Once they retire, people need to think carefully about how to make their retirement savings last. Taking too much out of your portfolio early on can have serious consequences. Market volatility can also limit your options. In this video, journalist MOIRA O’NEILL explains some key considerations.
Robin Powell: If you’re approaching, or already in retirement, your main financial priority is to ensure that the money you’ve saved lasts for as long as you need it. Taking too much out of your portfolio at the wrong time can have serious consequences. Market volatility can also limit your options. So you need to think very carefully about what’s called your withdrawal strategy.
Moira O’Neill: People have to think about – when they take the money – think about keeping that volatility in their portfolio as low as they can; and also think about what’s a safe level of income to take from the portfolio to make sure that it does last. Of course, the optimal outcome is that you take out enough income so that you can have a great lifestyle, and then it just runs out just as you die. But you know, life isn’t like that. We don’t know how long we’re going to live exactly. We don’t know what the market behaviour is going to be during that period of retirement. Of course, these days people can be in retirement for 10, 20, 30, even 40 years.
RP: So, how much money can you take out of your portfolio each year? The rule of thumb used to say four per cent. But, depending on your circumstances, you may need to be more conservative than that.
MO: We’re in different times now and there’s been a lot of research to show that four per cent may be too much. So we’ve got low interest rates, high inflation, we’ve got global equity markets that may not produce the returns in the future that they have produced in the past. And so a lot of independent research and advisory bodies are now telling us that the safe withdrawal rate might be three per cent, or even two per cent.
RP: Instead of deciding to take out a certain percentage to take out each year, you could go for a safer option. For example, if it’s large enough, you could choose to live off your portfolio’s natural yield.
MO: So that’s the income that your capital naturally generates as you’re investing. So that could be in the form of dividends from shares, or the income bit that comes out of a fund that’s invested with income as its goal. So therefore, your underlying capital just stays invested and stays the same amount and you’re able to draw that income off every year. That means you might, at the end, have some money left to pass to your children as well.
RP: As you’ve probably gathered, withdrawal strategies are a minefield. It really does pay to have the help of a financial adviser and to review your situation every year or so.
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