Drawing down

A whole life filling a pot. And one day, you have to learn the opposite: emptying it. Without it running dry too soon.

It is called drawing down. And it is harder than it looks.

Say three hundred thousand euros of capital when you retire. Two paths open up.

First path: the annuity. You give your capital to an insurer. In exchange, it pays you an income, for life.

For the example, say a rate of five per cent. Fifteen thousand euros a year, until the last day.

Live to one hundred, the insurer still pays. The risk of living long is carried by them.

The price: the capital is no longer yours. It takes twenty years of payments just to get your stake back.

And if you die early, what is left is usually lost to your heirs. Unless you take options, which lower the annuity.

Second path: gradual withdrawal. You keep the capital invested, and take a little out each year.

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You stay in control. What is left at the end can be passed on. But all the risks are yours.

And one of them is sneaky. It is called sequence risk.

Two retirees each have three hundred thousand euros. They withdraw fifteen thousand euros a year, for twenty years.

Their investments go through exactly the same years, good and bad. But not in the same order.

The first takes the crash right away. After one year, he has only two hundred and thirteen thousand euros left.

He withdraws from capital that has melted. What is sold at the bottom never comes back.

After twenty years, he has about thirty-two thousand euros left.

The second lives the same years in reverse: the good ones first, the crash at the end. He finishes with almost three hundred and forty-five thousand euros.

Same average return. More than three hundred thousand euros apart. Only the order changed.

That is why the first years of retirement are the most fragile. You protect them with a safe reserve, so you do not sell at the bottom.

One last question: if the money is in several wrappers, which one do you empty first?

An often-quoted rule: first whatever has no tax advantage. The most favourable wrappers keep working.

And every year, you use the allowances available. They are lost if unused. The rules change with the law.

Annuity or withdrawal is not all or nothing. Many combine: a safe base for life, and capital they keep in hand.

Filling the pot takes patience. Emptying it takes a plan.