How retired investors can survive tariff turmoil

If your retirement income comes from withdrawals from a pension pot via ‘income drawdown’, you may well be worried by the recent heavy falls in the stock market. After all, there is a good chance you are supplementing any ‘natural yield’ from dividends by making regular sales of investments – and those investments will now be fetching lower prices, so you’ll have to sell more of them to generate the sum you had in mind.

But it’s important to remind ourselves that a retirement will (we hope) last decades and that our plan for drawing down income must be equally long term. It should be able to take a period of market turmoil in its stride.

To reassure yourself that your retirement income plan is indeed resilient enough to cope, follow these steps.

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1. Take a step back
   
   How does the value of your pot today compare with when you started to take an income from it? That’s more relevant than recent market gyrations. It may be alarming if your savings are 10% less valuable than in February but let’s remember that those falls follow an exceptionally strong rise that was due, ironically enough, to euphoria over Donald Trump’s election and a wider belief in American ‘exceptionalism’.
   
   The S&P 500, the key American stock market index, is no lower than it was in June last year. The FTSE 100 is at about the level of a year ago, while the MSCI World index is back to where it was in August last year. So anyone who retired more than about a year ago will still find themselves with a pension pot worth more now (disregarding withdrawals) than when they started to take income from it. If they have topped up the natural yield by selling fund units or shares, they will have had to sell fewer of them thanks to that market rise.
   
   Remember also that market corrections are inevitable and you will certainly experience them over the course of a long retirement. Falls of at least 10% occur in a majority of years while declines of 20% or more happen once every four years on average, according to research from Schroders, a fund manager, which looked at the MSCI World index. A well thought out withdrawal plan will be able to cope with them.
2. Check the natural yield from your investments
   
   The higher the proportion of your income that comes from natural yield (dividends or bond interest), the less you need to worry about market movements – companies’ dividend payments are far less volatile than their share price. Despite the stock market sell-off you should continue to receive the dividends you expected, unless the tariff turmoil leads to a recession and reduced company profits. At the very least there will be a considerable time lag between the current market ups and downs and any dividend cuts caused by a recession, which means there is even less reason to take hurried action now.
   
   What if your portfolio produces little natural yield? If, for example, you have invested heavily in the American stock market, your natural income via the dividend yield is just 1.7% of the current value of your pot. In these circumstances you will almost certainly be topping up the dividends with regular sales of units of your funds (or individual shares). It is here that danger can lurk, although again it’s important to maintain perspective.
   
   Yes, a prolonged and deep bear market during which you continue to generate income from partial sales of your assets can end up doing serious damage as you sell investments at depressed prices and erode your capital. But we are not there yet. As we said earlier, world markets have fallen back only to where they were 8–12 months ago. And we don’t know if this stock market sell-off will last.
   
   That said, we want our withdrawal plan to be resilient and able to cope if this current bear market does last and perhaps even worsens. Step 3 looks at how to be ready for this eventuality.
3. Decide now what you’ll do if the bear market lasts
   
   If markets do fall severely and remain depressed, the dangers of selling more and more of your portfolio to maintain your income become greater. The simplest way to avoid this problem is to reduce or stop these partial sales of assets while markets are low. Of course, you’ll want to maintain your income so here is where you need to call on a ‘cash buffer’: money you kept aside in cash for just this eventuality. You can of course continue to take the portfolio’s natural income from dividends and bond interest, as doing so does not erode your actual holdings.
   
   How big should your cash buffer be? There’s no hard and fast rule. However, bear markets, while often brief, can last a couple of years, so perhaps a year or two’s income held in cash would be sensible. The figure will to some extent depend on how you have invested your pension pot and how much natural income it produces. Warren Buffett, in instructions about how his widow’s money should be invested in the event of his death, said 10% of the pot should be in cash.
   
   Read: Generate your retirement income the Warren Buffett way
   
   What if you do not have a cash buffer? You should certainly have one for future market corrections during your retirement. Selling assets to generate a cash buffer while markets are depressed would not be a good idea; instead you could think about doing so when they have recovered.
4. Ensure your withdrawals are reasonable
   
   The dangers posed to your retirement income by a bear market are greatly increased if your withdrawals are excessive in the first place. A popular rule of thumb is that you should take 4% of the value of your pot each year. The ‘4% rule’, devised in 1994 by an American financial adviser called William Bengen, suggests that in the first year of retirement you withdraw 4% of your pot’s starting value and increase your withdrawals in line with inflation each year. Your withdrawals do not fluctuate in line with the changing value of your pot, as they are tied only to its initial value and inflation. Mr Bengen says the 4% rule is designed for a worst-case scenario – that, in even the most adverse circumstances to have faced investors over the past 100 years or so, a retiree’s money lasts at least 30 years. In more recent research he has suggested that a higher figure such as 5% would be safe, although we should caution that he based his numbers on an American retiree invested in US assets.

If you’re unsure, it’s a good idea to take advantage of Pension Wise, the government-backed guidance service. This free and impartial advice can help you understand your options, make informed decisions and avoid costly mistakes. You can access the guidance online at www.moneyhelper.org.uk or over the telephone on 0800 138 3944.

Our team of retirement specialists can also provide you with free guidance to help you with your decisions. They can also provide advice and help you select products though this will have a charge.

• Read: The 4% rule: the basics
• Read: What Warren Buffett says - and does - when markets fall
• Read: Market falls - your questions answered

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Eligibility to invest in a pension and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55 (57 from 2028). This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.