Retirees lose years of retirement income as inflation and markets collide

Tom Selby of fund store AJ Bell said: “It can be very problematic if an investor makes a large withdrawal in the first few years of withdrawal, just when the value of the investments is falling. Even above-average yields in subsequent years would not make up for lost ground.

There are ways for savers to make sure their retirement pot lasts as long as they do. Tom McPhail of consultancy The Lang Cat said retirees needed to be much stricter about planning their cash flow in times of market volatility.

He said: “Think about everything that happens to your bills throughout the annual cycle. How does this relate to your income withdrawals? If you have a luxury vacation allowance, that might be something that gets thrown overboard at this point.

Another option is to take only the “natural return” generated by the investments in your pension. If the dividends and bond interest can cover your living expenses, it will allow you to stay invested and prevent losses from crystallizing in the portfolio.

Mr McPhail said: “This means that when the markets recover, you will have the same number of shares and benefit from the rise in the markets.”

This strategy comes with two disclaimers, however. First, it can expose you to wild swings in your income if dividends dry up, as they have during the pandemic. Second, the level of natural income must be sufficient to cover your needs.

Mr McPhail added: “Once you withdraw more than 4% of your pot each year, the chances of running out of money before you die start to increase.”

Using sources of income other than your pension, such as cash Isas or rent from rental properties, could also prove useful in the short term until stock markets fall and inflation subsides.

Romi Savova of savings company PensionBee said investors should avoid tinkering with their wallets, whether by withdrawing more money or changing their investments.

“Don’t try to time the market. This usually doesn’t work out well because in environments like this it’s hard to know if the markets have bottomed or not. If they’ve bottomed out and you change your investments, you run the risk of missing the recovery,” she said.

If they have no other alternative, Mr McPhail said retirees should remember that future sources of income could help mitigate the damage caused by reduced retirement savings. Individuals are entitled to the state pension from the age of 66, although the state retirement age increases to 67 from 2028 and to 68 between 2044 and 2046.

He added: ‘You may be able to take a little more money out of your retirement plan in the short term because you know that in a few years you will be entitled to the state pension.’

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