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  • FIRST POST
    • sunnyjim1234
    • By sunnyjim1234 22nd Sep 16, 7:40 PM
    • 10Posts
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    sunnyjim1234
    Drawdown Strategy for early retirement. could this work?
    • #1
    • 22nd Sep 16, 7:40 PM
    Drawdown Strategy for early retirement. could this work? 22nd Sep 16 at 7:40 PM
    Hi,
    I have been an avid reader of this forum board for quite some time and have found it invaluable.I'd like to run a drawdown strategy past you guys for some opinions on its feasibility.
    Me:
    54 yrs old
    Looking to retire at 55
    SPA 67 yrs
    35 yrs NI Contributions
    Full New SP amount
    Investments:
    SIPP £600,000 Multifund Diversified
    Cash ISA £144,000
    With Profits Pension GMP £4,000 from age 65.
    So 12 yrs between giving up work and SPA.
    I would like to achieve a net annual income of £36,000.
    What I propose to do is to think of the SIPP as 12 Tranches of £50,000.
    Each year I crystallise 1 tranche, and take 25% TFLS £12,500 and£11,500 Personal Allowance, leaving £26,000 invested.
    Switch the cash in the ISA to a S&S ISA and drawdown £12,000
    Giving me the desired £36,000 effectively tax free!
    Repeat each year for next 11 yrs.
    I realise this will mean I will be limited to a maximum £10,000 annual pension contribution going forward, but I don't see that as being a problem.
    If I reach SPA, the SP and GMP will give me £12,000 p.a, so going forward I will only require £24,000 drawdown from what is left of the SIPP. I realise that by this point there will be no more TFLS available on further withdrawals, unless I have been able to build up some more pension by then.
    How can I calculate at what age the income will dry up?
    I know I have not taken inflation into account but I hope that investment returns will at least keep pace with inflation.
    Would really appreciate any comments/opinions/advice from anyone.
    Thanks in anticipation.

    Sunny
Page 1
    • zagfles
    • By zagfles 22nd Sep 16, 7:57 PM
    • 10,984 Posts
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    zagfles
    • #2
    • 22nd Sep 16, 7:57 PM
    • #2
    • 22nd Sep 16, 7:57 PM
    Th state pension and "with profits" pension would use up your personal allowance after SPA, so you'd need to draw down about £30k to get the extra £24k net you want for a £36k net total.

    If investments rise with inflation, then you'll have £26k x 12 = £312k crystallised at SPA, so would last a bit over 10 years ie till about 77.

    Of course if your investments rise faster than inflation they'll last a lot longer...
    • sunnyjim1234
    • By sunnyjim1234 22nd Sep 16, 8:13 PM
    • 10 Posts
    • 1 Thanks
    sunnyjim1234
    • #3
    • 22nd Sep 16, 8:13 PM
    • #3
    • 22nd Sep 16, 8:13 PM
    Th state pension and "with profits" pension would use up your personal allowance after SPA, so you'd need to draw down about £30k to get the extra £24k net you want for a £36k net total.

    If investments rise with inflation, then you'll have £26k x 12 = £312k crystallised at SPA, so would last a bit over 10 years ie till about 77.

    Of course if your investments rise faster than inflation they'll last a lot longer...
    Originally posted by zagfles
    Thank you very much for that.
    I knew there had to be a flaw in my cunning plan!
    Actually, now I come to think about it, my mortgage will be paid off at that point, so I will probably only need an extra £12,000 net,
    on top of SPA/GMP so that'll hopefully buy me a few more years


