After more than ten years of a rising bull market, the first quarter of 2020 has clearly been a rocky road for global stock markets. When the World Health Organisation declared the coronavirus outbreak a pandemic on the 11 March, the FTSE 100 had already fallen by 21% since the turn of the year and the S&P 500 just shy of 15%. Drops not seen since the financial crisis of 2007/08.
Markets have gradually been increasing since then. Although the recent volatility presents challenges if you’re close to retirement, it’s worth remembering that market rises and falls are part of investing.
So, can you still retire in 2020? The answer is yes, but unsurprisingly, it is necessary to attach several caveats.
How much can you withdraw
Based on historical data, a safe withdrawal rate is typically around 3.5-4%. This is for a well-balanced portfolio. The aim is to sustain an income for 30 years and prevent you running out of money.
If your expenditure is above 4%, this might be sustainable with a higher level of risk. However, it comes with additional warnings, especially through periods of market stress.
It can be a worrying time if you need your pension savings to meet living costs during a downturn. This can exacerbate losses since you are forced to sell assets at depressed levels to maintain the same income. This term is known as pound cost ravaging and can have a detrimental effect to the longevity of your portfolio.
Review your portfolio and consider alternatives
If you need to withdraw more than 4% of your portfolio, look at this as a short-term fix and make sure you review this regularly. If you can, consider other income sources during periods of volatility.
Some questions to ponder include:
- Are you eligible to start drawing your State Pension? Will that relieve some pressure?
- Do you have any other income sources? Such as:
- rental income
- defined benefit (final salary) pensions
- continued ad-hoc work
- Do you cash reserves to call upon in case of further market drops?
Control your expenditure
Have you considered how much you will need in retirement? Going through bank statements is often a task that drops to the bottom of the to-do list, yet this can be a real eye-opener. Try and work out your likely spending levels. Are you planning on travelling? Is that going to be one big holiday a year or a six-month expedition?
Now link this back to your investments. Is your expenditure higher than the amount that your portfolio can generate?
With the current lockdown restrictions, you’ll certainly be spending less with restaurants and leisure activities unavailable. Therefore, look at your outgoings before the pandemic struck for a more realistic budget.
Your portfolio might well have a variety of different constituents. So drawing from the right pot, at the right time will be imperative to prevent any unexpected tax bills. Your investments might be held within a pension, a Stocks & Shares ISA, in cash or even an investment bond. All of which have different tax rules and methods of withdrawing.
Using a SIPP (self-invested personal pension) as an example. It is possible to draw down up to 25% of the value as a tax-free lump sum. There’s merit in this approach as you can draw on some funds and live from the proceeds whilst allowing the portfolio to rebuild over the coming years. However, if you can, it’s best to avoid selling assets at these lower prices. It might make more sense to draw down just enough to cover the next 12-24 months, leaving some of your tax-free cash invested to grow.
With the ongoing coronavirus uncertainty, being more flexible with how you draw on funds will be the sensible choice.
The changing face of retirement
Since the introduction of pension freedoms, there has been a massive change in the nature of retirement. We don’t see quite so many ‘sudden’ retirements as we used to. Stopping work on the Friday and being retired on a Monday has been replaced by a gradual retirement. Often in the form of a reduction in working days, possibly some form of consultancy or even a non-executive role.
If you’re approaching retirement it pays to be prepared. Please email us at firstname.lastname@example.org to find out more about how we can help you.
Alternatively, you can book a free telephone or video consultation here. You can also download our guide to retirement.