withdrawal rates?

Mosis

Can anyone clarify the criteria for the so-called safe withdrawal rates for pensions or investment portfolios in the draw-down phase? There was the traditional US based 4% rule, and looking to the future some suggest closer to 3%. Anyway whatever the figure, is the criteria of 'success' that over the 30, 40 or whatever year horizon:
a) does it mean the initial capital can be depleted and even if it eventually reaches close to zero provided it doesn't entirely run out this is success.
b) does a successful safe withdrawal rate aim to maintain close to the original value of the portfolio in numeric value terms but not in inflationary terms.
c) does it aim to maintain the value of the portfolio relative to inflation so that in essence income is only drawn from post-inflation returns.

Follow up question: what may be a realistic SWR in the context of current inflation and growth rates to achieve scenario a, b, and c?

Thanks for any insights.

HappyMJ

Mosis wrote: »

Can anyone clarify the criteria for the so-called safe withdrawal rates for pensions or investment portfolios in the draw-down phase? There was the traditional US based 4% rule, and looking to the future some suggest closer to 3%. Anyway whatever the figure, is the criteria of 'success' that over the 30, 40 or whatever year horizon:
a) does it mean the initial capital can be depleted and even if it eventually reaches close to zero provided it doesn't entirely run out this is success.
b) does a successful safe withdrawal rate aim to maintain close to the original value of the portfolio in numeric value terms but not in inflationary terms.
c) does it aim to maintain the value of the portfolio relative to inflation so that in essence income is only drawn from post-inflation returns.

Follow up question: what may be a realistic SWR in the context of current inflation and growth rates to achieve scenario a, b, and c?

Thanks for any insights.

The answer depends on so many factors.

Personally when I get to 55 I'm cashing everything out and withdrawing 10% of the starting capital each year without increasing the withdrawal rate which should take about 12 years to run out at which time the state pension of £155.65/week will be in payment. If I've got anything left I'll reduce my withdrawal rate down to 10% of the remaining balance which should last another 12 years or so which will supplement my state pension.

I doubt I'll be able to spend the amount that I'll be withdrawing each year so some of it will be reinvested each year.

AnotherJoe

Its an art not a science. Multiple discussions referenced from this thread, https://forums.moneysavingexpert.com/discussion/5466114

AnotherJoe

HappyMJ wrote: »

I doubt I'll be able to spend the amount that I'll be withdrawing each year so some of it will be reinvested each year.

That seems expensive, you'll be selling investments (cost) and then repurchasing them (cost). Why not just drawdown what you need?

dunstonh

Can anyone clarify the criteria for the so-called safe withdrawal rates for pensions or investment portfolios in the draw-down phase?

There is no such thing. I know a couple of papers have touched on this recently but they are mostly talking BS and provide no context and are quite poor. I feel sorry for people reading those articles and basing their decisions on them.

Going on to your questions and noting that there is no such thing as a safe withdrawal.....

a) does it mean the initial capital can be depleted and even if it eventually reaches close to zero provided it doesn't entirely run out this is success.

yes. if you don't run out before death then you would consider that a success in terms of income provision. That is unless your objective was to pass the pot onto a beneficiary and you deplete the pot. Then your objective would be different and your definition of success would be different.

b) does a successful safe withdrawal rate aim to maintain close to the original value of the portfolio in numeric value terms but not in inflationary terms.

Depends on the objectives in place. Some people may not want to maintain the original value. Others will.

c) does it aim to maintain the value of the portfolio relative to inflation so that in essence income is only drawn from post-inflation returns.

Depends on objectives.

Basically, and part repeating, there is no safe withdrawal. We tend to refer to a figure being "likely sustainable" but it would put that in a context. When we do income drawdown, we tend to give a range of when we think the pot would run out using various withdrawal rates and include one where we believe the pot will retain current value. The level of drawdown is heavily influenced by investment mix. If the asset mix has a low return potential then it will influence what you may consider to be sustainable or achievable.

enator

I simply take the natural yield from my pension portfolio, which over the last two years has averaged 4.3% - no selling of the underlying investments & market gyrations don't concern me.

Of course, dividend income can rise and fall but I also have tax free income from ISA's and VCT's which helps somewhat.

Linton

enator wrote: »

I simply take the natural yield from my pension portfolio, which over the last two years has averaged 4.3% - no selling of the underlying investments & market gyrations don't concern me.

Of course, dividend income can rise and fall but I also have tax free income from ISA's and VCT's which helps somewhat.

I have done much the same using an ISA for the past 11 years alongside fixed rate annuity income. I am also drawing down the maximum DC pension each year without going into the next tax band. This money consists of a lump sum that covers part of the next years expenditure with most of the rest going into the income portfolio. This strategy has worked well even during the difficult times of 2007-2009.

Mosis

Thanks dunstonh,

In answer to your question:
My aim would be to maintain the value of the portfolio relative to inflation as I want to pass that on.
I want to base my "likely sustainable" withdrawal rate on a diversified portfolio about 70% stocks, 30% bonds (possible 20% bonds 10% interest earning cash). Fund and platform costs about 0.3%. I know that 70% equities is more bullish than most retirees but I have three mortgage free buy to lets which will generate an income too.

Obviously as time goes on any figure needs to be adjusted according to circumstances, but if you had to put a figure on a sustainable withdrawal rate?