Outliving your pension

jamesd

Sea_Shell wrote: »

Is there an industry standard minimum amount to use to buy an annuity??? Say £50k ?

No formal minimum but income per Pound spent drops for smaller purchases, say under 10k, a lot under 5k. A 2005 study reported drops starting below 20k and a graph showed continued ever-smaller improvement up to 30k. The drops became more severe below-5-8k. At the other end above perhaps 70-100k there can be a reduction based on the belief that the buyer knows they have a longer life expectancy than usual.

In a male-female couple with no life expectancy modifiers it's better for the female to buy because of their roughly three year longer life expectancy that insurers are prohibited from taking into account. I've no data on effects on life expectancy except for traditional obvious gender at birth.

When writing about long term regular buying I'm likely to write 20k every other year rather than 10k a year to get to a size that is neither small nor large.

30k is entirely reasonable and 60k might be ideal, though too much for most regular buyers.

The paper also noted 75 as the optimum age to annuitise fully. Life expectancy increases will have raised this, health and lifestyle matter a lot and competition with state pension deferral is also a factor.

jamesd

Deleted_User wrote: »

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.

It's unreal in part due to imprecise simplified wording. A more strictly correct expression would be "100% of historic starting points for the rate, investments, planning period and drawdown rules specified succeeded". Which does recognise that it's possible for something worse to happen.

In general a lot of discussions between regulars here are between people who know the constraints. More care is often merited for newcomers and delivering that is part of the value of the Drawdown: safe withdrawal rates topic.

jamesd

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.

You got that somewhat wrong. I wrote "costs" while you wrote "fees".

The original SWR research didn't include costs in the calculation. Not trading, regulatory, fund, fund platform or adviser. By using 1.5% I aim to fairly comfortably allow for all of those costs.

It's not a whole waste because it's unavoidable to have some costs. Even someone who buys shares with share certificates and locks them in a safe has costs.

The effect of costs on SWR is about a third of costs because SWR is expressed as a percentage of initial pot size while the near failure cases deplete capital well below that so the average value on which the 1.5% is paid is much less than starting value.

But: the 1.5% is likely to matter more in times of average performance. Then you don't get depletion unless you increase spending. So 1.5% still matters but not for the logic you seem to have been expressing.

bostonerimus wrote: »

I'm assuming Jamesd's baseline SWR number is something like 4.7% but that one of the variable withdrawal strategies is being used

My UK 4% rule baseline with no costs is 3.7%. That's because research shows UK 4% rule based on historic performance to be about US minus 0.3%. For G-K it's 5.5% on a 40 rather than 30 year plan from UK-specific G-K work.

bostonerimus wrote: »

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%....

No...

bostonerimus wrote: »

... 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.

and no.

The difference in meaning between costs and fees matters and adviser fees are part of the costs.

If you're paying 0.5% for funds (including all of their costs), trading account and dealing and also 1% for advice the total costs are 1.5% and the cost-free 4% SWR is reduced to 3.5%.

The fee discussion isn't so much about its greatly reduced effect in the bad times edge case that sets the SWR but in the average case where you're going to pay something closer to 1% until death because your capital isn't getting depleted...

and here Kitces and others point out that you don't calculate 4% just once but should do it again to increase income if times have been good ... which helps to keep those fees under control.

Sea_Shell

jamesd wrote: »

No formal minimum but income per Pound spent drops for smaller purchases, say under 10k, a lot under 5k. A 2005 study reported drops starting below 20k and a graph showed continued ever-smaller improvement up to 30k. The drops became more severe below-5-8k. At the other end above perhaps 70-100k there can be a reduction based on the belief that the buyer knows they have a longer life expectancy than usual.

In a male-female couple with no life expectancy modifiers it's better for the female to buy because of their roughly three year longer life expectancy that insurers are prohibited from taking into account. I've no data on effects on life expectancy except for traditional obvious gender at birth.

When writing about long term regular buying I'm likely to write 20k every other year rather than 10k a year to get to a size that is neither small nor large.

