Advisers need to abandon their use of rules about sustainable pension withdrawal rates for their clients in drawdown, Abraham Okusanya has said.
Speaking at the Personal Finance Society's Festival of Financial Planning in Birmingham today (7 November), the founder of research firm FinalytiQ illustrated this by running a £100,000 portfolio for several 30-year periods over the course of a 100-year period.
This was done with the intention of running the portfolio down to zero at the end of the period taking an amount in line with inflation each year.
If you get good returns in the early part of retirement, chances are you will be fine but if you have poor returns in the early period of retirement then I came up with a technical term for that, and it is buggered.Abraham OkusanyaMr Okusanya said: "There is a massive difference between the maximum amount that could have been taken in year one for some periods than for others.
"If you started your retirement any time before World War One, you couldn’t take a penny more than 3.1 per cent without running out of money in a 30-year period.
"Whereas if you started your retirement in 1982 you could take £11,000 [or 11 per cent].
"If you get good returns in the early part of retirement, chances are you will be fine but if you have poor returns in the early period of retirement then I came up with a technical term for that, and it is buggered.
"The 4 per cent rule if you are using a UK portfolio has 80 per cent success rate. You would have run out of money within 30 years in 20 per cent of times.
"We should stop talking about the 4 per cent rule and the 3 per cent rule because there are so many variables."
Mr Okusanya also added there did not appear to be evidence of the U-shape spending pattern in retirement.
This is the idea that a person's spending in retirement goes down, before increasing again as they need to pay for care costs.
But Mr Okusanya pointed to research by the International Longevity Centre which showed most people's spending decreases gradually through retirement, and those who do need care tend to pay for it from releasing the equity in their home.
But he said there was not enough appreciation of how much had changed since the announcement of pension freedoms in 2014.
He said the retirement income system was now one which was "designed to ensure people screw themselves over."
Research from the Financial Conduct Authority has found more than twice as many pots are moving into drawdown than annuities, yet the proportion of drawdown bought without advice has risen from 5 per cent before the freedoms to 30 per cent now.
damian.fantato@ft.com
