Another new year, and I’m still at work. This reflects a problem that millions of us have, and will continue to have – that retirement is now a much more uncertain prospect than it used to be.
Years ago, those of us in good jobs could look forward to a final-salary-based pension that would protect us from inflation. We had security, if not great wealth, for the rest of our lives. Those with reasonable wealth who didn’t have this could achieve the same thing by buying an annuity at a decent rate. And even those who didn’t do this had a good guide on how to run down their wealth: the 'rule of 4 per cent' told us we could spend 4 per cent of our wealth each year in the reasonable hope of maintaining our capital intact.
Today, we have no such certainty. Fewer of us have final-salary pensions, annuity rates are pitiful, and we cannot rely on the rule of 4 per cent. For this to work, returns on financial assets must be sufficiently high to make up for us spending some of our wealth. But how can this be the case when returns on cash and gilts are nugatory? It can only be if there is a large equity risk premium. But risks sometimes materialise. And if they do, the 4 per cent rule will go out the window. It will only work if the future resembles the past. But we cannot be sure of this. Instead, we face what Richard Bookstaber, the author of The End of Theory, calls radical uncertainty.