Updated: Jul 22
How far will £1m go in retirement?
As you edge towards retirement age, everyone dreams of that perfect life. You’ve worked hard for decades, now you want to make sure your retirement fulfils your dreams and ambitions. But how far will £1,000,000 go in retirement?
How long will your portfolio need to work for you?
The simple answer is nobody knows. Your investment time may well be longer than you think, so prepare to live for the longest time possible and ensure you have enough money to live on.
The graph below shows the average life expectancy, given Fisher Investments understanding of medical advancements. It’s not final and many things, such as health, can have an impact.
It’s also critical to understand how withdrawals will impact your portfolio. You may have unrealistic ideas about how much you can withdraw in your retirement. It’s incorrect to assume that, since equities have historically delivered just over a 10% annualised average return over the long-term, it must be safe to withdraw 10% a year without drawing down the principal.
However, this is incorrect. Though markets may annualise 10% over very long periods, returns vary greatly from year-to-year. Miscalculating withdrawals during market downturns can substantially decrease the probability of maintaining your principal. Inflation is another important entity to think about. It decreases purchasing power over time and corrodes investment returns and real savings. Since 1925 inflation has averaged 4% a year. If this rate continues, a person who requires £50,000 to cover annual living expenses would need approximately £115,000 in 20 years and £175,000 ten years after just maintain the same purchasing power.
How do you establish a primary investment objective?
Everything in life needs a focus - your retirement in no different. You need to establish a primary objective for your portfolio.
It may seem like hard-work, but it can be fairly straightforward. To do so you need to define your ‘growth objective’ - the amount of money you plan to have at the end of your portfolio’s investment time.
You want to increase the purchasing power of your assets as much as possible.
Maintaining the value of your portfolio in real terms
You aim to maintain your present purchasing power at the end of your investment time horizon.
You have no desire to leave any assets behind.
You desire an end target, such as passing on to children.
''You need to establish a primary objective for your portfolio. To do so you need to define your ‘growth objective’ - the amount of money you plan to have at the end of your portfolio’s investment time.''
What are the important trade-offs you may need to make? You may well need to plan to draw from your portfolio during retirement. The level of cash you may need, combined with your growth objective, may call for you to make trade-offs to minimise the risk of running out of money. You may well need to increase your exposure to investments with higher returns. Conversely, you may need to lower your withdrawals by decreasing specific spending during retirement. Understanding these trade-offs is fundamental.
Which scenario and asset allocation make you most comfortable? The only right answer is the one that fits you. The asset allocation that may be the most appropriate for you will depend on your investment objectives, withdrawal needs and personal circumstances. All of is this, whilst factoring in your attitude to risk (Cautious, Balanced, Adventurous).
To make it that little bit simpler determine your primary investment objective is one huge factor that can help you decide which asset allocation may be best for your requirements.
Reeves Independent are specialists and have over 20 years’ experience. We can help you make sense of it all, and make it easier, setting you on the path to a bright and sustainable future.
The articles are for information only and should not be construed as advice or a recommendation. The investment strategies mentioned are examples only and may not be suitable for your particular: circumstances, tax position or objectives. Please seek independent financial advice before taking any action.
Names have been changed to protect identity.
No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.