At a recent investment seminar a presenter from a well-known financial institution introduced the audience to the concept of “The Ruin Age”. This was devised by Moshe Milevsky, a Canadian actuarial academic, and is the age when a pensioner exhausts their pension pot and runs out of money.

The seminar was largely focussed on the volatility of investment returns and looked at the implications for pensioners who had opted for income drawdown rather than annuities and how their fortunes were dependent on the timing of drawdowns. Milevsky says that the Ruin Age for an individual is almost as sensitive to the sequencing of returns as it is to the average return of a portfolio. Starting to draw down your portfolio in a bad year for the markets can significantly shorten the time until you run out of money. He makes the point that volatility of returns is therefore more important in the drawdown stage, than the accumulation stage because money extracted in a down year crystallises a loss that cannot be recouped. The converse in the accumulation stage, adding money at a market peak, is at least moderated by the compounding benefit of dividends in later years.
In real life this thought process is more relevant to the academic than the pensioner. Timing retirement is hard enough without having to consider if the stock market might be about to fall.

However, Robert Schiller, the Nobel Prize winning economist, showed that dividend income is much less volatile than capital values. So selecting a fund that generates more of its return from dividends than capital growth will reduce volatility. Moreover, dividend income is easy to extract, does not involve trying to time the market and does not incur costs so a high yielding fund should be able to support a higher drawdown and help maximise the Ruin Age.

There is of course no getting away from the fact, that for a given level of income, a large pension pot will last longer than a small one. So in simple terms dividing the size of the pot by the drawdown provides an estimate of how many years the fund will last.
In 2013 Credit Suisse and the London Business School calculated that the annualised mean dividend yield for world equities had been 4.1% since 1900. It is probably fair to say that…

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