    Regards
    Sunny
    • Thrugelmir
    • By Thrugelmir 22nd Sep 16, 8:41 PM
    • 49,929 Posts
    • 41,602 Thanks
    Thrugelmir
    • #4
    • 22nd Sep 16, 8:41 PM
    • #4
    • 22nd Sep 16, 8:41 PM
    If investments rise with inflation, then you'll have £26k x 12 = £312k crystallised at SPA, so would last a bit over 10 years ie till about 77.
    Originally posted by zagfles
    Investments fluctuate rather than serenely rise with inflation. With any drawdown model. The problem arises if there's a sizable fall in value in the early years of redemption. As the lost capital is never fully recovered.
    “A man is rich who lives upon what he has. A man is poor who lives upon what is coming. A prudent man lives within his income, and saves against ‘a rainy day’.”
    • sunnyjim1234
    • By sunnyjim1234 22nd Sep 16, 9:07 PM
    • 10 Posts
    • 1 Thanks
    sunnyjim1234
    • #5
    • 22nd Sep 16, 9:07 PM
    • #5
    • 22nd Sep 16, 9:07 PM
    Investments fluctuate rather than serenely rise with inflation. With any drawdown model. The problem arises if there's a sizable fall in value in the early years of redemption. As the lost capital is never fully recovered.
    Originally posted by Thrugelmir
    About this,
    I have been looking at jamesd's excellent thread about using Guyton & Klinger's safe withdrawal rate strategy and keeping 1 yrs worth of anticipated investment returns in cash to avoid having to sell assets during a market downturn. Do you consider 1 year sufficient, or would this be the bare minimum?
    Regards
    Sunny
    • Triumph13
    • By Triumph13 22nd Sep 16, 11:11 PM
    • 671 Posts
    • 602 Thanks
    Triumph13
    • #6
    • 22nd Sep 16, 11:11 PM
    • #6
    • 22nd Sep 16, 11:11 PM
    Assuming the mortgage is paid off at the point you hit SPA and if you think a 4% withdrawal rate is sustainable (and are prepared to reduce your spending in a downturn to keep it so), then I might be inclined for something a little more like the following:
    1. The £144,000 in cash ISAs I would be tempted to keep there, sticking it on a combination of long term fixed rates to hope to match inflation and withdraw steadily to give you a 'fixed' £12k per year to reduce income volatility.
    2. The £600k I wouldn't muck about with taking in tranches, I'd just take the £150k TFLS, put it straight back into the same funds you were using inside the pension, and continue to consider the whole £600k as providing your £24k pa drawdown. You might want to shuffle some of the TFLS funds into ISAs over time to avoid the slight risk of breaching the £5k limit for dividend income.
    3. Proceed to take your 4% drawdown of £24k pa each year, But take it as £11,500 from the pension and £12,500 from the S&S ISA to avoid paying any tax. That all adds up to your £36k pa tax free
    4. By the time you are drawing your SP, the cash ISA is exhausted and there would be little left in the S&S ISA so both your pensions and pretty well all your £24k pa drawdown would now be taxable, giving you around £31k net pa - which should be plenty now that your mortgage is paid off.
    • sunnyjim1234
    • By sunnyjim1234 23rd Sep 16, 12:01 AM
    • 10 Posts
    • 1 Thanks
    sunnyjim1234
    • #7
    • 23rd Sep 16, 12:01 AM
    • #7
    • 23rd Sep 16, 12:01 AM
    Assuming the mortgage is paid off at the point you hit SPA and if you think a 4% withdrawal rate is sustainable (and are prepared to reduce your spending in a downturn to keep it so), then I might be inclined for something a little more like the following:
    1. The £144,000 in cash ISAs I would be tempted to keep there, sticking it on a combination of long term fixed rates to hope to match inflation and withdraw steadily to give you a 'fixed' £12k per year to reduce income volatility.
    2. The £600k I wouldn't muck about with taking in tranches, I'd just take the £150k TFLS, put it straight back into the same funds you were using inside the pension, and continue to consider the whole £600k as providing your £24k pa drawdown. You might want to shuffle some of the TFLS funds into ISAs over time to avoid the slight risk of breaching the £5k limit for dividend income.
    3. Proceed to take your 4% drawdown of £24k pa each year, But take it as £11,500 from the pension and £12,500 from the S&S ISA to avoid paying any tax. That all adds up to your £36k pa tax free
    4. By the time you are drawing your SP, the cash ISA is exhausted and there would be little left in the S&S ISA so both your pensions and pretty well all your £24k pa drawdown would now be taxable, giving you around £31k net pa - which should be plenty now that your mortgage is paid off.
    Originally posted by Triumph13
    Thank you for your input. That does sound like a better plan.
    The reason I thought about a phased drawdown of TFLS was that it might result in a potentially higher TFLS due to investment growth of the tranches over time.
    Regards
    Sunny
    • tacpot12
    • By tacpot12 23rd Sep 16, 12:06 AM
    • 237 Posts
    • 166 Thanks
    tacpot12
    • #8
    • 23rd Sep 16, 12:06 AM
    • #8
    • 23rd Sep 16, 12:06 AM
    One year is the bare minimum to keep in cash, as investments rarely recover within 12 months. But one year is sufficient to avoid the worst of the worst.

