Drawdown: safe withdrawal rates

jamesd

dunstonh said:

and was based on living with US dollars in the US.  It failed if you extended the period.

4% failed but the 4% rule didn't. All that happened is that the safe withdrawal starting percentage was reduced to less than 4%.

NoMore

If I remember rightly mick, you have never actually figured out the amount you want/need in retirement and instead are just taking 4% and your db and see how that goes ?  You would be much better figuring your number out as you might find you don’t need anywhere near 4% from your dc 

michaels

jamesd said:

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

What worries me with VCT is that they may be extremely sensitive to the business cycle so basically act like a multiplier in terms of SOR risk?  Perhaps it is better to just pay the income tax?!

Or implement plan D - divorce DW so we can split my pension provision over two personal allowances....

jamesd

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. 

First, on guaranteed income and adding state pensions you may find that it's more like 70% guaranteed income from state pension age. Blanchett did some work on that and suggested around a 47% success rate target with only 50% and a medium income stability objective. Near the end of https://forums.moneysavingexpert.com/discussion/comment/70696748/#Comment_70696748

Next, 4%. Not really what you need. Instead you have three different drawing rates even ignoring wife:

Rate A: bridging retirement to start of DB
Rate B: bridging DB in payment to start of state pension
Rate C: rest of life

A is toughest and the basic target is presumably at least DB plus state pension but more likely also plus C. But A is also just shortish term high rate, not for life.

The effect of A can be estimated by taking total of DB and SP and multiplying by the number of years then deducting that from your pot. Deduct similarly for B and you get the residual pot that may need to last 40+ years.

With the initial bridging period you're very vulnerable to sequence of returns risk because of limited recovery time so the calculated SWR will be low and the highest will have unusually high bond percentage. Using the crude multiply by years approximation you'll need to be alert for finding yourself in a bad sequence and the need to adjust if you are.

jamesd

Mick70 said:

My plan is to use 4% from age 55 , but once receive SP I will half the amount of drawdown
 

4% for such a short time is likely to be lower than desirable. If you listen to the Guyton with Kitces interview it'd be covered using the discretionary chunk split out from the whole. Drawing half or more of your pot during just ten years wouldn't be unwise. Otherwise you'd be saving money for a time when guaranteed income meets your needs instead.

What you mustn't do is use the 47% sort of Blanchett success rate I mentioned for this period because during this time the guaranteed income is nil and the expected survival percentage high. That'll require a much higher success rate target.

dunstonh

Mick70 said:

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
 

In your case, the SWR doesn't apply (not at this stage).  Instead, you would model on the "funding the gap" basis.

Mick70

meant to say I get my DB pension now, due to protected rights it triggered when i turned 50 (long story), but on its own it wasnt enough for me to retire then.

Mick70

NoMore said:

If I remember rightly mick, you have never actually figured out the amount you want/need in retirement and instead are just taking 4% and your db and see how that goes ?  You would be much better figuring your number out as you might find you don’t need anywhere near 4% from your dc 

have done some rough calcs , and ideally I would  - thanks taking time to reply BTW

LHW99

VCTs do have a place.  I'm just not convinced when I see the fees, especially when the alternative is to invest in a low-cost tracker through an ISA (so no income tax and no CGT).

Perhaps more for those who have no problem filling their ISA allowance, and (when it was in effect) already at / above the LTA?

michaels

jamesd said:

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. 

First, on guaranteed income and adding state pensions you may find that it's more like 70% guaranteed income from state pension age. Blanchett did some work on that and suggested around a 47% success rate target with only 50% and a medium income stability objective. Near the end of https://forums.moneysavingexpert.com/discussion/comment/70696748/#Comment_70696748

Next, 4%. Not really what you need. Instead you have three different drawing rates even ignoring wife:

Rate A: bridging retirement to start of DB
Rate B: bridging DB in payment to start of state pension
Rate C: rest of life

A is toughest and the basic target is presumably at least DB plus state pension but more likely also plus C. But A is also just shortish term high rate, not for life.

The effect of A can be estimated by taking total of DB and SP and multiplying by the number of years then deducting that from your pot. Deduct similarly for B and you get the residual pot that may need to last 40+ years.

With the initial bridging period you're very vulnerable to sequence of returns risk because of limited recovery time so the calculated SWR will be low and the highest will have unusually high bond percentage. Using the crude multiply by years approximation you'll need to be alert for finding yourself in a bad sequence and the need to adjust if you are.

You can get rid of the SOR risk on the bridge by using an index linked gilt ladder where it just so happens the real return is currently approx 0% so multiply the gap(s) to be filled by the number of years, deduct this from the DC pot and what is left can have the 3.x% 'swr' applied.