These are tough times for investors. There are few who enjoy the kind of market volatility we’ve seen over the last couple of years, but it’s particularly hard for retired investors. Retirees who are using their investments to provide a living will get investment returns in time but, as we can see at the moment, those returns will not be constant – market volatility is one of the things that they will have to manage.

Those who are saving long term for retirement can endure volatility knowing that at least when markets are down they’re buying at lower prices, and they can expect good returns from those low-price investments in the future. As they accumulate, they may be uncomfortable with the volatility but at least they will eventually profit from it.

However, volatility is no friend of the retired – as they decumulate, retired investors tend to be sellers of investments rather than buyers. They need to make constant withdrawals to fund their living costs, and at the moment they are selling into weakness.

Few people now live solely on the returns from their investments. Our parents’ generation would largely put their savings in term deposits (or other similar investments). They would live off the interest while keeping their capital intact, to be passed on to the children through their wills.

Today we have to make our money last longer. Life expectancy for a 65-year old is close to 25 years and over that time inflation will reduce the real value of our income from investments. Moreover, most people want more income than can be derived from term deposits and the like – many retirees are very active and want to do a lot of things that cost. Simply taking investment income is not enough and they need to draw some capital as well.

It is now common for people to draw not just income but to spend a little of their investment capital each year. This means that the value of their investments gradually declines. This is slow at the start but, with constant draw downs, the amount that they have invested reduces faster and faster as time goes on.

The amount to draw is a difficult, complicated calculation with several factors at play: investment returns, inflation, and life expectancy are the main ones and all are unknown at the start of retirement. It’s an actuary’s job to make calculations using the best assumptions available.

For those without actuarial assistance, there are rules of thumb. For example, the 4% rule says you can draw 4% of your initial investment funds each year, increasing the amount with inflation each year for thirty years (at which time the money will be all gone). While such rules give guidance, finding a safe draw down rate which will prove to be neither too big nor too small is difficult.

Drawing capital means watching your account value decline. This is, of course, extremely uncomfortable. The discomfort is increased by volatility – not only is your account balance reduced because you are drawing on your investment capital, but volatility pushes the value of your investments down further. Retired people with investments are hit both ways.

This causes some to cut how much they withdraw – they are frightened into a reduced lifestyle. That is a great shame – people should be having the time of their lives in retirement.