Drawdown Strategy for early retirement. could this work?

sunnyjim1234

kidmugsy wrote: »

Your plan of avoiding 20% tax at age 55, but being prepared to pay income tax at 65 or 67 seems to me to be a bet on the basic income tax rate falling below 20% in the next dozen years. I might in your shoes bet the other way.

Similarly, your notion of not drawing the TFLS right away is a bet on the 25% TFLS surviving for a dozen years. Is that a bet you want to make?

Thanks for your input.
I hadn't thought of it from that angle. Are you suggesting drawing down more from the SIPP albeit taxed and preserving the ISA for tax efficiency later on?
I had assumed that if the TFLS was going to be messed with then there would be a period of grace in which I could alter my strategy.
Many Thanks

kidmugsy

sunnyjim1234 wrote: »

I hadn't thought of it from that angle. Are you suggesting drawing down more from the SIPP albeit taxed and preserving the ISA for tax efficiency later on?

Yes, but you'd have to accept that that would be a bet on the tax advantage of ISAs surviving. So far ISAs have been subjected to far less fiddling about than pensions.

I suppose your original plan at least has the advantage that you put off paying tax as long as possible. Hmmm: maybe that's a sensible way to bet. If tax rates fall, or personal allowances increase, you'll win. In other words, over the past half dozen years your proposed plan would have been advantageous. But the question is about the next dozen years. Oh for a crystal ball!

By the by, do you have anyone to leave unused money to if you die young? If so, there's a big advantage of leaving pension money, rather than ISA money, if you die before 75: the beneficiary gets to withdraw money from the pension tax-free, and there's no exposure to IHT.

sunnyjim1234 wrote: »

I had assumed that if the TFLS was going to be messed with then there would be a period of grace in which I could alter my strategy.

Maybe: it depends on how severe an economic emergency might be, and who is Chancellor at the time. There have even been cases of having to pay a tax introduced retrospectively, certainly in the case of Labour governments. (I don't know whether there have been any cases under Conservative or Liberal governments.)

jamesd

sunnyjim1234 wrote: »

I had assumed that if the TFLS was going to be messed with then there would be a period of grace in which I could alter my strategy.

My working assumption is that it might be changed with too little notice so I'll be taking it pretty much as soon as I can to protect myself from that particular legislative risk.

kidmugsy

jamesd wrote: »

My working assumption is that it might be changed with too little notice so I'll be taking it pretty much as soon as I can to protect myself from that particular legislative risk.

That's the way I'd bet: the chances of the TFLS being increased above 25% must be nil, so the risk is all one way.

atush

I personally think you might need to work a year longer and boost the Isas and pension. just because you are running down the isas in 12 years and have no leeway/emergency cushion.

sunnyjim1234

atush wrote: »

I personally think you might need to work a year longer and boost the Isas and pension. just because you are running down the isas in 12 years and have no leeway/emergency cushion.

Thank you for your very succinct reply.
I agree.
Retiring at 55 was always going to be pie in the sky!
I just needed you guys to confirm it.
I don't think I'm a million miles away, but I think you've hit the nail on the head. One, maybe two years extra would give me a more realistic margin of error.
I think I always knew that, I just needed to hear it from someone else.
Thank you to all who have contributed to this post
Back to the grindstone, but I can see light at the end of the tunnel.

sunnyjim1234

jamesd wrote: »

The natural yield/dividends of the investments means that the one year's pot gets topped up without capital selling so it is likely to last many years. Say the natural income is 3% and the drawdown rate is 6% that's around two and a half years of the extra over natural being funded.

it's also quite likely that cash inside the investment mixture was topped up by those rules before the downturn: "If anything had a positive return and is now at an overweight allocation, sell the overweight amount and put that in cash" as I paraphrased it.

James,
Huge fan of your posts by the way.
I have run my figures through cfiresim, using your fabulous walk through, and my required annual income (Guyton-Klinger) seems to be more than possible. Am I doing something wrong?
Regards
Sunny

jamesd

hard to say whether you did something wrong without knowing what you put into each entry there. Maybe you could say?

sunnyjim1234

jamesd wrote: »

hard to say whether you did something wrong without knowing what you put into each entry there. Maybe you could say?

Of course, stupid of me!
Okay, so I open up Cfiresim,
Retirement age 2016
End 2056
Investigate Max Initial Spending
Portfolio Value£ 744000
Spending plan Guyton=Klinger
Social Security £8000 Start Year 2030
Pension £4000 Start year 2028 not inflation adjusted
Run Sim
Many Thanks
Sunny

jamesd

Those numbers produce maximum initial spending of 43145 with 95% success rate and assumed death at age 95, an age that will be exceeded by 25% of 65 year old men. 1 in 10 chance of 99.

GMP is inflation linked so the 4000 should be inflation-linked not level. This change increases the maximum initial spending to 44469.

No mention of state pension deferral so I'll just pretend that you do this for five years. To do this I'll delay state pension start by five years to 2035 and increase it from 8000 to 10320, 29%. This increases the maximum initial spending to 48393. A lesson for anyone who doesn't believe that more guaranteed income increases safe withdrawal rates.

Looking at the results I see that there are years where spending level goes below 20000. That doesn't seem desirable so I'll add a floor to the income at 28800 which is 80% of the 36000 net target. Note also that this is ignoring tax so it's not really net income. This decreases the maximum initial income to 41615 but not too many years look to be at the floor level.

Now I'll increase the fees/drag from 0.18 to 0.68 to give some allowance for non-US investments. Maximum initial spending is now 37839. More at the floor but still looks OK.

That's at 95% success rate. At 99% success rate it drops to 29186.

I haven't adjusted the retirement time to the 1 in 10 age of 99. Now I'll add 4 years to the plan so retirement end year goes from 2056 to 2060. 99% success rate maximum initial is 26910. Many years at the 28800 floor, far too many, so initial spending would need to be lower. 95% success rate maximum initial is 36584 still with quite a lot of years at the floor level.

I don't think that you can comfortably plan on 36000 net from this sort of plan when the 95% gross is 37829 and 99% 29186 with the original horizon.

Now I try original time horizon with 36000 floor. The results are not encouraging. Almost all years have income at the floor and indicated maximum initial spending is 2219, which is a way of indicating "no way". How about 90% success rate? 14382 initial income, so still "no way".

So think again about the achievable level of income.