Invert, always invert: the key to sustainable retirement income

Deciding how much money to withdraw from savings to provide an income in retirement is a highly complex and challenging concept. This is true even for experienced professionals who work with uncertainty around investment strategies and longevity for their day job. How long do I expect to live? How well do I expect my assets to perform? How much do I expect that I need to spend?

To answer requires lots of assumptions on how we expect the future to evolve. However, in reality our lives will pan out far from any expectations that we come up with. Indeed as things evolve the problem becomes a dynamic system with lots of complexity, dependencies and feedback loops.

One technique that can be used to help solve challenging problems is to invert them, i.e. to turn the problem upside down or look at it backwards. This is something that has been popularized by Charlie Munger (Warren Buffet’s business partner), taking a leaf out of mathematician Carl Jacobi’s maxim “Invert, always invert”.

Applying this concept to post-retirement, does indeed help crystalize how to approach post-retirement withdrawal strategies. This is because, for sure, the thing that everyone would want to avoid in retirement is out-living their assets as this would effectively create a form of personal bankruptcy.

So the question now becomes, how do I avoid running out of money?

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.