Embrace the twists and turns of life - without the bumps

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Smoothed Funds are typically thought of as a solution for extremely cautious investors. And while it’s true that they offer investors the emotional safety net of a more comfortable journey towards potential attractive returns, their benefits go far beyond calming the nerves of those more concerned about possible losses than probable gains. 

For those nearing the end of their ‘wealth window’ – the period in which people actively earn and grow their retirement funds – Smoothed Funds offer soon-to-be retirees the chance to flatten some of the bumps in the road as they approach the final stretch of their careers.  

Using low-cost market index funds as a primary investment vehicle for long-term returns is compelling. But clients must understand that volatility is a feature of investing and, therefore, the price of admission to the long-term gains available simply by tracking the market. On the long, winding road to retirement they’ll have to ride over a few sleeping policemen to get to meet their goals. 

Approaching the 'wealth window'

For many investors, the Retirement Risk Zone is unavoidable. This is the period in which managing the variability and volatility of returns is key, especially in those savings that support their short- and medium-term goals.  

Recent research by Next Wealth and BNY Mellon^1. suggests the average age at which advised clients move into full retirement is 61. A 55-year-old planning to finish work at 61, therefore, has a ‘wealth window’ of just six years left to secure their ideal future in retirement.

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When clients understand they have more stable assets behind their short- and medium-term goals, it is easier to hold high returning or more volatile assets that better keep them on track to their longer-term goals and desired retirement. This is where we have seen advisers use Smoothed Funds for a much broader segment of their client base.  

How could Smoothed Funds help to cushion volatility

With cash and cash-like investments used for supporting shorter-term goals and needs that may occur in the next year or two, there is a compelling case to consider the stability offered by Smoothed Funds to support medium-term goals (over the next 4 to 7 years) for those planning to access retirement savings in some form.  

The steady growth of the underlying multi-asset funds to offset inflation, coupled with the provision of some shelter from the risk of a market downturn arriving at the wrong time, make them a valuable tool in the adviser’s toolkit to best ensure the road to and through retirerment is as pothole-free as possible.  

Smoothing out the road to and through retirement

According to the Financial Conduct Authority’s Financial Lives Survey 2022, people generally begin taking advice from age 45 and, in many cases, take advice for the first time between the ages of 55 and 64. 

This suggests that advisers must think about numerous timescales across their client base, and there is no single investment product that will fulfil all objectives.  

Advisers need an array of tools they can use to fund the various requirements of their clients. Smoothed Funds have emerged as a useful instrument to help provide some resilience to portfolios in the approach to, and in, retirement.  

By using them as part of the solution curated for the client, advisers can avoid the need to sell equities in a market downturn. This reduces the risk of depleting the portfolio due to poor market performance in the early years of retirement.  

Similarly, they offer the potential for a stable return, allowing clients to confidently take pension income without unnecessarily worrying about sharp market drops affecting their nest egg.  

With Smoothed Funds in the toolkit, advisers can help clients end their career with confidence and peace of mind through the otherwise nerve-wracking wealth window, allowing them to sit back, relax and enjoy the road to retirement. 

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1. BNY in partnership with Nextwealth:
   'Retirement advice in the UK: Time for change? Revisiting retirement strategies amid changing regulation, markets and client needs' - November 2024 | Issue 7