Drawdown Psychology and Capital Burn

Triumph13

jamesd wrote: »

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

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

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.

Thanks for this James, and particularly for the link. I have to say though I agreed much more with the comment underneath from Mike P!

With regard to WHY people are frugal when they don't have to be ... I think its complicated.. Probably most honestly, they simply don't enjoy the passivity of spending, they enjoy the challenges of doing the things that save and create wealth. At a deeper level perhaps they want to be able to provide their children with a degree of safety (its a wilder world these days).. perhaps they would like to leave something to a world that made their comfort possible .. finally, perhaps it just doesn't feel right to waste wealth when so many others have nothing (deserved or not).

This whole thing of blindly equating spending with happiness seems to be incredibly widespread in the literature and whilst I agree that there are no prizes for ending up dead and rich, I don't think there are particular prizes for spending more money either. I can afford to just walk in and buy fillet steak, but I get much more fulfilment from going and hunting through the special offers and yellow stickers and working out how to construct a gourmet meal from what's marked down.

MacMickster

Triumph13 wrote: »

This whole thing of blindly equating spending with happiness seems to be incredibly widespread in the literature and whilst I agree that there are no prizes for ending up dead and rich, I don't think there are particular prizes for spending more money either. I can afford to just walk in and buy fillet steak, but I get much more fulfilment from going and hunting through the special offers and yellow stickers and working out how to construct a gourmet meal from what's marked down.

But you, yourself, are making provision for your spending to increase significantly in retirement.

Triumph13 wrote: »

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

In order to do this you are sacrificing years of retirement to make absolutely sure that you have made sufficient provision for this increased spending (without diminishing the capital in your pension pot).

You can perpetually put off taking that step to retire. Delaying retirement by just one more year, each year, adds ever more financial security to that step which you can't bring yourself to take. Please remember that you can't buy time with your ever increasing pension pot.

Fermion

You don't mention what the total value of your various pension pots will be. If they are vary large and you only take the natural yield or less from you Income Drawdown (your figure of < 3.6% is realistic) and you get growth from your investment funds then you may be liable for additional tax when your total pension fund portfolio is revalued at age 75.

When you go into drawdown you need to check carefully what Standard Lifetime Allowance(STA) percentage figure is being quoted for the Drawdown Element and calculate the potential impact of the future DB elements. STA is £1M the 2016/17 tax year and will increase annually by CPI

For info, I put the majority of my SIPP funds into drawdown just over 1 year ago with a plan to draw a natural yield of 3.5%. This has actually worked out much better than I could have imagined. Not only have many of the "conservative/defensive" funds that I selected have given a much higher income yield (circa 3.8%) but the value of my drawdown pot has actually grown by about 8% as well (mainly due to Brexit & £ devaluation). I have therefore given myself a Drawdown pay rise to 3.6%, however I will carefully monitor the Drawdown fund growth and yield and adjust this downwards if the market takes a turn for the worse!

Triumph13

Thank you to everyone for your replies, suggestions and challenges. I've found it incredibly useful to articulate the issues and after sleeping on it, I think I'm a lot closer to something that will work for me in terms of maximising happiness which is what it's really all about.
I think a strategy based on what, from now on, I'm going to call 'The Linton Fudge' of budgeting a large income and then not spending it will probably be optimal in terms of 'pressing my buttons'. Thanks Linton! The large nominal income will make me 'feel' richer during that first decade, but the fact I won't spend it all should reduce the capital burn (which realistically I know would make me unhappy - irrational, but true.)
Markets permitting, this should hopefully result in a snowballing of wealth once the DBs come on line, making it even easier to do things like pay off the kids' student debts, increase charitable contributions etc.
I'm quite fancying the idea of routing some of the 'savings' during that first decade into dividend paying ITs as having another little income stream from these would also cheer me up each time they paid out.
Thank you all once again.

Triumph13

Fermion wrote: »

You may be liable for additional tax when your total pension fund portfolio is revalued at age 75.

An excellent point, and one I will have to be careful of as I do expect to be over the LTA. I haven't built the model out to 75 yet, but I will need to do some sensitivity analysis on drawings vs returns vs CPI as if returns are good I may need several years of drawing up to just below the HRT band to avoid a further LTA charge at that point. I'll probably end up juggling funds from Pension to ISA before 75 then stopping pension drawings until the ISAs are spent to minimise IHT risks (if rules haven't changed by then).

