{"id":1561,"date":"2016-07-15T10:55:27","date_gmt":"2016-07-15T10:55:27","guid":{"rendered":"http:\/\/bgfs2018.wpengine.com\/?p=1561"},"modified":"2016-07-15T10:55:27","modified_gmt":"2016-07-15T10:55:27","slug":"income-in-retirement-consistency-is-king","status":"publish","type":"post","link":"https:\/\/www.buckinghamgate.co.uk\/blog\/income-in-retirement-consistency-is-king\/","title":{"rendered":"Income In Retirement – Consistency Is King"},"content":{"rendered":"

We looked last time at the importance of reviewing your investment strategy if you intend to use a \u2018drawdown\u2019 pension during retirement and leave your fund invested for the longer term.<\/p>\n

For many the biggest risk of using a drawdown pension, rather than an annuity, is that the fund will run out during their lifetime. Of course, none of us can know for sure how long we will live and for most the tendency is to underestimate life expectancy.<\/p>\n

One of the most important factors in determining how long your pension fund will last, is the consistency of the returns that are generated throughout the lifetime of the investment.<\/p>\n

Many investors will be aware of the concept of \u2018pound cost averaging\u2019, which is where a regular payment into an investment is made and you \u2018buy into the market\u2019 at different points in time. The principal here is that it is actually positive to be buying investments when the market is lower, as you will be buying more shares for your money.<\/p>\n

This point can be illustrated using a very simple example over a 3 month period, comparing a lump sum investment purchase of \u00a330 vs a monthly payment of \u00a310 per month.<\/p>\n

 <\/p>\n

Example 1 \u2013 Shares Purchased Up Front<\/p>\n\n\n\n\n\n\n
<\/td>\nAmount Invested<\/td>\nShare Price<\/td>\nShares Purchased<\/td>\nFinal Value<\/td>\n<\/tr>\n
Month 1<\/td>\n\u00a330<\/td>\n\u00a31.00<\/td>\n30<\/td>\n<\/td>\n<\/tr>\n
Month 2<\/td>\nN\/A<\/td>\n\u00a30.50<\/td>\nN\/A<\/td>\n<\/td>\n<\/tr>\n
Month 3<\/td>\nN\/A<\/td>\n\u00a32.00<\/td>\nN\/A<\/td>\n\u00a360<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

Example 2 \u2013 Shares Purchased Monthly<\/p>\n\n\n\n\n\n\n
<\/td>\nAmount Invested<\/td>\nShare Price<\/td>\nShares Purchased<\/td>\nFinal Value<\/td>\n<\/tr>\n
Month 1<\/td>\n\u00a310<\/td>\n\u00a31.00<\/td>\n10<\/td>\n<\/td>\n<\/tr>\n
Month 2<\/td>\n\u00a310<\/td>\n\u00a30.50<\/td>\n20<\/td>\n<\/td>\n<\/tr>\n
Month 3<\/td>\n\u00a310<\/td>\n\u00a32.00<\/td>\n5<\/td>\n\u00a370<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

As you can see, in the second example, the fall in the share price in month 2 has been positive, as more shares where purchased, when have then gone up in value, meaning we have \u00a370 at the end of the three months, rather than \u00a360.<\/p>\n

The issue with a drawdown pension is that the opposite of the above phenomenon is also true. This is where more shares have to be sold <\/strong>to provide the same level of income. So using our above example, if we wanted an income of \u00a310 per month, 10 shares would need to be sold in month 1, 20 shares in month 2 and only 5 in month 3. The sale in month 2 of 20 shares would really damage the total investment over time.<\/p>\n

As a result of the above, we favour investments that produce very consistent returns during retirement. It is far better to have a return of 6% per annum consistently every year, than an average of 6% per annum, but spread over a wide variety of different outcomes (-6% one year, +12% next year for example).<\/p>\n

This is best illustrated with another example as follows:<\/p>\n

 <\/p>\n

Starting fund of \u00a310,000, \u00a3500 withdrawal made at the end of each year.<\/p>\n

 <\/p>\n\n\n\n\n\n\n
<\/td>\nYear 1<\/td>\nYear 2<\/td>\nYear 3<\/td>\nYear 4<\/td>\nYear 5<\/td>\n<\/tr>\n
Consistent Return<\/p>\n

(5% per annum)<\/td>\n

\u00a310,000<\/td>\n\u00a310,000<\/td>\n\u00a310,000<\/td>\n\u00a310,000<\/td>\n\u00a310,000<\/td>\n<\/tr>\n
Variable Return<\/p>\n

(average of 5%)<\/td>\n

\u00a38,500<\/td>\n\u00a37,575<\/td>\n\u00a37,984<\/td>\n\u00a37,963<\/td>\n\u00a39,214<\/td>\n<\/tr>\n
Return In Variable Scenario<\/td>\n-10%<\/td>\n-5%<\/td>\n+12%<\/td>\n+6%<\/td>\n+22%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n

 <\/p>\n

As you can see, in both scenarios, the average return is 5% per annum, however in the variable return scenario, the first years are poor, meaning that we have a smaller fund to carry forward. Despite the large positive numbers in the latter years, the second fund has still not recovered to the same level 5 years later.<\/p>\n

Of course the above is a simple example, however it does illustrate the importance of consistency when thinking about investing for retirement.<\/p>\n","protected":false},"excerpt":{"rendered":"

We looked last time at the importance of reviewing your investment strategy if you intend to use a \u2018drawdown\u2019 pension during retirement and leave your fund invested for the longer term. For many the biggest risk of using a drawdown pension, rather than an annuity, is that the fund will run out during their lifetime…. Read more »<\/a><\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[6,2],"tags":[],"class_list":["post-1561","post","type-post","status-publish","format-standard","hentry","category-investments","category-pensions","wp-sticky"],"_links":{"self":[{"href":"https:\/\/www.buckinghamgate.co.uk\/blog\/wp-json\/wp\/v2\/posts\/1561","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.buckinghamgate.co.uk\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.buckinghamgate.co.uk\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.buckinghamgate.co.uk\/blog\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.buckinghamgate.co.uk\/blog\/wp-json\/wp\/v2\/comments?post=1561"}],"version-history":[{"count":0,"href":"https:\/\/www.buckinghamgate.co.uk\/blog\/wp-json\/wp\/v2\/posts\/1561\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.buckinghamgate.co.uk\/blog\/wp-json\/wp\/v2\/media?parent=1561"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.buckinghamgate.co.uk\/blog\/wp-json\/wp\/v2\/categories?post=1561"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.buckinghamgate.co.uk\/blog\/wp-json\/wp\/v2\/tags?post=1561"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}