Why retirement spending is a minefield

There are two distinct phases to the wealth management process — there’s the accumulation phase, when you’re building your wealth, and there’s the decumulation phase, when you’re effectively living off that wealth. A video on the Bloomsbury Wealth YouTube Channel.

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Transcript: Robin Powell & Abraham Okusanya/ Financial Analyst.

RP: There are two distinct phases to the wealth management process — there’s the accumulation phase, when you’re building your wealth, and there’s the decumulation phase, when you’re effectively living off that wealth. Now, we tend to focus on accumulation phase, but in many ways it’s decumulation which presents a bigger challenge. Mountaineering provides us with a useful analogy. There are more deaths and accidents coming down the mountain than climbing up it. And it’s the same with wealth management.

AO: In the accumulation phase — you have options. So you can contribute more into your portfolio, you can delay your retirement, you can take risks, different risk levels in your portfolio — so there are options there. But once an individual makes the decision to retire, once going back to work is no longer an option, then you have this challenge of having so many unknowns. We don’t know what investment returns are going to be in the future, we don’t know what inflation’s going to be; how the cost of living is going to rise, especially over a long period of time; and then, of course, the most important question: we don’t know how long you’re going to live for.

RP: So, you have fewer options in decumulation, and you also have some big unknowns. It’s a complicated problem to solve. Get it wrong, and you can come badly unstuck.

AO: I think that the biggest mistake that I see in this space is when we do the natural thing as humans: we think in straight lines. So, someone in retirement can make a simple assumption to say, “well, suppose investment market, my portfolio grows at 6 per cent a year. Let’s say inflation does 2 per cent a year – then if I draw (x) from my portfolio, it should last me a lifetime.” Of course, the real world doesn’t work that way. Investment return doesn’t exist in this straight line way that we’re thinking about it.

RP: So how much money can you afford to spend in retirement? Well, a popular rule of thumb suggests you can spend 4% of your portfolio’s value each year without running out of money. But, for Abraham Okusanya, it’s crucial to seek professional advice on the right number for you.

AO: The challenge is that there isn’t a single withdrawal rate that works for everybody, because everybody has a different portfolio. A different tolerance to risk. So, a different asset allocation. You’ve got to be able to factor in fees and charges into the equation, you’ve got to be able to factor in your individual time horizon. If you are a couple, for instance, the picture changes completely.

RP: And one more thing. It’s wise to consider the worst-case scenario — perhaps a huge market crash just as you give up work. There’s nothing wrong at all with hoping for the best — but be sure to plan for the worst.

Disclaimer — The information in this video does not constitute advice or a recommendation, and you should not make any investment decisions on the basis of it. If you do however require advice please do not hesitate to contact Bloomsbury Wealth.

 

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