How to avoid running out of money in retirement In our last blog, we looked at the challenge faced when you’ve just retired to ensure you have enough money to last you for the rest of your life. The challenge is akin to climbing a mountain. Your working life is the ascent, retirement is at the top, and the descent is your retirement. The end of the descent is the end of your life, so you want to make sure you have enough money and assets to last. We want to look here at some strategies to help get you down safely. And here’s one thing we’d advise you not to do: use a calculator. More specifically, avoid using one of the commonly available retirement calculators, which are usually based on cashflow projections. Expert Dr William Bernstein calls any tool like this a “retirement calculator from hell”. He notes that “these calculators all make the same erroneous assumption – that your expected rate of return is the same each and every year”. The real world doesn’t work that way. How much should you withdraw? The key question that needs answering is how much can you withdraw from your portfolio and avoid the risk of running out. This is what Nobel Prize winner William Sharpe calls the single “nastiest, hardest problem in finance”. Our answer here at Proposito is to look at historical data to explore how well a withdrawal approach might fare under a wide range of market conditions. We’re following the example set by Bill Bengen, an aeronautical engineer turned financial adviser. Bengen’s idea is very simple; consider how your withdrawal would have fared in good times and bad times. Then, choose a conservative approach that survived most or all situations over the last 100 years or so. You’ll still have to adjust along the way, but you can be confident that market conditions would have been at their worse in previous times. The focus on worst case scenario is important. It takes into account the Great Depression and two World Wars, as well as the more recent Dotcom bubble, the Credit Crunch and the Covid-19 pandemic. We can also bring in the concept of probability of success (also known as success rate). The success rate gives us the percentage of times that a given withdrawal approach has lasted the full retirement period. Keep continually assessing Given the wide variations, it is of course essential to continually assess the portfolio against market conditions, making adjustment as necessary. That’s where the advisers here at Proposito come in. If you read our last blog, you’ll remember that in our mountaineering analogy, we are the financial Sherpas who guide you (and your assets) back down the mountain. One of the biggest challenges in working out how to make your money last is not knowing how long you will need it for. In other words, how long you will live. In retirement planning, it’s best to think of it in terms of survival probability. This gives us an idea of the chances you’ll live to a certain age. According to the Office for National Statistics there’s a 14% chance a 65-year-old male will celebrate his 95th birthday, and that rises to 20% for a female of the same age. For a couple of the same age, the probability that at least one of them will live to age 95 is even higher – 37%! Ideally, a withdrawal plan should go right through to the tail end, where an individual or a couple only has a 10% to 20% probability of surviving. The goal isn’t to precisely predict how long you may live. The goal is to address the risk that you outlive your wealth. Creating your sustainable withdrawal strategy This is the plan that tries to ensure you don’t run out of money, and is unique to each individual and each couple. It needs to take into consideration: How much income you want or need Your investment plans How long you are likely to live Fees and taxes you will need to pay along the way Legacies you’d like to leave It’s a good idea to draw up some principles here, that form a Withdrawal Policy Statement, that will guide the ongoing withdrawal strategy. The policy should be broad enough to encompass unexpected events as they happen and specific enough, so your adviser is rarely in doubt about the action to take when things change. And, of course, you can change it along the way, but it acts as a starting point and ongoing guide, as well as an anchor point when events change. Keeping your withdrawal strategy on track Creating a strategy is one thing, monitoring and keeping it on track is another. To borrow the words from former President Dwight Eisenhower, “plans are worthless, but planning is everything”. Traditional retirement plans have a fundamental flaw – they are out of date the minute you create them so they have to be regularly updated, and that is where the Proposito team can help. So, you’ve gone up the mountain, you’re poised at the top for, what we hope, will be a very long and happy descent. We’d love to help you along the way. And for some of you, we already are. To find out more about financial planning, money coaching, and particularly how we can help if you are approaching retirement, or would like to some expertise to help you navigate your way after retirement, please get in touch with the team here at Proposito. If we have already helped develop a retirement strategy for you, then maybe you may know of others that may benefit from our expertise. So please pass this on and let us navigate them up and down the mountain safely too.