level of sustainable income?

justme111

I think malthusian did not say it as if it was her/his opinion but as a stance theories calculating drawdown and public mostly apply. Accepting one may need to reduce ones income has obvious benefits as it allows one to retire with less money required.

jamesd

NeilC1965 wrote: »

I will have total fund value around 930k. Retiring at 55, what would a realistic , before tax , annual income be able to support from a fund of this size? My state pension kicks in at 67.

For an introduction to this please see the examples linked from here and move on to the rest of Drawdown: safe withdrawal rates.

Ignoring the state pension two options to compare with 1.5% of costs allowed for are:

1. £29,760 with "constant inflation-adjusted income" often called the "4% rule". 3.2% of initial capital increasing with inflation each year for 30 years. The oldest and best known rule but inefficient and you're likely to die with more money than you started with. So people researched more efficient rules.

2. £46,500 with the Guyton-Klinger rules. Starts at 5% of initial capital for 40 years. Usually increases with inflation but skips that or makes extra increases or cuts depending on the times you live through. Not less safe, just using people's real ability to vary spending to be more efficient.

To run out of money with either would take a combination of not paying attention and living through worse times than seen in the last 125 or so years.

You can safely lower the success rate if you want more. Success rate meaning the chance that just following the rules would have worked historically. Accepting having to make bigger cuts if you live through times in the bottom half of the historic cases produces a big increase, a reward for being flexible.

People tend to spend less as they get older and this can be built in to the plan as well.

A flexible person including cuts later might have a plan that starts at around £80,000 entirely realistically.

Lots of tools around but something like cfiresim has the capability to do flexible planning. So read the examples, then the research and decide what things best match your own preferences.

NeilC1965

LHW99 wrote: »

Just a thought - how large are your DC funds, because that CETV is getting close to the LTA?

Total fund value of 930k includes my CETV and other dc pots + AVC pot.

NeilC1965

enthusiasticsaver wrote: »

Aren't you getting close to the LTA? Is that £930k at todays value or if you carry on contributing until 67 which obviously you wont if you retire at 55.







I would think long and hard about giving up a DB pension at that level to transfer to a DC scheme. You will need to pay for financial advice which will be very expensive due to the cost of the insurance premiums any pension transfer specialist would have to take out to guard against you suing them in the future for advising you poorly.

That is 930k at today's value. I reach 55 in 17 months time, November 2020, so room for a little growth or a little loss!

[Deleted User]

Malthusian wrote: »

The main disadvantage being that if the fund value goes down your income goes down. All the safe withdrawal rate rules of thumb assume that you cannot cope with any fall in your income. Even the clever ones (Guyton-Klinger et al) assume the most you can cope with is a freeze in your income, except in extreme circumstances. If you can comfortably afford to reduce income during a crash or correction then you have no problems.

People are highly averse to taking pay cuts. This is why inflation is an essential economic lubricant (it allows businesses to cut real-terms wages by the rate of inflation by freezing pay) and why it is easier to sack someone than get them to agree to a paycut.

There is little reason to think this changes in retirement, except that it makes drawdown solutions easier to sell and makes people's retirement plans easier to draw up.

This is why "safe withdrawal rate" discussions fixate on a rate that can survive continuing to draw the same income throughout a crash and the consequent pound-cost ravaging. Even though the benefits of keeping a large fund in cash and stopping income during a crash are obvious.

No retiree should have to cancel their annual holiday to the Algarve because the stockmarket has crashed. If you do then your lifestyle is maintaining your pension when it should be the other way around.

True re disadvantage of VPW. Note that people using a fixed withdrawal rate will have to cut expenses more drastically AND in an unplanned manner if they run out of money.

I believe that most people would naturally cut their expenditure (or take a “pay cut” in your words) if they are retired and the value of funds goes down during a crash. It’s common sense. Those using VPW would have a plan and a system for doing it, but people using SWR will be feeling less safe and cut too. I am not talking about those with 10M or more; wealthy people won’t care too much.

[Deleted User]

Also, most people using VPW a) underspend vs the annual limit in the table and b) have a system for smoothing the curve. For example you could have 2-3 years’ worth of expenditure in a high interest account.

jamesd

Deleted_User wrote: »

I believe that most people would naturally cut their expenditure ... if they are retired and the value of funds goes down during a crash. ... people using SWR will be feeling less safe and cut too.

One of the challenges for advisers apparently is indeed clients using safe withdrawal rates thinking that they should cut back or just doing it without thinking about it.

No regulated advice from me but I do try to get in enough explaining for people to know that the rules have already allowed for that and worse (assuming the person hasn't opted for a low success rate higher initial income, which might need a tweak down a little).

Reluctantpensioner

One conservative way to value a CETV is to imagine you buy an annuity with it and see how it compares with the DB pension.
ATM, £930K would give at 65: £27379 Joint life 50%, 3% escalation, no guarantee.
For other possibilities : https://www.hl.co.uk/retirement/annuities/best-buy-rates

jamesd

Malthusian wrote: »

People are highly averse to taking pay cuts. ... There is little reason to think this changes in retirement.

The evidence shows that retired people normally take pay cuts entirely voluntarily as they get older, with the unspent money being saved. The more income they have, the bigger the cuts tend to be (bullet point second from bottom).

Malthusian wrote: »

This is why "safe withdrawal rate" discussions fixate on a rate that can survive continuing to draw the same income throughout a crash and the consequent pound-cost ravaging.

Some people do like fixed and those rules are simpler to derive, explain and use so it isn't surprising that they are discussed and used a lot.

Malthusian wrote: »

Even though the benefits of keeping a large fund in cash and stopping income during a crash are obvious.

Cash is just part of the bond percentage that you can draw your income from, at east according to Guyton. If you run out of cash you just move on to the bonds.

jamesd

Reluctantpensioner wrote: »

One conservative way to value a CETV is to imagine you buy an annuity with it and see how it compares with the DB pension.

That may seem conservative but ...

Reluctantpensioner wrote: »

£930K would give at 65: £27379 Joint life 50%, 3% escalation

Five years of say 14% inflation would devastate the income of a buyer of that product but the 4% rule would just pay those 14% increases and still be within its limits because its testing included being able to survive 1970s Britain.

Many defined benefit pensions would also fail in some way in such dire conditions, or be capped and even after it's built in cuts the PPF should be expected to need to do lots of borrowing after a repeat of say the great depression causes many sponsoring companies to fail.

Annuities and defined benefit pensions are excellent but expect lots of trouble in many if the nastiest cases that limit safe withdrawal rates happen. Where they excel is in the really bad but not horrendously bad range. The FSCS protects 100% of annuity payments and I do think that governments would lend it enough to pay.

Incidentally, this is one reason why I like state pension deferral. There ultimately can be situations where the state pension might not get inflation-matching increases but it's likely to be safer than private sector DB and most annuities (around 90% bought have no inflation increases).