Outliving your pension

jamesd

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?

A range of factors:

1. global is close enough to UK
2. I expect UK overweight compared to global weight of the UK
3. I'm normally writing to people relatively new to the subject or looking at high level issues so need to avoid adding too much complexity, that's where the more extensive writing and links to research in Drawdown: safe withdrawal rates comes in
4. if I tried it I'd end up with more distracting (to the person asking for help) discussions about national variation than from using UK

Personally, I have lots of non-UK but am still well overweight in UK, particularly fixed interest (P2P).I doubt that high global weights are as common as either of us would suggest.

jamesd

Linton wrote: »

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.

Anyone who's blindly following the rules is doing it wrong. According to me, you, Kitces, Guyton, Bengen and undoubtedly many others.

Particularly with the 4% rule you're expected to review upwards when the you find that your first five to ten years weren't as dire as the ones that set the limit. Guyton-Klinger does some of this but still won't keep up with really good times. And there's always that chance that you might live through something worse than in the studies.

Linton wrote: »

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.

Yes.

By their nature, you're free to restart the calculation whenever you like. Though just after a big market drop before recovery would be a bad idea because you'd take an avoidable income cut for an event that was already allowed for.

In general I think that 75% or lower is likely to be a good move and that implies paying enough attention to notice if you're experiencing the 25%. High inflation above say 10% for 3-5+ years is a major warning and what Guyton said concerned him most as a potential risk.

jamesd

bostonerimus wrote: »

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%.

Still no. If you have a SWR that's calculated with 1% out of pocket adviser fees you're supposed to be withdrawing 3.5% plus fees, handing over the fees and living on the 3.5% SWR.

bostonerimus wrote: »

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

Not out of pocket but you must allow for them when working out the SWR because they are part of what's taking your actual returns below market. Everything taking your returns below market needs to be factored in.

bostonerimus wrote: »

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.

I agree about flexibility. It's also something Guyton provides for in his own advice firm with a three way split:

1. shortish term, like bridging from retiring to state pension age
2. long term retirement living with desired base spending, using Guyton-Klinger rules
3. discretionary capital to use as desired

bostonerimus wrote: »

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

Fees are certainly a factor though I doubt you've managed actual nil, in part because of payments related to the BTL. Not sure about the existence of genuinely free brokerage accounts either.

bostonerimus

jamesd wrote: »

Still no. If you have a SWR that's calculated with 1% out of pocket adviser fees you're supposed to be withdrawing 3.5% plus fees, handing over the fees and living on the 3.5% SWR.

The success rates for 3.5% vs 3.5% plus fees are going to be very different. That's not necessarily a bad thing as long as the retiree understands the parameters and has included everything in their budget. The bad scenario would be to withdraw 3.5% and spend it and then be faced having to take a surprise 1% out to pay the annual financial fees....especially if it happens into a 20% drop in the markets.

Fees are certainly a factor though I doubt you've managed actual nil, in part because of payments related to the BTL. Not sure about the existence of genuinely free brokerage accounts either.

The rental property certainly has some expenses, but the mortgage is paid off and I budget for the expenses. I just spent $14k to have the house painted and as the rental is on the ground floor and I live on the two floors above I will only be able to deduct a third of that on my taxes. My US vanguard account has no platform or trading fees and I don't pay an IFA. so that's nil in my book. My fund fees average out to be around 0.07%

Sea_Shell

We include our (paid) fees in our annual spending, as they are taken from the "cash" element on our Fidelity platform. So does that mean we've accounted for them?

All the other fees, currently, as far as I am aware (pensions etc) are reflected/taken in the current valuation of the pot? Rather than units sold.. Correct?

Once these are put into drawdown, then again, we'll need to account for actual fees taken (from number of units sold)

bostonerimus

Sea_Shell wrote: »

We include our (paid) fees in our annual spending, as they are taken from the "cash" element on our Fidelity platform. So does that mean we've accounted for them?

