750k Drawdown at 58

garmeg

Notepad_Phil said:

garmeg said:

Thrugelmir said:

BritishInvestor said:

SouthCoastBoy said:

You have asked the question nobody can really answer. It is one of the main disadvantages of a DC scheme, there will always be a risk of running out of money. Personally I have modelled 3.5% growth rate, inflation at 2.5%, and then projected out on a yearly basis until I am 90. Then alter the variables and understand the impact. Ultimately all guesswork, nobody can guarantee anything. I think the key is to be flexible and have a cash reserve so you never draw down to 0. One thing I have noticed, with inlaws and my mother, is that when you get to post 80 the amount of required disposable income appears to decrease, so drawdown may not necessarily be linear. Also if you plan to give/leave money to kids etc. maybe do it earlier rather than later (not advice, just a thought) as if you go into a home all assets could be potentially swallowed up in care home fees. Unfortunately my mum has dementia and is now in a care home so we have first hand experience of this. Same happened to my grand parents.

You can certainly create a robust retirement plan where the retiree understands what they can spend and what might need to be adjusted (and how this will be done) if poor market outcomes are experienced and the chances (given historical outcomes) that this might happen. 
https://www.kitces.com/sample-withdrawal-policy-statement-wps-from-jon-guyton/
If you are modelling this in a sheet you might want to think about non-linear returns, especially in early retirement. 

Not sure that historic US centric outcomes are of value at the current time for a whole variety of reasons. 

Each year take out 100/(100 - age) % of that year's start fund value.

So at age 60 take 2.50%, at age 70 take 3.33% and at age 80 take 5.00%.

As good a plan as anything else. 😀

Hmmm - Mrs Notepad's mum is 96, now how much money should she be taking out...

25% - party time!

GSP

These sorts of replies were just what I was hoping for, thank you.
So many views, so many different attitudes and mentalities to retirement.
From what I have read, I do agree that money will be used more in the earlier years, while in the latter years mainly just getting through day to day seems to be the priority!
My Mum and Dad were lucky to travel the continents when they retired, several good holidays a year on occasions, always planning, always looking forward towards the next one. 

I don’t think it was holiday fatigue, but growing older which caught up with my late Dad. He died when he was 84, but the appetite and enthusiasm was diminishing in those later years. He found it a struggle with the packing, with the suitcases and the journey’s.
I see comments from time to time on TV when someone has had something bad happen to them, it’s called live for today. Trouble is though we are all on different journey’s, how miserable to run out of cash before you die if you are too easy with your money.
Seems to be all about finding a balance. You can’t take it with you, I would say you should be allowed to enjoy most of your fund or money. When things are getting close, say 75% gone of what you had then the brakes should come on. By that time though in those later years you would hope the SP would sort out most of your bills if you were spending more time at home.
It’s a difficult call as everyone has different circumstances, but while I try to weigh up things, and these comments on here are so so useful, there is no master plan issued for everyone to adopt. 

There’s just general thoughts out there and conversations like these  to make decisions.

  

BritishInvestor

GSP said:

Seems to be all about finding a balance. You can’t take it with you, I would say you should be allowed to enjoy most of your fund or money. When things are getting close, say 75% gone of what you had then the brakes should come on. By that time though in those later years you would hope the SP would sort out most of your bills if you were spending more time at home.

As mentioned, I think an expenditure exercise would help you formulate a plan. So if you think your minimum income requirements - heating, clothing, food etc (whether a couple or widowed) would be covered by SP then you might consider front-loading spending in the earlier/fun years (obviously excluding care fees planning/gifting etc). Lots of spreadsheet out there to help you with this.

Albermarle

There seems to be one assumption running through this thread . That once day to day spending is covered, and maybe some money for supporting offspring, the only discretionary spending is on holidays, holidays and more holidays .
Despite the stereotype , I am sure not every financially comfortable retiree is spending all their money globe trotting but I suppose from a financial planning point of view it is an easy example to use of discretionary spending.

jamesd

BritishInvestor said:

I think you'd need to be very happy with potential the cuts in real income if using Guyton-Klinger and if a poor series of returns was encountered in early retirement, especially if the guardrails were applied annually.

Being willing to skip inflation increases or take cuts above inflation is the trade off for starting at 5% instead of 3.2% (5.5% used in the guard rail calculation). For those unfamiliar with G-K, the withdrawal statement linked to earlier includes those rules, part including guard rail prosperity and inflation rules being:

"your Annual withdrawal amount will increase by the prior year’s inflation rate, unless:

A) you decide instead to keep your withdrawal amount the same in some years.

