If you have already decided to take the 25% drawdown of your pension pot(s), then the next question that usually comes to mind is, “should I invest it?”
After taking some money for a new car or special holiday, most people will realise that the value of their remaining lump sum is going to be eroded by inflation.
At current rates of inflation, the spending power of a lump sum that just stays in a high street bank account will halve in less than 20 years.
If you want to ensure you have money for emergencies like a new boiler, or roof repair, are worried about care home costs or want to help children or grandchildren with home deposits, you need to look at investment.
With the right investment in bonds and equities (shares of the best companies in the world) you can grow your lump sum and ensure you never run out of money.
But what about stock market “crashes?”
Crashes is a ‘click bait’ news headline that is very misleading. If you are invested in a professionally designed portfolio, while you will suffer temporary declines (sometimes significant ones) your funds will recover and then continue to grow over the long run.
Here are the facts that prove long term investing works:
Let’s imagine you had retired in 2007, just before the 2008 world economic ‘credit crunch’ and invested £100,000.
This is the unluckiest time anyone could retire and invest since 1973* - you will suffer a temporary decline in your investment pot of 50% in 2008.
But, provided you took the right advice, it doesn’t matter
As you will see from the table below, you can still withdraw your required money, and by remaining invested in the right way, the market and your investment naturally recovered to fund the rest of your years on planet earth.
In the example below we have assumed that to maintain a comfortable retirement, you needed to draw out £8,000 per year to top up your pension by just over £650 per month.
You withdraw this amount, adjusted for inflation, every year no matter what else happens. After 14 years (to 2021), the amount you would need each year will have risen due to inflation to £10,072.
In total over the 14 years, you will have withdrawn £134,000. £34,000 more than you started with.
And you would have an investment pot left of £78,000! Despite 2008.
If you had not invested the money, and just withdrawn from the lump sum, you would have run out of money 4-5 years ago (around 2017).
| Date | Annual Change | Annual Gain/ Loss | Compounded Gain/Loss £ | Inflation Adj Withdrawal | Capital | Inflation % |
|---|---|---|---|---|---|---|
| Dec 21 | 18.95% | £36,122.77 | £215453.77 | £78,541.13 | ||
| Jan 21 | 177448.024 | -£10762.86 | £40,535.38 | |||
| Dec 20 | 16.49% | £22,126.48 | £179331.00 | £53,181.23 | 0.99 | |
| Jan 20 | £156135.53 | -£10657.36 | £29,985.76 | |||
| Dec 19 | 23.40% | £31,645.11 | £157204.52 | £41,712.11 | 1.74 | |
| Jan 19 | £135202.37 | -£10418.77 | £19,709.96 | |||
| Dec 18 | -10.09% | -£14,615.13 | £125559.41 | £20,485.77 | 2.29 | |
| Jan 18 | £147491.65 | -£10185.52 | £42,418.01 | |||
| Dec 17 | 18.51% | £23,477.04 | £140174.54 | £45,286.42 | 2.56 | |
| Jan 17 | £119439.80 | -£9931.28 | £24,551.77 | |||
| Dec 16 | 5.75% | £5,906.91 | £116697.50 | £31,740.67 | 1.01 | |
| Jan 16 | £104087.76 | -£9831.97 | £19,130.92 | |||
| Dec 15 | -1.91% | -£3,145.22 | £110790.59 | £35,665.73 | 0.37 | |
| Jan 15 | £111793.81 | -£9795.73 | £36,668.96 | |||
| Dec 14 | 3.22% | £3,252.22 | £113935.80 | £48,606.68 | 1.45 | |
| Jan 14 | £106510.81 | -£9655.72 | £41,181.69 | |||
| Dec 13 | 22.18% | £21,490.18 | £110683.58 | £55,010.19 | 2.29 | |
| Jan 13 | £93653.07 | -£9439.56 | £37,979.68 | |||
| Dec 12 | 13.25% | £10,383.39 | £89193.40 | £42,959.57 | 2.57 | |
| Jan 12 | £82695.35 | -£9203.04 | £36,461.52 | |||
| Dec 11 | -6.48% | -£6,505.27 | £78810.02 | £41,779.23 | 3.86 | |
| Jan 11 | £87183.69 | -£8861.00 | £50,152.90 | |||
| Dec 10 | 11.10% | £7,438.35 | £85315.29 | £57,145.51 | 2.49 | |
| Jan 10 | £74613.89 | -£8645.72 | £46,444.11 | |||
| Dec 09 | 26.61% | £16,532.46 | £77876.94 | £58,352.89 | 1.96 | |
| Jan 09 | £55915.49 | -£8479.53 | £47,724.30 | |||
| Dec 08 | -50.62% | -£44,573.40 | £61344.48 | £53,153.29 | 3.52 | |
| Jan 08 | £97751.62 | -£8191.2 | £89,560.42 | |||
| Dec 07 | 7.28% | £5,917.89 | £105917.89 | £105,917.89 | 2.39 | |
| Jan 07 | £100000 | £100,000.00 |
Of course, with the right financial advice, you would have adjusted the investments and your withdrawals each year, out performed the MSCI world index, and would be even better off.
(Plus it’s worth noting that all the people that retired in the 13 other years from this example, were lucky enough to avoid 2008 and were left even better off.)
*If you do this same exercise from 1973 to 2008, or today, it works just as well. The temporary decline recovers and you continue to enjoy a comfortable retirement or investment income.
