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.
If you plan to retire and live on income from investments, you know that returns from markets will greatly affect your fortunes - but have you considered the role that the timing of your retirement can play as well?
Consider this - two people begin their retirements at different times but with exactly the same amount of savings. They both achieve the same annualised return from their investments over the long term, and both take the same regular withdrawals.
However, as we explain below, they can end up with wildly different amounts of money as their retirements progress - and this can happen even when there is only a small difference between their retirement starting points.
That’s because the sequence in which returns are achieved - not simply how big those returns are - greatly impacts the size of a retirement fund once withdrawals have begun.
It is a well-known challenge in retirement planning. 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 later. 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.
Much better to experience big falls several years in once your exposure to markets has dwindled.
We wanted to examine exactly how much difference sequencing can make to your retirement prospects. It meant looking back through recent history to uncover what the best - and worst - moments to retire have been.
Here’s what we learned.
Running the numbers
We wanted to see how investors over the past three decades have been treated by markets, and to work out which of them had had the best and worst luck. To do that we used market data going back 31 years 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. This level of withdrawals replicates the ‘4% rule’ - the convention, based on extensive research, that this is the level of withdrawals that has been sustainable for 30 years in the vast majority of market scenarios.
Our work looked at the scenarios that have occurred between 1994 and 2016 - the final point for which 10 years of returns are available. The chart below shows the value of the pots 10 years after withdrawals began.
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.1
Beyond that, it’s also noteworthy that in the majority of scenarios - 20 out of 23 - 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 years 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 2000.2
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 matters. 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 your 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 www.moneyhelper.org.uk or over the telephone on 0800 138 3944.
Source:
1,2 Fidelity International - September 2023
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- Read: Will 2026 be a good year to retire?
- Read: 6 money mistakes people make in their 60s
- Read: 5 truths of investing from an FT expert
| (%) As at 31 Dec |
2020-2021 | 2021-2022 | 2022-2023 | 2023-2024 | 2024-2025 |
|---|---|---|---|---|---|
| FTSE All World | 18.9 | -17.7 | 22.6 | 17.7 | 23.1 |
| FTSE World Government Bond | -2.6 | -13.8 | 4.7 | 1.0 | 2.5 |
Past performance is not a reliable indicator of future returns
Source: LSEG, total returns from 31.12.20 to 31.12.25. Excludes initial charge.
Source:
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). Eligibility to invest in an ISA and tax treatment depends on personal circumstances and all tax rules may change in the future. 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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