Are you going to Outlive your Money, or is your Money going to Outlive you?…
As your financial advisers, we have a professional duty to raise issues we deem important. Some of these topics may be difficult to bring up, but it’s critical to our long-term relationship that we always share what we believe to be true.
In a retirement lasting up to three decades, there are ultimately two financial outcomes:
The money will outlast the people (the desirable outcome).
The people will outlast their money.
Our role is to do everything we can to help ensure that the money outlasts our clients. We achieve this by investing assets appropriately and supporting clients in managing their expenses.
Investing Rule of Thumb
Investment theory, backed by sound research, suggests that if around 4% of invested capital is drawn each year (with annual increases to account for inflation), it is likely the money will last. This is considered a “sustainable” withdrawal rate—suitable for a retirement of around 30 years (the average for a two-person household).
While the research is robust, a more cautious approach would involve starting with a 3% withdrawal rate, increasing the likelihood that funds will last even longer.
To put this into context:
On £100,000 of investable assets, a 4% withdrawal rate = £4,000 per annum.
On £100,000 of investable assets, a 3% withdrawal rate = £3,000 per annum.
This rule is intended as a guideline, and adjustments may be necessary depending on life circumstances and market conditions.
Our Concern
Withdrawing more from your investment capital than would typically be considered sustainable in normal market conditions brings a real risk that your capital may be depleted before the end of your life - potentially leaving you without sufficient funds to maintain your lifestyle.
Once your invested capital (pensions, ISAs, general accounts, etc.) is exhausted, the two most common remaining options are:
Downsizing your property to release equity, or
Using an equity release mortgage to access capital while remaining in your home.
These are “last resort” options, but they may be necessary to preserve your lifestyle.
It’s important to us that our clients don’t inadvertently make financially harmful decisions. While we understand the importance of maintaining your lifestyle, we want to highlight the risks of continuing along a financially unsustainable path.
What Happens Next?
Clarity around your current withdrawal strategy and its sustainability will lead to important conversations—and help us outline the options available to you. Our key goal remains simple: to ensure the money outlasts the people. We want to avoid scenarios where clients run the risk of their funds drying up too soon.
As part of our ongoing financial planning service, we update your financial plan each year - including a review of your withdrawal strategy. This ensures that we’re always helping you navigate this challenge proactively.
Clients are free to adjust their withdrawals at any time, but we always use our modelling tools to ensure any changes don’t compromise the long-term plan we’ve put in place together.