B) next year’s WD amount would make your WD Rate more than 6.5%. If so, next year’s WD amount is reduced by 10% from what it would have been with the inflation adjustment.

C) next year’s WD amount would make your WD Rate less than 4.3%. If so, next year’s WD amount is increased by 10% from what it would have been with the inflation adjustment.

D) neither B nor C applies, but the prior year’s investment return was negative. If so, your WD amount remains the same as it was the prior year."

A fairly severe worked example might be a 40% equity drop in a 65:35 £500k mixture followed by nil investment growth and nil inflation (a simplifying alternative to 2% each). 5.5% initial, upper guard rail 20% higher at 6.6%, lower (prosperity) 20% lower is 4.4%. For comparison 4% rule (UK 30 years before costs) at 3.7% is £18,500 and an age 55 single life RPI annuity with 5 year guarantee quotes 1.624% which on £500,000 is £8,120. This initially looks like:

Year 1 take 5.5%, £27,500 and see equity drop, ending value £370,000.
Year 2 planned taking is £27,500 after 0% inflation increase, which is 7.4% of £370,000. Above upper guard rail 6.6% so reduce by 10% to £24,750. Ending value £345,250.
Year 3 planned £24,750 is 7.2% of £345,250 so reduce to £22,275. Ending value £322,975.
Year 4 planned £22,275 is 6.9% so reduce to £20,047. Ending value £302,928.
Year 5 planned £20,047 is 6.61% so using that extra digit cut to £18,042. Final value £284,886. (4% rule final value £305,000)
Year 6 planned £18,042 is 6.3%, below 6.6% so no change. Final value £266,844.
Year 7 planned £18,042 is 6.8% so reduce to £16,237. Final value £250,607.
Year 8 planned £16,237 is 6.5%. Final value £234,370.
Year 9 planned £16,237 is 6.9% so reduce to £14,613. Final value £219,757.
Year 10 planned £14,613 is 6.7% so reduce to £13,151. Final value £206,606. (4% rule final value £212,500).

Ten years in G-K has paid more and is now paying enough less than 4% rule to have recovered from most of the earlier lack of the pessimism that's built into the 4% rule but more cuts will be needed. Both remain well above the annuity £8,120 final value £nil. Note that this is with G-K on a tougher 40 vs 30 year path.

Within G-K calculators there can be adjustments to limit the drop potential. One is to cut by 20% instead of 10% if the upper guard rail is exceeded, so it more rapidly adjusts towards a long term stable value that's higher, a change I like. Another is to set an income floor, which can reduce initial income; I tend to use annuity or DB alternatives.

Beyond G-K parts of a pot can be using different rules.

Personally I like the lower initial pessimism of Guyton-Klinger because it tends to favour higher income at younger ages, which is desirable if age-related spending decrease is expected.

GSP

Mickey666 said:

Gary1984 said:

How old are the kids? Would it be more beneficial for them if you took some of your tax free cash and gifted it to them now rather than getting it decades down the line when they may not have as much need for it? As you say they'll inherit the house anyway. 

Hear hear!  If they are over 18 (ish) I'd give them the earmarked £50k each now, when it could help them start their independent lives running.  Wait another 20/25 years and they might not really need it - yes, always nice to have at anytime in life, but perhaps more valuable when just starting out.

Very interesting thought. 

My financial adviser would have a fit as he is suggesting I am taking a bit too much out now. I suppose that’s his job, to advise and such a reduction would only take us nearer the abyss of running out of money, or so he would say. Quite agree about the usefulness of it though as probably by the time we both die the kids would have already made their retirement plans.

Bobziz

Not much comentary about care fees. How are people factoring this in to their plans ? My mothers care home is costing £86k/year.

garmeg

Bobziz said:

Not much comentary about care fees. How are people factoring this in to their plans ? My mothers care home is costing £86k/year.

Realistically I dont think you can.

cfw1994

GSP said:

Mickey666 said:

Gary1984 said:

How old are the kids? Would it be more beneficial for them if you took some of your tax free cash and gifted it to them now rather than getting it decades down the line when they may not have as much need for it? As you say they'll inherit the house anyway. 

Hear hear!  If they are over 18 (ish) I'd give them the earmarked £50k each now, when it could help them start their independent lives running.  Wait another 20/25 years and they might not really need it - yes, always nice to have at anytime in life, but perhaps more valuable when just starting out.