    The problem of excessive capital depletion in the early years is one reason that flexi-drawdown is safer than UFPLSs - you have to take less capital out if you don't have to pay tax on any of the withdrawal. But this is only a concern if you expect to have to sell assets to fund withdrawals. A portfolio that produces sufficient natural income to meet you needs doesn't require assets to be sold.
    • westv
    • By westv 23rd Sep 16, 12:21 AM
    • 4,005 Posts
    • 1,698 Thanks
    westv
    • #9
    • 23rd Sep 16, 12:21 AM
    • #9
    • 23rd Sep 16, 12:21 AM
    But won't a portfolio where you solely use the natural yield only produce a sub 3% income if you also want real growth. That seems rather low and is nudging index linked annuity rates.
    • kidmugsy
    • By kidmugsy 23rd Sep 16, 12:36 AM
    • 8,461 Posts
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    kidmugsy
    Your plan of avoiding 20% tax at age 55, but being prepared to pay income tax at 65 or 67 seems to me to be a bet on the basic income tax rate falling below 20% in the next dozen years. I might in your shoes bet the other way.

    Similarly, your notion of not drawing the TFLS right away is a bet on the 25% TFLS surviving for a dozen years. Is that a bet you want to make?
  • jamesd
    One year is the bare minimum to keep in cash, as investments rarely recover within 12 months. But one year is sufficient to avoid the worst of the worst.
    Originally posted by tacpot12
    The natural yield/dividends of the investments means that the one year's pot gets topped up without capital selling so it is likely to last many years. Say the natural income is 3% and the drawdown rate is 6% that's around two and a half years of the extra over natural being funded.

    If using Guyton-Klinger it's also quite likely that cash inside the investment mixture was topped up by those rules before the downturn: "If anything had a positive return and is now at an overweight allocation, sell the overweight amount and put that in cash" as I paraphrased it.
    • sunnyjim1234
    • By sunnyjim1234 23rd Sep 16, 5:57 PM
    • 10 Posts
    • 1 Thanks
    sunnyjim1234
    Your plan of avoiding 20% tax at age 55, but being prepared to pay income tax at 65 or 67 seems to me to be a bet on the basic income tax rate falling below 20% in the next dozen years. I might in your shoes bet the other way.

    Similarly, your notion of not drawing the TFLS right away is a bet on the 25% TFLS surviving for a dozen years. Is that a bet you want to make?
    Originally posted by kidmugsy
    Thanks for your input.
    I hadn't thought of it from that angle. Are you suggesting drawing down more from the SIPP albeit taxed and preserving the ISA for tax efficiency later on?
    I had assumed that if the TFLS was going to be messed with then there would be a period of grace in which I could alter my strategy.
    Many Thanks
    • kidmugsy
    • By kidmugsy 23rd Sep 16, 9:43 PM
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    kidmugsy
    I hadn't thought of it from that angle. Are you suggesting drawing down more from the SIPP albeit taxed and preserving the ISA for tax efficiency later on?
    Originally posted by sunnyjim1234
    Yes, but you'd have to accept that that would be a bet on the tax advantage of ISAs surviving. So far ISAs have been subjected to far less fiddling about than pensions.

    I suppose your original plan at least has the advantage that you put off paying tax as long as possible. Hmmm: maybe that's a sensible way to bet. If tax rates fall, or personal allowances increase, you'll win. In other words, over the past half dozen years your proposed plan would have been advantageous. But the question is about the next dozen years. Oh for a crystal ball!

