Drawdown Psychology and Capital Burn

Triumph13

justme111 wrote: »

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?

Very succinctly put. I'm hoping to find others who have successfully made the transition from capital being something you accumulate to being something you allow yourself to spend and get some tips on how they did it! First world problem or what?

Linton

You dont mention inflation.

Your flat rate budget and current expenditure are similar to mine - most months I would be hard pushed to spend anything near to the budget. From what you say its difficult to see what your problem is. Surely you can simply plan on the basis of taking your budgeted flat rate expenditure as income, but when the time comes dont take it if you dont need it. Budgeted expenditure not taken has a major effect on the plan - replan once a year. You can always raise or lower the budget if necessary at that time.

There seems no point in worrying about variable expenditure schemes now when you know that a generous flat rate policy works. When things change in the future or your initial assumptions prove to be incorrect you have the slack to adjust the plan accordingly - you wont actually be spending the budgetted amount anyway.

Linton

Triumph13 wrote: »

Very succinctly put. I'm hoping to find others who have successfully made the transition from capital being something you accumulate to being something you allow yourself to spend and get some tips on how they did it! First world problem or what?

One way is to see planned expenditure as a target to be achieved, as important as a target for accumulation. If you dont spend according to plan you will die leaving more than you intended, which makes some of the efforts you made to accumulate rather pointless. The expenditure neednt be pure indulgence, you can always give extra money to charities or local good causes.

Also after retirement you dont stop accumulating. If you retire at say 55 you could well have another 40 years to go, 3/4 of your assets wont be used for another 10 years. So there is plenty of time for a major part of your assets to be invested for higher risk, higher return.

Triumph13

Linton wrote: »

You dont mention inflation.

Your flat rate budget and current expenditure are similar to mine - most months I would be hard pushed to spend anything near to the budget. From what you say its difficult to see what your problem is. Surely you can simply plan on the basis of taking your budgeted flat rate expenditure as income, but when the time comes dont take it if you dont need it. Budgeted expenditure not taken has a major effect on the plan - replan once a year. You can always raise or lower the budget if necessary at that time.

There seems no point in worrying about variable expenditure schemes now when you know that a generous flat rate policy works. When things change in the future or your initial assumptions prove to be incorrect you have the slack to adjust the plan accordingly - you wont actually be spending the budgetted amount anyway.

Sorry, my 3.6% was budgeted real return so all numbers are in today's money.
That sounds like an excellent fudge that I think would work for me mentally - budget for the flat, but keep sticking the excess back into investments. Just as long as I don't get too hung up on how much I can beat the budget by.

jennyjj

Linton wrote: »

You dont mention inflation.

We can tie ourselves in knots trying to work inflation into the figures.
Personally, I work everything out with today's value of money on the assumption that my capital, investments, and any pensions that I take will be able to hold their own against my own personal measure of inflation. The only problem arises when that no longer happens.
There's a lot to be said, I think, for putting your numbers into a spreadsheet or pension planning tool like retireeasy.co.uk website and frequently reviewing the 'current' situation. Then adjust spending or income as required along the way.
Too many of us work to grossly pessimistic assessments of where we stand, and so put off retiring far later than we should. Who amongst us knows anyone who retired early and actually ran out of money? Who amongst us knows of someone who died obscenely rich?

atush

Triumph13 wrote: »

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



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




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.


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!

I dont give a monkey's either, but I do like a 2+ holidays a year lol.

My main worry for you is funding Uni from retirement funds. I know from personal experience, having just put 3 thru Uni incl twins, one who went on to Law school, is that it is expensive. And I didnt want to fund it from retirement funds, and in fact we put off retirement to fund it completely.

And my car is 11, the OHs is 15. So we too dont care about scruffy. But this year we at least need to get a new one for the OH. Mine can wait til next year. but both need replacing Before retirement from income. Not TFLS, not savings, not loans.

jamesd

Triumph13 wrote: »

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.

That's why you accumulated it in the first place. You're not throwing money away, you're using it as intended.

Triumph13 wrote: »

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.

That's natural and you just explained why it's wrong. There are no prizes for ending up dead and very rich.

Triumph13 wrote: »

I would be very grateful for any insights anyone else has, or even just the knowledge that I am not alone.

You're not only not alone, you're pretty normal. As Kitces explains in Why Most Retirees Will Never Draw Down Their Retirement Portfolio "affluent retirees relying on their portfolios in retirement are failing to even spend their annual income in their retirement years (and the more affluent they are, the worse the trend tends to be). In fact, not only are retirees not fully spending their available income, but their spending actually begins to decline in retirement". And it gets even worse after a market drop even though the drawdown rules have provision for that built in already.

You have an even worse problem.

Your long term income is mostly state pension and DB. So the proportion the "pot" that is visible to you is only a small part of your "real" pot in the form of combined DB and DC value. So you will see the DC pot dropping a lot even though the DB pot continues to grow. You don't have the long term income reason that Kitces described for those relying mainly on drawdown because your need for this capital is not lifelong, just a bridge.

Use that money for its intended purpose, bridging that gap until DB and state pension are fully paying out.

westv

Just wondering what investment strategy you would use for funds filling the gap between retirement and DB pensions kicking in. Just sufficent to keep pace with inflation?

Apodemus

atush wrote: »

My main worry for you is funding Uni from retirement funds. I know from personal experience, having just put 3 thru Uni incl twins, one who went on to Law school, is that it is expensive. And I didnt want to fund it from retirement funds, and in fact we put off retirement to fund it completely.

A +1 from me on the Uni costs. Numbers One and Two are now finished and Number Three is just half-way through. The process seems to just keep getting more expensive! Perhaps a balance between funding them now versus inheritance later, but I really don't like the thought of them starting out with debts in a way that I never had to and it has had a major impact on eventual retirement date!

Triumph13

I'm afraid I see no point at all in fully funding my kids through Uni. That's what student loans are for! I can think of plenty of scenarios under which they would end up not fully repaying their loans, especially if they stay on for postgraduate degrees, and I therefore have no intention of paying them off up front.
I intend to bung the kids about £500 a month through Uni to cover parental contribution and a bit extra and will then do them a deal whereby I reimburse them for the first slice of loan repayments - say the bit between £21k and £41k of income. If it becomes clear that they will end up repaying in full then I may take the decision to pay off a capital sum, but I would hope to average better than inflation plus 3% from investments anyway so not convinced that would make sense.