Your age in bonds…… Really??

For many years now the investment principle of holding your age in bonds has been considered good advice by many investors approaching or in retirement. And intuitively it makes sense, right? Well, sorry to disappoint but, with Pensions Freedoms and people living longer, you may be investing for as long in decumulation as you have been in accumulation and to secure an income that keeps pace with inflation you are going to need growth which means taking risk…

While bonds have been secure investments in the past, the inverse relationship with interest rates means that investors who are acting on this principle today are mathematically guaranteed to achieve a loss, which, just at the age when you are making plans to work less or stop working, could raise some difficult questions!

Growth has become more important to investors in retirement as our research shows that 50% of an investors’ income during their retirement is made up of the growth on their funds during this period.

To go into this in more detail, and give an example, let’s do the maths…

Take the example of the life span of an investor, Paul, who saves regularly into a pension during the accumulation phase and takes withdraws from their fund during decumulation until their fund is gone. Paul saves from an early age, 25, until he retires at age 65 and starts to take income as withdrawals from his fund. He’s saves 9% of his £50,000 salary each year which increases annually by 3.5% and withdraws 4.7% of his fund each year which increasing by 3% to keep pace with inflation.

The graph below illustrates the point… You can see the buildup of Paul’s funds and then how his funds are withdrawn and the fund value falls over his retirement. The line shows how his funds rise and then fall as he takes income.

Savings and withdrawals graph
Source: Russell Investments. For illustrative purposes only.

Now here’s the maths;

  • Paul contributed £380,000 to his fund by saving regularly over the 40-year period.
  • The growth on Paul’s savings during that period were £932,000, assuming he invested in fund consisting of equities and bonds where the assumed growth rates annually were 8% and 3.5%.
  • The growth on Paul’s fund during retirement was £1,221,000, assuming he was, again, invested in a funds combining equities and bonds.
  • Paul’s total distributions during this time were £2,533,000, assuming he uses all of his fund and lives until the ripe old age of 91!

So actually, Paul’s regular savings make up 15% of his overall withdrawals - £380,000/£2,533,00 - while his growth in this saving period make up 35% of his overall income and his growth in retirement of £1,221,000 makes up a massive 50% of his income or withdrawals!

As growth in retirement is incredibly important investors following the principle “your age in bonds” and taking less risk, may need advice to review their risk profile and choose an investment solution that balances risk and return.

We’re keen to support advisers with clients in this situation, so, if you would like us to share the paper on this, which contains all the details, and discuss how our fund range can be used please contact the Russell Investments Relationship Management team.