Drawdown: safe withdrawal rates

jamesd

You might find these discussions with Jon Guyton and Bill Bengen interesting.

How A Retirement Researcher Implements Retirement Planning For His Own Clients, With Jon Guyton

• For his clients they split the portfolio up to three ways: 1. core spending, strict Guyton-Klinger rules, long term; 2. bridge between retiring and pensions starting, near-cash; 3. discretionary, medium term 8-10 years mixture
• G-K rules call for a cut if the withdrawal percentage has grown to 20% more than the original percentage. So 5% becoming 6% triggers a cut. First work out the next year's income then if called for apply the 10% cut to that.
• G-K rules usually increase with inflation but they don't do that automatically for their clients. They find that other inflation-linked pensions and the normal spending decrease as people get older works.

Bill Bengen at reddit

Linton

How do this Bill Bengen guys clients cope with relatively large cuts in the income that pays for their “core spending”? If they simply accept it with equanimity can it really be core rather than discretionary? Or is it made up from a cash fund? If so, what % of their total assets is in the cash fund?

May be anyone rich enough to pay for Bill Bengens services has a different concept of core needs than the many future uk pensioners living on drawdown who could be worried about paying their council tax.

Thrugelmir

A question asked.

Hi Bill,

1926-2000 in the United States is a period characterized by the highest returning market of any stock market in any country in recorded history. Many academics and experts say the 4% rule is potentially harmfully aggressive considering it's based on an overly optimistic sample. Ie a 4% rate of withdrawal doesn't hold well at all if we use a different developed nation's stock returns or we use data outside of the 1926-2000 sample.

In response.

billbengen

The criticism may be correct. I simply don't know.

westv

Plus the rest of the reply which you have ignored.

Thrugelmir

westv wrote: »

Plus the rest of the reply which you have ignored.

I highlighted this part for good reason. I doubt many UK investors have held or currently hold fully hedged US portfolios.

k6chris

Saw this. Interesting, though once again it talks about the 4% "Safe" withdrawal rate.


http://www.morningstar.co.uk/uk/news/189130/pension-drawdown-unsustainably-high.aspx


I wonder if a new government might roll back some of the pension freedoms?

Thrugelmir

k6chris wrote: »

Saw this. Interesting, though once again it talks about the 4% "Safe" withdrawal rate.


http://www.morningstar.co.uk/uk/news/189130/pension-drawdown-unsustainably-high.aspx


I wonder if a new government might roll back some of the pension freedoms?

The article makes no reference to any other pension provision or savings or other assets the individual may have. A huge assumption therefore that people will "run out of money".

After the next major market correction. There'll be a fad for annuities again in the mainstream. Life moves in cycles. As people chase the next "best thing" in order to gain an edge.

DT2001

There are quite a few on this forum that are funding the gap to SPA by depleting pension funds. It is part of our plan to use all of OH’s SIPP before her SPA. To be useful the headline of 9% needs to be backed by further information or maybe we’ll get a knee jerk reaction.

jamesd

k6chris wrote: »

SI wonder if a new government might roll back some of the pension freedoms?

No great need to from what's in that piece. I expect those who thoroughly understand safe withdrawal rates to withdraw from pensions at unsustainably high rates because the rates often don't need to be sustained for life.

I was one of the respondents to the survey cited when the pension freedoms were introduced. Here's a very cut down version of what I wrote, remember the GAD limits on how much you could take out:

1. during care the highest GAD rate is unlikely to be fast enough.
2. between state pension age and needing care the rate needs to be sustainable (I didn't mention spending declining with age)
3. between start of DB and state pension age pension drawing needs to be higher to substitute for the lack of state pension
4. between retiring and start of DB rate needs to be higher still. At a time when the GAD limit is lowest, the opposite of what's appropriate for someone who wants a level income throughout retirement
If you want me to use pensions more, stop forcing me to use non-pension investing to get a level income throughout retirement.

The pension freedoms comprehensively addressed the points I made and for the reasons I gave it's desirable that rates should be "unsustainable" when grossly over-simplified as meaning 4%, because that best fits people's needs. Ideally the desired cashflows should be put into a tool like cfiresim so the true varying sustainable rate can be calculated. That will normally mean higher drawing at the start and lower later.

jamesd

Linton wrote: »

How do this Bill Bengen guys clients cope with relatively large cuts in the income that pays for their “core spending”? If they simply accept it with equanimity can it really be core rather than discretionary? Or is it made up from a cash fund? If so, what % of their total assets is in the cash fund?

May be anyone rich enough to pay for Bill Bengens services has a different concept of core needs than the many future uk pensioners living on drawdown who could be worried about paying their council tax.

Bill Bengen is the 4% rule person, Jon Guyton is the variable Guyton-Klinger rules one so I think you really meant Guyton? I'll reply as if you did.

Core in his context means "normal lifestyle" rather than bare minimum. Core's a long term investment mix with equities and bonds. It's the bridging (until social security or DB) that's relatively minimally equities and high in near-cash because it's shortish term. Have a read of the paragraphs around "the ability to travel at a certain level is every bit as core and central to the retirement that they want to live as the need, you know, to pay the grocery bill and the real estate taxes".

He doesn't think much cash is needed when there are plenty of low risk investments in the portfolio.

Of course the three way split is and is intended to be unsustainable when compared to 4%, because that's what is right for his clients. Only the core portion is intended to be for life and even that need declines with age.

Mean client investment level is a million Dollars.