One outcome of the Covid-19 pandemic that may become more visible over time is a sharper focus on financial advice around retirement. There are a number of drivers that, in combination, put advisers in greater demand as difficult market conditions and changing lifestyles require the guidance of a trusted professional adviser.

A government survey from May shows 1 in 8 (13%) of UK workers aged 50 years and over say they have changed their retirement plans, with 5% saying they will retire earlier and 8% planning to retire later1.

Figures from the Office for National Statistics (ONS) also show 2020 saw the highest number of people in nearly two decades reach the pension freedom age, with about 940,000 people turning 552.

Those individuals facing or embracing retirement must contend with a challenging low-yield and low-return environment. Although bond yields picked up in 2021, they remain close to record lows and far from the double-digit yields available to UK investors in the early 1990s3.

Our research, illustrated in the chart below, found that a broadly diversified portfolio of 60% global equities and 40% global bonds in the early 1990s would have generated a ‘natural yield’ (dividends and interest) of between 4-5% on average per year. In recent years, a similar portfolio has generated an average natural yield of around only 2% – below the traditional 4% spending target for retirement investors.

Yields on traditional investments

Line chart showing Yield (%) every third year starting 1990 and ending 2020, with 0-4% being spending target range, for Global bonds; and 60% global developed market equity/40% global bonds.

Past performance is not a reliable indicator of future returns.

Source: Vanguard calculations3 using data from Macrobond and Bloomberg.

Notes: Yields for global equities and global bonds from 1 January 1990 to 30 April 2020. Global equities are defined as the MSCI ACWI Index USD, and global bonds are represented by the Bloomberg Barclays Global Aggregate Index Unhedged USD.

The relatively low yield environment could tempt some clients to invest in riskier, higher yielding assets to fund their retirement spending. This is where Vanguard believes advisers can add significant value by helping clients shape and execute a sustainable retirement plan that is consistent with their client’s attitude to risk and helps them achieve their retirement goals.

Calculating how much clients need to retire

Deciding how much they need to retire is the first question advisers can help clients answer. Replacement ratios work as a rule of thumb to estimate what percentage of a person’s pre-retirement full-time income will be needed to maintain their lifestyle in retirement. The ratio considers the client’s final full-time salary, pension income, savings, tax and regular expenses to calculate a desirable annual spending budget in retirement (as a percentage of final full-time salary). However, Vanguard recommends advisers build on these ratios to design more personalised budgets and help clients adjust, where necessary, their saving and spending habits in the build up to their retirement, as explained in our white paper, The UK replacement ratio: Making it personal.

Advisers who use cash flow modelling to stress-test client portfolios under different conditions like retiring early, making larger withdrawals and adding new ongoing expenses can leverage the Vanguard Capital Markets Model (VCMM) to estimate future asset returns. VCMM is a forward-looking, global tool that sets risk and return expectations for more than 300 asset classes over the medium and long-term4. Although Vanguard encourages investors to stick to a long-term allocation strategy, advisers may find the VCMM useful to occasionally reassess market forecasts to ensure client portfolios still rest on reasonable expectations.

Sustaining income while managing risk

Once a client’s desired income target has been established, the next big question is how to get there. In today’s low-yield environment, income-driven strategies may lead investors to tilt their portfolio towards higher risk assets, such as high-yield bonds, emerging market debt and high-dividend equities. However, these higher-yielding assets may come with additional risk.

Our analysis found that a 20% tilt towards any one of these higher-yielding asset classes would offer less downside protection in a low-return environment compared with a globally balanced 60/40 portfolio of stocks and bonds5, which could put retirees at greater risk of exhausting their savings. In market downturns, similar to that of early 2020, a balanced portfolio continues to deliver the diversification needed to withstand large drawdowns relative to the high-yield portfolio.

As explained in our recent paper, Managing the low-yield environment: stay the course with a total-return investment approach, Vanguard recommends a total-return approach to investing, which allows retirees to meet their goals with a more flexible approach to spending through a combination of portfolio income and capital, based on a more broadly diversified portfolio that can be better equipped to withstand market shocks than an income-driven approach. A total-return approach can also be more tax-efficient for higher-rate taxpayers given current tax laws for dividend income versus capital gains6.

Appropriate spending strategies

One of the most important factors in determining whether a retiree’s portfolio can withstand varying market shocks and volatility is the client’s spending strategy. One common strategy is the ‘pound-plus-inflation’ rule, which involves setting an annual spending budget and then increasing it each year in line with inflation. This approach provides a high level of certainty regarding annual spending, at least in the short term, but risks early depletion of funds following a run of poor returns7.

