How much pension will you get? Build your own dashboard to keep track of your progress

bostonerimus

dharm999 wrote: »

Having said that, I'm using 3%, combined with a real low growth rate of 3%, in my spreadsheet

Stress testing a plan is very useful...as they might say in an acting class, "explore the space". But an area often overlooked is what you spend. A detailed understanding of how and why you spend is enormously useful in retirement and the ability to control spending in response to circumstances is essential. This is why many people like to have paid off all debt prior to retirement; it's far easier to reduce spending when large fixed costs like a mortgage or car loan are not part of the equation.

hugheskevi

A detailed understanding of how and why you spend is enormously useful in retirement and the ability to control spending in response to circumstances is essential. This is why many people like to have paid off all debt prior to retirement; it's far easier to reduce spending when large fixed costs like a mortgage or car loan are not part of the equation.

As well as reducing spending, this also helps with risk-management (it is sort of the same thing, admittedly).

Expenses such as mortgages, car loans, house improvements, etc, obviously all require funding. If all post retirement income is guaranteed, eg, State Pension or Defined Benefit then this is straightforward budgeting. But if the expenditure is funded by uncertain Defined Contribution pension income, then there may be a significant benefit in reducing expenditure prior to retiring.

Whilst working, investment and inflation uncertainty can fairly easily be managed by working longer, although if pension pot is large relative to income this may not be so straightforward and there is a risk of income shocks (eg redundancy or ill-health). Once retired, you either have sufficient contingency for very adverse scenarios (a cost-of-capital) which is inefficient in terms of optimal retirement on a risk-neutral basis (ie you end up working longer than likely to be necessary) or you adjust via a lower consumption, which could lead to poor outcomes unless there are very large incomes involved.

If post retirement expenses can be met or mitigated pre-retirement by actions such as paying off mortgage, purchasing a new car (without debt), having no debts, having a round of home improvements replacing things like boiler, etc, then guaranteed income will fund a higher percentage of post retirement spend, and reduce the risk arising from the uncertain income provided by Defined Contribution pension.

jamesd

Deleted_User wrote: »

he recommends a system where you might be cutting expenditure dramatically if the trouble hits. That allows you to start with 4%. I really wouldn’t call his system SWR, as “safe” implies that you can carry on withdrawal at a 4% rate and live happily ever after. He is pushing for variable withdrawal rate.

The meaning of safe withdrawal rate includes variable strategies. Safe does not imply unchanging, it merely requires taking no more than specified by the rules used to calculate the safe withdrawal rate being used.

It seems that you simply have a preference for the fixed variety. Nothing wrong with that preference but it doesn't mean that others are less safe.

You might find something like cfiresim useful because it can be told to use the variable spending Guyton-Klinger rules but with a constraint that the income isn't allowed to go below a specified value. You can set that value to the SWR calculated for whatever fixed rule you prefer.

Deleted_User wrote: »

Now... when we take 100 years’ worth of stock data in the one country that went from an emerging market to an economic superpower and apply these data to the next 50 years under completely different conditions to all sorts of brexity places and claim 4% = nirvana guaranteed... Count me as a sceptic.

Since the relevant rates have also been calculated for the UK and include situations far worse than that is likely to produce including millions of British workers being killed and the UK changing fro a superpower to something less you might consider being less sceptical. Brexit could be unpleasant but it isn't likely to be close to what is already handled by the drawdown rules.

Paul_Herring

Safe does not imply unchanging

To those who skim without researching, or at least trying some modicum of understanding, I. E. the target audience, it most certainly does. Thus the criticisms being levelled.

bostonerimus

jamesd wrote: »

The meaning of safe withdrawal rate includes variable strategies. Safe does not imply unchanging, it merely requires taking no more than specified by the rules used to calculate the safe withdrawal rate being used.

It seems that you simply have a preference for the fixed variety. Nothing wrong with that preference but it doesn't mean that others are less safe.

You might find something like cfiresim useful because it can be told to use the variable spending Guyton-Klinger rules but with a constraint that the income isn't allowed to go below a specified value. You can set that value to the SWR calculated for whatever fixed rule you prefer.

Of course 4% is just the starting point and adjusting for inflation is an integral part of the original SWR derived from studies like Trinity. Every year the amount withdrawn increases so, if inflation is 3%, after one year the 4% initial withdrawal becomes 4.12%. Strategies like Guyton-Klinger add the possibility to reduce spending rather than blindly increasing it by inflation every year.

jamesd

bostonerimus wrote: »

Of course 4% is just the starting point ... Strategies like Guyton-Klinger add the possibility to reduce spending rather than blindly increasing it by inflation every year.

What Mordko appeared to be suggesting is that none of the more modern variable safe withdrawal methods can be called safe, just because they can vary income up (usually) or down (much less likely). That's quite important when in the US the 4% rule is so wasteful that:

1. Only 10% of the time the final pot would have been lower than the starting value after 30 years
2. The chance of finishing with more than six times the starting value is also 10% after 30 years

jamesd

Paul_Herring wrote: »

To those who skim without researching, or at least trying some modicum of understanding, I. E. the target audience, it most certainly does. Thus the criticisms being levelled.

If someone was to just do what the article says, the chance of failure starting around state pension age would be roughly nil because:

1. around 90% of 68 year old retirees will be dead before they are 98
2. they aren't likely to live through worst case times
3. the article includes no mention of inflation increases
4. spending also tends to decrease as people get older
5. the investments mentioned are about 90% equities and 10% bonds, assuming 20% bonds in the UK managed fund

Of course it doesn't say retiring around state pension age either, so it could be taken to apply at 55, which also would work most of the time, partly because of the lack of inflation increases.

Terron

IIRC the original study defined safe as there being only a 5% chance of running out of money within 30 years - not 0% or 1 in a million.


If you are calculating the minimum pot you need to fund your retirement you use the minimum income you need assuming everything is adjusted for inflation. So reducing the pot would not be an option to consider. Once you have a pot larger than that you can consider methods that allow for income to be reduced.

jamesd

Terron wrote: »

IIRC the original study defined safe as there being only a 5% chance of running out of money within 30 years - not 0% or 1 in a million.

"using the charts for a 50/50 stock/bond allocation, determine the highest withdrawal rate that satisfies the desired minimum portfolio life" from Determining Withdrawal Rates using Historical Data, Bill Bengen's original 1994 4% rule paper. If that's the original paper you meant.

bostonerimus

jamesd wrote: »

What Mordko appeared to be suggesting is that none of the more modern variable safe withdrawal methods can be called safe, just because they can vary income up (usually) or down (much less likely). That's quite important when in the US the 4% rule is so wasteful that:

1. Only 10% of the time the final pot would have been lower than the starting value after 30 years
2. The chance of finishing with more than six times the starting value is also 10% after 30 years

But the planning emphasis with the 4% SWR is not on the vast majority of scenarios where you die with more money than you started with, but on the small number where you have to go into the workhouse. And of course the applicability of historical data to the next 30 years is unknown. I think the best approach is to use the statistics of historical market and returns derived from recent bond and stock markets...or set things up so you don't have to directly rely on the performance of the markets for your retirement income.

https://retirementresearcher.com/safe-withdrawal-rates-and-retirement-date-market-conditions/