Interest rates have fallen substantially over the last 10 years, and reached all-time lows during 2020. 

    Even with the increase in government yields since the start of the year, they remain at historically low levels. 

    As we covered here, this means investment portfolio return expectations are significantly lower than they were 10 years ago.

    But what does this mean when it comes to helping clients achieve their goals?

    Let's take the example of a client looking to take annual withdrawals from their pension of 3.5 per cent, inflation-linked, for 25 years - a fairly typical withdrawal rate.

    In this case, the impact of lower rates is significant.

    Our investment partner Hymans Robertson analysed projections for a balanced portfolio with 50 per cent in bonds and 50 per cent in equities. 

    They mapped out thousands of different potential economic scenarios in order to understand the range of potential outcomes. 

    They did this starting from today's market conditions (that is, factoring in low interest rates), and with the impact of low interest rates stripped out, (so more similar to conditions 10 years ago).

    What they found was the likelihood of a client achieving a 3.5 per cent withdrawal rate drops from 94 per cent to 77 per cent due to today’s low interest rate environment.

    Interest rate assumption

    With today’s low interest rates

    Low interest rates stripped out

    Goal likelihood

    77 per cent

    94 per cent

    Source: Hymans Robertson to December 2020. Notes: Impact of current low interest rates on achieving 3.5 per cent inflation-linked withdrawal rate for 25 years. Net of adviser, platform, and portfolio charges.

    Sustainable withdrawal rates

    Another way of looking at this is the sustainable withdrawal rate. 

    Let’s assume a client is working towards their retirement goals and is targeting at least an 85 per cent chance of success, and has chosen a withdrawal rate to match.

    In less challenging interest rate environments, this would suggest a sustainable, inflation-linked withdrawal rate of 4 per cent.

    But with today's low interest rates, the sustainable rate is only 3 per cent.

    In a nutshell, the income achievable has fallen by a quarter. This is a large drop which many clients may find difficult to accept.

    So what can advisers do to solve this? 

    For us, it comes back to managing client expectations and making sure current market conditions are built into portfolio construction.

    Using old assumptions may lead to unrealistic client expectations, with traditional asset mixes having less relevance in this environment.

    The way to tackle this is to place client goals at the heart of your solution.

    In IMX, our managed portfolio service, we take an outcome-led approach to portfolio design which reflects the latest forward-looking market expectations and helps make sure portfolios are aligned to client goals.

    We also provide a modelling tool to support advisers and their clients in understanding how the selected portfolio and the current market conditions impact the likelihood of clients achieving their goals.

    This allows advisers to stay well informed on the most appropriate portfolio for client goals, and means there shouldn't be any nasty surprises down the line for you and your clients.