30k is entirely reasonable and 60k might be ideal, though too much for most regular buyers.

The paper also noted 75 as the optimum age to annuitise fully. Life expectancy increases will have raised this, health and lifestyle matter a lot and competition with state pension deferral is also a factor.

Thanks for that info, very interesting. I didn't realise that annuities could be bought with such relatively small amounts.

Sounds like drip-buying annuities might be a THING to look into, further down the line (if still available in nearly 30 years time!!!!)

Anonymous101

There's a very good article on the "early retirement now" blog at the moment regarding using Monte Carlo simulations for retirement planning.


https://earlyretirementnow.com/2019/07/10/monte-carlo-plan-for-retirement-guest-post-gasem/


Personally I intend to use a drawdown strategy on my investments (ISA and DC pot) which will hopefully see my original capital provide sufficient income until much later in life. My plan is to live off the investment returns and keep the capital for any end of life care should that situation arise. If not I'll have to formulate a legacy plan should I ever have children.

Linton

James - why decrease UK SWR relative to the US values now that hopefully most investors in drawdown will have a broad global portfolio?

enthusiasticsaver

DB pensions provide our essential expenditure topped up by state pension when we get there. DC pensions and ISAs/SIPPS are invested for drawdown for non essential large holidays, extra home improvements, care costs etc etc. What is left will go to our children/grandchildren along with house.

Linton

I am somewhat dubious about the whole SWR concept. Its fine for a first pass plan but to expect that people will actually follow it blindly year after year seems unrealistic.


If you are going to use it, it seems sensible to me to re-evaluate it every few years. If it is operated with a 95% success rate over say 30 years most people, most of the time, will be well in profit after 10 years. If they then recalculate the SWR over 20 years they will get a larger figure.

Anonymous101

Linton wrote: »

James - why decrease UK SWR relative to the US values now that hopefully most investors in drawdown will have a broad global portfolio?

The Trinity study on which the 4% withdrawal rate was based only used the US markets. During the sample range the US economy grew from almost nothing to the worlds largest economy.


From what I understand at the same time a Developed World portfolio had a SWR of around 3.45% and the UK alone 3.36%.


Many investors do have some home bias within their portfolio but even if they were strictly US based 4% would still be pretty racy given the history of the US stockmarket at that time.


I'd caveat that though by saying that the SWR is a 100% probability that you won't run out of capital test. There are many factors that aren't incorporated into this. For example: You could adjust your withdrawal rates throughout your retirement. In the good years you may not need the full 4% whilst in the poor years you could reduce spending. There is also the possibility that you could earn more money at some stage in your drawdown period.

bostonerimus

jamesd wrote: »

If you're paying 0.5% for funds (including all of their costs), trading account and dealing and also 1% for advice the total costs are 1.5% and the cost-free 4% SWR is reduced to 3.5%.

Obviously we don't include the fund fees in the out of pocket cost of a portfolio as fund returns are given after those are accounted for. When I talk about fees I'm including, trading, platform and advisor fees. If those are 1% Kiches says they will reduce your SWR by maybe 0.4%,but if SWR is 3.5% in the first year you will still have to pay all your expenses from that and one of your major expenses will be the 1% you have to hand over in financial fees. That will reduce the amount you have to spend on yourself to 2.5%. As time goes on the size if the fees relative to your withdrawal will decrease, but in the first few years you have to allocate a very large percentage of your budget to those fees. It's a nice bit of marketing to concentrate on a result from the model that over time SWR is only reduce by a fraction of the fees, it makes it look like the customer is getting a good deal, but that doesn't address the practical budgeting issue that occurs early on in retirement when maybe a quarter of your withdrawal is going on financial fees rather than towards things like food and shelter. This can be a bit of a shock and so there needs to be some flexibility in the annual withdrawal if the budgeting process hasn't been really rigorous.

Of course my attitude is why accept any reduction in SWR which is why I made sure I have zero out of pocket fees.