusing on volatility, this phase prioritises mitigating longevity risk by fully allocating to growth assets. A key component in achieving a comfortable retirement is maximising this pre-retirement phase.

Once in retirement, allocations in terms of present value—spanning equity, multi-asset, and stability—are employed to ensure we fulfil these future spending requirements.

The initial eight-year spending necessities for a member are addressed by stability assets—as found in the light blue allocation below. These assets contain a greater allocation to shorter duration fixed income, modest amounts of credit, and a small allocation to defensive equities—offering greater certainty in meeting short-term spending needs. From an ongoing investment management perspective, we may actively intervene during times of extreme market stress to ensure we deliver that stability.

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In the subsequent eight-year phase, spending requirements are addressed through the slightly darker blue multi-asset allocation. This allocation looks past immediate spending needs and aims to fund a more comfortable retirement down the line. A complete allocation to stability assets at this phase may introduce the risk of foregoing further gains.

At point of retirement, we support long-term spending with an allocation to equities, as shown in the dark blue bars. At SEI, we prefer an active approach to investing in equities. This means focusing on proven sources of return that are universal and persistent. It is important to note that this approach aims to enhance value over time while also managing risks by avoiding market-weight bubbles—a common issue with passive management. Equities can also provide protection in an inflationary environment, as rising revenue and earnings benefit investors.

Key takeaways

• Highlighting the importance of planning for longevity risk is crucial when deciding on the right investment strategy.
• Retirement planning goes beyond time, with spending patterns and inflation impacting annual income targets.
• A well-designed investment strategy should consider more than just traditional risk and return characteristics, addressing these critical needs.

 ¹  Tom Rutherford, ‘Population ageing: statistics’, House of Commons Library,  10 February 2012. commonslibrary.parliament.uk/research-briefings/sn03228/ 

 ² ‘Future of an ageing population’, Government Office for Science, 7 July 2016. gov.uk/government/publications/future-of-an-ageing-population

³ ‘Picture Your Future: Retirement Living Standards’, Pensions and Lifetime Savings Association, 2023. retirementlivingstandards.org.uk 

⁴  ‘Dataset: Consumer price inflation time series’, Office for National Statistics, 2023. ons.gov.uk/economy/inflationandpriceindices/datasets/consumerpriceindices

⁵ Rowena Crawford, Heidi Karjalainen, David Sturrock, ‘How does spending change through retirement?’, Institute of Fiscal Studies, 19 May, 2022.  ifs.org.uk/publications/how-does-spending-change-through-retirement-0

Important Information:

This is a Marketing Communication. This webpage has been created in relation to the SEI Master Trust, an occupational pension scheme which is authorised by the Pensions Regulator. The trustee of the SEI Master Trust is SEI Trustees Limited. SEI Trustees Limited has appointed SEI Investments (Europe) Ltd (“SIEL”) as investment adviser to the SEI Master Trust and pursuant to its investment advisory agreement. This information is issued and approved by SEI Investments (Europe) Ltd (“SIEL”) 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR. This advert and its contents are directed at persons who have been categorised by SIEL as a Professional Client and is not for further distribution. SIEL is authorised and regulated by the Financial Conduct Authority. While considerable care has been taken to ensure the information contained within this webpage is accurate and up-to-date and complies with relevant legislation and regulations, no warranty is given and no representation is made as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. The information in this webpage is for general information purposes only and does not constitute investment advice. You should read all the investment information and details on the funds before making investment choices. Please refer to our latest Prospectus (which includes information in relation to the use of derivatives and the risks associated with the use of derivative instruments), Key Investor Information Document, Summary of UCITS Shareholder rights (which includes a summary of the rights that shareholders of our funds have) and the latest Annual or Semi-Annual Reports for more information on our funds, which can be located at Fund Documents (https://seic.com/en-gb/fund-documents). And you should read the terms and conditions contained in the Prospectus (including the risk factors) before making any investment decision. If you are in any doubt about whether or how to invest, you should seek independent advice before making any decisions. The UCITS may be de-registered for sale in an EEA jurisdiction in accordance with the provisions of the UCITS Directive. Past Performance does not predict future returns. Investment in the range of the SEI Master Trust’s funds are intended as a long-term investment. The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested. This document and its contents are for Institutional Investors only and not for further distribution. The SEI Strategic Portfolios are a series of the SEI Funds and may invest in a combination of other SEI and Third-Party Funds as well as in additional manager pools based on asset classes. These manager pools are pools of assets from the respective Strategic Portfolio separately managed by Portfolio Managers which are monitored by SEI. One cannot directly invest in these manager pools.