The risk of running out of money during retirement

Nearly half of all Australians have exhausted their pension savings by their 75th birthday. The Australian environment is different to the UK landscape, but this is still a startling statistic. Flexi- access drawdown is becoming increasingly popular for UK retirees. Since 2015 there have been no limits on withdrawals.

Suitability reports must now clearly state that income levels may not be sustainable, but how real is the risk?

Impact of performance on different income levels

The chart below assumes four different withdrawal rates and 6% p.a. fund growth:

Withdrawing £5,000 each year (increased by 2.5% p.a.) would cover a longer than average retirement. After 30 years, there’s still more than £50,000 left in the fund. At £6,000 p.a. it’s not quite so rosy. There’s enough to cover average life expectancy for someone at 65, but not much more. Withdrawals of £8,000 p.a. and £10,000 p.a. would exhaust the fund in less than 20 years.

A real life example

In this example, the performance of the FTSE All Share index between 2000 and 2013 is used to map returns. The income assumptions are unchanged from the previous example.

On this basis, a completely different picture emerges.  In the space of 13 years, even the lower withdrawal rates of £5,000 p.a. and £6,000 (increasing at 2.5% p.a.) mean that the fund value of would fall to less than £40,000 by the end of the period. In the case of the higher income levels, the fund would run out of money before the end of the 13 year period.

These charts demonstrate that retirement can be an unforgiving environment. Market falls in the early years can be devastating. Of course, clients could invest in risk free assets, but these are unlikely to keep pace with inflation.