Drawdown at 55

Markneath

I often hear 4% is a safe figure to drawdown from your pension at but is this still the case if you start at 55?

Also could you then increase this 4% with inflation each year?

Thanks, Mark

Prism

If we assume that early retirement means that the pot has to last longer then typically the withdrawal rate needs to be a little lower. Also 4% is not really considered a safe rate - more like 3-3.5% I would suggest. A variable rate looks the best way to go

Dox

There is no really 'safe' figure, unless you have the famed crystal ball and can predict inflation, your date of death and similar minor variants!

You need to keep things under constant review - and err on the side of caution. There's no safety net if you run out of cash.

bostonerimus

Yes, in the simplest case drawdown amounts increase each year with inflation.
So if inflation is 3% and you start withdrawing 4%, then in year two you would withdraw 4.12% of your initial drawdown pot, in year 10 it would be 5.4% and in year 30 it would be 9.7%. Of course withdrawals and inflation will probably vary according to your circumstances and economic conditions, but modelling that becomes complicated and the simple constant spending power approach is probably enough to get the concept across. It becomes a tug-o-war with investment gains on one side and inflation linked withdrawals on the other side and the size of your pot as you get deeper into retirement will be dictated by the relative sizes and variation in those two competing factors.

SonOf

I often hear 4% is a safe figure to drawdown from your pension at but is this still the case if you start at 55?

No. 3% at 55 moving to 3.5% as you get older.

Remember that a) there is no safe figure and b) you have to remember inflation.

Markneath

Thanks for your comments.

NedS

I'm a little way off going into drawdown yet, so haven't really looked at this in too much detail, and this may be overly simplistic, but...

I have recently been looking at City of London Investment Trust (CTY). It's a FTSE listed IT that currently pays around 4.5% dividend, and has a history of increasing it's dividend payout every year for the last 51 years. Being an investment trust, it currently holds sufficient cash reserves to cover 85% of it's annual dividend payout allowing it to smooth out any fluctuations in dividend performance and continue to raise dividends every year even if underlying market performance wouldn't normally allow. I know past performance is not a guide to future performance, but it has a pretty strong past record over multiple market cycles of increasing dividend payouts even during market downturns and looks well placed to continue.

As such, assuming past performance continues, placing one's drawdown pot into CTY shares and drawing only the dividend income could allow an initial 4.5% yield (hopefully increasing with inflation) without touching the underlying capital which historically has also grown over time. I have been picking up shares during market dips at initial 4.8-5% dividend yield.

I'm guessing the downside is past performance is not a guide to future performance, and as the trust typically has less that 100 holdings of mostly FTSE100 listed dividend paying equities, it does not constitute a conventionally well diversified portfolio so there are risks there.

Is this too simplistic a view?

gm0

A fixed % extraction rain or shine is not really ideal. There are better approaches which may help you shave a little bit more if you can be bothered with a bit more complexity once a year or so when reviewing investments and taking income. Knock it down from 4% for safety and then perhaps try and edge it up a bit with improved methods. Understand the failure probability (zero or not) from back testing for the amount and duration you have chosen.

The EarlyRetirementNow blog series (aimed at US "young" retirees) has a lot of analysis of backtesting (and some MC random walk simulation) of investment returns. People do sometimes criticise that blog for "adjusting" or simplifying other people's investment portfolio management and drawdown approaches before criticising it with modeling output but if you read around that aspect carefully with a pinch of salt then the core points being made are well argued and the modelling work is useful. A lot of superficially appealing ideas are demonstrated not to work or to have rather limited application. 40 year retirements are at the short end of what they are interested in as it is a FIRE blog.

I have found the McClung book Living Off Your Money fairly convincing in that it uses more data sets International Equities not just USA for back testing. It does show that you can improve on the most simplistic approaches to SWR - assuming the envelope of the future resembles the past in terms of volatile periods, crashes and recoveries.

Only you can decide if the added complexity is worth it. Useful tables showing failure risks vs SWR and portfolio mixes for available back testing historical data and a variety of durations and extraction approaches. Not an easy read. More SafeWithdrawlRate theory than most people want.

Clive_Woody

This WHICH? calculator can be fun to play with to give an idea of how long your pot might last based on various factors.

https://www.which.co.uk/money/pensions-and-retirement/options-for-cashing-in-your-pensions/income-drawdown/income-drawdown-calculator-making-your-money-last-awvp49g8uq6l

bostonerimus

NedS wrote: »

I'm guessing the downside is past performance is not a guide to future performance, and as the trust typically has less that 100 holdings of mostly FTSE100 listed dividend paying equities, it does not constitute a conventionally well diversified portfolio so there are risks there.

Is this too simplistic a view?

Yes it is almost entirely UK invested. There's a few ways to make money from investments; capital gain, dividends and interest. An IT might chose to distribute those gains mostly as dividends, whereas an open ended fund might see more in the area of capital gain, there's no free lunch, but lots of ways to split up the pie. One "advantage" closed end funds have is that they can use "gearing" or borrowing to pump up their returns, that comes with it's own risks though.

bostonerimus

Markneath wrote: »

I often hear 4% is a safe figure to drawdown from your pension at but is this still the case if you start at 55?

Also could you then increase this 4% with inflation each year?

Thanks, Mark

The overly general 4% rule assumes a 60/40 ish S&P500/bond index portfolio, index linked withdrawals for 30 years and a 95% probability that you won't run out of money before 30 years. You can play with the variables as much as you like.