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  • FIRST POST
    • GSP
    • By GSP 29th Dec 17, 10:26 AM
    • 162Posts
    • 34Thanks
    GSP
    £780k pot how much would you drawdown each year
    • #1
    • 29th Dec 17, 10:26 AM
    £780k pot how much would you drawdown each year 29th Dec 17 at 10:26 AM
    Hi,
    I am four months into drawdown fund of £780k. The wife will be eligible for a fund of £150k in 4.75 years time. SPA age for me is 12 years time, my wife 15 years and we have to make 5 years contributions for full SPA.

    She has given up work and we intend to have some good holidays though keeping an eye on the fund.
    I have been reading posts regarding safe withdrawal rates etc. Some posters are cautious, but some say enjoy what you can.

    I will be having reviews with my IFA but with differing opinions out there be interesting to know how much people would withdraw each year. Excluding shopping, all regular household bills are less than £500 a month, no loans or mortgage.

    Thanks
Page 7
    • bostonerimus
    • By bostonerimus 8th Jan 18, 1:47 PM
    • 1,397 Posts
    • 815 Thanks
    bostonerimus
    Thanks for your reply. Unless the markets crash immediately after first accessing a pension surely squirrelling away a minimum of two years 'drawdown buffer' supports an annual withdrawal in excess of the 'natural yield'? Also, from my basic understanding of shares even dividends are not guaranteed and I would expect them to decrease in line with a reduction in share (pension fund) value? Regarding running out of pension fund, my current model does empty my pension fund by 85 however my reasons for doing this by then is because all I will be financing is the basics, food, council tax, heating (I have solar..), etc... I do start with a draw down in excess of my current net pay so I'm expecting to have cash savings too. The full state pension isn't such a meagre sum to live off from 85 especially if I haven't blown everything that I've drawn down since 59 and my daily thrills from 85 are finding the remote control and going to the bathroom by myself! Hence I've front loaded the pension withdrawals. Based on the this, do you still think I need to re-plan?
    Originally posted by pensionpawn
    The 4% (probably 3.5% for the UK) starting drawdown levels are derived so you can survive 95% of possible combinations of historical market scenarios, so it's a conservative number, as it should be for retirement. Dividends are given per share and are so pretty stable with price fluctuation. Your approach to income planning is not one I'd adopt. It sounds sensible, but you're not planning for the worst case which is dangerous; some combination of bad market returns, a long life and long term care costs could put you in the poor house. There is US research that shows retirement spending inflation to be less than the general inflation rate by 1% or 2%, but I haven't seen any UK numbers and it's hard to do a comparison because of costs for healthcare being so different. Still if you intend to front load tour spending make sure you have a plan to reduce spending in bad years. A previously mentioned the Guyton Klinger rules are useful for that, but also identify places in your budget where you can save.
    Last edited by bostonerimus; 08-01-2018 at 1:54 PM.
    Misanthrope in search of similar for mutual loathing
    • Linton
    • By Linton 8th Jan 18, 5:15 PM
    • 8,847 Posts
    • 8,879 Thanks
    Linton
    ......
    In my calculations I also intend to run down my pot completely by 85 (if I make it as far as my father...). I want to have most money available from 60 - 70, then slightly less from 70 - 80 and then if I have made it that far have just enough to keep me (and the wife hopefully) warm, dry and fed during the run in.... Again, if all goes to plan, there should be plenty in ISAs from the early withdrawals to draw on in emergencies especially with a full new state pension to take up quite a lot of the slack from 67 onward.

    ......
    Originally posted by pensionpawn
    I think you need to plan for having more money in extreme old age as expenses may well rise eg modifications to the house, private care beyond what the council may be able to provide, taxis.

    Note that 85 is less than your life expectancy (assuming you are of average health) so there is a more than 50% chance your pot will be empty before you die.
    Last edited by Linton; 08-01-2018 at 5:22 PM.
    • pensionpawn
    • By pensionpawn 8th Jan 18, 8:59 PM
    • 25 Posts
    • 1 Thanks
    pensionpawn
    Thanks for your reply, I really do appreciate observations on my strategy as I know I don't know everything about finance (although more than most of my peers) and may have overlooked something.

    I appreciate what you are saying and that's why my strategy includes saving a fair percentage of draw down into cash / sas ISAs therefore I should have a slush fund for life's hidden expenditures. I realise there is a balance to be struck between the better (hopefully) growth rate of the pension fund compared to having immediately available 'cash on tap' / minimising exposure to higher rates of tax through regular draw down / protecting against poor growth. Also, money in the fund can pass to relatives tax free on death.

