Simple Drawdown and Investment Plan?

k6chris

There are many comments on this excellent forum about the rates of investment growth that can be achieved once you have a DC pot as well as draw down methodologies that can be applied. It strikes me that any pension planning based around drawdown requires these two figures, average investment return and annual drawdon, to be realistic. Two questions arise;

1. What is a sensible investment return to use (inc growth and dividends etc) and give some examples of how that might sensibly be achieved for the average mortal
2. What is a sensible drawdown rate, assuming a planning assumption of 30+ years of DD requirement, with a DD of capital during this period being acceptable

For this simple scenario, I want to assume only investments that would fit in a basic SIPP (think HL) and that any DD calculations or investment rebalancing should need to be done no more than once a year.

Thanks!

AnotherJoe

There's a whole thread in this forum specifically on drawdown rates.
https://forums.moneysavingexpert.com/discussion/5466114

As you will see in there, its by no means simple ! But i think a conclusion is that anywhere from 4% - 6% is OK if you manage it carefully.
However some cautious people will go for 3.5% and others will say if you are in the UK it should be 3.5% because 4% is a USA figure, and others if you are in the UK but have global investments it can be 4% or higher !!

A few more comments
- you dont have to have one withdrawal rate over your lifetime, for example it might be high (lets say 6%) until state pension kicks in and whilst you can make good use of money, lower (say 4%) when SP is incoming, and very low (say 2%) after say age 85 but in any case as your big spending diminishes. This is my general plan for example, though also drawdown will match my spending, eg ist a maximum. If i only need 3% then thats what I'll drawdown.
(This is outside the nuclear option of massive spends due to care home fees)

- withdrawal rate may (will) change from year to year, I will have 3 years buffer of cash, in a market crash year I will not withdraw anything but live off the cash, topping up in good years. In a good year, lets say market up 20% I will top up the cash if its fallen below 3 years. Some people are happy with 1 year.

- withdrawal rate may also change if market performance has been good and the pension pot is increasing, or my lifespan isn't looking so good, or my initial calculations seem too cautious.

As for investment rates, that again can vary from 4-8% after inflation as fairly average figures. Obviously thats averaged over time and could vary hugely. Someone here posted recently they were aiming for, IIRC 11% or 12% drawdown and were roundly derided (rightly IMO)

coyrls

AnotherJoe wrote: »

- you dont have to have one withdrawal rate over your lifetime

Totally. I worry when I see the level of granularity with which people are planning both their accumulation and spending phases. Sometimes detail can give the illusion of accuracy. My general take is that if you can live off between 3% and 4% of your pot, have flexibility to cut out some discretionary spending if necessary and have a cash buffer, you should be OK. If you’re disciplined enough to build up a decent pension pot, you are probably going to be disciplined enough to manage spending it.

dunstonh

What is a sensible investment return to use (inc growth and dividends etc) and give some examples of how that might sensibly be achieved for the average mortal

Depends on the level of investment risk you take. The lower the risk, the lower growth will likely be over the long term.

What is a sensible drawdown rate, assuming a planning assumption of 30+ years of DD requirement, with a DD of capital during this period being acceptable

Linked to above, your health, capacity for loss etc.

You also have to be prepared to adjust your income during periods of negative returns. Otherwise your drawdown could accelerate the erosion and leave you running out of money much earlier than planned. This is in part whey periodic ongoing reviews are needed.

At this time, you would probably be more cautious on an example drawdown rate. However, were the markets say 30% lower than their high, you may feel more confident with a higher rate.

Drawdown is not a simple thing. There is no one-size-fits-all approach.

BLB53

What is a sensible investment return to use (inc growth and dividends etc) and give some examples of how that might sensibly be achieved for the average mortal

For my own sipp I have averaged 8% over 10 yrs using mainly global equities, but depending on your asset allocation, I would suggest a conservative real return (after inflation) of ~5% p.a.

What is a sensible drawdown rate, assuming a planning assumption of 30+ years of DD requirement, with a DD of capital during this period being acceptable

I am now in drawdown and take the natural income from my investment trusts of ~4% p.a but if you want to also gradually take out some of the capital you could draw 5% or 6%.

You may find this article useful on the diy investor site http://diyinvestoruk.blogspot.co.uk/2016/08/a-look-at-sustainable-drawdown.html

Just a final thought, if you use the Vanguard Lifestrategy (or Target funds) you will not need to worry about rebalancing.

Linton

The 3.5% figure often seems to mean 3.5% of the initial pot and then increase it with inflation. The idea being to mimic an annuity. Taking a fixed % of the current pot and hoping it will meet inflation is another approach which will reduce the effect of taking excess in the bad times. It doesnt always seem clear wht quoted % drawdown figures mean.

Aiming to gradually draw capital can be rather risky, particularly in the early years, as eating into your core savings will reduce the investment gain, which could lead you to withdraw even more from your core savings the following year etc etc rather like a mortgage in reverse. To avoid this you may want to specify a rather long life expectancy in your plans. Better in my view for planning purposes is to aim for sustainability.

Triumph13

Possibly the most important factor of all is flexibility. If the drawdown is your only income, and it only just covers your essential living costs, then you can't afford anything that might reduce it. That forces you to use investments with minimal volatility (which have lower average returns) and to make very cautious assumptions about longevity. Ultimately you could end up worse off than with an annuity because you don't get to average that longevity risk with others.
On the other hand, if your core spending is covered by state pension and any DBs you may have, then you can probably cope if your DC drawdown income drops by 50% or even more for a year or three. That would allow you to invest much more in higher earning, but volatile investments and to start out with a much higher drawdown percentage.

Linton

A retirement plan does need an assumed investment return and an assumed inflation rate. However you dont need to assume any drawdown strategy.

I simply assumed a single pot of invested money from which was drawn down each year whatever was needed to satisfy the gap between my budgeted expenditure and guaranteed incomes. You can judge the safety of the plan by the size of the investment pot at the end of the plan.

In practice the amount we drawdown from our SIPPs is the maximum we can each year whilst keeping within our current tax bands. Excess drawdown goes into our S&S ISAs. Hopefully my SIPP will be drained before I need to undefer my SP.

martinsurrey

Triumph13 wrote: »

That forces you to use investments with minimal volatility (which have lower average returns) and to make very cautious assumptions about longevity.

I think you are being overly simplistic in your assessment of individual pension pots.

Even if you only have draw down income, only a small fraction of a pension fund should be in low return low volatility assets, and they should be used to cover drawdown in adverse market conditions (1-3 years of drawdown is common, so 5-15% of the pension fund).

The rest of the pension fund should be targeted to higher return investments.