🎧The ultimate investing challenge: don't let your pension pot die before you do

What matters is not how you accumulate. It's how you decumulate.

Feb 13, 2025

Hi this is George. My day job is to produce podcasts for smart B2B brands. As an ex-financial markets pro, I love (re)thinking about investment management and of course, I’ve got a podcast for that, Investology. You may also know me from the Investorama YouTube channel, where I separate investment facts from financial fiction, with clips from movies and series.

This article is based on my Investology interview with Hugh Cutler from Mobius Life: Listen to the episode on every podcast platform, or watch it on YouTube.

There’s this epic 30 second opening of the French ‘cult’ film: La Haine (The Hatred).

Heard the story of the guy who falls from a 50-storey building?
On his way down past each floor.
He keeps saying to reassure himself:
So far so good
So far so good
But what matters is not how you fall.
It’s how you land.

My latest podcast conversation with Hugh Cutler from Mobius Life reminded me of the movie. The conversation was about pension technology.

Here’s the link: We are all potentially “that guy” when it comes to our retirement money.

We accumulate (climb the stairs) for many years. And then decumulate by spending our pensions and other savings. And it is our responsibility to do so in the DC (Defined Contribution) model that is becoming commonplace. There is no collective solidarity.

As long as we have cash to withdraw, it’s:

So far so good

But if we run out, we realise that it is not about the fall. It’s about the landing.

And the main challenge for pensions today is to avoid the hard landing.

It is not a theoretical problem

Hugh is an actuary (and we discussed that “historically, actuaries were very focused on how long people were going to live and life insurance), which means he’s very good at math and modelling. You can model this by withdrawing a fixed amount every year and assigning volatility and growth parameters. We discussed how volatility can be your friend when you accumulate via “dollar-cost-average”, but it’s your enemy when you decumulate.

But he brought a real-life example to make it more tangible:

If you started in 2000 and start with a million quid and you take out 50, 000 pounds a year and you increase the amount you take out every year with inflation and you invest your money in the stock market.
You run out of money after about 20 years.

Let’s say you live to 95. You retire at 65 in 2000. So far, so good in your 70s. So far, so good until 85. It’s 2020, and you ran out! What do you do? I don’t have the answer for that, and it’s a problem that no healthy 85-year-old with a decade ahead of him/her wants to tackle.

It’s hard for us to comprehend because TODAY. We have this wonderful combo of relatively high interest rates and risky assets that have grown by over 10% p.a. in the last decade, but TOMORROW…

If you’re unlucky with the timing of the markets or if you withdraw much too early, you could prepare yourself for a hard landing

It’s not an easy problem; in fact, it’s THE hardest

Sharpe, the Founder of the Sharpe ratio and obviously a Nobel prize winner said that this decumulation problem is the hardest and nastiest problem in finance. You don't know anything. You don't know how long you're going to live. You don't know how much money you're going to need. You don't know what markets are going to do, and you don't know what order they're going to do them in.

You can think of it as a multi-dimensional matrix with each having thousands of potential outcomes:

Mortality
Market and it’s not about the overall performance but about the sequence
Inflation
Spend
Other incomes

It makes for some very interesting models (I guess), that challenges even the most numerical pension managers, but the trick is that now the individual is responsible for facing this challenge.

Asset Allocation and Communication

The goal of the conversation was NOT to solve this hardest problem in finance, but we touched on elements that contribute to solving it: asset allocation and engagement

Asset allocation

Mobius Life’s business:

We look after the assets for pension funds. We make sure it's invested in the right managers for them; make sure the rebalancing or the cashflow or the reporting or the monitoring, that kind of stuff is all done. The individual pots of money get aggregated.
We put them into underlying investments and across a range of asset managers, a range of different types of assets, private markets, public markets. We build portfolios for those individual members.
It's governed by the pension funds and the trustees and their advisors.
It’s all around technology, it's around regulation, it's around cost and tax efficiency. So that money doesn't get wasted and is in the right place at the right time.
And ultimately, that drives better outcomes for the pension members.

In other words, they work on the plumbing.

Being able to connect with various types of income-producing assets is one of the potential solutions to the decumulation puzzles.

Doing it efficiently helps with the overall outcome.

Engagement

I’ve been doing some research and being engaged in the decision-making process seems to be an important factor. For example, you could decide to withdraw less money if a market crash just occurred, and that would make a big difference to the end outcome. But this type of nuanced judgement is very hard to achieve, for normal people who don’t read this newsletter, don’t study finance, etc. We also discussed extensively financial education with Hugh, but engagement is another important factor.

For member engagement, if you say, put a wind farm in your portfolio, we own a wind farm. You could even have the situation where your app tells you when you're near the wind farm, right? It's all connected. These things get people engaged and interested.
So it's a way of drawing people into the pension, both in terms of making that provider attractive because they've got interesting assets and they're doing interesting things and it's ethical and it's social and it's environmental, that's all good. It attracts people in and also once they're actually invested, if they can vote on the companies in their portfolio or if they can see the assets and feel the assets and know that it's doing a good thing, they're then engaged. And then because they're engaged, they put more money in. Because they put more money in, they have better retirements. Because they're engaged, they can understand decumulation.

This is the type of conversation that I particularly enjoy because it’s about a lesser-known technology that’s in the background and impacts one of our most important benefits: pensions. It’s not about radical changes though. It’s about small improvements that improve the outcome by enabling better investment decisions and increased efficiency (= reduced costs = better performance).

I can connect it with two inspirations that I consistently refer to: John Bogle, who relentlessly pursued lower fees & Robert Shiller who wants to reclaim finance for the “Good Society”.

It may not sound very exciting if you’re not an investment management geek, but it is to me, and I hope you enjoy it too!

Thanks for reading!
George

Listen to the episode on every podcast platform, or watch it on YouTube.

More information:

My channels

Investorama - Separating Investment Facts from Financial Fiction (YouTube)

Investology - Re-Think Investment Management (YouTube)

Investology in Audio version

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Investology: re-think investment management

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