Retirement Dilemma

Pension drawdown downturn
If you’re like me and chosen to retire in the last couple of years and begun drawing down an income from your modest pension fund, then you might be feeling a little bit wobbly right now…

What is the appropriate response to a significant downturn in the stock market?

If you’re like me and chosen to retire in the last couple of years and begun drawing down an income from your modest pension fund, then you might be feeling a little bit wobbly right now… With the weakness of the pound, the Bank of England stepping in to buy bonds and the equities market taking a hammering, what looked like a reasonable drawdown strategy one or two years ago, suddenly feels more uncomfortable, risky and maybe even reckless. Even if, like me, you managed to reduce spending to more modest levels before you made the jump into retirement, the idea of withdrawing more funds from a greatly reduced investment pot feels counterintuitive and downright scary!!

As a working example, say we started with a retirement pot of £300,000 and decided to withdraw 5% per annum so £15,000 without any other income and with tax of 25% on £2,500 or £625 (the difference between the personal allowance of £12,500 and £15,000) this would give you a monthly income of nearly £1,200.

Assuming a fairly stable equities market, we could assume that over the next ten or twenty years we would get average growth of 5% or greater – as such our £300,000 would be relatively stable. Indeed, over the last decade or so, the average return has been in the order of 9%, and so we would not only not see our fund shrink, we would see a healthy growth – 4% growth compounded over 10 years, would leave our pot standing at £444,000 and over 20 years it would be a whopping £658,000 over double what we started with….

So just to be clear, if the market performed over the next 20 years as it has over the last 20 years, and we withdrew only 5%, then we would be very comfortable at 80!! This of course is a simple example and doesn’t take account of the vagaries of the market, inflation, or potential capital costs we might incur as we move through retirement.

Let’s take another scenario where we experience a “correction” or even a “crash” where say 20% is wiped from our fund in the early years of drawdown. Suddenly our £300,000 is £240,000 and now our £15,000 is now 6.25% quite a bit above the recommended maximum to ensure your money doesn’t run out in retirement. Let’s assume that this downturn lasts for three years with no growth to speak of – by the end of year three, we are down to £195,000 and our £15,000 withdrawal is now 7.7%! This could be even worse if we’ve built in inflation to our calculations and the £15k increases by 10% or 20% making the situation worse!

It is clear that if, like me, you have a modest pension fund and the market and economies are working against you, it will be necessary to make some adjustments to your drawdown strategy to protect yourself as best as you can.

Other options

Firstly, most retirees have some form of cash reserve – this could be in the form of savings or liquid assets. It makes sense to spend these first and hold off or reduce fund withdrawals, while the market is depressed.

The issue is, that the more you withdraw, the harder it is to recover once the upturn arrives. It’s not the 20% that your portfolio first dropped, to get back to £300,000 from your theoretical year three £195,000 you now need a 33% uplift to recover your losses.

So the first thing I’m considering, is drawing on cash reserves to help ride out the dip that’s upon us. This strategy allows me to make tactical changes to my drawdown, minimising the drop in fund value. The minimum we should do is reduce our drawdown back to 5% maximum, and frankly probably 4% is more prudent. This would mean dropping from £15,000 to £12,000 at 5% of the new valuation or at 4% a more modest £9,600! One of the positives of this strategy, is that you won’t pay any income tax. At 12k you would be £200 a month poorer, which will require savings elsewhere – a topic of future blog posts.

Secondly, if you are increasing your drawdown annually by the amount of inflation, this isn’t sensible when markets are depressed. It has a knock-on effect which compounds over time, so for me there will be no increases in drawdown based on inflation.

What else can be done?


Often, retirees ignore the value tied up in their home – maybe you are considering downsizing at some point in the future? Well, perhaps now is the time to grasp the nettle and sell up, thereby releasing capital. The housing market is still fairly buoyant, and downsizing could free up enough to top up your investments and help you ride out the downturn.

Equity release

Alternatively, you might want to consider equity release, which is essentially a loan secured against you the value of your house. This might sound counterintuitive, taking on what is effectively debt, but assuming you need some liquidity, have equity in your home, and you don’t want to move in the near future, equity release can work very well for some folk. I plan to do a separate blog soon, providing more detail on equity release – how it works the pros and the cons and under what circumstances it might make sense to consider as a financial strategy.

The most important message is – don’t ignore what’s happening and hope it’ll all be OK. Keep on top of your numbers and your budgets. If you’re informed, you’ll be better prepared to ride out the market downturns, such as the one we’re in, and be able to take advantage of the upturn when comes – which it surely will!

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