Introduction
Those reading yesterday's post on how much a comfortable retirement might cost would be justified in thinking this blog is a "cut-and-paste job" in an attempt to drive traffic to our site! However, whereas yesterday's post attempted to determine a reasonable retirement pot for Mike and Jenny to finish work and enjoy a comfortable retirement, today's blog looks at why it can be suboptimal to assume a given size of retirement plot may apply to your situation.
For Mike and Jenny, we evaluated a comfortable retirement for a couple; today, we will look at a moderate retirement for a single person, which the PLSA puts at £31,300.
Elizabeth Clay
Let's start with Elizabeth. Elizabeth is 65 and approaching retirement, looking to finish work next year and has the following assets, along with a full state pension.
Like yesterday, we assume that spending increases at 1% less than inflation each year, and in these scenarios, we won't make an allowance for care fees.
In Timeline, we assume a 70% equity portfolio (with the same allocation as Mike and Jenny - scenario #6) with total fees of 1.5% annually. Timeline shows Elizabeth has a good chance of retirement success, with the plan succeeding in 90% of historical scenarios.
Furthermore, the worst case has the money running out in Elizabeth's mid-80s - realistically, slight adjustments to expenditure should she experience a poor outcome in early retirement would push this back several years.
The chance of both a poor series of market returns AND outlasting the retirement pot is minimal!
John Dalton
Now we come to John. John is 50 and, after a career in technology, is thinking of hanging up his boots next year. John is too young to remember the .com bubble, and based on tech's strong performance in recent years, he invested his portfolio into the U.S. tech markets. This strong performance has meant that John believes he can bring his retirement forward several years.
Like Elizabeth, John will have a full state pension (he intends to top up his National Insurance contributions to ensure he receives the full amount) and plans to increase his expenditure at 1% less than inflation each year. John also won't be planning for care fees.
John's balance sheet is twice that of Elizabeth's, so even though he is retiring far earlier than her, it may be that he will also be able to finish work next year.
The Voyant cashflow confirms this to be the case. Happy days!
Let's take a look at Timeline. At a high level, things look fine, with the plan working in 80% of historical scenarios and the median case showing the balance increasing over time.
But, and it's a BIG "but", the worst case has the money running out before John has drawn on his state pension!
His concentrated position (for John, I assumed a 100% U.S. equity position - a real-world tech portfolio will be even more focused!) means that worst-case outcomes are bad. Really bad. Furthermore, the behaviour gap of these more concentrated portfolios tends to be worse than those with more diversified holdings (we talk more about the behaviour gap and the impact on safe withdrawal rates in part three of our 4% "rule" series).
From 1973 to 2022, NASDAQ investors trailed the benchmark by 5.3%! We have been kind to John and assumed the behaviour gap is "only" 3%.
Conclusion
Be wary of headline numbers stating the exact amount needed for a given level of retirement income. We've shown that Elizabeth, who has half of John's assets, is likely to be more confident of a successful retirement (although John probably doesn't realise that yet!).
Many variables can impact the retirement pot required for a given retirement standard, including when you finish work and whether you are like Elizabeth or, instead, someone like John.
Want to find out more?
If you worry that you are in John's position (Elizabeth already uses an adviser specialising in retirement planning) and want to build a more robust retirement plan, please get in touch.
About us
The team at Pyrford Financial Planning are highly qualified Independent Financial Advisers based in Weybridge, Surrey. We specialise in retirement planning and provide financial advice on pensions, investments, and inheritance tax.
Our office telephone number is 01932 645150.
Our office address is No 5, The Heights, Weybridge KT13 0NY.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.