When the markets are down, you purchase more units of an investment; when the markets are up, you purchase fewer units for the same amount of money. This method is referred to as pound cost averaging.
Experts typically advise drip-feeding money into investments, to lessen the impact of market volatility. This is effective because it removes the need to time the market. Instead, you make recurring (typically monthly) contributions to your investments.
So, let's look at this the other way…
The process of flexibly withdrawing income from your pension while keeping the remaining funds invested is known as drawdown. Drawdown has advantages such as allowing your pot to experience long-term growth and providing you the freedom to control withdrawals according to your requirements.
Drawdown does, however, carry certain risks. Imagine you are taking sizeable withdrawals in your early years of retirement and your investments see significant declines, as many individuals have in the past year or two. It is more difficult to make up lost ground. This is the evil twin brother of pound cost averaging and goes by the name of pound cost ravaging (boooo!). Also known as negative pound cost averaging.
Here is an example:
Consider Charlie and Jill, two 67-year-olds whose pensions are both worth £100,000.00. Each is withdrawing £7,500.00 per year, with an annual increase of 2%.
In the first five years, Charlie's investments generate returns of -10%, +4%, +4%, +4%, and +4%. At the end of that time, his pot will be valued slightly over £59,000.00.
While Jill receives the same returns, they happen to her in a different order: +4%, +4%, +4%, +4%, -10%. Her pot will be worth almost £69,000.00 over the same period.
In other words, simply by experiencing bad investment performance in year one rather than year five, Charlie has been left with a pension worth around £10,000.00 less than Jill.
This is one of the reasons it is crucial to regularly assess your drawdown plan and be ready to modify your withdrawals as needed. This will assist in ensuring that your retirement income strategy stays on course.
Hope that helps.
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