Very interesting thought. 

My financial adviser would have a fit as he is suggesting I am taking a bit too much out now. I suppose that’s his job, to advise and such a reduction would only take us nearer the abyss of running out of money, or so he would say. Quite agree about the usefulness of it though as probably by the time we both die the kids would have already made their retirement plans.

Maybe he’d have a fit if you took 50-100k out of his “control” & he lost a chunk of his % management fee with that?  I assume he charges for the amount he is managing?  

garmeg said:

Bobziz said:

Not much comentary about care fees. How are people factoring this in to their plans ? My mothers care home is costing £86k/year.

Realistically I dont think you can.

I suspect you are right.   Our faint thinking on those lines is that the house could become the finance for that, but the reality is that only a small number have expensive care home costs.  If you try to prepare for that, you’ll need a helluva lot bigger pot that if you don’t.....what are your thoughts, @Bobziz? How are you or she managing that cost?

garmeg

jamesd said:

BritishInvestor said:

I think you'd need to be very happy with potential the cuts in real income if using Guyton-Klinger and if a poor series of returns was encountered in early retirement, especially if the guardrails were applied annually.

Being willing to skip inflation increases or take cuts above inflation is the trade off for starting at 5% instead of 3.2% (5.5% used in the guard rail calculation). For those unfamiliar with G-K, the withdrawal statement linked to earlier includes those rules, part including guard rail prosperity and inflation rules being:

"your Annual withdrawal amount will increase by the prior year’s inflation rate, unless:

A) you decide instead to keep your withdrawal amount the same in some years.

B) next year’s WD amount would make your WD Rate more than 6.5%. If so, next year’s WD amount is reduced by 10% from what it would have been with the inflation adjustment.

C) next year’s WD amount would make your WD Rate less than 4.3%. If so, next year’s WD amount is increased by 10% from what it would have been with the inflation adjustment.

D) neither B nor C applies, but the prior year’s investment return was negative. If so, your WD amount remains the same as it was the prior year."

A fairly severe worked example might be a 40% equity drop in a 65:35 £500k mixture followed by nil investment growth and nil inflation (a simplifying alternative to 2% each). 5.5% initial, upper guard rail 20% higher at 6.6%, lower (prosperity) 20% lower is 4.4%. For comparison 4% rule (UK 30 years before costs) at 3.7% is £18,500 and an age 55 single life RPI annuity with 5 year guarantee quotes 1.624% which on £500,000 is £8,120. This initially looks like:

Year 1 take 5.5%, £27,500 and see equity drop, ending value £370,000.
Year 2 planned taking is £27,500 after 0% inflation increase, which is 7.4% of £370,000. Above upper guard rail 6.6% so reduce by 10% to £24,750. Ending value £345,250.
Year 3 planned £24,750 is 7.2% of £345,250 so reduce to £22,275. Ending value £322,975.
Year 4 planned £22,275 is 6.9% so reduce to £20,047. Ending value £302,928.
Year 5 planned £20,047 is 6.61% so using that extra digit cut to £18,042. Final value £284,886. (4% rule final value £305,000)
Year 6 planned £18,042 is 6.3%, below 6.6% so no change. Final value £266,844.
Year 7 planned £18,042 is 6.8% so reduce to £16,237. Final value £250,607.
Year 8 planned £16,237 is 6.5%. Final value £234,370.
Year 9 planned £16,237 is 6.9% so reduce to £14,613. Final value £219,757.
Year 10 planned £14,613 is 6.7% so reduce to £13,151. Final value £206,606. (4% rule final value £212,500).

Ten years in G-K has paid more and is now paying enough less than 4% rule to have recovered from most of the earlier lack of the pessimism that's built into the 4% rule but more cuts will be needed. Both remain well above the annuity £8,120 final value £nil. Note that this is with G-K on a tougher 40 vs 30 year path.

Within G-K calculators there can be adjustments to limit the drop potential. One is to cut by 20% instead of 10% if the upper guard rail is exceeded, so it more rapidly adjusts towards a long term stable value that's higher, a change I like. Another is to set an income floor, which can reduce initial income; I tend to use annuity or DB alternatives.

Beyond G-K parts of a pot can be using different rules.

Personally I like the lower initial pessimism of Guyton-Klinger because it tends to favour higher income at younger ages, which is desirable if age-related spending decrease is expected.

@jamesd thanks i will try and model this in Excel.