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Perhaps one of the most hazardous complexities of new flexibilities, allowing individuals to manage their own income in retirement, is the potentially catastrophic effects of pound cost ravaging.

Unlike dollar-cost averaging, which helps investors to manage volatility by contributing a regular fixed amount to a pre-set allocation of investments – so if the price is high your amount will buy fewer units, and if it’s lower you will purchase more units – pound cost ravaging can be devastating.

Withdrawing regular amounts from retirement savings during unfavourable market conditions can ruin a healthy pension pot, causing people to run out of money far sooner than planned.

So, taking this into account, is it possible for two people to enter retirement (the longest holiday of their life!) and have two totally different experiences even if they retire at the same time, have the same level of pension funds, draw the same level of income, achieve the same level of returns, use the same pension contracts and incur the same costs and even die at the same time?

The answer, unfortunately, is YES. The examples below show how twin Brothers Toby and Arnold aged 65 have very different retirement experiences leading to Arnold running out of money just shy of his 87th birthday whilst Toby never ran out of income and was able to pass on £138,046 to his Grandchildren when he died at 90…!

How? I’ll explain…

Toby & Arnold Pension Funds


The twins retire at the same time (aged 65) with pension funds valued at £250,000 and they decide to draw an annual income of £13,500, set to increase with inflation each year at 2.5% per annum. They both achieve an ‘average’ growth rate of 6.5% per year. Therefore why are their outcomes so different?

The key is during the first 9 years Arnold takes a different investment approach leading to poor performance in the EARLY years; 1, 2 and 3. However, this evens out over the next 6 years, averaging to discrete annual growth of 6.5% per annum, but the damage has already been done!

Year 1 Year 2 Year 3 Year 4 Year 5
Toby Growth 6.50% 6.50% 6.50% 6.50% 6.50%
Toby Pension Size £251,873 £253,507 £254,880 £255,964 £256,732
Arnold Growth -20% 3% -18% 24% 20%
Arnold Pension Size £189,200 £180,623 £136,481 £151,209
Year 6 Year 7 Year 8 Year 9 Average Discrete
Annual Growth
Toby Growth 6.50% 6.50% 6.50% 6.50% 6.50%
Toby Pension Size £257,152 £257,194 £256,821 £255,997 n/a
Arnold Growth 10% 14% 22% 3.50% 6.50%
Arnold Pension Size £163,124 £168,114 £185,522 £174,991 n/a
Year 1 Year 2 Year 3 Year 4 Year 5
Income drawn £13,500 £13,838 £14,183 £14,538 £14,901
Year 6 Year 7 Year 8 Year 9 Average Discrete
Annual Growth
Income drawn £15,274 £15,656 £16,047 £16,448 n/a


What has caused Arnold to run out of money is something coined ‘Pound Cost Ravaging’ inflicted over these early years. This is a challenge for pensioners drawing from their hard-earned pension funds. It results from a combination of ‘volatility drag’ and ‘sequencing risk’, amplified by withdrawals from the pension funds.

Volatility drag is illustrated easiest using an example. Looking back at Toby and Arnold’s £250,000 pension funds I have reviewed the impact of differing falls in the value of a pension, and then calculated how the value can be recovered.


Starting Value Year 1 Year 2
-10% fall 10% rise 11.11% required rise
£250,000 £225,000 £247,500 £250,000
Starting Value Year 1 Year 2
-25% fall 25% rise 33% required rise
£250,000 £187,500 £234,375 £250,000
Starting Value Year 1 Year 2
-50% fall 50% rise 100% required rise
£250,000 £125,000 £187,500 £250,000


Clearly, the bigger the fall in value the harder the fund has to work to recover.

The sequencing risk is highlighted by the earlier table and graph, which show that falls in the early years can cause catastrophic damage to a portfolio, even if the poor returns are then followed by exceptional future years of growth.  The damage done can lead to a retirement strategy initially deemed to be reasonable quickly becoming totally unsustainable over the long term.

The impact of sequence risk is compounded further by income withdrawals during a falling market leading to pound cost ravaging.  This is where you are essentially forced to sell your pension investments when prices are falling to pay the required income.

The order in which returns occur whilst in drawdown has by far the most dramatic impact on your pension fund.  This is why the expertise and experience of a suitably qualified pensions expert to guide you through the journey is so critical.

You will often find most Financial Advisers will advise you to not be too concerned with the yearly valuations of your investments.  The impetus is on the final result in achieving the goal/objective set, which is the destination, so volatility in value along with the way (journey) is less of an issue so long as the returns even themselves out.  This is exactly right for those with long term investment time horizons with no requirement for access to income or capital along the way.

It is very different for those requiring access to capital or income though, there must be a much higher degree of emphasis on ensuring volatility and regular access do not ‘ravage’ your pension funds.

Advisers will often talk of the destination as the most important aspect of financial planning however during retirement it’s the journey that’s all-important!

What can you do to protect your retirement income?

1. Factor volatility into your cash flow planning calculations when working out the maximum income that can be withdrawn over the rest of your life. Then within an acceptable degree of risk set a ‘sustainable’ level of income. If markets outperform these pessimistic expectations then it may well mean living your life in retirement in less comfort than could have otherwise been achieved, opting for the Canary Islands over Hawaii or never buying that new car you always wanted!!

2. If possible you could consider stopping your income withdrawals during market falls and using savings or accessing capital from less market correlated investments you may hold to replace it. This will mean depleting your assets potentially to a level you are not willing to accept.

3. Use an investment provider which can provide smoothed returns to help iron out the volatility drag, sequencing risk and pound cost ravaging effect from withdrawals. No investment strategy can be perfect and as such this may lead to a significant drag on performance, higher costs, complexities and events which may lead to the smoothing strategy failing.

4. Hold a well-diversified portfolio of investments in your pension and drawdown from the areas least impacted by market volatility. This can be dangerous because it is likely to cause a skew in your investment allocation meaning you become overexposed in the areas you don’t touch.

5. Build a pension investment strategy which contains 2-3 years’ worth of cash within your pension to access income from. This strategy means that your pension will not be working as hard for you leading to a potential performance drag due to poor returns available on cash.

6. Opt to purchase an annuity – An annuity remains highly suitable for many and used as part of a retirement portfolio can provide a bedrock of income required to cover those essential costs. There is a huge, irreversible commitment made when purchasing an annuity.  Only a crystal ball would help you understand whether or not it was the right thing to do.  A drawdown pension provides much more flexibility.

7. Many providers will offer a pension product which provides an underpin of protected income for life. This may come at the expense of a reduced and restricted level of income compared to an income drawdown plan, investment restrictions and additional charges but for the peace of mind, this type of plan can fit the bill.

Financial Adviser…?

Having a Financial Adviser to help tackle these issues, make you aware of your options and ensure the journey is as smooth and enjoyable as possible is simply a must.

Mistakes made within a personal financial strategy can be extremely difficult to overcome and can result in life-shattering implications.

Therefore, consulting with an independent financial adviser is the best way for individuals to devise and manage a tailor-made retirement planning strategy, in order to secure financial security in later life.

About Mike Coady

Mike Coady is an expat expert based in Dubai and is on hand to help with all of the above and more.

Mike is an award-winning money coach and industry leader in the financial sector.

Qualified to UK Financial Conduct Authority (FCA) standards, a member of the Chartered Insurance Institute, a Founding Fellow of the Institute of Sales Professionals (FF.ISP), a Fellow of the Institute of Directors (FIoD) and featured as a highly qualified Financial Adviser in Which Financial Adviser.

To learn how to choose a great financial adviser, download our free guide.

Blog published by Mike Coady.