Sense check on retirement plans

k6chris

jamesd wrote: »

At the moment I'm getting around 16k of income a year on around £125k of non-pension P2P. That isn't inflation linked.

How safe is the money tied up in the overall scheme, ie what protection is there from the P2P organisation going under??

Dino_Charger

I may consider P2P in future. The lack of FCSS protection worries somewhat although P2P providers have some 'protection fund' in place. On SWR, I'm modelling based on 5% (which I don't think is conservative), and willing to accept capital may not be preserved beyond 20yrs.

jamesd

k6chris wrote: »

How safe is the money tied up in the overall scheme, ie what protection is there from the P2P organisation going under??

Similar to S&S ISAs and SIPPs: no protection for investment performance but all client money has to be kept apart from the firm's own money in accounts just for client money. The main difference is that there is no FSCS protection for fraud, while none of them have FSCS protection just for investment performance. P2P providers are required by the FCA to have a funded run-off plan that will take care of collecting the remaining loan payments, doing chasing as required. I currently use four P2P providers though two are not getting new money at the moment, I'm just running down my loan books there. Using multiple P2P providers is a good protection move if the amounts aren't quite small.

Dino_Charger wrote: »

although P2P providers have some 'protection fund' in place

Some P2P providers doing unsecured lending to consumers and businesses have protection funds that are intended to cover losses due to defaults. Those tend to be the lower paying platforms compared to the ones that do lending secured on physical assets of some sort. The funding for runoff in case of platform failure is common to all.

Beyond that the individual loan details vary. For example, at MoneyThing there are loans with IDs AEnnn. AE does HP, normally used, car sales to lower credit rating customers. Those loans pay 1% a month, have six month optional renewing terms and:

1. the cash flow from the outstanding HP payments is at least twice the value of the loan
2. the car value is no more than 80% of the retail value
3. if the borrower is still in business, it'll swap out any defaulted HP customers with non-defaulted ones
4. specific cars registered as charges at Companies House places payment high in the precedence in case of insolvency, above unspecified security and unsecured, below the administrators. Though the HP payments are the main recovery method
5. the cars are in the hands of the HP buyers so the borrower can't easily get at them
6. all of the cars have trackers installed

Or with more risk there's one currently taking new money at
Ablrate that's paying 16% for a holiday park development project in Scotland:

1. Land as main security might not fully cover the loan, later the project being developed in stages should take care of that. This is a second charge but the first charge holder has a cap on how much they will take.
2. There's an intermediary APF that takes first loss in case of default if the security turns out not to be enough

Those sorts of thing aren't as neat as a protection fund but the interest rate difference is substantial and the security helps. I've five figures lent to each of the borrowers mentioned.

Thrugelmir

jamesd wrote: »

Looks as though you're considering taking only as income only about half of what would be sensible with modern retirement rules. Currently for US investments with the Guyton and Klinger decision rules being used the projected safe withdrawal rates are:

Conservative: 4.88% (25% equity, 95% success rate)
Moderate: 5.44% (50% equity, 90% success rate)
Aggressive: 6.10% (75% equity, 80% success rate)

UK safe withdrawal rates are about 0.3% lower than US so deduct that. Assuming you're also sensible and use Guyton's sequence of return risk reduction method that'll either increase the amount you can take or increase the success rate. Those are for 30 years, reduce by another 0.5% given your age unless you don't expect to have normal life expectancy. All are allowing for inflation, expected to increase with it each year barring poor market conditions when the rules can suspend that or even cause a drop if returns are bad enough.

Recently I've heard far far lower figures being suggested. Struggling to think where it was. Though there was a lot of very sound reasoning behind why.

jamesd

Thrugelmir wrote: »

Recently I've heard far far lower figures being suggested. Struggling to think where it was. Though there was a lot of very sound reasoning behind why.

Those will probably be assuming the Bengen "4% rule" method is being used. At the link I gave earlier you'll find that the safe withdrawal rate with that rule - fixed percentage at the start increasing with inflation - is currently 2.39%, 2.89% or 3.59% for the three investor types I gave earlier. US equity markets and bond prices are currently quite high so those with only US investments are at a time when there's significant risk of being at the lower end of the historic returns. The 4% rule should cover the worst cases anyway. Other issues are retirement age and life expectancy which make the 30 years too short a time in many cases. The difference between 30 years and 40 years for the original 4% rule is about 0.3% lower safe withdrawal rate.

Of course you shouldn't use the 4% rule. It's one that pays too much of the income in later life and in normal market conditions pays too little in total. That's part of why I tell people to use the more modern Guyton and Klinger approach. As Wade Pfau observed in the 4% rule article I linked to:

"While the constant inflation-adjusted spending strategy provides a useful benchmark and baseline for analyzing sustainable retirement spending strategies, it should probably not be viewed as a realistic or reasonable retirement income strategy. Efficient retirement strategies must adjust spending at least somewhat for portfolio volatility."

4% is easy but wasteful and less safe than something more modern.