Drawdown Pension Growth

Thrugelmir

cfw1994 wrote: »

For example, "what if the value of the pot drops 30% near the beginning, or after 5 years?"

The challenge to be faced is more likely going to be a 10% -15% fall at any time. The oft quoted phrase is "The market can stay irrational longer than you can stay solvent.” Setting ones portfolio up to weather volatity is the key.

Focussing on year end to year end performance figures can be totally misleading. All depends when you need to drawdown cash.

On an individual basis people need to consider their ability, willingness and need to take risk.

Audaxer

MrDinosaur wrote: »

I have a nice spreadsheet which calculates my drawdown amount and I have used the following growth rates.
3% growth with 2 % inflation - which gives me an overall value of 1%.
does this look about right or is there a standard which i should be using.

I suppose it depends how long a term you are looking at. I think on a medium risk portfolio over 30 years, I would certainly hope for an average growth rate of over 3%. However the next 10 years I think the average could be a lot lower than 3% after a 10 year bull market.

Thrugelmir

Audaxer wrote: »

I suppose it depends how long a term you are looking at. I think on a medium risk portfolio over 30 years, I would certainly hope for an average growth rate of over 3%. However the next 10 years I think the average could be a lot lower than 3% after a 10 year bull market.

The S&P has in the past underperformed inflation for an entire decade. A better return was earnt on cash than holding 83% of the stocks in the index. Focus on investing for the future not the past would be my recommendation. You can only play what's in front of you.

bostonerimus

I'm around 75/25 and I work with 5% return and 2% inflation as my mid range combo. I push return and inflation around to stress test my numbers.

AlanP_2

I'm using three inflation rates in my high-level model:

1) BR Tax Allowance of £12.5k increases by 1% pa

2) CPI at 2% for DB and SP increases

3) Expenditure going up by 3% pa

As for investment returns I have those in at 1.75% pa so slightly behind CPI.


So a pessimistic set of overall assumptions but the thinking behind it is if works out OK based on those numbers on the s/sheet then it should work out OK (and probably better) in reality. I prefer that outcome to the alternative.

NOTE - We are fortunate as DB & SP will cover the vast majority of our expenses so investments are only a small part of the model.

WannabeEdouard

Is there a ready made blank spreadsheet available that i can download and use for drawdown/growth figures? Save doing one as I am lazy

MrDinosaur

AlanP wrote: »

I'm using three inflation rates in my high-level model:

1) BR Tax Allowance of £12.5k increases by 1% pa

2) CPI at 2% for DB and SP increases

3) Expenditure going up by 3% pa

As for investment returns I have those in at 1.75% pa so slightly behind CPI.


So a pessimistic set of overall assumptions but the thinking behind it is if works out OK based on those numbers on the s/sheet then it should work out OK (and probably better) in reality. I prefer that outcome to the alternative.

NOTE - We are fortunate as DB & SP will cover the vast majority of our expenses so investments are only a small part of the model.

Just tried your figures - Pension runs out at 91.

MarkCarnage

The most robust ways would either be to do a stochastic modelling exercise using Monte Carlo simulations or similar, which would give a probability based range of outcomes. However, this is not easy for practicable for most.....

More realistically, a series of robust stress tests might give an indication of the implications of bad outcomes. These might cover poor asset return sequences at various withdrawal rates, a move to high inflation, a move to deflation etc. It might help determine what is a safe withdrawal rate for the individual, depending on their capacity and appetite for investment risk, and to vary their withdrawal rate if need be. That in turn might help them determine what cash buffer for withdrawals they need/are comfortable with.

I use a very simple matrix showing different levels of real investment returns on one axis and real withdrawal rates on the other, plugged into my current portfolio value. You can stress test that by just sticking different portfolio values in too. I'm happy that even with nil real investment returns over the long term, I'm ok for beyond my lifetime at the lower half of the withdrawal range, which would be ok.

[Deleted User]

For examples I just use cfiresim etc

Triumph13

Personally I'm modelling based on 3.33% real return on a portfolio that's predominantly global equities. Based on past returns that is hopefully a little conservative long term, but who knows what the future holds.
More importantly, I have also modelled what happens if we get a 50% crash first before resuming 3.33% growth from that lower level to make sure I have a strategy to survive that. That's why I can sleep at night with an equity-heavy asset allocation.