How much is enough, and will the money run out?


A recent article in the Telegraph (December 2016) reminded me of a common fear that we come across, particularly when meeting clients for the first time who are seeking our advice on life after work. Frequently the most common financial questions asked are: ‘Can we afford to retire?’, ‘Have we saved enough?’ and ‘will the money run out?’.

The Telegraph article was based around the concept of how long a £100,000 investment would last if it were invested in a ‘typical balanced’ investment portfolio split between UK shares and Bonds and an income extracted over a theoretical 45 year retirement period. The analysis uses actual investment returns experienced since 1900.

The article highlights how timing can be crucial both when investing and at the point extraction of income commences.  As we are all aware, the markets have experienced both exceptional and turbulent times during this period. This highlights a key risk when it comes to extracting an income from your investments known as ‘sequential risk’.  To summarise, this means that far greater damage is caused to your investments by extracting an income when values are low, especially if this occurs in the early years.  Recovering from this scenario will require significant investment returns in subsequent years.

One of the best head starts over the period in question would have been if you had invested at the start of 1982, with the portfolio increasing by 30% by the end of that year, even after a £3,000 income was extracted.  The report shows that the worst time to invest would have been 1900, with the funds running out after just 25 years if you were to extract an income of £3,000 annually increasing by inflation.

A possible solution to address this degree of variability of outcome would be to diversify your investments across a far wider range of assets. History has demonstrated that diversification can reduce both investment and sequential risks. A well-diversified portfolio will include an element of Cash to cover short term income requirements (perhaps 2 – 5 years), but long-term inflation beating returns will need to come from a well-constructed portfolio containing a variety of assets, which should be monitored and reassessed regularly.

Of course whilst diversifying your investments is an important consideration, having a cohesive strategy and financial plan will increase your chances of achieving your future financial goals.

Rob Starling is Partner and Chartered Financial Planner with Bluesky Chartered Financial Planners