In the back
only the amount of money you need to
fund it, leaving the rest invested.
gardener – maybe a bit of everything?
Will you still work in some capacity?
I say this in every article I write, but
it is really important to try to cost out
the type of retirement lifestyle you’re
after, simply because you can then see
how much you will need from your
pension pot to fund these activities.
Once you can put an annual figure
on your outgoings, you can start to
allocate your pension in terms of a
monthly or annual drawdown.
If you continually take out £40,000
a year (and don’t forget that your
pension is taxed as if it were income),
when will it run out? If spending
£40,000 a year means your pension
runs out when you’re 80, then you may
have to look at spending less, or opt for
a more basic lifestyle in your 80s.
The 4% rule
Traditional wisdom suggests you can
take out 4 per cent of the value of
your portfolio each year, adjusted for
inflation, in perpetuity. That’s fine
for people with large pension funds,
but given the average pot in the UK is
around £100,000 at retirement, this
will only provide an income of £333
a month. You would need a pension
of £1m to fund a £40,000 per annum
income using the 4 per cent rule.
And I reiterate, work out the costs of
your desired lifestyle and withdraw
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[ PLATFORMS & PENSIONS ]
52 / 53
Re-thinking risk
The double-edged sword of retiring
these days is that we are all living
longer. Imagine going on a two-week
holiday with your travellers’ cheques
and then being told you’ll have to stay
on holiday for four weeks instead.
Hooray! But it won’t be much fun in
the second fortnight when you have to
sleep on the beach and eat out of bins
because you’ve run out of money.
Nowadays, our pensions are not
guaranteed for life and we are living
longer, so we need to adapt to the
new reality.
One way you can make a finite
amount of money last longer is to keep
your entire pension fund invested
and, rather than move into low risk/
low return investments, maintain a
relatively higher risk stance throughout
the first half of retirement.
Back in the day, the popular advice
was to reduce your portfolio risk as
you approached retirement and then
move all your holdings into income-
generating investments.
This strategy not only reduces the
risk of larger drops in the value of
your pension pot, but prevents you
from making larger gains.
This is old-school thinking and needs
to change because the great thing
about our increased longevity is that
Nowadays, our pensions are
not guaranteed for life and
we are living longer, so we
need to adapt to the new
reality
So, please question the conventional
wisdom of “glidepaths” in your
retirement strategy. Risk and return go
hand in hand and it’s worth aiming for
some portfolio growth in retirement,
even though it will be a bumpier ride.
Sequencing risk
we have a longer investment horizon. “What happens if there’s a crash
Our pension portfolio can afford to be and all my portfolio is in higher-risk
riskier earlier in retirement because
investments?” I hear you all shout in
we have a 20-year time horizon in our unison.
mid-60s, something our parents and
That’s absolutely true. There is the
grandparents didn’t.
very real likelihood that at some stage
At retirement, our pension funds
in retirement, there will be a market
are the biggest they will ever be, so an correction or full-blown crash and your
extra 3 to 5 per cent of growth in the
pension fund could halve in value.
portfolio makes a big difference that
could buy you years of extra income.
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