For info, I put the majority of my SIPP funds into drawdown just over 1 year ago with a plan to draw a natural yield of 3.5%. This has actually worked out much better than I could have imagined. Not only have many of the "conservative/defensive" funds that I selected have given a much higher income yield (circa 3.8%) but the value of my drawdown pot has actually grown by about 8% as well (mainly due to Brexit & £ devaluation). I have therefore given myself a Drawdown pay rise to 3.6%, however I will carefully monitor the Drawdown fund growth and yield and adjust this downwards if the market takes a turn for the worse!

I'm a bit nervous about those "conservative/defensive" funds. You don't say your age, but if you need to plan for a 30 to 40 year retirement I would be concerned at your ability to get high enough returns above inflation long term from funds designed more to preserve nominal wealth.

jennyjj

Fermion wrote: »

If they are vary large and you only take the natural yield or less from you Income Drawdown (your figure of < 3.6% is realistic) and you get growth from your investment funds then you may be liable for additional tax when your total pension fund portfolio is revalued at age 75.

Could someone elaborate on that please?
What additional tax? What revaluation at 75? I think I've missed something in my planning and only have 18 years to figure out what

Triumph13

MacMickster wrote: »

But you, yourself, are making provision for your spending to increase significantly in retirement.

In order to do this you are sacrificing years of retirement to make absolutely sure that you have made sufficient provision for this increased spending (without diminishing the capital in your pension pot).

You can perpetually put off taking that step to retire. Delaying retirement by just one more year, each year, adds ever more financial security to that step which you can't bring yourself to take. Please remember that you can't buy time with your ever increasing pension pot.

I couldn't agree more. It's a very difficult balancing act.
If we'd had our kids earlier I would have already pulled the trigger by now and we'd be off travelling. As it is, we're tied to home anyway until they finish school.
I have retirement models for a wide range of dates and you can tell how work is going by which one I decide to play with.:rotfl:
On good days I do think about going even longer, but always end up ruling it out, other than in the case of a market meltdown. I come back to 30 June 2019 every time as that is the first point where I don't have to use a mortgage facility for cashflow purposes (endowment matures 1 July and wife hits 55 in August). I will re-assess next Xmas and may indeed go in 2018 instead, but if I can stick it out I will.

Triumph13

jennyjj wrote: »

Could someone elaborate on that please?
What additional tax? What revaluation at 75? I think I've missed something in my planning and only have 18 years to figure out what

As well as being assessed against the LTA when you crystallise a pension, there is a final check against it when you turn 75. If say you had a £30k pa DB scheme (£600k of LTA) and £400k of DC funds when you crystallised them then you would have fully used up the £1M LTA. If you were then to just take the TFLS from the DC and leave the other £300k invested, you would need to watch out as any investment gains above CPI on that £300k would end up being hit with a 25% charge on your 75th birthday. It's easy enough to avoid by just making sure you withdraw any investment growth above CPI before then.

EdSwippet

Triumph13 wrote: »

... any investment gains above CPI on that £300k would end up being hit with a 25% charge on your 75th birthday.

That's sort-of the effect, but I believe the mechanics of it are a bit different. The remaining pot is measured against the LTA, but any 25% excess charge isn't collected instantly, but rather taken piecemeal as you draw down. The implication being that you might avoid some or even all of it by dying sooner than planned...

Triumph13 wrote: »

It's easy enough to avoid by just making sure you withdraw any investment growth above CPI before then.

Yup, that(*). Tax even at 40% higher rate is less than 55%.

(*) Well, assuming the government sticks to its promise to up-rate the LTA by inflation and doesn't change the rules yet again in the intervening decades. In my estimation both of these are laughably optimistic assumptions.

jamesmorgan

I recognize many of the dilemmas the OP is facing - not least that some of the decisions (eg when to retire) tend to be irreversible. I watched my own parents work long past the date they ideally would have retired at so as to ensure that they had a large income buffer, only to see their failing health mean that they were not in a position to spend most of this income.

For me this encouraged me to tend to take the opposite view and retire as soon as I felt I had sufficient capital/income to cover the gap up to when state pension would be payable without compromising my pre-retirement lifestyle. Luckily for me, I was 41 when I reached that milestone. That was over 10 year ago and whilst individual assumptions in my retirement plan have not all gone to plan, overall the plan is broadly what I expected.

I think a key activity is to undertake a formal risk assessment. Try to identify any key risks that will impact your assumptions and ensure that you can identify appropriate contingency measures to address that risk (either to minimize the chance of it happening, or to mitigate the impact if it does happen). Try to be as creative as possible in identifying risks - 10 years ago I couldn't have predicted leaving the EU, but I did have currency fluctuation as a key risk).

As well as being a useful exercise in its own right, doing the above will give you greater confidence to make decisions at an appropriate time.