Drawdown Psychology and Capital Burn

Triumph13

Apologies if this is a bit long and rambling.
I'm 30 months from my planned early retirement date and really getting into the nitty gritty of cashflows and withdrawal strategies. I'm finding some aspects of this to be a real challenge psychologically and would be interested to hear how others in my situation have approached it.
In the old days of DB pensions and annuities it was all very simple - you retired and lived off the income stream. In the new world of DC pensions it's more challenging, but still not too complicated - you build up your capital and then aim either to a) live off the investment growth / income to preserve capital for inheritance / emergency; or b) spend the capital over your estimated lifespan (we are firmly in type a by natural inclination)


The reason I'm struggling is that we are in the in-between position of having a mixture of smallish DB schemes and state pensions that won't kick in until 10 - 14 years after we retire, plus large chunks of DC money. We are very lucky that either would probably be enough to fund a reasonably comfortable lifestyle, but together they should allow for plenty of travel, helping the kids through college etc.
When I run the numbers though, I get very uncomfortable with the fact that if I plan for an even net income every year, I burn through a huge amount of capital from the DC schemes in the period before the DB / SP money comes on line. If instead I tweak the spreadsheet to cut back income in the first decade of retirement, I get a big double-whammy of benefit by being able to push that money into income generation rather than spending. I find myself pushing more and more funds to the income pot until I finally tell myself I'm being stupid and should give myself the big income whilst I'm young and fit enough to spend it (and still have the kids at home) and so I even everything up again. Then I look at the amount of capital I'd burn in the first decade and the whole internal monologue starts again.
Frankly this is doing my head in a bit! I would be very grateful for any insights anyone else has, or even just the knowledge that I am not alone. And before anyone suggests it, I definitely don't want to take the DB schemes early as they are the security blanket that will help me sleep at night.

missile

You do not say what age you are planning to retire?

Fun for us today or Jam for my kids tomorrow? That is how I view it. It is very hard to strike a balance and only you can decide what is right for you and yours.

westv

We have no kids so it'll be fun, fun, fun from the Friday I flee - when ever that is.

Triumph13

missile wrote: »

You do not say what age you are planning to retire?

Fun for us today or Jam for my kids tomorrow? That is how I view it. It is very hard to strike a balance and only you can decide what is right for you and yours.

We'll be 53 and 55. Kids will be 14 and 16.
The problem for me is that if I have less jam in the first decade I get lots more jam after that as all that capital will still be earning income rather than having been spent. I'd therefore hope to have a significantly higher total lifetime jam ration, as well as leaving more for the kids

atush

With kids at home, and worried abt burning capital- work another year.

atush

Ok, you cross posted with ages.

Your kids are really young. You wont be able to travel easily as they are in school. Have you filled their Jisas each year? To help with Uni expenses?

TBH, retiring before they leave home? I wouldnt do it unless i had a lot more put aside that even my most profligate drawdown scenario was over funded.

Triumph13

atush wrote: »

With kids at home, and worried abt burning capital- work another year.

Already built in 3 extra years to cover this. Our 'smooth income' option is budgeted for 45% more than or current spending.

atush wrote: »

Ok, you cross posted with ages.

Your kids are really young. You wont be able to travel easily as they are in school.

That's the only reason we are doing the extra 3 years or we'd already be off.

atush wrote: »

Have you filled their Jisas each year? To help with Uni expenses?.

That will all come out of pensions funds. No point using Jisas if I can get tax / NI relief from a pension instead and even if I'm a bit over the LTA I'll still be profiting thanks to salary sacrifice.

atush wrote: »

TBH, retiring before they leave home? I wouldnt do it unless i had a lot more put aside that even my most profligate drawdown scenario was over funded.

We have the benefit of not giving a monkey's for 'status' and so are very happy with old cars, scruffy clothes I don't have to worry about changing before chopping wood, etc. An excellent local Grammar means no school fees, I don't play golf, I prefer kayaks to yachts and we are both excellent cooks. As a result we will indeed be overfunded for drawdown scenarios that we would consider outrageously profligate!

justme111

You are trying to decide your drawdown rate now 3 years before retirement trying to chose between more jam in your lifetime overall or more jam after retirement in 3 years time while whichever way you chose there is enough jam for your liking?

Linton

I retired over 11 years ago at 52 and 56 but didnt have kids. We had a working plan based on reasonably pessimistic assumptions and had no qualms then or regrets since as to whether early retirement was right for us.

Although you havent given us any figures nor told us what assumptions you have used regarding investment return and inflation your reaction suggests to me that your plan is too tight. You dont want to spend the next 10 years worrying about money so I would agree with Atush. Stay at work until the plan satisfies you without anguished soul-searching.. What difference would 1 more year of work make to the plan?

Dont plan to skimp or go wild at any period of your retirement. Simply base the plan on maintaining your current standard of living, skimping or bingeing can come later when you know how your plan is working out.

Linton

Triumph13 wrote: »

Already built in 3 extra years to cover this. Our 'smooth income' option is budgeted for 45% more than or current spending.

From my experience a 45% uprate is over the top. There are limits on how many meals out you can face and how much time you want to spend on holidays when every day is a holiday. Our retirement plan was based on 10% above our previous average total annual spend, increasing with CPI. In practice the only times we have exceeded our budget in the past 11 years has been when we have had major work done on the house. A few exotic holidays have been accommodated without problems. This has resulted in plenty of unplanned capital being available now for whatever we want, helped by assumptions on investment return and inflation that proved to be rather pessimistic.

Perhaps the assumption of a rather lower steady income would give you a plan you feel comfortable with and would provide the flexibility to accommodate significant changes in the future. It is better to plan on pessimistic assumptions and be pleasantly surpised than the reverse.

Triumph13

Linton wrote: »

Although you havent given us any figures nor told us what assumptions you have used regarding investment return and inflation your reaction suggests to me that your plan is too tight. You dont want to spend the next 10 years worrying about money so I would agree with Atush. Stay at work until the plan satisfies you without anguished soul-searching.. What difference would 1 more year of work make to the plan?

Dont plan to skimp or go wild at any period of your retirement. Simply base the plan on maintaining your current standard of living, skimping or bingeing can come later when you know how your plan is working out.

I didn't want to own up to the numbers as they are embarrassingly large (in my mind at least), but here goes. Current spending is £2,750 per month which is basically what the DBs and SPs will eventually give post tax if all the capital disappeared. Flat budget is £4k per month. Assumptions are 3.6% investment income / growth on an 80% equity portfolio and a zero real return on cash. I'm accounting for market fluctuation by modelling a structure with sufficient of my income in cash for that first decade that if the income from investment sales was 40% below budget every year I'd still have an income of £3k a month which I feel is a) sufficient prudence; and b) an income level I'd be very comfortable with. Also a six figure additional capital fund for unexpected surprises, no account taken of any possible inheritance and provision for house deposits for the kids.
I definitely don't think I'll be worrying about going too early, more struggling to stick it out until 2019 when if I'm honest I know I really don't need to.
I'm afraid I'm very much a second marshmallow kind of person and so I suspect I am going to end up underspending to save burning capital when I don't 'need' to. It's just that I also suspect that is stupid.