Drawdown: safe withdrawal rates

Pat38493

jamesd said:

You may have noticed that during the low inflation and low interest rate times I suggested that cash and money market were safer than bonds because of capital losses when interest rates rise. Bank Rate (base rate) is now around historic norms and while there's reason to think it might be 3.5% or so a couple of years from now the conditions which favoured cash have ended.

This post is to formally end my prefer cash to bonds guidance, for anyone who didn't notice the conditions change already. Today it's just shorter term decisions about what offers the best deal.

Thanks - funnily enough I was just discussing with someone this morning that after putting my employer contributions into money market for the last 6 months or so I think I am going to change to bonds for 2024 - my current overall bonds percent is only 3% and I would like to increase it to at least 15% or more.

jamesd

If the suspected cut to around 3.5% happens you'd be on the receiving end of a capital gain because that's what cuts produce.

jamesd

For convenience some links to discussions of VCTs in retirement, from risks to practicalities.

Do remember that VCTs invest in very small companies. VCTs are right for me but that doesn't mean they are right for you.

Here's a discussion I started with the results of the VCTs I purchased around the time I started mentioning them in My use of VCTs as part of retirement planning: https://forums.moneysavingexpert.com/discussion/6293901/my-use-of-vcts-as-part-of-retirement-planning/p1

Albion remains a very well respected manager but I've been buying others for diversification since, using six more different VCTs. Not meaning anything bad about Albion, just me being sensible because diversification is important. It's really time now for me to revisit them.

You might also find interesting Retirement planning is main use of VCTs, 56% of users: https://forums.moneysavingexpert.com/discussion/6320619/retirement-planning-is-main-use-of-vcts-56-of-users/p1

This post says more about selling VCTs: https://forums.moneysavingexpert.com/discussion/comment/80487916/#Comment_80487916

This and following posts say more about VCT risk and the way the tax relief calculations work: https://forums.moneysavingexpert.com/discussion/comment/80525918/#Comment_80525918

More on VCT risks and mitigations: https://forums.moneysavingexpert.com/discussion/comment/80501678#Comment_80501678

Mick70

Im hoping to use the 4% rule for both of our pensions

Mind you half of our pension income will be provided by a final salary pension , which reduces the overall risk somewhat.
But for the remaining 50% , which is in mixtures of  DC pension/ S+S ISAs / Bank accounts - if they come to say, 500k , then year 1 will withdraw 4% giving £20k , and increase that amount by inflation each year.  I hope to retire age 55 or 56 BTW (2 yr) ,  57 at the max, as find my job very stressful at times and my spouse is nearly 3 year older and her job is physically tiring.    Hopefully that 4% rule will work for us. 

Qyburn

Mick70 said:

Hopefully that 4% rule will work for us. 

Isn't 4% over optimistic? My understanding is that the "rule" applied to a US investor aiming to make their pot last for 30 years. Not sure how much it can be relied on in the UK, or for a longer retirement.

westv

The UK is between 3% and 3.5% if not using a flexible withdrawal method.

dunstonh

Qyburn said:

Mick70 said:

Hopefully that 4% rule will work for us. 

Isn't 4% over optimistic? My understanding is that the "rule" applied to a US investor aiming to make their pot last for 30 years. Not sure how much it can be relied on in the UK, or for a longer retirement.

The 4% rule used a shorter life expectancy and was based on living with US dollars in the US.  It failed if you extended the period.

For UK, 3% in your 50s and 3.5% in your 60s is more reliable.

bownyboy

We're currently withdrawing 6%; but I keep a very close eye on the markets and 50% of our expenses are discretionary so we can pull back if needed. 

Alternatively in 2022 I decided to take a 4 month contract towards the end of the year to top up the cash bucket due to the terrible returns that year.

Also we both have full state pensions that we can access in 10 and 17 years.

Also we don't have a mortgage on the house so some type of reverse mortgage is an option in later life (to also help fund any care requirements).

OldScientist

Mick70 said:

Im hoping to use the 4% rule for both of our pensions

Mind you half of our pension income will be provided by a final salary pension , which reduces the overall risk somewhat.
But for the remaining 50% , which is in mixtures of  DC pension/ S+S ISAs / Bank accounts - if they come to say, 500k , then year 1 will withdraw 4% giving £20k , and increase that amount by inflation each year.  I hope to retire age 55 or 56 BTW (2 yr) ,  57 at the max, as find my job very stressful at times and my spouse is nearly 3 year older and her job is physically tiring.    Hopefully that 4% rule will work for us. 

According to

 https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07

for ages of 57 to 60, there is a 10% chance of living to around 97-98, i.e. a retirement of about 40 years.

Using https://www.2020financial.co.uk/pension-drawdown-calculator/ a 4% inflation adjusted withdrawal had a failure rate of just under 40% (using 65% stocks and 35% bonds) with the first failure occurring after 17 years. Of course, the portfolio failure will be ameliorated by your state and DB pensions. For example (using 60% stocks, 40% 'all stocks' gilts and assuming £20k RPI protected DB pension and two state pensions) the 0th (i.e. worst case), 10th, 25%, 50% (i.e. median) and 75th percentile of real total income for historical retirements are shown below



i.e., in between 25% and 50% of historical cases, the portfolio fell to zero before 40 years has elapsed and the first failure occurred before 20 years.

Allowing a bit of flexibility in portfolio income (using an inflation adjusted £10k plus 2% of the remaining portfolio*) meant that in the worst cases the income dropped to £35k before the state pensions kicked in while the median case kept the income close to £40k. At the other end of the retirement, the portfolio was only exhausted before 40 years had elapsed in fewer than 10% of historical cases and then only very close to the end.



Of course, which of these outcomes might be preferable is a personal decision.


*EDIT I should also note that there are a load of different 'flexible' withdrawal approaches - I surveyed 15 or 16 of them a while back and came to the conclusion that they basically fall into 3 groups - not flexible (like inflation adjusted and variants), very flexible (like percentage of portfolio, VPW, etc.) and hybrid (where the flexibility of percentage of portfolio is constrained, e.g. Vanguard dynamic or inflation adjusted withdrawals are allowed to vary, like Carlson's endowment formula as used here).

Mick70

Qyburn said:

Mick70 said:

Hopefully that 4% rule will work for us. 

Isn't 4% over optimistic? My understanding is that the "rule" applied to a US investor aiming to make their pot last for 30 years. Not sure how much it can be relied on in the UK, or for a longer retirement.

in our own scenario, if i retire 55 (wife 58) - half of our pension income would be Final salary pension 
because of this , i think, we aren't exposed as much regarding the risks of these rules.
I think come SP ages, once we have the SP and my final salary pension we would be fine anyway.
My plan is to use 4% from age 55 , but once receive SP I will half the amount of drawdown