Reasonable growth rate for calcs

tony4147

Looking into whether I can retire at 60 (now 54), I was always planning on working until 64 ish but I'm finding work getting more and more stressful every year and as I've worked in the same industry since I started work it isn't easy to move to a less stressful job with my skill set.
I will be planning on going the drawdown route. I'm doing a couple of spreadsheets to see if I can / cannot retire.

Would it be reasonable to use 4% PA (after fees) as a growth rate on the capital?

To retire at 60 I would need to taking 6% drawdown from age 60 until 67 and would then revert to 4% when I receive the full SP.

I understand that from 60-67 I will be depleting my capital and my spreadsheet is until age 90.

I haven't allowed for inflation in my calcs, as I believe as I get older I will require less money, and should I have to go into a care home then I have a house presently worth £600k that would fund that.

TheTracker

Some see decades long markets rising 5% pa over inflation, close to the modern historical average. Others feel 3-4% is more appropriate in today's climes. A few will say below 3 or above 5.

But these are long term averages, and you'll be bouncing around from -20% to +20% and anywhere in between from year to year. Were I you I'd be modelling how I'd cope if I lost 40% in the first two years of retirement, which may be as simple as pulling in the purse strings and weathering the storm.

dunstonh

Would it be reasonable to use 4% PA (after fees) as a growth rate on the capital?

Depends on the investment risk you are taking. You wouldnt want that rate if you are cautious or lower.

Linton

tony4147 wrote: »

Looking into whether I can retire at 60 (now 54), I was always planning on working until 64 ish but I'm finding work getting more and more stressful every year and as I've worked in the same industry since I started work it isn't easy to move to a less stressful job with my skill set.
I will be planning on going the drawdown route. I'm doing a couple of spreadsheets to see if I can / cannot retire.

Would it be reasonable to use 4% PA (after fees) as a growth rate on the capital?

Your return should be seen as a figure above inflation. I used 1% above inflation for my retirement 12 years ago which proved to be too pessimistic. Your 4% above inflation seems rather high as an assumption. I believe the long term average is about 5% but you may not be retiring in average times so you should err on the pessimistic side.

To retire at 60 I would need to taking 6% drawdown from age 60 until 67 and would then revert to 4% when I receive the full SP.

I understand that from 60-67 I will be depleting my capital and my spreadsheet is until age 90.

I haven't allowed for inflation in my calcs, as I believe as I get older I will require less money, and should I have to go into a care home then I have a house presently worth £600k that would fund that.

In my view calculating to 90 is too early, unless the age 90 caculation leaves plenty of money remaining. From the Office of National Statistics data, assuming you live until you are 60 you have a more than 25% chance of living to 95 or later and about 13% chance of living to 100 or later.

You should allow for inflation in your calculations. The past few years have seen low inflation. If the BoE keeps to its remit of 2%/year in 25 years the value of a £1 would drop to about 60% of its current value. In the past inflation has risen to 15% and could do so again. My assumption was 3%.

It is risky to assume that your expenditure will decrease as you get older. In particular although most people dont go into care homes many receive some level of care at home. Council provision may be limited, paying for it yourself means you can get exactly the level you want.

Having got your spreadsheet model set up I suggest you try a range of what-ifs on the assumed parameters.

Linton

dunstonh wrote: »

Depends on the investment risk you are taking. You wouldnt want that rate if you are cautious or lower.

Good point - the 5% figure I used was for equity. Even if the OP only invests in equity he would need a significant cash buffer for protection during major stock market falls.

ex-pat_scot

It's a simple question with a complicated answer.

It depends on whether you are happy with (the risk of) partial depletion of your pot between 60 and 67.


Historical figures suggest that the long term returns on 100% equity diversified portfolio should be around 4% BEFORE fees.
For a 50/50 Equities /Bonds portfolio, then the figure is approx. 3.5%
These figures are net of inflation.
In practice, these figures would result in broadly maintaining your capital, whilst being able to take 4% or 3.5% per year.


Clearly if you are targeting a 6% initial withdrawal rate then you ought to be anticipating a depletion of your capital.


None of this is certain. The numbers are historic long run averages, but the future will not be average. Certainly not for a roughly 7 year specific timeframe.


What you can do is use something like cFireSim to model the probability of success (ie broad maintenance of capital) with your inputs ie 6% for 7 years followed by 4% for c30 years.


