Drawdown at 55

jamesd

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?

No, that's for the US with no costs and for a 30 year plan. Have a read of Drawdown: safe withdrawal rates for UK versions and use a tool like cfiresim.

The constant inflation-adjusted income rule - 4% rule - increases with inflation each year even though it's actually less than 4%.

More modern rules can do better. With 1.5% costs, 30 year UK 4% rule is 3.2% but 40 year Guyton-Klinger starts at 5% then can skip inflation increases, cut more or increase more depending on the times you live through.

Using tools like cfiresim you can account for the state pension and other income or spending changes.

In practice you probably won't live through bad enough times for the 4% rule to fail at 4% but by starting too high and with perhaps 5-10 extra years you're being fairly optimistic and might have to adjust downward if your first 5 and 10 years aren't at least average.

You should also consider whether inflation is enough when workers are historically expected to get inflation plus 1%. 20 years in that's quite a drop of spending power compared to wider society.

Paul_Herring

bostonerimus wrote: »

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%..

Oh? I thought it worked more like:
If, at the start, "4%" works out at £4,000 and inflation is 3%, you would withdraw £4,120 in year 2, and in year 10 it would be £5,375, year 30 £9,709...

i.e. the inflation is applied to the monetary figure being withdrawn, not the percentage of pot being withdrawn (and how would "9.7%" work - 9.7% of what's left? 9.7% of the starting amount? Though the latter looks like a roundabout way of describing what I've written above...)

tacpot12

I am applying inflation to the figures being withdrawn, not to the percentage of the pot being withdrawn. The percentage of the pot being withdrawn should always be 4% if you are applying the 4% rule. If you increase your withdrawal amount by inflation, unless your portfolio value has increased by the rate of inflation, you are not drawing 4% and hence you are not operating the 4% rule.

Because so much of the research and analysis is undertaken in the USA, where they don't have a state pension, the 4% is unnecessarily SAFE for most retirees in the UK. I'm withdrawing 5.6% of my pension pot each year and have run this through CFIRESIM for a 45 year retirement and it is succeeds 100% of the time (In the interests of full disclosure, I also have about £5k pa rental income currently as well as my expectation of a full state pension).

I also plan to adjust my withdrawal rate based on the Cyclically Adjusted Price Earnings (CAPE) ratio for the UK stockmarket (as over 60% of my investment is UK based). There is an Early Retirement Now article on CAPE and it persuaded me that this was a better method than Guyton-Klinger, or any of the other methods.

Paul_Herring

The percentage of the pot being withdrawn should always be 4% if you are applying the 4% rule.

I'm sure that's not how the 4% rule works.

https://www.thebalance.com/dont-confuse-these-two-retirement-rules-of-thumb-453920

For example, you retire with $700,000 in your portfolio. In your first year of retirement, you withdraw $28,000. ($700,000 x 0.04 equals $28,000.) The following year you withdraw the same amount, adjusted for inflation. Assuming 3 percent inflation, you should withdraw $28,840. ($28,000 x 1.03 equals $28,840.)

The $28,840 figure might be more than 4 percent of your remaining portfolio, depending on how the markets fluctuated during your first year of retirement. Don't worry about that—you only need to calculate 4 percent once.

https://www.investmentnews.com/article/20190204/BLOG09/190209983/an-update-on-the-4-rule

Through his research, Mr. Bengen found retirees can take 4% of their initial retirement assets and increase that amount every year to account for inflation,...

https://www.kiplinger.com/article/retirement/T037-C032-S014-why-the-4-withdrawal-rule-is-wrong.html

This rule of thumb states you can withdraw 4% of your portfolio in the first year of retirement, adjust the amount withdrawn each year for inflation and safely avoid running out of money over three decades

bostonerimus

Paul_Herring wrote: »

Oh? I thought it worked more like:
If, at the start, "4%" works out at £4,000 and inflation is 3%, you would withdraw £4,120 in year 2, and in year 10 it would be £5,375, year 30 £9,709...

i.e. the inflation is applied to the monetary figure being withdrawn, not the percentage of pot being withdrawn (and how would "9.7%" work - 9.7% of what's left? 9.7% of the starting amount? Though the latter looks like a roundabout way of describing what I've written above...)

Its the same thing.

I was careful to say that the increased percentage is applied to the starting value of the pension pot, so we are saying the same thing.

bostonerimus

tacpot12 wrote: »

I am applying inflation to the figures being withdrawn, not to the percentage of the pot being withdrawn. The percentage of the pot being withdrawn should always be 4% if you are applying the 4% rule. If you increase your withdrawal amount by inflation, unless your portfolio value has increased by the rate of inflation, you are not drawing 4% and hence you are not operating the 4% rule..

This is a fundamental misunderstanding of the 4% rule and retirement drawdown. The amount withdrawn increases with inflation each year. So if you start by taking an amount equal to 4% of your starting pension pot then with 3% inflation in year 2 you will withdraw 4.12% of the starting value of the pension pot. As pointed out above that's the same as just inflating the first year's withdrawal by 3%. The withdrawal as a percentage of the current pension pot balance is variable depending on investment gains and annual inflation. Putting some additional constraints on the amount withdrawn is part of the Guyton type of withdrawal strategies ie you deviate from the constant spending power assumed by the original 4% rule studies.

[Deleted User]

Here is an approach which guarantees that the funds don’t run out until you are 100. People use variations such as purchase of an annuity at age 75 to insure against unusual longevity. https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

coyrls

tacpot12 wrote: »

The percentage of the pot being withdrawn should always be 4% if you are applying the 4% rule.

If that were the case you could have a 50% rule and you would still never run out of money.

atush

Markneath wrote: »

Thanks for your comments.

You can draw closer to 4%, depending on how much cash you have (esp outside of your pension) as savings. If you have 1-3 years spending n cash, you can avoid taking any income from your pension during a period of volatility/correction or even crash. This will enable you to have the required level of risk in investments to grow that much.

if you are very cautious, and use lower risk investments, you might find it hard to take even 3% each year.

Mick70

So , regardless of how much you drawdown , you should only use 4% of the full pot value in year 1 And then just increase that amount by inflation year on year ? Is that about right