Four obstacles that could derail your retirement plans

When the time comes to access your retirement income, you’ll have a number of challenges to contend with. In our latest article, we explore the four main culprits.

Retirement is a journey, and to keep it running smoothly once it’s time to access your funds, it’s important to start pacing yourself.

In the lead up to retirement, you’ll likely be saving and investing regularly and building up your wealth. But in retirement, you’ll be relying on this pot without continuing to accumulate new assets. You’re therefore vulnerable to a number of risks that ordinarily might be less of a concern.

The good news is that there are various ways of avoiding or mitigating them – here, we’ve jargon-busted four risks that are particularly pertinent to drawing an income if you remain invested in retirement: sequencing risk, pound-cost ravaging, inflation risk and longevity risk.

1. Sequencing risk

What does it mean?

Sequencing risk is the risk that the timing of withdrawals from a retirement account will damage the overall value of your retirement pot. Simply put, taking money from your pension during a market downturn is more costly than withdrawing during a strong market. In particular, poor returns early on in retirement can make it more difficult to recover from losses, because as a retiree, you’re no longer contributing new capital to your pot, so the withdrawals you’re making are not being offset by new gains.

What should you look out for?

Market volatility in the early stages of retirement should set the alarm bells ringing if you’re taking income from your drawdown fund.

What can you do about it?

Look at drawing from other sources, or managing your income levels during market volatility early on, will help to protect your fund. Sequencing risk is only an issue when you’re taking income from the fund.

If you’ve just retired, now might be the time to take professional advice, as a number of headwinds currently have the potential to knock markets off-track – COVID-19, the US Election, US-China tensions and Brexit, to name but a few.

2. Pound-cost ravaging

What does it mean?

Although this is related to sequencing risk, pound-cost ravaging can be a problem at any point in retirement – not just the early stages. If you continue to withdraw the same level of income during market downturns, when your fund may be falling in value, you’ll need to cash in more of your pot to maintain your income over the longer term. This can therefore deplete your pension funds quicker than expected – which is why taking advice may be prudent in this situation, as it’s more difficult to bounce back.

What should you look out for?

As with sequencing risk, it’s an issue if you’re taking income from a fund that’s being negatively affected by market volatility.

What can you do about it?

Falling markets should serve as a reminder to review the level of income you’re taking from your pot and work with a financial adviser to adjust where necessary.

3. Inflation risk

What does it mean?

Inflation – how quickly the prices of goods and services are rising – can be doubly damaging in retirement, because it can reduce the value of your capital as well as the purchasing power of your income. While you have time on your side to tackle the effects of inflation before retirement, you don’t have such luxury once in retirement.

What should you look out for?

You can’t directly affect the rate of inflation, but it’s worth noting whether it’s rising – and how quickly – so you can review your future income needs.

What can you do about it?

Assets such as equities tend to beat inflation over time, so maintaining at least some exposure can mitigate the impact of rising prices on capital value.

4. Longevity risk

What does it mean?

People in their 50s and 60s underestimate their chances of survival to age 75 by about 20 percentage points and to 85 by around 5 to 10 percentage points, according to the Institute for Fiscal Studies. In other words, men born in the 1940s who were interviewed at age 65 reported a 65% chance of making it to age 75, while the official estimate was 83%.1

What should you look out for?

Underestimating your survival chances by even a year can seriously hurt your retirement plans – so think about the probability of living beyond a certain age, rather than average life expectancy statistics. If your life expectancy is estimated at 85, for example, that’s just the 50-50 point; you have a very good chance of living even longer.

What can you do about it?

Don’t underestimate how long you might live. An adviser can use their knowledge of cashflow modelling to ensure that your retirement income strategy accounts for the potential impact of longevity on your income and capital.

Protecting yourself from volatility

As you can see, all of the above risks can pose a very real danger to retirement incomes, but investors are often unaware of them until it’s too late. If there’s a single step you can take to protect yourself against them, it’s to take professional financial advice.

Financial advisers can help you monitor, adjust and maintain your retirement strategy with the risks in mind. At Wellesley, our experienced advisers will take a broad view of your retirement strategy, and can advise on other sources of drawing income. They can also equip you with the information you need in order to put a plan in place to mitigate the various risks.

Need help understanding the ‘jargon’? Give us a call on 01444 244551.

The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and the value may fall as well as rise. You may get back less than the amount invested.


1 Subjective expectations of survival and economic behaviour, Institute for Fiscal Studies, 2018

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