Capital or pension: The security aspect - capital market risk

In Economico Flash 4, we have provided an overview of the “capital versus pension” decision. In Flashes 6 & 7 we look at the security aspect.

In this Flash, we look at the capital market risk. This again only concerns the lump-sum withdrawal, as the pension fund remains responsible for the management of its capital in the event of a pension decision. However, when you make a lump-sum withdrawal, you also assume responsibility for its management.

If you want to generate the same return on the capital withdrawn that is implicitly guaranteed with the pension, a substantial equity component is necessary, as explained in Flash 5. Above is an illustration of an investment strategy to which we attribute the required return potential (gross 3.4%; cost assumption 1.3%; net 2.1%) in order to keep up with the 2.1% interest guarantee of the pension from a return perspective.

Such an investment strategy with an equity component of 35% can and will lead to painful losses during the occasional stock market turbulence. For example, it is quite possible – as happened recently in 2022 – that you could lose 12% or more of your capital within a year with such an investment strategy.

In a situation like this, when the doomsday prophets are usually shouting the loudest, you need to keep calm and stick to your investment strategy with iron discipline. This requires nerves of steel.

It is therefore advisable to create the following prerequisites for the independent management of the capital drawn:

• Sufficient knowledge in defining and implementing the investment strategy
• Sufficient risk appetite and risk capacity to cope with losses
• Continuity and investment discipline generally pay off and avoid unnecessary transaction costs
• Cost-efficient implementation of the investment strategy reduces the required gross return and also enables investment strategies with less risk. Economico supports you in this.

If you want to avoid capital market risk and thus sleep soundly in old age, we recommend the pension.