All the other fees, currently, as far as I am aware (pensions etc) are reflected/taken in the current valuation of the pot? Rather than units sold.. Correct?

Once these are put into drawdown, then again, we'll need to account for actual fees taken (from number of units sold)

I don’t have a line in my budget for fund fees as I use a net number for fund return estimates, basically because the net return is what the fund reports. If you pay an IFA/FA and have trading and platform costs then I’d have a line item for those so they can be included when you plan your annual withdrawal. They could easily be one of your largest expenses.

LadyTC

Hi PH

To help us make sure our money will last we use an online cashflow tool from Retireeasy. We were introduced to this concept by an ex IFA but the problem with this was we only got written reports and could not logon to all the charts that were shown to us by the IFA at the bi-annual reviews.

We found Retireeasy by chance and are very pleased with it but there are a few others out there.

We have built 2 basic plans both with our outgoings increasing by 3% inflation and then growth set at 4% and 5%. We run out of money (before any downsizing) at age 92 at the 4% growth rate and are fine with growth at 5%.

The differences in the output are quite astonishing when you start to play around with the assumptions but we do at least have some peace of mind.

Sea_Shell

I've concocted a spreadsheet which you can set a growth (loss) rate, inflation rate and initial annual withdrawal amount and it then shows projections up to, well however many years you want to click and drag the formulas down to!!

jamesd

Sea_Shell wrote: »

We include our (paid) fees in our annual spending, as they are taken from the "cash" element on our Fidelity platform. So does that mean we've accounted for them?

Maybe. How did you allow for those and fund costs when working out a safe withdrawal rate?

If you deducted 30% of them from a cost-free SWR or included them in the cfiresim box, you're over-providing because taking out enough to pay them is on top of the SWR.

Since you're not in drawdown yet, this doesn't need to be addressed yet: just pay attention to maximising returns after all costs.

Sea_Shell wrote: »

All the other fees, currently, as far as I am aware (pensions etc) are reflected/taken in the current valuation of the pot? Rather than units sold.. Correct?

Correct. The charges are deducted in pro-rata amounts each day (ignoring minor details) and the value quoted to you each day is what you'll get. Relax and believe those numbers.

There are a few details and exceptions you might want to know about:

1. OEICs (pronounce oiks) are most common now and if you see the same price for buying and selling or only one price it's probably an OEIC. The price can vary by a tenth of a percent or so "window" based on the relative buying and selling demand on the day.
2. unit trusts have different buy and sell prices and the sell price is used in your valuations. They switch between"bid basis" and "offer basis" depending on the balance of supply and demand. That reflects the cost of actual buying or selling on the value difference between fund purchases and sales, like the OEIC window.

In times of stress there might be issues with liquidity or getting an accurate valuation for something like a building. If it's serious enough either might suspend buying and selling. Or a unit trust might offer a much lower sell price than buy price to reflect the fire sale value that sellers force it to accept.

There are also ETFs, investment trusts and even still a few with profits funds that work a bit differently but you probably don't have those.

Terron

I have just turned 60 which is when I have been planning to take my pensions since I was in my 20s.
I have taken 2 as annuities. They have GARs of 10.6%. I had to keep to the original terms so they will be paid annually in arrears. So I can expect >£4kpa around my birthday for the rest of my life. No indexation though.
I have a FS DB pension with little indexation. I have taken the maximum TFLS and it will pay almost £300pm. The TFLS arrived this week and I have already spent most of it on a (nearly) new car.
I have a hybrid pension. I will be taking the maximum DB pension from it (almost £10kpa), the maximum I can tax free after that and the rest will go into my SIPP. The DB part will be indexed at CPI to a max of 5%.
Then there is my SIPP which I keeping invested for now.


For the last 5 years I have been getting most of my income from BTL and that will continue. That is enough for me to live on so the pensions will pay for some luxury (like replacing my 12 year old car).