    Regarding life after 85, well I know predictions suggest that those who are in good health should all live a little longer however that doesn't necessary equate to a high quality of life. Even if I make 85 fully healthy I'm not going to be burning my candle at both ends. I did that in my teens and 20's and I'll have a final crack in my 60's, after that I be taking it easy financially as well as activity wise. Of my relatives that made it past 80, none of them were leading the lifestyle of a rock star and were happy just to be able to eat well, stay warm and comfortable and not want for anything. I think the state pension and 25 years of drawing out of a personal pension pot will provide that (unless I've overlooked something...)
    • pensionpawn
    • By pensionpawn 8th Jan 18, 10:24 PM
    • 25 Posts
    • 1 Thanks
    pensionpawn
    The 4% (probably 3.5% for the UK) starting drawdown levels are derived so you can survive 95% of possible combinations of historical market scenarios, so it's a conservative number, as it should be for retirement. Dividends are given per share and are so pretty stable with price fluctuation. Your approach to income planning is not one I'd adopt. It sounds sensible, but you're not planning for the worst case which is dangerous; some combination of bad market returns, a long life and long term care costs could put you in the poor house. There is US research that shows retirement spending inflation to be less than the general inflation rate by 1% or 2%, but I haven't seen any UK numbers and it's hard to do a comparison because of costs for healthcare being so different. Still if you intend to front load tour spending make sure you have a plan to reduce spending in bad years. A previously mentioned the Guyton Klinger rules are useful for that, but also identify places in your budget where you can save.
    Originally posted by bostonerimus
    I'll look into this further, thanks!
    • bostonerimus
    • By bostonerimus 9th Jan 18, 2:11 PM
    • 1,397 Posts
    • 815 Thanks
    bostonerimus
    T

    Regarding life after 85, well I know predictions suggest that those who are in good health should all live a little longer however that doesn't necessary equate to a high quality of life.
    Originally posted by pensionpawn
    There's about a 50% chance you'll reach 85 so you must plan to live longer. Using the numbers from the ONS I'd advise every one to plan for at least 95.

    I Even if I make 85 fully healthy I'm not going to be burning my candle at both ends. I that in my teens and 20's and I'll have a final crack in my 60's, after that I be taking it easy financially as well as activity wise. Of my relatives that made it past 80, none of them were leading the lifestyle of a rock star and were happy just to be able to eat well, stay warm and comfortable and not want for anything. I think the state pension and 25 years of drawing out of a personal pension pot will provide that (unless I've overlooked something...)
    You are overlooking care costs, those could be enormous, and the possibility that you migyt live a long and expensive life....yayyyy! There's a good chance that the last 3 years of your live will be spent in care and that could cost 30k a year at today's prices. You might also want to leave some money to relatives so planning for these eventualities is important. Using a strategy of "I'll be old and sat in a chair so I don't need any money" is really depressing IMHO. When I was planning for retirement I took out a long term care insurance policy to protect the inheritance I hope to leave to my family. Unfortunately such policies are not available in the UK (I live in the US)
    Misanthrope in search of similar for mutual loathing
    • pensionpawn
    • By pensionpawn 9th Jan 18, 8:32 PM
    • 25 Posts
    • 1 Thanks
    pensionpawn
    There's about a 50% chance you'll reach 85 so you must plan to live longer. Using the numbers from the ONS I'd advise every one to plan for at least 95.



    You are overlooking care costs, those could be enormous, and the possibility that you migyt live a long and expensive life....yayyyy! There's a good chance that the last 3 years of your live will be spent in care and that could cost 30k a year at today's prices. You might also want to leave some money to relatives so planning for these eventualities is important. Using a strategy of "I'll be old and sat in a chair so I don't need any money" is really depressing IMHO. When I was planning for retirement I took out a long term care insurance policy to protect the inheritance I hope to leave to my family. Unfortunately such policies are not available in the UK (I live in the US)
    Originally posted by bostonerimus
    If I do live longer than 85 I hope I am actually enjoying the extra time and not just 'staying alive' as the Bee Gees would say! Hence why I am front loading my pension to enjoy the 'quality years' from 59 - 70! If I do need care then by my calculations I will have paid over £200k in PAYE since retiring (to 85) and half of the value of my home will become available to foot the bill. At today's rates that's over £400k from my estate which at your value of £30k per year takes me well beyond 95. I think I've paid my fair share of taxes along the way...

    If I make it to 85 I think a 26 year retirement (before wasting away in a chair) at an average net income level comparable to my final salary (if I've done the maths correctly..) will be a good innings, especially as I was only in full time post graduate employment for 37 years!

