There is a mismatch between the amount people think they can draw down from their retirement funds without running out of money, a study by asset manager Schroders has found, but there are some sectors that could have helped them keep their initial investment over the long term.
The 2019 Schroder Global Investor Study indicated investors believe they can draw down 10.3 per cent a year during retirement without running out of money.
This figure stood at 9.9 per cent for the UK.
However, the asset manager warned that such a high level is unlikely to be sustainable in the long term.
“While the reality of this is subject to age at retirement, and the amount the individual has saved, it’s still generally a high figure,” the asset manager noted.
“It indicates that people are likely either underestimating how long they will live for, underestimating the returns required to generate the ability to draw such a high rate, or have other sources of wealth/income.”
Sangita Chawla, Schroders’ head of retirement savings, said there was a mismatch between how much people are saving ahead of retirement and the amount they expect to draw upon once they stop working.
“This disconnect is worrying and implies that people globally are not being realistic about the lifestyle they want to enjoy when retired,” she explained.
“It is imperative people start saving consistently and sufficiently as early as possible when working and, before retiring, do some serious thinking about the level of income they can afford to sustain throughout their well-earned retirements.”
As such, Trustnet decided to uncover the sectors where long-term investors could have drawn down 9.9 per cent a year without losing their initial capital. Of course, it should be remembered that past performance is no guide to future returns.
Investors in UK equities would have been left disappointed had they expected to make such a high level of withdrawals without shrinking their principle.
Source: FE Analytics
An initial investment of £10,000 in the FTSE All Share a decade ago with annual withdrawals of 9.9 per cent would have shrunk to £7,744.78.
Investors in active funds – as represented by the IA UK All Companies sector – would have fared slightly better, as the pot would now be worth £7,947.80.
However, not only would long-term investors in UK smaller companies have kept their initial investment after a decade of withdrawals, they would have seen it grow. A £10,000 outlay in the average IA UK Smaller Companies fund would now be worth £10,978.69, even after regular withdrawals.
For income-focused investors in sterling-denominated bond sectors – including UK gilts – and the IA UK Equity Income sectors, there would have been much less left over from an initial £10,000 investment.
Source: FE Analytics
Investors in the average IA UK Equity Income fund would have seen the smallest shrinkage in principal, with £10,000 in 2009 becoming £7,844.54.
From a fixed income perspective, an investment in inflation-linked gilts would have been most prudent as – after withdrawals – £10,000 put into the average IA UK Index Linked Gilts fund would have fallen to just £7,452.08.
Investors in the average gilt fund would have seen the biggest fall in their initial outlay, dropping to £5,830.37 over the past 10 years.
Given the amount of uncertainty created by Brexit and its impact on sterling in the past few years, investors in most developed markets outside of the UK would have fared better.
However, as the below chart shows, that was not always the case.
Source: FE Analytics
An investor in the average IA Europe Excluding UK fund, for instance, would have been worse off with a £10,000 initial investment falling to £7,707.28. However, investors who put a lump sum into a Japanese fund would have seen its value shrink by less.
Thanks to the strong bull run in US equities since the global financial crisis, investors in the average IA North America fund would have made a gain of £3,000.21 on a £10,000 outlay, even after withdrawing 9.9 per cent a year.
Would investors in higher risk areas have fared better? Again, not necessarily.
As in the UK equity space, small cap strategies fared well in this study. Those investing in North American smaller companies would have been best off, with their £10,000 growing to £14,434.72 even after 9.9 per cent annual withdrawals.
Meanwhile, a £10,000 investment in the average IA Japanese Smaller Companies fund would now be worth £11,385.72.
Source: FE Analytics
Investors who put money in emerging market strategies 10 years ago hoping that the higher-growth, higher-risk equity market would have delivered strong returns may have been left a little disappointed.
An initial £10,000 investment in the average IA Global Emerging Markets fund would have shrunk to £6,200.27 after regular withdrawals of 9.9 per cent each year.