The Office for National Statistics (ONS) reports that the average life expectancy for a male is 85 and 87 for a female. With the length of time retired nearly equalling the length of our working lives, how do we ensure that our money lasts?
Most importantly, and particularly as we are seeing now with Covid-19, people’s plans can change quickly and pension pots are being dipped into earlier or more readily, as featured in the latest Smart Money.
For those at or near retirement, our job as Wealth Planners is to ensure that the funds you have earmarked for retirement can provide a sustainable income throughout your retirement years whether that might be 20 or 40 years, and with enough flexibility to cater for life’s unexpected changes.
Introducing the 4% Rule
In 1994, William Bengen published a study setting out what is known as the 4% rule. The study used 50 years’ worth of financial data and suggested that if an investor withdrew their money at a rate of 4% per annum, adjusting their withdrawals for inflation, then their nest egg should last 30 years. So, in theory, a saver with £500,000 could begin drawing £20,000 per annum, increasing this over time in line with inflation.
This all sounds simple enough however, 27 years have passed since this was published and we now need to make some adjustments to this theory:
- The ONS also suggests that there is around a 10% chance of living beyond this 30-year period (96 for men and 98 for women).
- Life’s unpredictability can lead to ad-hoc spending needs. For example, it was suggested that all retirees were going to want a sports car when George Osborne introduced the pension freedom legislation in 2015!
- Not everyone will want to retire at 65. If we decide to retire sooner, then we may need to put less pressure on our pots in the early years to ensure they last. Conversely, retiring later may allow greater withdrawals in the future.
Considerations for a successful and sustainable retirement
- Make a plan. While Bengen’s study may provide a loose rule of thumb, it is still a starting point. By just having a retirement plan to begin with will get you halfway there. This plan needs to be realistic and actionable for it to succeed. It is also crucial to update and adjust your plan over time as your circumstances
- Stick to the plan. Adjustments to a plan are inevitable but throwing the plan out of the window can be disastrous. March 2020 was a great example of how having a suitable plan in place, while being invested appropriately, and sticking to it can allow you to ride out even the most turbulent of times.
- Don’t compare to others. Everyone is different. Therefore, it is best not to take advice or suggestions from people who are in a different situation to you. Work with a professional who looks at your individual scenario to help create your Wealth Plan. By making use of a variety of tools, including cashflow modelling, they can review and project the likely sustainability of your retirement plan.
- Invest appropriately. Typically, we have the time horizon to tolerate and recoup losses as we accumulate assets throughout our working life. As we approach and enter retirement, this ability is significantly diminished. This therefore often sees a need to shift from a growth focused strategy to one aimed at capital preservation and income generation.
- Seek advice and support. The sustainability of your withdrawal rates should be monitored and adjusted over time, while also taking into account your changing needs through retirement and the inevitable ups and downs of investment markets. Assessing this requires an experienced and objective opinion. A wealth planner can help advise and guide you through retirement suggesting suitable withdrawal rates, tax planning opportunities, and asset allocation all while considering your overall circumstances.
We seek to ensure that you enter retirement with an effective Wealth Plan and a suitably invested portfolio to match. We know that your needs and objectives will change over the years, however we are here to guide you as we look to ensure that you can receive the income you need throughout your retirement years.
Related article: Click here to read “If Money Could Buy You Time” by Sharon Bray
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General Disclosures: This article is based on current public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur.
