Win, lose or withdraw: Factors that influence the optimal decumulation strategy

We outline some of the key factors that then influence how quickly an individual spends their retirement funds, including ‘retirement outcome risk’. Whilst a one-size-fits-all approach is not possible, we suggest steps towards a framework that incorporates many of the factors involved.

In the next edition of our series we’ll use such models to find better rules of thumb than the 4% rule; investors could reference these to help assess how quickly to draw down on their pension funds.
Win, lose or withdraw: Factors that influence the optimal decumulation strategy

The hit 1990s TV game show Win, Lose or Draw was based on the board game Pictionary. Teams took turns guessing phrases, titles or other things based on one team member’s drawings. Critically, each contestant had to make a decision about how fast to draw – too quickly and their teammates couldn’t decipher their pictures, yet too slowly was equally wasteful as the clock ticked down.

Whilst the game show was a bit of harmless fun, we can ‘draw’ parallels between it and an altogether more serious matter – how fast retirees can sustainably draw down their retirement funds.

Withdraw too quickly and you risk running out of money. Withdraw too slowly and you risk suffering a sub-standard retirement and passing away with unused assets. (That said, currently many retirees are ‘prudent with a purpose’ with the aim of leaving their children a large inheritance).

In our first Decumulation Demystified article, we discussed some of the issues facing the once-popular 4% drawdown rule and considered whether it has now outlived its usefulness (answer: yes). Originally developed by US financial planner Bill Bengen in the 90s, the 4% rule was a mainstay for many advisers, guiding that retirees could safely withdraw 4% of their initial fund annually, adjusting for inflation, without running out of money over a 30-year time frame.

But, as demonstrated by the shifting popularity of TV game shows, tastes change over the decades. Market conditions have changed (in particular interest rates have fallen) and Bengen’s 4% rule has lost some of its appeal, with many advisors favouring a more flexible approach to decumulation, founded on considerations that are unique to each investor.

We see three primary factors which affect the pace of drawdown most worthy of consideration, each of which is broadly in line with FCA guidance on suitability, namely that “recommendations to retail investors consider all relevant circumstances, including investment objectives, current and future income requirements and the investor’s attitude to risk.”

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