He offered three characters on the ‘glidepath’ to retirement – Prudent Poly, whose stock-bond allocation progressively moves from 80-20 to 20-80; Balanced Burt, whose stock-bond allocation is rebalanced annually to a static 50-50; and Contrary Connie, whose stock-bond allocation progressively moves from 20-80 to 80-20.
According to Mr Arnott, assuming an annual investment of $1,000 (£784.70) over 40 years, on average, Polly could expect to enter retirement with around $124,000, Burt with $138,000 and Connie with $152,000.
Crucially, the worst case scenarios showed a similar pattern.
In the worst outcomes experienced over 140 years of historic returns Polly would end her working life with just $50,000, Burt with $52,000 and Connie with $53,000.
Many others have corroborated this research. In 2017, I carried out a similar study to explore how far retirement savings might last in a range of scenarios.
In this study, two investors (and admittedly this is not a hard luck tale – these would be high-net-worth individuals) save an average of £20,000 a year from the age of 30 to 60, retire and then set about withdrawing an annual pension of £60,000 a year.
But having also modelled much more modest scenarios, the conclusions drawn below in terms of the risk reward trade-off are consistent whether you save £20,000 or £2,000, and draw £60,000 or £6,000.
One invests throughout in a moderately cautious portfolio generating 4 per cent per annum on average (after advisory fees and miscellaneous costs), the second targets 5 per cent per annum through a balanced portfolio.
The cautious investor runs out of money at nearly 86, by which point the balanced investor still has £800,000 in savings.
This was a simple model – it assumed the portfolios were kicking out exactly 4 per cent and 5 per cent a year.
Not very realistic, you might argue.
Subjecting them to the vicissitudes of normal markets using real-life market data that included the market crash of 2008 to 2009 aimed to address that issue.
Taking a ‘bad’ scenario (on a scale of one to 100 of outcomes, where one was the best and 100 was the worst, this was number 80 on the scale), the cautious investor ran out of cash at around 80; the balanced investor ran out of money at 84.
Caution still did not pay.
We dialled up the gloom even further, this time assuming both investors had been taking the same levels of risk all their lives, so they started out with the same pot of money at 60.
Then we plugged in the 90th centile – ‘really bad’ – market data. Both investors ran out of money at roughly the same time – when they were 80.
No need to be reckless
The comforting conclusion is that it only takes a modest increase in risk to generate significantly better returns – in our research it was one step up the risk ladder, from moderately cautious to balanced.
