De-risking the five-year bridge to state pension

The numbers:

• £32,000 on £800,000 is a 4.0% initial withdrawal for five years - then £32,000 − £11,500 = £20,500, or 2.6%, from 67.
• Five years of full draw = £160,000, 20% of the portfolio, needed before any state pension arrives.
• To sustain 4% real for five years and 2.6% thereafter over a 30-year horizon, she needs roughly 4% gross real return. That is not achievable from cash or short gilts; it is achievable from a growth-tilted portfolio, but not reliably from one.

Attitude vs capacity:

• Attitude is high: she wants to stay in equities and fears missing rallies.
• Capacity is moderate, not high. Her human capital ends at 62, there is no DB income, and the SIPP must fund a fixed £32,000 for 60 months with no backstop. A 30% fall at 61 would hit money she is contractually about to spend.
• The two are misaligned in a specific way: her stated preference is for more equity than her bridge period can safely carry. The binding constraint is the five-year bridge, not the 30-year horizon.

Plan is sustainable if the bridge is funded defensively; it is fragile if the whole £800,000 stays 85% equity into age 62.

Illustration. Start: £680,000 equity, £120,000 bonds. Equity falls 30% in year one of drawdown:

• Equity: £680,000 × 0.70 = £476,000; total = £596,000.
• Withdraw £32,000 → £564,000.
• Required growth to regain £800,000: 800 ÷ 564 − 1 = +41.8%. An investor who withdrew nothing needs only +34.2%.
• And the next £32,000 is now 5.7% of remaining capital, not 4.0%.

The same average return delivered in a different order gives a different outcome, because withdrawals taken from a depressed portfolio convert a temporary fall into a permanent loss of units.

Response:

1. Ring-fence the bridge. Hold 3–5 years of net spending - £96,000–£160,000 - in short-dated gilts and cash inside the ISA, so the equity portfolio is not sold at the bottom.
2. Glide path, not a cliff. Reduce equity from 85% towards 60–65% by 62, replenishing the defensive sleeve from equities after strong years and spending from it after weak ones.
3. Rebalance on rules, with a written band (e.g. ±7.5%) so the decision is not made in the moment.
4. Stage the income. Use ISA withdrawals and tax-free cash to smooth the tax position rather than taking a fixed 4% from one pot.

It swaps a visible risk for a certain one.

• Inflation and real erosion. With ~4% inflation and cash returning around 4% gross before costs, the real return is roughly nil. Withdrawing 4% and inflation-linking it means real capital falls by about 4% a year - the pot halves in real terms in under two decades, against a 30-year-plus horizon.
• Longevity. At 56 with a healthy life expectancy, the money must last past 90. Cash cannot do it at a 4% draw.
• It does not eliminate risk; it reallocates it from volatility (which she can partly ride out) to shortfall (which she cannot).
• It also ignores her attitude to risk, so it is likely to be abandoned at the first inflation scare or after a year of real losses - the worst of both worlds.

Judgement: the correct answer is neither 'all cash' nor '85% equity throughout'. It is a portfolio whose bridge is defensive and whose long-term growth engine remains in real assets, documented against both her attitude and her capacity. The colleague's proposal fails the capacity test in the opposite direction from her current allocation.