Safe Withdrawal Rates

okydoky

I know it's crystal ball stuff,but interested in the views of others on this. (I've faffed about with spreadsheets for ages,and done more "firecalc" scenarios than you can imagine!!)

I've now retired(60),and wife(58) will work p/time for another 3 years. My SIPP is in drawdown within my PA after transferring 10% to OH, so neither of us pay tax now.

We pay max into our SIPPS(£12K pa nett) and regard the £3K uplift from HMRC as "income". Ours SIPPS are fully invested, mainly equities, with funds in ISA wrappers as well, mainly equity based, and also a small share portfolio utilised to invest in wife's SIPP each year, buying the same stock back but in the SIPP wrapper.

We hold cash of about £110K(20% of total portfolio, including pensions), in various(numerous), current accounts/monthly savers producing £4K+ pa.

So there are several distinct periods for SWR analysis:-

- the next three years(while OH works) withdrawal rate will be 1.71%

- the next three years until my SP kicks in, WR will be 3.94%

- the next two years until OH SP kicks in 2.23%

- Thereafter, (hopefully for some time!) at 0.60%

I know this is a simplistic view and I have taken no account of inflation or investment growth(other than interest on cash accounts), but would appreciate the views of others on the safety, or otherwise of this strategy, and the projected withdrawal rates.

maximumgardener

How much are you both planning "spending" in the various time periods up to SP age and beyond?

input/ output important here

jamesd

Those look like extraordinarily conservative withdrawal rates. 0.6% long term? Surely you can find something that you would enjoy doing that you could spend more of the money on in your earlier years of retirement? Have a look at Wade Pfau's Retirement Dashboard and the safe withdrawal rates for the various spending strategies he gives near to the bottom of the page. I tend to favour Guyton and Klinger with the addition of a one year income buffer in cash.

In spite of the recent stock market drops you can reduce your exposure to sequence of returns risk by doing some diversifying into P2P lending and some of the more cautious VCTs like Albion VCT (100% asset-backed) or some of the early exit ones.

How are you able to pay £12k into your SIPPs when you're retired? Surely you nave nil earned income and are entitled to contribute only £3,600 a year?

20% in cash looks extremely wasteful to me. It's not going to do much better than inflation so it'll be hurting your long term income prospects. Maybe drop to one year's target income, or stretch it to three years, and use natural yield from the investments to top that up with capital sales if required during good market times?

Surely you can do some P2P to get a higher income from it, without any significant stock market correlation, by using the firms like Ablrate (planes, shipping containers and some more varied things), MoneyThing (secured on pawned items, used car stock, supercars, stock lending, cars for leasing), SavingStream (secured on property being developed mainly). All of those pay in the region of 10-12% before bad debt for secured loans and have varying levels of security and other cover. At nearer 5-6% there are a range of firms that do unsecured lending to consumers with protection funds intended to cover defaults.

okydoky

maximumgardener wrote: »

How much are you both planning "spending" in the various time periods up to SP age and beyond?

input/ output important here

I avoided going into this level of detail to keep it simple, preferring percentages since it is really the SWR that I wanted views on. However I can confirm we consistently spend about £22k pa but for the purposes of calculating the percentages, I worked on £24k.

James - thank you for the suggestions, much more reading up to be done by me! Incidentally the pension contributions at £12k nett pa will only be for the next three years whilst wife continues in work, thereafter it will revert to £2880 nett each.

Particularly interested in your comments re our cash situation, I get some comfort from having this amount readily available, it is roughly 5 years spending so more or less up to pension age for me. I thought I was doing rather well getting more than £4k interest on it, but will investigate some of the alternatives you have suggested.

Thanks again.

jamesd

Five years of spending might be assuming that you're not taking any natural income like interest or dividends from your investments. It's wastefully conservative if you have dividend and interest income that you take that routinely tops it up. That way a year or two's worth will only need to cover the difference between the investment yield each year and the spending each year, not the whole amount, so it's likely to last well beyond five years.

That in turn means more money invested and making you money to increase your income potential.

Ignoring potential bad debt losses the 12% platforms would get me something like £13,200 a year on the whole £110k of cash though of course I do keep some cash and credit facilities available. Given that the lending has security on physical goods the likely level of lending loses is well below the increased income potential. Don't use one platform, use at least four or five so that a complete loss to fraud at a platform wouldn't cost you an excessive amount. Unlikely to happen but it could and diversification is what protects you because there is no FSCS protection for P2P - a platform major fraud is way more costly than likely normal lending losses.

jamesd

You should also plan to defer your state pensions for at least five years. The income increase from doing this pays more than the likely return of the UK stock market and it's for life with no investment risk. Very useful extra income security and far, far better than annuity purchase for those in normal good health around state pension age.

BLB53

I have my sipp invested 60% equities (mainly global) and 40% bonds and I currently withdraw 3.5%. Some of this is the natural income from some investment trusts and the balance is via the sale of units in my Vanguard Lifestrategy fund.

Depending on your preferred mix of equities to bonds, I would say anything between 3% - 4% withdrawal should be fairly sustainable long term.

I also have a 10% cash buffer in my BS account to cover periods when there is negative return on my LS fund.

kidmugsy

It's easy as pie. Take 3.14%.

okydoky

kidmugsy wrote: »

It's easy as pie. Take 3.14%.

Just for a split second I thought you were being serious😜

How many decimal places do you suggest??

jamesd

One other thing to consider is desired income level at perhaps three levels: minimum, target and great. If you were to use an income drawdown strategy you'd pick a level of income that would not have a high chance of your income falling below the minimum level even with sustained bad investment returns. You'd aim for the target if things were OK but might have to cut this to stay above minimum. If investment returns turn out to be normal you could well hit great income level. For my planning the normal returns income level could easily end up being twice the target level give the level of confidence required to get to the target and avoid the minimum.

The Guyton and Klinger rules allow for this sort of thing, both decreasing and increasing, and you can see the lowest level the income would drop to using Monte Carlo simulations.

You may find the videos here of interest, try the bottom one with Guyton first.

For more analysis of a range of approaches to safe withdrawal rates it's well worth reading Making Sense Out of Variable Spending Strategies for Retirees.

mgdavid

You have c. £550,000 retirement fund; is the value of your house on top of this?
Across the long term you seem to be planning to live on income alone - how are you managing the IHT situation?