What does the Lifetime income show and why do I have a shortfall in Lifetime Income when my success rate is high?

If a client wants £40k a year in retirement income over a 30-year period, their income requirement over their lifetime is £1.2m in today's terms. This is the total Lifetime Income, in today’s terms. Depending on the withdrawal strategy, the client would be able to take more or less than this. 

Reasons for the Lifetime income potentially having a shortfall while you have a high success rate could include applying dynamic spending rules and/or withdrawal strategies. For example, applying the Guardrails or the Boundaries. Other reasons include not adjusting the income withdrawn for inflation. If the withdrawal is not inflation adjusted, the Lifetime Income will show a shortfall to reflect the fact that withdrawals won't keep pace with inflation.

Please note that the total Lifetime income is not affected by the inflation or withdrawal rules strategy; it is based on the client's required income. The shortfall or excess is what results by applying the inflation rules strategy or spending rules strategy.

Timeline compares this required lifetime income to the actual total withdrawal from the portfolio in a given percentile scenario.

For example, if a 65 year old requires an income of £40,000 a year for 30 years until age 94, then the Lifetime Income required is £1.2m (i.e £40,000 X 30). Suppose, the withdrawal strategy only supports a total of £1m in the bottom 10th percent scenario during the stated retirement period. The result is a shortfall of £100k in Lifetime Income.

Timeline expresses the actual and required lifetime income in real terms.

There are a number of reasons why the actual lifetime income may be less or more than the required income, for any given scenario.

  • If the portfolio runs out of money in a given scenario before the end of the planning period.

  • If a withdrawal strategy increase/decreases the actual withdrawal depending on the portfolio performance. For instance, the Guardrails strategy reduces the income during periods of poor performance (and vice-versa). Accordingly, the actual lifetime income may be lowered than the required income, even if the portfolio doesn't run out of money.

  • If withdrawals are not adjusted for full inflation.

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