You will need to consider your risk appetite for two things:
1. longevity. Based on your personal circumstances (health, smoker status, lifestyle, genetic factors) what is your expected and extreme longevity?


2. attitude to investment risk. How would you cope with volatile returns and adverse market conditions? Do the numbers allow you to be flexible in your financial requirements ie take less out when investment returns are lower, so as to broadly maintain the capital pot?


3. phasing of costs. (OK I said two things). Your retirement expenditure will hopefully be a shallow "U" shape curve ie higher in early retirement years, when you enjoy the fruits of your labour and are still in good health, then tailing off until the final stage where care costs and health issues can ramp up.


A lot will also depend on the actual amounts in question.


If your pot is £1m and the 6% is £60,000 then I guess you can afford to be quite cavalier with your strategy. If it's £100,000 and £6,000 then the margin for error is rather tighter.


In general terms, your approach is roughly that which I am expecting to follow.
A £1m pot at age 55/56 could well deliver 6% (£60,000) until age 67, at which point SP x 2 would kick in.


I'm still 6 years off, so I haven't yet run the numbers in real detail.
My initial modelling suggests that I would be able to take roughly £55,000 to £60,000 until SP kicks in, whilst still giving an overall success rate (preservation of capital until 95) of around 75% - 80%. In practice I would vary the income if initial market conditions /returns were severe, and if necessary top up through consultancy, so my plans won't have to be particularly precise.


From 6 years out, this gives me the bones of a plan. I suspect I will be more anxious to refine the model and approach as I near the 55 mark though.
Whilst our ages are not aligned, our broad timescales are!


Another way of looking at this is as a game of 2 pots.
If you believe that the long run stable approach is to take 4% pa, then the 7 years at 6% represents a 2% deliberate depletion. So I would perhaps think of things in this light ie view your available retirement pot as 14% (being 7 years x 2% depletion) lower than the actual amount available.
Ie if you have say £1m pot at age 60, and want 6% for 7 years then 4% thereafter, then you should view this pot as a c£875,000 sustainable pot (from which you could take 4% ie c£35,000 gross pa (c£30,000 net)) in perpetuity, and the surplus £125,000 be taken over the first 7 years). Hope that makes sense.

bostonerimus

If you have something like a 60/40 asset allocation your 6% and 4% withdrawals are too high to give a 95% probability of you having any money left after 30 years. The initial 6% is particularly worrying as if it is combined with a couple of years of negative returns it will significantly deplete your pot. Also not including inflation is dangerous. Studies show that the increase in annual spending is least after age 70 and that you might be able to take 1% or 2% off the general inflation rate, but if thats 4%, your spending will still increase each year. You must also remember to compound your withdrawal rates by your personal rate of inflation each year so if we take that as 1% after 7 years your 6% withdrawal would be 6.4% and after 24 years your 4% would be 5%. Here is a useful article. Use it carefully as it's US based and includes health care spending which isn't that same (yet) as in the UK.

https://www.kitces.com/blog/age-banding-by-basu-to-model-retirement-spending-needs-by-category/

Stubod

..for my retirement modelling spreadsheets I have assumed "interest" will be 50% of whatever inflation is and I have modeled inflation varying between 3.5% and 5.0%..but that's just me being (hopefully), pessimistic....

OldMusicGuy

Similar situation to me. I was planning on working to 63/64 but found work increasingly stressful once I turned 55, so am retiring in 8 weeks aged 60.

I would say they key to your planning is sensitivity analysis. I don't like the safe withdrawal approach for detailed planning. Instead, I go bottom up - I look at required income and then see how that can be funded from pensions and investments. I've done a detailed budget to assess what we need to live on and then built a planning spreadsheet that lets me model different inflation rates, investment growth rates and cash income returns. I then run various scenarios to see what the likelihood of running out of money is. I also make some assumptions about tax.

Like you I believe that the impact of inflation is overstated by many as lifestyle and expenditure can be adjusted to minimize the impacts. But I still run various scenarios with different inflaftion rates to see what the impact would be.

So build a spreadsheet that uses simple formulae in each year for things like investment growth, inflation etc and then play with different scenarios that will help you build confidence that if you retire you won't face unpleasant surprises. Or at least it will highlight the scenarios you need to watch out for so you are prepared if they start to come to fruition.

My goals is for one or both of us to reach our early 90s with at least 100K in today's terms left in our investments plus a property which could be sold. Those together should provide enough to fund a few years in a care home when needed.

westv

This thread is useful

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