Rubbish BBC article - "Pensioners could run out of cash"

GenghisKhan

chucknorris wrote: »

I know that this is lazy and I should simply do my own spreadsheet but has anyone got a feel for what a safe(ish) drawdown % is? Obviously as well as the duration where your money is invested/saved is important too, so it becomes very subjective.

This might also give you a bit of a head start as I've already prepared a few simulations. This post tracks a fictitious person who retired at the end of 2006 and so started draw down just before the down turn. I use a few simple stock:bond portfolio's with a few different withdrawal rates to look at how each permutation is faring. I update the study every year.

Linton

GenghisKhan wrote: »

A lot of the internet info is for US based retirees - for example the 4% rule that IMHO is so dangerously bandied around. Wade Pfau has done some work that considers UK. This post contains my musings and includes links to the relevant Pfau articles.

Personally I'm planning on a 2.5% withdrawal rate after expenses on my investment pot. I expect my investment expenses at that time to be about 0.25%. I'm planning on a very early retirement (whether I retire or not at that time is a different story - it's about options) so am thinking very long draw down periods.

I can well believe that the figures given in the tables for the quoted investment allocations are correct. But investing 100% in UK assets is just foolish in my view. More importantly it seems to me that the assumed 50% equity/bond split is over cautious as drawdown in retirement is mostly a long term investment, at least until one approaches one's life expectancy. So I would plan on the basis of 4%. Now add in the option of reducing the drawdown by say 10-20% in the bad times and I would guess that 4.5% may be reasonable.

Robin9

Not everybody has a big pot to play with. I ended up with £15k when I took an early retirement package at 54 (12 years ago). Trying to find a suitable annuity was difficult. The options now being talked about would have given me a choice - the challenge we all face is working out when we will die.

GenghisKhan

Linton wrote: »

I can well believe that the figures given in the tables for the quoted investment allocations are correct. But investing 100% in UK assets is just foolish in my view. More importantly it seems to me that the assumed 50% equity/bond split is over cautious as drawdown in retirement is mostly a long term investment, at least until one approaches one's life expectancy. So I would plan on the basis of 4%. Now add in the option of reducing the drawdown by say 10-20% in the bad times and I would guess that 4.5% may be reasonable.

Of course you're right about 100% UK assets. The study is also limited by only considering bonds and equities. But hey it's a start... I haven't found anything more detailed out there and this is the reason I also built my own study linked in the post above. Personally I hold US, European, Japanese and Australian equities on top of my UK ones. I also have asset classes including bonds, equities, commercial property, gold, cash and even some NS&I ILSC's.

I'm now early 40's and expect to have the early retirement option in 2 years at current run rate. I therefore could potentially have a looong retirement. Additionally because I'm so far from State Pension age I am working on the principle that it will be means tested by the time I get there so I won't be eligible. For me at least 4 to 4.5% is therefore way to bullish given the data.

gadgetmind

GenghisKhan wrote: »

I use a few simple stock:bond portfolio's with a few different withdrawal rates to look at how each permutation is faring. I update the study every year.

Out of interest, how to you model the dividend income given that you don't seem to be using ETFs and bonds that automatically accumulate them?

jamesd

GenghisKhan wrote: »

A lot of the internet info is for US based retirees - for example the 4% rule ... This post (link promoting own commercial site removed) contains my musings and includes links to the relevant Pfau articles.

You used a 50% equities, 50% gilts mixture. That's way too low on equities for the time periods you're considering, since it's believed the the ideal equity proportion increases as the time in retirement increases, reaching close to 90% at the sort of range you're considering. You're using a low life expectancy investment mixture and then apparently being surprised that it doesn't last a long time.

Other research suggests that a gradually increasing equity mixture may do better than fixed higher level, with a US maximum historic sustainable rate of 4.3-4.4% for initial equity percentages in the 30-60% range and final in the 50-100% range. Fixed 50:50 delivered 4.3%. All these with a 10% failure rate which would require reducing income in the most adverse scenarios.

It doesn't help that you're using gilts initially at a time when those are expensive, though at least you try global. But you don't try higher paying alternatives like P2P, say.

4% is likely to be too low for normal investment conditions and sensible asset mixes since it's based on the worst case US situation, not normal investment returns.

Rising equity mixtures doing better shouldn't be surprising once sequence risk is understood, since the worst adverse cases start with a large drop in value at the start of retirement. Reduced initial equity mixtures reduce this risk, though there are other ways of reducing the risk.

jamesd

patanne wrote: »

Well I am hoping that the "rubbish BBC article" scares a few people that really should not be in control of their own pensions into taking an annuity. After all if they had any idea about pensions they would already have known what was possible or would have consulted an IFA.

I'm hoping it doesn't since it would be expected to deliver a lower inflation-adjusted income. 4% would be £1,160, well below the levels used to claim that it's dangerous but still well above the rates available from inflation-linked annuities.

Overall it's scaremongering that might push people to unnecessarily take significantly lower income levels. Even more so given the low proportion of their likely total income involved - it'd be around £6.5-8k guaranteed state pension plus only £1.16k variable income so even a need to drop variable income by 20% would only cause a total income drop of 3%.

Given the trend to decreasing spending with age a fixed 6% initial withdrawing rate might be better.

But none of these is really the correct choice for this sort of pot size for a person in normal good health: deferring the state pension will provide inflation-linked 10.4% for those reaching state pension age before flat rate or 5.8% after.

gadgetmind

For me, the main advantage of drawdown is that it lets people be flexible about how they take income, with perhaps a little less initially while they are still in part time work, a lot more after they fully retire but SP hasn't kicked in, and then much less after SP age.

Annuities just can't (yet) do this.

GenghisKhan

gadgetmind wrote: »

Out of interest, how to you model the dividend income given that you don't seem to be using ETFs and bonds that automatically accumulate them?

I use Total Return data. The iShares website includes a relevant benchmark for all their ETF's. The Chart tab under Performance for each ETF allows you to grab benchmark data for whichever index and whichever period you're interested in all for free.

gadgetmind

Out of interest, what was the ASF's yield at the start of your study and just after the big crash?

The real killer during the financial crisis seems to be a few complete losses (or massive dilutions) for big institutions, and dividend cancellations for many that survived.