The risk nobody mentions
Why the order matters more than the average
Two people, same money, same average return over thirty years. One is comfortable at 90 and one ran out at 79. The only difference is which years were the bad ones.
Two people, same money, same average return over thirty years. One is comfortable at 90 and one ran out at 79. The only difference is which years were the bad ones.
If two people get the same average return over thirty years, you'd expect roughly the same outcome. While you're still saving, that's about right — the order barely matters.
Once you start taking money out, it stops being true, and the difference is enormous.
When you're saving, a bad year means you buy at lower prices — it can even help. When you're drawing, a bad year means you sell at lower prices, and those units are gone. They aren't there to recover when the market does. The loss becomes permanent in a way it never was while you were building up.
Two people stop at 62 with £500,000 each. Both take £30,000 a year, rising with inflation. Both experience exactly the same set of annual returns over the next twenty-five years — the same numbers, in a different order.
Three poor years right at the start. They draw £30,000 from a falling pot, selling more units each time to raise the same money. By 70 the pot is far smaller than it should be, and the good years that follow are working on much less capital. The money runs out in their late seventies.
The same three poor years arrive in their mid-seventies instead. By then the pot has had a decade of growth behind it and can absorb the hit. They still have money past 90.
Exactly the same numbers. The only variable is the order they arrived in, and it produced a difference of more than a decade.
That's the uncomfortable part. It wasn't a bad decision or a bad investment. It was when they happened to be born.
Most calculators — including the free one on this site — use one flat growth rate. They effectively assume every year is average, which is a year that has never actually happened.
That produces a smooth, reassuring line and tells you nothing about how fragile the plan is. Two plans can show the same answer on a flat-rate projection while one survives almost any sequence and the other only works if the first five years behave.
This is why the Plan runs your numbers two thousand more times with the good and bad years reshuffled, and tells you in how many of them the money lasted. That percentage isn't a forecast. It's the answer to one question: how much does this plan depend on luck?
There's no way to eliminate it. There are recognised ways of reducing how exposed you are, and they're trade-offs rather than solutions.
Keeping a year or two of spending in cash means a bad market at the wrong moment doesn't force you to sell into it. It costs growth in every year it isn't needed. Whether that insurance is worth its premium is a genuine decision.
Someone who can cut 10% in a bad year is dramatically more robust than someone whose outgoings are fixed. Flexibility is worth more than almost any product feature.
Even modest income in the first few years reduces how much you have to sell at the worst time. This is why two days a week at 61 does more for a plan than the money alone suggests.
Where the State Pension and any defined benefit scheme cover the non-negotiable costs, market falls affect your choices rather than your survival — a completely different kind of bad year.
How you structure investments to manage this is a regulated advice question and not ours to answer. What we can do is show you how exposed your plan is, and what each of the above does to the numbers — so if you do go to an authorised adviser, you arrive knowing what problem you're asking them to solve.
Related but not the same. Market risk is that investments fall. Sequence risk is that they fall at a particularly damaging moment — specifically, just as you start taking money out. You can have a perfectly good long-run average return and still be badly hurt by when the bad years landed.
Roughly the five years either side of stopping work. That is when the pot is at its largest and you are about to start drawing from it, so a fall does the most damage in absolute terms and you have the least time left to recover. Before and long after, it matters much less.
No, and that would introduce a different and equally serious problem — money in cash tends to lose purchasing power over a long retirement. The question is not cash or investments but how much of the early years you want protected, which is a balance rather than a switch. Where and how is a regulated advice question.
That is precisely what running it thousands of times tells you. If your money lasts in 95% of the sequences, the plan is robust. If it lasts in 45%, the plan works only if the next few years are kind — and that is worth knowing before you rely on it rather than after.
No, and it says so on the page. The free projection uses one flat growth rate, which is exactly the simplification this guide is about. Seeing your own exposure needs the full version — that is one of the main things the Plan is for.