Why I don't want to go with drawdown

Albermarle

However, given your quoted fees of 1.35% I can see why you might look an an annuity. The idea of spending over 25% of your annual income on IFA fees is ridiculously obscene.

If you read the OP , he says total fees are 1.35%. Presumably includes IFA+ platform + fund fees.

[Deleted User]

dunstonh wrote: »

Who would have guessed that. A stockmarket crash is coming. Well I never.

There are always crashes coming. And the last 20 years includes two significant ones which were larger than most. They are also good ones to model as one was a quick decline in a W shape. The other was a slow decline over a three year period and happened right at the start (so no gains to begin with).

Reading comprehension problems? Or are you just building a nice straw man?

Suggesting that Shiller is your typical crash predicting talking head is ludicrous. The word “crash” wasn’t used by anyone other than you. On the contrary,

Shiller cautioned that he is not predicting major calamity for the market but rather a much lower level of returns, in the 2.6 percent annual range, than investors have come to expect during the 9-year-old bull market.

DT2001

Deleted_User wrote: »

Let’s just say that the majority of experts beg to differ. https://www.cnbc.com/2018/09/14/nobel-prize-winner-shiller-sees-bad-times-in-the-stock-market-ahead.html

Is this the correct link? One expert Shiller is supporting your contention and another Siegel suggests otherwise not a majority?
Even on Shiller’s forecasting of 2.6 a £250k pot would produce over £6k.

I support the suggestion of looking at guaranteed income and required income split between essential and comfortable. If the amount needed from the £250k pot were below the bear view of the market maybe the OP would be able to ‘sleep at night’.

Linton

I dont think Schiller was intending his words to be used as a prediction for the next 20 years.

Malthusian

Deleted_User wrote: »

Besides, it’s not unusual to be retired for 35 years. Pretty scary scenario if you do and money runs out after 20.

If the OP invested in drawdown and the proposed investment failed to achieve the target of 5.35% by a 50% margin - i.e. he drew 5.35% each year but average growth was only 2.675% - he would still have half his money left after 20 years.

Naturally this is a very rough guide and does not take into account the risk of pound cost ravaging. But there is nothing stopping the OP keeping a large buffer in cash and not drawing a penny when markets have crashed, in which case the reality of fluctuating returns would make real-life performance better, not worse.

There is nothing wrong with the OP buying an annuity if that's what they want. However they don't want it yet or they'd've told their IFA to go ahead and buy it.

When you have the choice between two options and Option A is irrevocable and permanent while Option B can be switched to Option A at any time, option B should be the default choice until you know you want option A.

This is a psychological problem and not a financial one. An annuity is a financial solution and financial solutions are designed to solve financial problems; dithering is not a financial problem and an annuity is not the answer. Yet.

[Deleted User]

DT2001 wrote: »

Is this the correct link? One expert Shiller is supporting your contention and another Siegel suggests otherwise not a majority?
Even on Shiller’s forecasting of 2.6 a £250k pot would produce over £6k.

Siegel’s words: “Stocks are overvalued on a longer-term basis”. It is true that Siegel thinks that “normal” PE ratio has changed and even from current overvalued basis, you can make about 5% real (assuming you are using ETFs and have almost zero cost). Siegel is an outlier in this respect. Bogle, Buffett and a few other well known names tend to be less optimistic

https://www.marketwatch.com/story/how-low-will-the-sp-500-go-buffett-and-shiller-know-2019-01-23

In the end we don’t know what will happen over the next 20 years but assuming it will be like the past 20 years is downright dangerous.

Shiller’s forecasting used in your example tells us nothing about the sequence of return, which is another key factor to keep in mind.

choi

Malthusian wrote: »

If the OP invested in drawdown and the proposed investment failed to achieve the target of 5.35% by a 50% margin - i.e. he drew 5.35% each year but average growth was only 2.675% - he would still have half his money left after 20 years.

Naturally this is a very rough guide and does not take into account the risk of pound cost ravaging. But there is nothing stopping the OP keeping a large buffer in cash and not drawing a penny when markets have crashed, in which case the reality of fluctuating returns would make real-life performance better, not worse.

There is nothing wrong with the OP buying an annuity if that's what they want. However they don't want it yet or they'd've told their IFA to go ahead and buy it.

When you have the choice between two options and Option A is irrevocable and permanent while Option B can be switched to Option A at any time, option B should be the default choice until you know you want option A.

This is a psychological problem and not a financial one. An annuity is a financial solution and financial solutions are designed to solve financial problems; dithering is not a financial problem and an annuity is not the answer. Yet.

My problem is I have no experience in this matter and the IFAs I have spoken to are unable to convince me about the benefits of drawdown

This is my understanding of cautious drawdown

Let's say average total increase pa is 3.35
Fees take 1.35
Leaving 2% increase pa
On a £250k pot this is £5k

At this stage what do I do

Just take the £5k and top up with my cash savings

Take the equivalent annuity sum of £6.5k which reduces the pot and let the pot slowly diminish due to inflation and drawing down more than it yields

Is this honestly a better safer option than the annuity with 50% spouse and RPI escalation

Am I missing something

LHW99

OP would the annuity you are looking at give a) you & your OH sufficient income (with SP etc) to live on? b) give you OH sufficient to live on after your demise?


If so, and you value lack of worry over a bit more money per year - take the annuity.
If not, than one of the other suggestions (hybrid approach?) in the thread may be worth at least putting to your IFA.

bostonerimus

Albermarle wrote: »

If you read the OP , he says total fees are 1.35%. Presumably includes IFA+ platform + fund fees.

It would be informative to see the make up of the 1.35% fees. In any case my idea of acceptable fees is very different form the norm accepted in the UK. I'd like the OP to be paying a tenth of that.

Linton

choi wrote: »

My problem is I have no experience in this matter and the IFAs I have spoken to are unable to convince me about the benefits of drawdown

This is my understanding of cautious drawdown

Let's say average total increase pa is 3.35
Fees take 1.35
Leaving 2% increase pa
On a £250k pot this is £5k

At this stage what do I do

Just take the £5k and top up with my cash savings

Take the equivalent annuity sum of £6.5k which reduces the pot and let the pot slowly diminish due to inflation and drawing down more than it yields

Is this honestly a better safer option than the annuity with 50% spouse and RPI escalation

Am I missing something

The value of the pot may well decrease over time, but as long as it is well clear of zero by the time you die that is not a problem.



Forgetting inflation, if you simply put your money as a pile of cash under the bed with zero return it would last 25 years at 4% of the original. This is not wildly different from your life expectancy after retirement. You do not need a very high return to make a significant difference to the amount of money left at death. To provide the inflation linked drawdown you need an annual return matching inflation and a bit more.


But it is a far less safe option than an index linked annuity. However you would be stupid if you took the 4% regardless until you were left with nothing. In practice you would reduce your drawdown well before that point. The real risk is in the amount you get. And with an annuity your starting point is a lot less. That is the balance you must make - certainty of income vs amount of income.