Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

MOVING from saving for your retirement to using investments to provide an income brings a whole new challenge for investors. 

You simply don’t know in advance how long you need your money to last, or the rate of investment return you’ll get along the way. That makes knowing how much you can safely withdraw as income difficult. 

If investments rose in a smooth and predictable way the task would be much easier - but they don’t. The long-run return from investment assets may well be ample to provide the income you’re looking for but the sequence in which those returns come through makes a huge difference to your outcome.

If you suffer large market falls in the early years of retirement - when your pot of invested assets is still large - this will cause lasting damage to the value of your fund, even if prices rebound after that. That’s because you’ll need to sell more assets in the early years to raise the income you need, leaving fewer to recover later. In investing jargon it’s known as ‘sequencing risk’.

We wanted to examine exactly how much difference sequencing can make to your retirement prospects, as well as putting a common method of ensuring safe withdrawals - the ‘4% rule’ - to the test. 

It meant looking back through recent history to uncover what the best - and worst - moments to retire in recent history have been. Here’s what we learned.

The 4% rule - why it works, why it doesn’t

A lot of thought has gone into working out a sustainable level of withdrawals from investments. Perhaps the most widely used measure is the ‘4% rule’ which says investors should be able to take 4% of the value of their fund in the first year of withdrawals - while escalating that amount each year by the rate of inflation - and expect their money to last 30 years, reflecting the length of a full retirement.1

To establish it, academics ran numerous simulations of market returns going back several decades to work out the likelihood of an investment fund running out within 30 years. Based on these historical scenarios, 4% withdrawals have been very unlikely to exhaust an investment fund.

That makes the 4% rule a great starting point if you want your money to last. However, it also creates a high likelihood that you will be left with an excess at the end of 30 years. In the most favourable scenarios this excess could dwarf the original size of the pot.

That’s a good problem to have but less than ideal if you want to maximise your retirement fund for income throughout your retirement.

Running the numbers

We wanted to see how the 4% has stood up in the recent past. To do that we used market data going back almost three decades - 29 years to be precise - to build a series of overlapping scenarios, each starting one year apart. Our first scenario began on 1st January 1994, the second a year later in 1995, the third in 1996, and so on.

In each scenario a 4% annual withdrawal was taken from a £100,000 pot invested in a 60/40 blended portfolio of shares and bonds. Withdrawals then escalated by 2% each year to represent inflation.

The chart below shows the value of the pots 10 years after withdrawals began. The final scenario for which 10 years of returns were available began in 2013.

You can see that even after 10 years the range of pot sizes is substantial, with the worst performing scenario leaving around £81,000 and the best around £177,000. And remember - these scenarios share the same starting value and the same level of withdrawals.2

The best (and worst) years to retire: how timing affects your income

Source: Fidelity International/DataStream. Based on blended returns - 60/40 FTSE All World Index/FTSE World Government Bond Index - 31/01/1994 to 31/12/2022. Withdrawals based on 4% of fund value at start, escalating by 2% annually. A 0.35% fee applies to all the assets up to a value of £249,999. Between £250,000 - £1million, a 0.20% fee applies to all assets. No service fee for investments over £1million.

Beyond that, it’s also noteworthy that in the majority of scenarios - 17 out of 20 - pots were actually larger after 10 years of withdrawals then they had been at the start. Even the worst performing fund retained four fifths of its value after 10 years.  

The best and worst years to retire

The huge role that timing can make to retirement outcomes is thrown into even sharper focus when you compare the worst and best performing scenarios over a longer period. The chart below shows the value of two £100,000 funds after 15 years - one starting in 2000 and one in 2003.

Despite there being just three years between their start points - meaning they shared the same market returns for 12 of their 15-year durations - the difference between the two pots after 15 years is huge. The pot beginning in 2003 grew to be more than two-and-a-half times bigger than the pot beginning in 2000.3

2000 vs 2003: The worst and the best year to retire

Source: Fidelity International/DataStream. Based on blended returns - 60/40 FTSE All World Index/FTSE World Government Bond Index - 31/01/1994 to 31/12/2022. Withdrawals based on 4% of fund value at start, escalating by 2% annually. A 0.35% fee applies to all the assets up to a value of £249,999. Between £250,000 - £1million, a 0.20% fee applies to all assets. No service fee for investments over £1million.

A little knowledge of stock market history reveals whys. The ‘dot com’ crash saw stock markets fall sharply from March 2000 until the end of 2002. A retirement fund that had begun withdrawals In January 2000 will have been badly affected, while a fund beginning withdrawals in January 2003 will have enjoyed the recovery that then took place.

Of course, it’s not only the market returns after withdrawals start that matter. Someone retiring in 2003 may have enjoyed a rising market in their early retirement - but their pot is also likely to have been hurt by the crash that happened in the preceding three years. 

What you can do

Understanding the role that timing can play in your retirement prospects is valuable, but it doesn’t make you any more able to control what happens to returns after you begin taking an income from your savings.

There are things you can do, however, to nudge things in your favour. By carving out a pot of cash savings and taking income from that in the first instance you can give invested money the chance to recover. For example, you hold two years’ worth of income as cash and pay yourself from that. After a year, if your invested pot of money has fallen in value, you can decide to take the second year of income from the cash pot rather than selling assets that are now worth less.

With luck, in the third year your investments will have recovered some ground and you can replenish your cash pot. There’s no guarantee of it, of course, but by building this flexibility into your plans you may be able to avoid the worse time to sell investments.

Another tactic is to tweak your withdrawals in periods of falling markets so that you take just the income that is produced naturally from investments. This might include the dividends from company shares, income from funds or the interest from bonds. This might mean a lower level of income overall, but it means you won’t need to actually sell assets when their price has fallen.

Finally, consider taking paid-for professional financial advice to help you make the most of your income options. A professional adviser will be able to model your future income and maximise different sources to navigate periods when markets are falling. Regular ongoing advice means you will automatically course-correct through your retirement.

Fidelity’s retirement advisers use cash-flow modelling tools to help you plot a sustainable - but optimised - plan for income in retirement. Meanwhile, the government's Pension Wise service offers free, impartial guidance to help you understand your options at retirement. You can access the guidance online at or over the telephone on 0800 138 3944.

Check out my latest podcast, which discusses what the best year to retire was in recent history, in conversation with Tom Stevenson. 


1 AAII - Retirement Savings: Choosing a withdrawal that is sustainable  

2 Fidelity International - September 2023

3 Fidelity International - September 2023

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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