58 / 59
In the back
Case study
Sarah retires today with £500,000 in her pot
and wants to draw down £2,500 per month.
Assuming 6 per cent growth per
annum, her pot will provide her
desired income until the age of 89.
Her friend Carol who has just retired
also draws down £2,500 a month, but
due to a market crash, her pension
pot has dropped 30 per cent. In her
case, at 6 per cent growth per annum,
her money runs out when she is 81 –
eight years earlier.
To ensure her money doesn’t run
out early, Carol will have to reduce
her monthly drawdown to £1,750 per
month, £750 less than Sarah.
This is a crude example of what
happens if a market crash and
retirement coincide. Given there have
been regular crashes over the last 20
years, the chances are at least one will
affect your retirement.
The huge difference in outcomes an
investor can experience at retirement
due to stock market conditions is
known as sequencing risk.
IMPACT OF MONTHLY £2.5K DRAWDOWNS
ON £350K PENSION POT
Growth rate of 4%
p.a.
Growth rate of 6%
p.a.
Growth rate of 8%
p.a.
£350k
£300k
£250k
£200k
£150k
£100k
£50k
0
67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89
TRUSTNET
[ PLATFORMS & PENSIONS ]
index continued to fall and the bear
market feels like it is nearer
to the beginning than the
end.
Each crash seems to come with
its own unique fundamentals,
so history is not always
helpful in trying to
understand what
will happen going forward.
What we do know is this crash is
wreaking havoc with businesses
all around the world and those
unearned revenues cannot be
replaced. It may yet wipe out whole
sectors, such as travel, hospitality
and retail, at least in the short term.
Governments are putting in place
unprecedented levels of support to
try to hold economies together.
In short, this crisis is complex and
unpredictable, so trying to buy low
and sell post-recovery is like playing
Russian roulette.
Avoid lifestyling funds
When I first heard about lifestyling
funds, I thought they sounded like
a good idea. Effectively, you invest
in a fund that has your planned
retirement date in mind and it
gradually changes its asset-allocation
model from risk-on to risk-off as you
approach the point you draw your
pension. Also called target-date
funds, these are popular in the US.
Each crash or crisis seems
to come with its own
unique fundamentals, so
history is not always helpful
in trying to understand
what will happen going
forward
However, imagine you’re in a target-
date fund with a couple of years to
go until you retire. The fund takes a
30 per cent hit and you notice it isn’t
recovering as fast as you expected.
That’s because the asset-allocation
trustnet.com