Everyone reaching retirement age, or indeed those over 55 years of age who can access their pension pots, will want to know what their anticipated income in retirement will be.
For those who do not have a final salary scheme to help through retirement, and indeed those who do who seek to take advantage of new pension legislation, the importance of ensuring their pot lasts through their lifetime will be a priority.
Pension advisers, and Independent Financial Advisers (IFAs) are the first port of call. They will advise on how much clients can expect to draw from their fund each year. Key to this advice will be the information provided by back office systems for IFA’s.
It is difficult to decide how much an individual can take from his or her pension pot annually and still retain capital to last a lifetime. Over 23 years ago, Bill Bengen, a financial adviser, introduced the 4% rule.
This suggested that pensioners could withdraw 4% of their fund in the year immediately after retirement, with future withdrawals decided by inflation figures, to guarantee their fund lasted through their lifetime.
The figure was based on a 60%-40% split between stocks and bonds, with a retirement period of 30 years.
This presents a number of problems for current retirees, who can seek advice at the Citizens Advice Bureau website.
The first issue is the investment portfolio. With bonds offering small interest returns, it is more likely that investors will be looking to equity markets which have performed well since their recovery from the financial crisis of 2008. To a certain extent, this has been balanced by lower than average inflation rates, although that trend is being bucked in the UK.
Although the portfolio will lean towards growth if it is equity heavy, investors should always remember that what goes up inevitably comes down, and market volatility will always have an impact on their capital holding, which funds their income.
Is the 4% rule still relevant to today’s retirees? It remains a good rule of thumb to estimate how much to withdraw from your nest egg. It also gives an indication of how your fund can grow, taking into consideration market growth and interest rate rises.