Safe withdrawal rate UK / early retirement

jkwer521

When thinking about early retirement, what safe withdrawal rate figures do people use in their assumptions?

I am aiming to “retire”, or at least not need to work, as early as possible. In order to calculate how much I would need to stop work indefinitely, I think I need to estimate two things:

1 - How much I would like to be able to spend
2 - What rate of return I can expect on capital/investments above inflation

For 1, I track all my spending so I can easily come up with a spending estimate. But I’m finding it more difficult to estimate what returns I could expect and therefore what my safe withdrawal rate is.

So I’m interested what other people use as an assumption and broadly what investments they would have to make those returns. The standard one for the US seems to be 4% above inflation, therefore a safe withdrawal rate of 4% and therefore required capital of 25x annual spending.

Linton

Suggest you try out https://www.cfiresim.com. It is based on US data, but should give you an understanding of the topic.

When considering drawdown it is usual to work in terms of initial payment as a % of income with the aim of then matching inflation. People generally don't want their income to drop be 50% in a severe crash.

There is a long thread initiated by Jamesd on safe drawdown rates. Sorry I can't provide a link, it's too messy on an iPad.

westv

Here you go

https://forums.moneysavingexpert.com/discussion/5466114

dunstonh

Remember that the asset mix of your investments will largely dictate what is considered sustainable.

The standard one for the US seems to be 4% above inflation, therefore a safe withdrawal rate of 4%

I would not consider that sustainable. I tend to aim for 3.5% but have people on higher (and lower) and have had no issues.

One of the biggest risks with drawdown is add-hoc withdrawals and thinking that you can draw out gains during good years without it impacting later on. If you set your income draw rate at the upper end, then that can be a very bad thing to do.

Spreadsheetman

dunstonh wrote: »

...
I would not consider that sustainable. I tend to aim for 3.5% but have people on higher (and lower) and have had no issues.
...

And don't forget platform charges, fund charges and management fees - that 3.5% may mean that the person drawing can only realistically take 2% when all the other things are accounted for.

westv

Spreadsheetman wrote: »

And don't forget platform charges, fund charges and management fees - that 3.5% may mean that the person drawing can only realistically take 2% when all the other things are accounted for.

If you're only going to draw 2% you might as well consider an index linked annuity.

dunstonh

Spreadsheetman wrote: »

And don't forget platform charges, fund charges and management fees - that 3.5% may mean that the person drawing can only realistically take 2% when all the other things are accounted for.

Returns are after charges. So, you dont need to deduct them again.

Spreadsheetman

dunstonh wrote: »

Returns are after charges. So, you dont need to deduct them again.

Sadly not: see Wade Pfau's article here https://retirementresearcher.com/trinity-study-updates/

quote: "Trinity study does not incorporate mutual fund fees"...

bostonerimus

dunstonh wrote: »

Returns are after charges. So, you dont need to deduct them again.

The US research into safe withdrawal rates does not include investment costs in the results, therefore, fees have to be treated as part of your spending and will come out of the safe withdrawal rate.In the first year if you have 1% fees that will come straight off your withdrawal rate. The effect is lessened over time, but for planning purposes I would take at least 50% of your investment fees off your safe withdrawal rate. So if your expense ratio and IFA fees total 1% take off 0.5% from your safe withdrawal rate. For 3.5% withdrawal that would be 14% of your income going on fees....that's a big part of your budget.

Also most of the models that use US historical data show that a good balance of risk and portfolio survivability is attained with a 60/40 equity to bond asset allocation.

GSP

Hi dunstonh, from above
"One of the biggest risks with drawdown is add-hoc withdrawals and thinking that you can draw out gains during good years without it impacting later on. If you set your income draw rate at the upper end, then that can be a very bad thing to do".

What do you advise people should do with gains made? All for being careful but would of thought a pension is to enjoy and not take to the grave with you. If there something left over for the kids (who'll be in their fifties by then and hopefully sorted financially) then great, but at what point can people release the shackles and spend a bit more if their fund has done well. Thanks

westv

Also remember the 4% rate takes no account of the state pension and is a robotic 4% + inflation - whatever is happening to the pension pot.