    By the by, do you have anyone to leave unused money to if you die young? If so, there's a big advantage of leaving pension money, rather than ISA money, if you die before 75: the beneficiary gets to withdraw money from the pension tax-free, and there's no exposure to IHT.




    I had assumed that if the TFLS was going to be messed with then there would be a period of grace in which I could alter my strategy.
    Originally posted by sunnyjim1234
    Maybe: it depends on how severe an economic emergency might be, and who is Chancellor at the time. There have even been cases of having to pay a tax introduced retrospectively, certainly in the case of Labour governments. (I don't know whether there have been any cases under Conservative or Liberal governments.)
  • jamesd
    I had assumed that if the TFLS was going to be messed with then there would be a period of grace in which I could alter my strategy.
    Originally posted by sunnyjim1234
    My working assumption is that it might be changed with too little notice so I'll be taking it pretty much as soon as I can to protect myself from that particular legislative risk.
    • kidmugsy
    • By kidmugsy 24th Sep 16, 1:59 PM
    • 8,461 Posts
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    kidmugsy
    My working assumption is that it might be changed with too little notice so I'll be taking it pretty much as soon as I can to protect myself from that particular legislative risk.
    Originally posted by jamesd
    That's the way I'd bet: the chances of the TFLS being increased above 25% must be nil, so the risk is all one way.
    • atush
    • By atush 24th Sep 16, 7:11 PM
    • 15,154 Posts
    • 9,066 Thanks
    atush
    I personally think you might need to work a year longer and boost the Isas and pension. just because you are running down the isas in 12 years and have no leeway/emergency cushion.
    • sunnyjim1234
    • By sunnyjim1234 24th Sep 16, 11:59 PM
    • 10 Posts
    • 1 Thanks
    sunnyjim1234
    I personally think you might need to work a year longer and boost the Isas and pension. just because you are running down the isas in 12 years and have no leeway/emergency cushion.
    Originally posted by atush
    Thank you for your very succinct reply.
    I agree.
    Retiring at 55 was always going to be pie in the sky!
    I just needed you guys to confirm it.
    I don't think I'm a million miles away, but I think you've hit the nail on the head. One, maybe two years extra would give me a more realistic margin of error.
    I think I always knew that, I just needed to hear it from someone else.
    Thank you to all who have contributed to this post
    Back to the grindstone, but I can see light at the end of the tunnel.
    • sunnyjim1234
    • By sunnyjim1234 25th Sep 16, 12:21 AM
    • 10 Posts
    • 1 Thanks
    sunnyjim1234
    The natural yield/dividends of the investments means that the one year's pot gets topped up without capital selling so it is likely to last many years. Say the natural income is 3% and the drawdown rate is 6% that's around two and a half years of the extra over natural being funded.

    it's also quite likely that cash inside the investment mixture was topped up by those rules before the downturn: "If anything had a positive return and is now at an overweight allocation, sell the overweight amount and put that in cash" as I paraphrased it.
    Originally posted by jamesd
    James,
    Huge fan of your posts by the way.
    I have run my figures through cfiresim, using your fabulous walk through, and my required annual income (Guyton-Klinger) seems to be more than possible. Am I doing something wrong?
    Regards
    Sunny
  • jamesd
    hard to say whether you did something wrong without knowing what you put into each entry there. Maybe you could say?
    • sunnyjim1234
    • By sunnyjim1234 25th Sep 16, 8:36 AM
    • 10 Posts
    • 1 Thanks
    sunnyjim1234
    hard to say whether you did something wrong without knowing what you put into each entry there. Maybe you could say?
    Originally posted by jamesd
    Of course, stupid of me!
    Okay, so I open up Cfiresim,
    Retirement age 2016
    End 2056
    Investigate Max Initial Spending
    Portfolio Value£ 744000
    Spending plan Guyton=Klinger
    Social Security £8000 Start Year 2030
    Pension £4000 Start year 2028 not inflation adjusted
    Run Sim
    Many Thanks
    Sunny
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