Pension Cashflow Retirement Planner - Key Info?

jamesd

GSP said:

Not sure where I read it, but there were suggestions the SWR 4% rule was not considered fit for purpose anymore.

The 4% rule is fine when used properly. There are just more recent rules that can potentially do a better job.

coyrls

GSP said:

coyrls said:

The "classic" SWR takes a percentage of the initial pot and increases it each year by inflation, so there is no decrease over time if the pot shrinks.  In practice it is likely that most people will use a SWR as a guideline but it is important to understand that the whole motivation for SWR studies was to establish a fixed sum increased by inflation that could be withdrawn over a period of time (usually 30 years) with a high probability (>95%) of not running out of money.  Since the classic 4% study there have been more refinements that allow you to take a higher start % if you are willing to have a variable income.  It also likely that net of fees and in the UK environment a figure of 3% to 3.5% is a safer fixed SWR.

Thanks coyrls. Does that mean if the fund contracted over the year, the drawer would take even more money out of it? Surely then we are getting into the realms of those key things not to do to protect the fund.

The key thing is something you have invented.  Yes if the value of the fund goes down then you will be takling a larger percentage of it than you did the previous year.  If the fund goes up by more than inflation, you will be taking a smaller percentage.  As I said the whole point of the SWR study was to establish what initial withdrawal increased by inflation each year would survive these ups and downs.

GSP

coyrls said:

GSP said:

coyrls said:

The "classic" SWR takes a percentage of the initial pot and increases it each year by inflation, so there is no decrease over time if the pot shrinks.  In practice it is likely that most people will use a SWR as a guideline but it is important to understand that the whole motivation for SWR studies was to establish a fixed sum increased by inflation that could be withdrawn over a period of time (usually 30 years) with a high probability (>95%) of not running out of money.  Since the classic 4% study there have been more refinements that allow you to take a higher start % if you are willing to have a variable income.  It also likely that net of fees and in the UK environment a figure of 3% to 3.5% is a safer fixed SWR.

Thanks coyrls. Does that mean if the fund contracted over the year, the drawer would take even more money out of it? Surely then we are getting into the realms of those key things not to do to protect the fund.

The key thing is something you have invented.  Yes if the value of the fund goes down then you will be takling a larger percentage of it than you did the previous year.  If the fund goes up by more than inflation, you will be taking a smaller percentage.  As I said the whole point of the SWR study was to establish what initial withdrawal increased by inflation each year would survive these ups and downs.

I was under the impression not adjusting your withdrawal level when your fund contracts acts as a double whammy later on. Two bad years, how would your SWR study recover from that?
Looking at a sequence risk definition, the key takeaway from it is “timing is everything”.

coyrls

You said that you had read the research but if you have, I don't think that you have understood it.

jamesd

GSP said:

I was under the impression not adjusting your withdrawal level when your fund contracts acts as a double whammy later on. Two bad years, how would your SWR study recover from that?
Looking at a sequence risk definition, the key takeaway from it is “timing is everything”.

The key thing is that the SWRs already take drawing during the drops into account, so you need to do nothing more than continue to follow the drawdown rules you're using.

In the case of Guyton-Klinger the rules for an equity drop say that the income is to be taken from cash then bonds. No equity selling, so no ravaging effect.

Guyton's sequence of return risk mitigation approach that decreases equity percentage when there is  a higher chance of poor equity performance should help as  well.

I do both of those.

If using the 4% rule it would be a good idea to do both as well.

Nothing says that you can't reduce spending if you want to, but since the money shouldn't be coming from down equities and the rules work anyway, it's not needed.

GSP

Thanks jamesd. Using the 4% rule, say at drawdown time would you withdraw if the pot growth was down, or defer to another time. When revisiting to drawdown again, would you withdraw if the pot was down on growth again, or defer again. When revisiting...., all same above again. Reason I ask is that I have been looking at my wife’s numbers where she won’t start drawdown for another 2 years. It’s a clean run of data free of withdrawal distortions. In the 3 years August since the money has been invested, growth each of those 3 years has grown between 3%-4% each year. If you took her numbers at year end, they would be something like -6%, +16%, and something else but a big figure. During all this time even though this is just medium risk, the balances have fluctuated considerably. From my end, that’s why I can see a flaw in setting plans 1,2,3 years ahead to withdraw when we don’t know what the fund will look like. That’s why I am homing in taking the good growth if and when it’s available, but the timescale for that can vary.

jamesd

If using the 4% rule, just withdraw each time and perhaps review every five years. Yes, there's lots of volatility but the income limit allows for it.

If using Guyton-Klinger the rules do use market performance each year to make adjustments.

GSP

jamesd said:

If using the 4% rule, just withdraw each time and perhaps review every five years. Yes, there's lots of volatility but the income limit allows for it.

If using Guyton-Klinger the rules do use market performance each year to make adjustments.

Thanks jamesd. But why withdraw if the fund looks poor if you can wait a month, several months etc.  With fluctuations, at some point the fund will look healthier with growth. Sure it must be more beneficial to withdraw on positive growth rather than negative growth?

jamesd

If you truly can stop spending or spend with 0% credit cards with no minimum payment you can stop withdrawing. Otherwise you're withdrawing your spending money from somewhere.

Cutting spending will improve long term portfolio health. But it's not free, you were budgeting to spend that money so you have t give up some of your benefit.

Now, I'm routinely and happily spending less than my own SWR without missing out so there's nothing inherently wrong with spending less than you could. It's a very common desire during down markets. It's just not necessary if using a SWR.

GSP

jamesd said:

If you truly can stop spending or spend with 0% credit cards with no minimum payment you can stop withdrawing. Otherwise you're withdrawing your spending money from somewhere.

Cutting spending will improve long term portfolio health. But it's not free, you were budgeting to spend that money so you have t give up some of your benefit.

Now, I'm routinely and happily spending less than my own SWR without missing out so there's nothing inherently wrong with spending less than you could. It's a very common desire during down markets. It's just not necessary if using a SWR.

Thanks jamesd. While working, I spent over 30 years juggling with money having more money going out than coming in most of the time so am used to doing what needs doing with finances.
If by following rigid rules to time your withdrawal, surely it’s better to choose a better time if your fund was down 20%, say leave it a month or two at least. Yes things might have not recovered and if you really have to get hold of money then needs must (that’s why probably best you have at least a few months cash in your own bank account to hold on a decision). But to protect your fund, keep that balance as high as you can which is paramount, it’s surely all about timing.