The ‘percentage of portfolio’ rule keeps the annual spending at a predetermined percentage of the portfolio. That means the pot never runs down to nil, but a client’s annual spending power will fluctuate according to market returns8.

In our paper, Sustainable spending rates in turbulent markets, Vanguard suggests a ‘dynamic spending’ rule, which is essentially a hybrid of the pound-plus-inflation and percentage of portfolio approaches. Dynamic spending makes modest adjustments to withdrawals in response to market performance, limited by a ‘ceiling’ and ‘floor’ for maximum and minimum spending budgets. The goal is to keep annual real (inflation-adjusted) spending relatively stable while also preserving portfolio longevity.

Withdrawing money in a tax-efficient manner is also important. Tax-efficient accounts, such as individual saving accounts (ISAs) and pensions, will grow faster than those attracting full rates of tax and should be kept in reserve for as long as possible. Investors with multiple pots can minimise the taxes paid on their retirement assets by selecting the optimal withdrawal order among their accounts. Read our paper, Withdrawal order: making the most of retirement assets, to find out more about how advisers can help construct tax-efficient withdrawal strategies.

The value of advice

In light of the challenges facing retirees in the low-yield and low-return environment, advisers have an important and valuable role in shaping appropriate investment and spending strategies to help retirees meet their goals. Vanguard’s suite of retirement-themed research materials, through our Adviser’s Alpha framework, is available to support advisers in delivering added value to clients in retirement planning.


1 Living longer: older workers during the coronavirus (Covid-19) pandemic, May 2021Office of National Statistics.

2 Office for National Statistics

3 Vanguard calculations using data from Macrobond and Bloomberg. Yields for global equities and global bonds from 1 January 1990 to 30 April 2020. Global equities are defined as the MSCI ACWI Index USD, and global bonds are represented by the Bloomberg Barclays Global Aggregate Index Unhedged USD.

4 Projections and other information generated by the Vanguard Capital Markets Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Distribution of return outcomes from the VCMM are derived from 10,000 simulations for each modelled asset class. Results from the model may vary with each use and over time.

The VCMM projections are based on a statistical analysis of historical data. Future returns may behave differently from the historical patterns captured in the VCMM. More important, the VCMM may be underestimating extreme negative scenarios unobserved in the historical period on which the model estimation is based.

5 See Managing the low yield environment: stay the course with a total-return approach to investing, Daga and Rocha, September 2021. Results generated by the Vanguard Capital Markets Model (VCMM) as of 31 May 2021. Notes: Portfolio asset allocations for the four portfolio tilts are as follows: 1) Base portfolio – 15% domestic equity, 45% international equity, 14% domestic bonds and 26% international bonds. 2) High-yield tilt 20% – 15% domestic equity, 45% international equity, 14% domestic bonds, 6% international bonds and 20% high-yield bonds. 3) UK corporate bond tilt 20% – 15% domestic equity, 45% international equity, 20% international bonds and 20% UK corporate bonds. 4) Emerging market bond tilt 20% – 15% domestic equity, 45% international equity, 14% domestic bonds, 6% international bonds, 20% emerging market government bonds. Domestic equity = MSCI UK All Cap Index; international equity = MSCI All Country World Index ex UK; domestic bonds = Bloomberg Barclays Sterling Aggregate Bond Index; international bonds = Bloomberg Barclays Global Aggregate ex GBP Index; high yield bonds = Bloomberg Barclays Global High Yield Corporate Index; UK corporate bonds = Bloomberg Barclays UK Aggregate Corporate Bond Index; emerging market government bonds = Bloomberg Barclays EM Aggregate Index. All indices in GBP.

6 2020/21 UK tax year, law for a higher-rate taxpayer: Any dividends and interest earned above an annual allowance are taxed at 32.5% and 40%, respectively, relative to capital gains at 20% (capital gains tax on property is 28%). The annual tax-free capital-gains allowance is £12,300, compared with £2,000 for dividends.

7 See Sustainable spending in turbulent markets, Daga, Clarke and Pakula, March 2021.

8 See Sustainable spending in turbulent markets, Daga, Clarke and Pakula, March 2021.

Investment risk information

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.

Any projections should be regarded as hypothetical in nature and do not reflect or guarantee future results.

Past performance is not a reliable indicator of future results.

Simulated past performance is not a reliable indicator of future results.

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