    My children should inherit at least 50% of the value of our house and whatever I haven't spent from my pension, minus any care home fees.

    Of course I could have made mistakes in my planning and that's why I will always welcome comments on this forum.
    • Gerbert
    • By Gerbert 9th Jan 18, 8:35 PM
    • 11 Posts
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    Gerbert
    There's a good chance that the last 3 years of your live will be spent in care and that could cost 30k a year at today's prices.
    Originally posted by bostonerimus
    My own personal family experience suggests at least £40K pa at today's prices for somewhere not terrible, but far from appealing. You probably have to near double that to get somewhere good, and that's personal care only ie not specialist nursing (ie medical) care. (Though depending on whether the afflictions of old age affect you more physically or mentally, you might not notice or even care whether it's good or not)
    • Thrugelmir
    • By Thrugelmir 9th Jan 18, 9:36 PM
    • 56,660 Posts
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    Thrugelmir
    It isn't all based on US data,
    Originally posted by jamesd
    The basis of the 4% rule is. Which many people use as the basis of their investment thinking.
    ďOpportunities come infrequently. When it rains gold, put out the bucket, not the thimbleĒ
    ― Warren Buffett
    • Thrugelmir
    • By Thrugelmir 9th Jan 18, 9:45 PM
    • 56,660 Posts
    • 50,045 Thanks
    Thrugelmir
    The biggest threat isn't a big drop then recovery just after retiring, it's a decade or so of low returns just after retiring.
    Originally posted by jamesd
    The risk posed is that depletion of capital in the early years is never recovered. Long term returns as you often quote. Only average 5% above inflation with income reinvested. You do appear to be falling into "This time is different syndrome". Born out of experiencing a benign bull market.
    ďOpportunities come infrequently. When it rains gold, put out the bucket, not the thimbleĒ
    ― Warren Buffett
    • bostonerimus
    • By bostonerimus 9th Jan 18, 11:23 PM
    • 1,397 Posts
    • 815 Thanks
    bostonerimus
    If I do live longer than 85 I hope I am actually enjoying the extra time and not just 'staying alive' as the Bee Gees would say! Hence why I am front loading my pension to enjoy the 'quality years' from 59 - 70!
    Originally posted by pensionpawn
    having the money to live a quality life after 85 is a reason to not front load your spending.
    Misanthrope in search of similar for mutual loathing
    • westv
    • By westv 10th Jan 18, 7:17 AM
    • 4,420 Posts
    • 2,042 Thanks
    westv
    The basis of the 4% rule is. Which many people use as the basis of their investment thinking.
    Originally posted by Thrugelmir
    But you were originally referring to jamesd's thread, not the 4% rule so that isn't really relevant.
  • jamesd
    The basis of the 4% rule is. Which many people use as the basis of their investment thinking.
    Originally posted by Thrugelmir
    The 0.3% lower rate for the UK is based on UK investments, not US. These are the sources: 1, 2 I link to though of course there are others.

    But please don't use the 4% rule today as an actual safe rate. It's not horrible for general planning but there are more modern, better alternatives.
    Last edited by jamesd; 10-01-2018 at 8:22 AM.
  • jamesd
    The risk posed is that depletion of capital in the early years is never recovered.
    Originally posted by Thrugelmir
    That's a significant risk and the worst case for that risk isn't a normal big drop and recovery, it's low returns sustained for a decade or more.

    Guyton found that varying the investment mixture greatly reduced the sequence of returns risk, with that and dynamic withdrawal rules increasing the safe withdrawal rate by at least 1%. That'd be 25% higher income compared to the 4% rule, or greatly increased safety.

    Long term returns as you often quote. Only average 5% above inflation with income reinvested. You do appear to be falling into "This time is different syndrome". Born out of experiencing a benign bull market.
    Originally posted by Thrugelmir
    So which are you suggesting? That I'm being too optimistic because of my time in a bull market or that I'm using long term historic rather than bull market results? Not sure how I can be simultaneously doing both.

    Of course neither is actually the case. Safe withdrawal rate calculations are based on the worst historic sequences. That's why the SWR is below the long term historic average performance if using level, inflation-adjusted income, with 1936 the worst UK starting year. As explained by Kitces in What Returns Are Safe Withdrawal Rates REALLY Based Upon?

