Outliving your pension

JoeEngland

PH91 wrote: »

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?

I could not afford to retire now if I relied on an annuity so that's a non-starter as a way forward. We have a combination of DC pensions, small DB pensions and eventually SP. Our financial plan is based on cautious assumptions and modest income, and there's some contingency in it. Since working PT is also an option, our plan shows that we shouldn't run out of money. We could even have more money than expected in the long term if we're lucky with DC pension returns.

bostonerimus

westv wrote: »

But rate before costs is "only" something like 0.5% more.

Costs/fees were not included in the original US 4% rule withdrawal models. If you have 1.5% in fees on top of that they have to come out of the 4% so you would end up with 2.5%....I'm assuming Jamesd's baseline SWR number is something like 4.7% but that one of the variable withdrawal strategies is being used. Even so, giving up 1.5% of a 4% to 5% withdrawal is ridiculous IMO.

westv

bostonerimus wrote: »

Costs/fees were not included in the original US 4% rule withdrawal models. If you have 1.5% in fees on top of that they have to come out of the 4% so you would end up with 2.5%....I'm assuming Jamesd's baseline SWR number is something like 4.7% but that one of the variable withdrawal strategies is being used. Even so, giving up 1.5% of a 4% to 5% withdrawal is ridiculous IMO.

No that isn't correct. You don't take off the whole 1.5%.

bostonerimus

westv wrote: »

No that isn't correct. You don't take off the whole 1.5%.

As the withdrawal increases with inflation the fees become a smaller percentage of that withdrawal. Still, in the first year if you withdraw 4% and your financial fees over and above fund fees are 1.5% you have to pay them out of your 4% and are left with just 2.5% to spend. The playing down of fees as an issue comes from the financial industry and people like Kitces who look at the potential long term effects and come up with 1% fee reducing the SWR by around 0.4% over time. Kitces looks at this from a financial planner perspective and is looking to give advisors ammunition to justify their fees, so I take it with a massive grain of salt.

[Deleted User]

bostonerimus wrote: »

Yes that looks to be right, which just floors me. People seem sanguine about 1.5% fees when at that level they are almost 50% of the spendable income you end up with. That will decrease as spending increases with inflation, but still it's an enormous amount of money to waste. And I think it is a waste for most people.

Very true, but the “100% success rate” claim is just wrong.

bostonerimus

Deleted_User wrote: »

Very true, but the “100% success rate” claim is just wrong.

Well you can set the success level wherever you want, but 95% is more usual number to use.

Thrugelmir

bostonerimus wrote: »

Well you can set the success level wherever you want, but 95% is more usual number to use.

Rather like deciding not insuring your property against total loss through fire. Everyday it happens to someone somewhere. When you are personally one of the few affected it's too late to have regrets.

westv

Thrugelmir wrote: »

Rather like deciding not insuring your property against total loss through fire. Everyday it happens to someone somewhere. When you are personally one of the few affected it's too late to have regrets.

Hardly the same. You'll have, say, 30 years to adjust withdrawal rates if things are running a bit tight. How many house fires last that long?

bostonerimus

Thrugelmir wrote: »

Rather like deciding not insuring your property against total loss through fire. Everyday it happens to someone somewhere. When you are personally one of the few affected it's too late to have regrets.

The long tail on the probability distribution means that setting a success rate at 100% can require very low withdrawal rates. Like many things its a balancing act. If you want to set a withdrawal rate at 100% success you will presumably also be using a lifespan that takes you well into the range of the "Queen's telegram"....or maybe she sends an SMS text message today.......and then you might as well just buy an annuity.

[Deleted User]

I just don’t believe that 100% success rate for any SWR is real. For starters one has to assume that the future will be like the relatively recent past. And that assumption might be wrong.