The 10/30/60 retirement rule – are you ready?

10 30 60 retirement income rule

Did you know 60% of investment growth occurs in retirement?

Historically, you may have used your pension fund to buy an annuity. However since 2006, it was no longer compulsory to purchase annuity from your pension pot. After the pension ‘freedom’ rules introduced in 2015, this provided even more options with the ability to also use your pension as a tax-efficient saving tool.

Under the new rules your pension can essentially be treated like the rest of your savings and investments for planning purposes (with some tax advantages and disadvantages).

For much of our working life we focus on how to save for the longest holiday of our lives - retirement. However, did you know that that’s not where most of your retirement incomes comes from? Well, here’s the break down using the 10/30/60 rule.

Where does the money come from?

Investments research shows that 60% of your investment earnings come from post-retirement investment return. This essentially means that you will see the highest value in return, after you stop working and officially retire.

Therefore, developing a retirement plan that ensures your portfolio keeps growing post-retirement is even more important than during your working life!

What is the 10/30/60 rule?

The rule was devised from research carried out by world-renowned pension fund expert Don Ezra. It was based on research undertaken with defined benefit (DB) pension funds and has since been replicated with defined contribution (DC) funds.

According to the 10/30/60 Rule, your retirement income usually comes from the following sources:

  • 10% from the money you saved during your working years;
  • 30% from the investment returns you achieve before you retire; and
  • 60% from the investment returns you achieve during your retirement.

 The actual figures will inevitably vary for each person, but the consensus of the rule can be broadly applied to many retirees. Putting this another way, essentially 90% of your income comes from investment growth, with a huge majority of this coming post-retirement.

10 30 60 retirement income rule

Therefore, the key to success is having the ‘right’ portfolio (for you) up to retirement and beyond.

What does this mean?

Here’s an example based on historic modelling and future projections.

Paul was a Sales Executive by trade and made contributions worth a total of £120,800 throughout various stages of his working life.

Paul retires at 65 and begins to withdraw from his retirement savings – starting with £21,241 the first year and increasing each year until age 90.

He was able to withdraw a total income of £1.1 million (£1,013,750 to be exact) during retirement.

Figures can be confusing, let’s try illustrating this in comparison to the 10/30/60 rule.

10 30 60 retirement income example breakdown

From the table we can see that:

  • Just 12% of Paul’s investment earnings between ages 65 and 91 came from his initial contributions of £120,800.
  • 31% of Paul’s investment earnings came from portfolio growth of £316,169 which occurred before he turned 65.
  • A whopping 57% of Paul’s investment earnings totalling £576,781 came from growth that occurred between the ages of 65 and 91.
  • Paul’s total distributions between 65 and 91 were £1,013,750.

Why does it matter?

This is a great illustration of why traditional views of retirement and retirement income should be challenged and further examined. Are your investments equipped for producing the returns you require when no longer in work? Will they help you reach that average of 60%?

The impact of financial planning into the future highlights the importance of on-going advice, cash-flow modelling and a good investment solution which should be regularly reviewed.

The Value of an Adviser

Many people don't make an active investment choice on their pensions and simply accept the default investment option offered by providers.

For example, have you considered whether the auto-enrolment of lifestyle pensions is right for you? Allowing your pension savings to transfer into another fund automatically may not always produce the returns you are expecting. With lifestyle pensions generally having a lower risk profile as you get closer to your planned retirement age, it’s always important to reassess whether these align with your goals.

As advisers we take into consideration three key elements to build the best strategy for you: risk levels versus your objectives and expectations.risk objective expectation measure

Whilst many default investment options offer well diversified portfolios with a growth focus, you have control of how these should reflect your personal investment needs and risk profile.

If you have any questions or concerns about your retirement income and future-planning, speak to your financial adviser, or us.

Please note the content in this article is for research and insight purposes only and should not be treated as financial advice offered on behalf of Murphy Wealth.

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