Retirees who live off private pensions risk running out of money as the global downturn continues to have a devastating effect on portfolios, a report from one of the world’s largest asset managers has found.
Research from Vanguard, which controls more than £4.5 trillion, seen exclusively by Telegraph Money, shows how someone who retires at a time of an economic crisis could deplete their pension pot in around 20 years if they draw down 5pc a year.
However, the firm found that using a formula to allow annual incomes to fluctuate in line with the markets would leave the same pensioner with ample money after more than 35 years.
The finding gives hope to those who had planned lengthy retirements or who have had to put their plans on hold after stocks plummeted in March.
Would-be retirees today can face bleak retirement prospects. The dividends paid by British firms have fallen to their lowest levels since the depths of the financial crisis. Forecasts predict that total dividends paid in 2020 will be half the record £100bn paid to investors last year.
Rising life expectancy over the past few decades also means that savings have to last longer. At 65, men are now expected to live to 85 on average, while women, who typically have smaller pensions, can expect to live to 87.
One-and-a-half million people aged over 50 plan to delay their retirement as a direct result of Covid-19, according to research published in May by Legal & General, the insurer. Instead, they expect to carry on working for at least three years until the economic environment improves.
There was a 17pc drop in the number of people who made withdrawals from their private pensions in the second quarter of the year compared with the same period last year, suggesting that savers are exercising extreme caution.
A survey of savers published last week by State Street Global Advisors, the asset manager, found that a third had already been affected financially by the pandemic. Half of respondents said they were pessimistic about their retirement prospects.
But Vanguard’s research suggested that you could avoid running out of funds even if you were retiring in a recession.
The American firm modelled various outcomes for someone who started a 35-year retirement with a $500,000 (£380,000) pension split equally between American stocks and bonds over the six worst recessions of the 20th century, including the Great Depression. It used American data, which provides the best historic information.
It compared what would happen in each scenario if the pensioner withdrew $25,000 (5pc of their portfolio) each year, adjusting for inflation, as opposed to using a “dynamic drawdown” approach.
In found that someone who retired in 1973 and withdrew 5pc a year would run out of money 23 years into their retirement, more than a decade earlier than planned. Someone who retired in the same year but used a dynamic approach would still have $250,000 in their pension after 35 years. This is show in the below chart.