The purpose of this simulator is to:
Simulate the potential effects of taking regular withdrawals from an Investment Bond, depending on numerous factors, such as the initial fund value, the level of regular withdrawals, investment growth rate and investment volatility. This tool is similar to the Pension Fund Withdrawal Simulator.
One major problem when looking at investment products is that any initial projection works out the final projected fund value by using a linear averaged growth rate (minus withdrawals and regular charges). Usually this assumes that the initial fund value grows by 4%, 6% or 8% minus withdrawals and charges.
However, we know that in the real world investments do not grow at such a uniform rate. In some years they may increase in value by twenty percent, and in other years may lose as much value. Often there can be years of sustained losses and negative growth.
Using a standardized calculation, assuming that on average equity investments have averaged 8% growth over the last fifty years, you could draw out 8% in withdrawals every year and retain your original capital. This could work, but the chances are that you could end up with a seriously depleted fund in ten or fifteen years’ time.
For example, an individual who purchased an Investment Bond in 1999 and invested in a significant amount of equity-based funds will have seen years of negative investment returns, primarily between the years 2000-3 and since mid-2007. Although the other years in this period registered impressive investment returns, if withdrawals continued to be taken during the bad years, this could have had a significant negative impact on the investment fund, and it becomes much harder to get back to the starting point during the good years.
The effects of timing cannot be ignored. If you get off to a good start, any income producing investment is more than likely to work in your favor. For instance if you had invested in 2003 and invested mainly in equities, your fund value, despite taking withdrawals, is likely to be worth more now than at the start date. Conversely, someone who commenced in early 2007 is likely to be suffering as of mid-2008.