Merry Correction Day

Prism

Audaxer wrote: »

I don't think that is a safe withdrawal rate going forward, as you would definitely run the risk of running out of money in a long retirement.

I am planning on using a variable withdrawal rate which has a high chance of allowing a 5%+ withdrawal rate after 5-10 years. I don't believe that the fixed 4% idea works that well at all. Most people are flexible with income throughout their lives - no need not to be in retirement too.

TBC15

atush wrote: »

No one was harping. More making a statement about misleading thread titles

Apologies, "mental note" must include emoticons to indicate light hearted joshing.:D

Audaxer

Prism wrote: »

I am planning on using a variable withdrawal rate which has a high chance of allowing a 5%+ withdrawal rate after 5-10 years. I don't believe that the fixed 4% idea works that well at all. Most people are flexible with income throughout their lives - no need not to be in retirement too.

I like the idea of a variable withdrawal rate. When you say 5%+ after 5-10 years, do you mean just draw from cash for the first 5-10 years?

Prism

Audaxer wrote: »

I like the idea of a variable withdrawal rate. When you say 5%+ after 5-10 years, do you mean just draw from cash for the first 5-10 years?

It typically involves using a formula (there are a few about) to calculate that years withdrawal rate. Sometimes you withdraw from your equities, sometimes from bonds. The allocation between these two might float (rather than a set ratio) in addition to the rate floating. The general idea is to ensure that you don't take to much early if conditions are bad. I guess you could do this with a common sense approach by taking out less during a downturn, but I don't like the idea of a formula to reduce the guesswork.

As long a there is no severe crash during the first few years the safe withdrawal rate typically increases to 5%+ fairly quickly and can go as high as 8-9% under optimal conditions, but the system is primarily designed not to fail so can also go down to 3% if required.

Audaxer

Prism wrote: »

As long a there is no severe crash during the first few years the safe withdrawal rate typically increases to 5%+ fairly quickly and can go as high as 8-9% under optimal conditions, but the system is primarily designed not to fail so can also go down to 3% if required.

Let's say when you start withdrawing, a bull run continues for another 5 years or so. Just wondering if there any downside to being too cautious in good years and sticking to say 3% withdrawals, in that when the crash comes you will have a bigger percentage loss and then won't be able to withdraw as much from the investments or have as much cash available to draw on?

Prism

Audaxer wrote: »

Let's say when you start withdrawing, a bull run continues for another 5 years or so. Just wondering if there any downside to being too cautious in good years and sticking to say 3% withdrawals, in that when the crash comes you will have a bigger percentage loss and then won't be able to withdraw as much from the investments or have as much cash available to draw on?

The formula should take care of that (I say should since I am not in drawdown yet so at least for me its untested). In general, in good times you take a higher percentage withdrawal and you take it from the equity pot. When equites are not performing you take a smaller percentage but from the bond pool. Sounds like common sense really but its all about the formula for the detail.

The model I am looking at most closely never rebalances between bonds and equities - well at least not directly.

Thrugelmir

Prism wrote: »

When equites are not performing you take a smaller percentage but from the bond pool. Sounds like common sense really but its all about the formula for the detail.

When bonds and equities are correlated what's the third option?

Linton

Audaxer wrote: »

Let's say when you start withdrawing, a bull run continues for another 5 years or so. Just wondering if there any downside to being too cautious in good years and sticking to say 3% withdrawals, in that when the crash comes you will have a bigger percentage loss and then won't be able to withdraw as much from the investments or have as much cash available to draw on?

I do not believe taking a defined % drawdown is the best approach for implenting retirement financial management. It may be OK for sanity checking plans made pre-retirement. Furthermore switching drawdown between bonds and equity on an annual basis is an unnecessary complication which can be avoided by long term planning.


There are 3 different issues:
(a) extracting money from a DC pot
(b) assigning money for the current years expenditure.
(c) keeping your asset allocation in line with your objectives/plan

These issues require different solutions based on the long term financial plan...
(a) it makes sense to me to, as a minimum, extract sufficient money from your drawdown to use up the current tax band. Anything not used can be reinvested in S&S ISAs. This approach may not be appropriate if you want to leave money in the pension for inheritance

(b) When you retired you presumably defined an inflation adjusted expenditure level to keep you in your desired standard of living to be met by external income and drawdown. So long as your plan remains viable the required drawdown cash is what you need to assign to expenditure from your assets. It does not make sense to me to go on a spending spree just because the markets have out performed in a particular year nor have a year on the breadline purely because of a crash. If the plan is showing excess long term wealth you can always increase your annual budget or justify a large one-off expenditure. If the plan shows inadequate wealth in your extreme old age that is the time to cut back on your annual budget for the long term.

(c) Having transferred money from your pension and set aside the appropriate cash you will need to rebalance your investments back to the allocation appropriate to implement the plan.

Linton

Thrugelmir wrote: »

When bonds and equities are correlated what's the third option?

Bonds covers a wide range of very different investments. There are also others - infrastructure and property income, cash, non tradable loans, gold and other similar non productive assets, hedge and private equity funds. Also there is a wide range of equity investments, not all of which are always highly correlated.

Prism

Thrugelmir wrote: »

When bonds and equities are correlated what's the third option?

That would depend on the formula you follow. The one I am looking at you take bonds unless equities out perform by a certain percentage