    I don't think that this time is different. That's why I've been writing about the implications of today's cyclically adjusted price/earnings ratio (lower expected returns for 10-15 years) and in the first post suggest that people use Guyton's approach to reduce that effect. And that's what I've been doing myself, cutting equity percentage and increasing fixed interest percentage. As Okusanya observes for UK retirees "the client is able to increase the withdrawal rate to 5.5% of their initial portfolio (based on 65% equity allocation), without running out of money over a 40-year retirement period" if they do no more than switching to the Guyton-Klinger decision rules.
    Last edited by jamesd; 10-01-2018 at 9:27 AM.
    • GSP
    • By GSP 10th Jan 18, 11:02 PM
    • 162 Posts
    • 34 Thanks
    GSP
    Just one more if okay and thanks for all the replies. Certainly helped others as well it seems.

    My fund has grown to £792k and as already said we must be in a very decent period of growth. Of the 792, 71 is post retirement (crystallised) and 721 pre retirement (uncrystallised).

    I have already taken £26.5k tax free and £11.5k taxable leaving the rest in post retirement crystallised.

    Is it best to crystallise the whole lot which I assume is 25% of the pre retirement (even though that figure has grown and different to the one when I withdrew the above.
    Means I have just under £200k tax free, but what do I do with it?

    Or, If I just take the amount I need out of the pre retirement each year, I assume as long as it grows will mean extra tax free money as I go on.
    Thanks
    Last edited by GSP; 10-01-2018 at 11:17 PM.
    • pip895
    • By pip895 11th Jan 18, 6:35 AM
    • 490 Posts
    • 279 Thanks
    pip895
    I'm no expert but I would take out as much as I could taxable without breaching the 40% limit. Then on top of that as much tax free as I could find a good home for. 20k in an isa max possible in OH pension + their isa etc.

    S&S outside a wrapper are always possible but will potentially complicate your tax return - the CGT limit is quite generous though so unless you have other unbundled funds or ganes you probably won't breach it - use OH's allowance as well.

    You could look at second hand VCT's for your unbundled funds. These don't come with the income tax benefits (on the input side) but do remove issues with the income coming out being taxable and CGT. Some of the old established funds are relatively safe big dividend payers. My understanding is that newer + non second hand ones are generally rather high risk (the rules have changed) and I don't think you need to go there personally.

    This might be the money saving forum but you should also remember to use some to go on some nice holidays and enjoy your retirement
    • pensionpawn
    • By pensionpawn 11th Jan 18, 9:29 AM
    • 25 Posts
    • 1 Thanks
    pensionpawn
    I'm no expert but I would take out as much as I could taxable without breaching the 40% limit. Then on top of that as much tax free as I could find a good home for. 20k in an isa max possible in OH pension + their isa etc.

    S&S outside a wrapper are always possible but will potentially complicate your tax return - the CGT limit is quite generous though so unless you have other unbundled funds or ganes you probably won't breach it - use OH's allowance as well.

    You could look at second hand VCT's for your unbundled funds. These don't come with the income tax benefits (on the input side) but do remove issues with the income coming out being taxable and CGT. Some of the old established funds are relatively safe big dividend payers. My understanding is that newer + non second hand ones are generally rather high risk (the rules have changed) and I don't think you need to go there personally.

    This might be the money saving forum but you should also remember to use some to go on some nice holidays and enjoy your retirement
    Originally posted by pip895
    I agree! I'm no economist either, just someone trying to plan how to eek out a moderately good retirement out of a better than average, though not as large as on this forum, pension pot. I see reference to what appears (to me) to be (no doubt sound and proven) economics theory however the layman in me still can't see how just drawing the growth (and no more than*) out of a fund each year can be detrimental. E.g. year 7 growth is 12% (take it all within 20% tax, add to slush fund), year 8 is 8% (take it all within 20% tax, add to slush fund), year 9 is 0% (draw from slush fund at reduced though comfortable rate), year 10 is -5% (draw from slush fund at reduced though comfortable rate) etc until fund recovers to the value you predicted n years down stream. My largest pot is a fund I started in 1989 and paid into until 1996 when I moved into an occupational DC scheme. No capital added for 21.5 years and yet it is now into six figures with an average growth, through the rise of the late 90's and the double falls of the naughties, by 10%. I know that past performance is no indicator of future performance and provision MUST be made for downturns however 10% must be a safe benchmark for future planning?

    * I may take out more than the growth rate on occasions as a) I don't want to retire post 60 (tomorrow is never promised) and b) having more cash in the early years of retirement, when you will have more energy and hopefully better health, is preferable to having a huge pot going into your 80's when health and energy are on an increasingly on the decline.

