The regular nibbles that inflation takes from the spending power of our wealth are similarly formidable.
Even if inflation is in line with the Bank of England Monetary Policy Committee’s (MPC's) target of 2 per cent per annum, this accumulates over time to leave only two-thirds of the starting value after 20 years and less than half after 40 years.
These figures account only for expected inflation. If inflation exceeds the MPC's target, as it has done following the EU referendum, then the impact will be even larger.
What effect this has depends very much on spending patterns during retirement.
Most people lead a more active life in the early years of retirement and do less as they reach more advanced ages. Declining spending power might therefore not be as much of an issue as we might think.
Here, however, the final risk is lurking. Life expectancy is steadily rising, and the active portion of retirement is likely to continue to lengthen.
Office for National Statistics (ONS) figures show that an average man retiring at 65 in the UK in the early 1980s could expect to live for 13 years. By the middle of this decade that had increased to 19 years.
The life expectancy data is even starker when we look at a couple. For a heterosexual couple both aged 65 in 2018, half of couples would expect to see at least one spouse living to 93, a quarter will see one spouse living to 98, and one in 10 will see one spouse living to 102.
Greater longevity is something to be welcomed, but brings a significant challenge for investors in decumulation. A drawdown portfolio could well need to last for 40 years.
Doing it alone
These risks highlight what a difficult task advisers face in managing a client through retirement.
The sweeping changes that the pension freedoms brought in have left somewhat of a vacuum for advisers when it comes to decumulation. Advisers have often been left to their own devices to come up with a decumulation solution that works for their clients.
This is not efficient and presents a huge number of challenges and risks for advisers without discretionary permissions.
Unless providers address these issues with innovative and unique product or service offerings, there is a real risk of investors outliving their portfolio. Better services and increased access to financial planning are needed if we are to ensure consumers can enjoy retirement and have the opportunity to provide a legacy.
Lawrence Cook is director of marketing and business development at Thesis Asset Management
