Outliving your pension

PH91

Hi all,

Just wondering for people who are planning on leaving your DC pension pot invested after retiring, how are you planning to make it last so you don't run out of money?

On a related note, is your choice to stay invested rather than buying an annuity predominantly driven by a desire to take a higher level of income than an annuity would offer, or the possibility of leaving some of it to children / grandchildren / others?

OldMusicGuy

I shall gradually annuitize a large chunk of it as I get older (ie above 75).

Buying an annuity now (aged 62) is a poor use of my hard-earned DC pension pot.

GSP

OldMusicGuy wrote: »

I shall gradually annuitize a large chunk of it as I get older (ie above 75).

Buying an annuity now (aged 62) is a poor use of my hard-earned DC pension pot.

Would probably do the same, unless something crazy happened to annuity rates in the not too distant and would lock in a fair proportion then.

Linton

My annual target expenditure is controlled by a year by year pessimistic financial plan which shows my invested wealth steady in £ terms, but dropping about 50% in real terms between now and my 90's. The plan is continually monitored and updated with reality.



This controlling of expenditure, both up and down, is not applied on an individual year by year basis (eg as in some Safe Withdrawal Rate approaches) but rather to the whole of the rest of my lifetime. This means that relatively small changes can have major effects, so there should be need to react in a panic to events.



In this way I expect to keep well clear of any risk of running out of money. Also as OMG says, there is the possibility of annuitising once managing the investments becomes too difficult.

Albermarle

If you google 'pension safe withdrawal rates ' you will see a lot of sites giving info on this .
The most common figure you hear is 4% a year but not everybody agrees, and there are some quite complicated strategies mentioned ( but don't ask me to explain them !)

bostonerimus

I never really wanted the bother of having to make sure my DC pot lasted using one of the numerous algorithms. So I deliberately chose a job with a DB pension for the last 10 years of my career and bought an income property. Rent and the DB pension cover my expenses and so I can leave my DC pot aggressively invested without too much worry.

tacpot12

I'm using a safe withdrawal rate and have validated this rate with firesim and cfiresim.

PH91

Thanks all for the interesting responses! Looks like the different options put forward are:

a) use DB for essentials and DC for 'extras';
b) buy an annuity down the line, just not up front; and
c) just limit the amount you are withdrawing to a safe withdrawal rate.

'A' is a nice option if you have it!

I suppose the question I have with 'c' is a safe withdrawal rate of 4% (which is not risk free in the same way an annuity is, but I'm sure that's been discussed elsewhere) is lower than the % you could get if you bought an annuity at 65 (5-6% from a quick google).

In other words, you can either aim to keep capital value at broadly the same level in perpetuity, in which case you'd be leaving a big bequest but your level of income would be lower than an annuity. Alternatively you can look to spend the underlying capital over time, but then you have to take a view around whether you should aim to make it last for 15 years of retirement or 50 years (and how this translates into what you can affordably take year by year, which isn't simple / intuitive).

If annuities are expensive because long term (risk free) interest rates are very low and insurers have to make a profit on top, is there anything available which could allow you to take investment risk (so your average level of income is higher, albeit there's no guarantee), but which could allow you to offload the risk of significantly outliving your life expectancy at retirement? Maybe this is what b) achieves, although it seems like you have to insure both your investment risk and longevity risk at the same point in time if you buy an annuity?

DigForVictory

I do not live a healthy life, I do not expect to make old bones, so I plan to have fun.
Which will largely consist of pumping money towards grandchildren and then living on tuppences for the last of the 7th year.

Linton

PH91 wrote: »

......
I suppose the question I have with 'c' is a safe withdrawal rate of 4% (which is not risk free in the same way an annuity is, but I'm sure that's been discussed elsewhere) is lower than the % you could get if you bought an annuity at 65 (5-6% from a quick google).
.......

No, an SWR of 4% means that you take 4% at the start and then increase it with inflation over time. It can be compared with an inflation linked annuity which would provide about 3% of initial investment increasing with inflation.

Prism

I plan on using a variable withdrawal rate method with the hope of getting between 5-6% but possibly having to live with 3% if the markets let me down.