    Out of interest, do these economic models assume preservation of pot size or can capital erosion be factored in too?
    • bostonerimus
    • By bostonerimus 11th Jan 18, 1:58 PM
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    bostonerimus
    I see reference to what appears (to me) to be (no doubt sound and proven) economics theory however the layman in me still can't see how just drawing the growth (and no more than*) out of a fund each year can be detrimental. E.g. year 7 growth is 12% (take it all within 20% tax, add to slush fund), year 8 is 8% (take it all within 20% tax, add to slush fund), year 9 is 0% (draw from slush fund at reduced though comfortable rate), year 10 is -5% (draw from slush fund at reduced though comfortable rate) etc until fund recovers to the value you predicted n years down stream.
    Originally posted by pensionpawn
    What if the your funds fall by 25% or 50% for a few years? and inflation is factored into the "safe withdrawal" rates too. Everyone who retires needs a detailed budget so they understand their spending. If you are going to front load that spending it's even more necessary so you know how to reduce spending in down years or when you've had to sell after a few down years to top up your cash /short term bond cushion.
    Misanthrope in search of similar for mutual loathing
    • Linton
    • By Linton 11th Jan 18, 2:56 PM
    • 8,847 Posts
    • 8,879 Thanks
    Linton
    ....... the layman in me still can't see how just drawing the growth (and no more than*) out of a fund each year can be detrimental. E.g. year 7 growth is 12% (take it all within 20% tax, add to slush fund), year 8 is 8% (take it all within 20% tax, add to slush fund), year 9 is 0% (draw from slush fund at reduced though comfortable rate), year 10 is -5% (draw from slush fund at reduced though comfortable rate) etc until fund recovers to the value you predicted n years down stream.
    Originally posted by pensionpawn
    Some problems
    1) You need to reinvest sufficient in your pot each year to cover inflation. Over the past 21years inflation has averaged about 2%.
    2) How much money do you put in your slush fund? The greater the % drawdown the more cash you need in your slush fund. The more cash in your slush fund the less you have in investments to generate the return.
    3) You need to replenish your slush fund fairly quickly - the next major fall could happen pretty soon after the previous one.
    4) In your example the worst case is -5%. -40% might be a a better number to use if you want 10% average returns.

    My largest pot is a fund I started in 1989 and paid into until 1996 when I moved into an occupational DC scheme. No capital added for 21.5 years and yet it is now into six figures with an average growth, through the rise of the late 90's and the double falls of the naughties, by 10%. I know that past performance is no indicator of future performance and provision MUST be made for downturns however 10% must be a safe benchmark for future planning?
    What makes you think that the past 21.5 years were particularly problematic? They seem to have been unusually benign to me apart from two rather short difficult periods. Assuming 10% is the average annual return over 21.5 years is rather risky since you only have 1 period of 21.5 years to look at. Even if it were a reasonable guess it would imply that 50% of the periods of 21.5 years would be worse. Is a 50% chance good enough?

    The actual annual return would vary considerably - presumably taking 10% income, half the time you would be using your slush fund to some extent.

    You can assume whatever your like. The question is what happens if your assumptions are wrong? How wrong do they have to be before you are in the doo-doo? In my retirement planning 12 years ago I assumed 1% return above inflation. Despite the great crash that turned out to be very pessimistic for which I am now very grateful.
    .........
    Out of interest, do these economic models assume preservation of pot size or can capital erosion be factored in too?
    The problem with relying on capital erosion is that you need to know when you are going to die and then start eroding capital some years previously. Drawing down is like paying a mortgage in reverse - it mainly operates in a steady state mode until relatively close to the end of the term. Once you start seriously eroding your capital your returns fall rapidly.

    I suggest you have a play with http:\\www.cfiresim.com. It bases its results on data over the past 100 years and more and gives a far more realistic view of how drawdown can work out.
    • kidmugsy
    • By kidmugsy 11th Jan 18, 3:14 PM
    • 9,969 Posts
    • 6,724 Thanks
    kidmugsy
    The front of the baby boomer wave is 72 this year. As the wave swells there will magically become available a Dignitas-like option, letting the old and ill, the old and fed up, the old and weary, the old and lonely, the old and demented, shuffle off this mortal coil before they are sans everything. Maybe.
    Free the dunston one next time too.
    • lisyloo
    • By lisyloo 11th Jan 18, 3:29 PM
    • 21,370 Posts
    • 10,280 Thanks
    lisyloo
    and half of the value of my home will become available to foot the bill
    How does half of the value of your home become available? (apologies if I missed something in the thread).
    You cannot usually sell half a house and you don't have any knowledge of what state your other half will be in for example they may have installed a stair lift, hoist and walk-in bath and not want or be in a great posistion to move away from family and friends.
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