Pension Cashflow Retirement Planner - Key Info?

GSP

Linton said:

GSP said:

Are the any FA’s or advice suggesting ‘enjoy‘ your fund in good growth, tighten your belts in bad times, and avoid pound cost ravaging at all costs?

That is basically what the Guyton-Klinger rules for drawdown do - see https://finalytiq.co.uk/guyton-klinger-sustainable-withdrawal-rules/ for example.  The advantage is that your safe (based on historical data) drawdown rate increases by perhaps1.5-2%%. 

The disadvantage is that if drawdown is  a significnt part of your retirement income varying expenditure can be difficult to manage.  You dont want to be switching between a champagne lifestyle and living on the breadline - it's probably not as bad as that but hopefully you get the picture.   Also it can make long-term planning difficult. One way of avoiding changing income is to maintain a cash buffer to use when share prices collapse. However the cash buffer is providing neither significant income nor growth and reduces the effective drawdown rate.   Any rules like this require you to have good knowledge of your finances and the ongoing time and inclination to carry out the management perhaps on a monthly basis.  This may become more difficult as you get into real old age.

That’s good to know thanks Linton. I appreciate my FA’s concern about withdrawing too quickly, but I have never heard him say ‘enjoy‘ your money for a while times are good. I’m all for caution, but surely you need to try and enjoy the good times as well, rather than leaving a large sum.
I think switching between lifestyles is part and parcel of drawdown. If we had lived on another planet we would have never have known about the big fall in Spring as markets have recovered since then. It seems to be about choosing your time, and protecting your fund when you need to.

dunstonh

but I have never heard him say ‘enjoy‘ your money for a while times are good.

You would hope not as averaging means you need the profits in the good years to offset the negative years.   If you spend the excess in good years then you head to trouble if you don't hold a cash pot to draw on instead during negative/nothing years.

 I’m all for caution, but surely you need to try and enjoy the good times as well, rather than leaving a large sum.

If you don't mind erosion of the fund then you can draw a little more. However, as your date of death is unknown, this is a difficult one to manage in terms of how much you draw in that erosion.   Too much too quickly and you can create a spiral effect that drains the money far too quickly.   

If we had lived on another planet we would have never have known about the big fall in Spring as markets have recovered since then. It seems to be about choosing your time, and protecting your fund when you need to.

In the past when statements were annual, many drops and recoveries occurred between statement dates and were just not seen by people.  I had someone recently say that their pension had never dropped before and they wanted to move it.   I took a look at and their fund had dropped plenty of times.  They just hadn't looked when it had.   The more you see the values, the more noticeable the volatility will be.    And the more worried people often become when they follow it more closely than they should.

BritishInvestor

dunstonh said:

You are not paying him to do  ‘a quick and dirty cashflow projection'”, you are paying him to create a robust retirement plan that stops you having to spend time fretting and posting on here!

The OP does say that the adviser did say that it is just the start.

Is a real return of 1% throughout realistic? Is that too safe?

What investment assets are you using?  are you at the lower risk end or the higher risk end?    What margin of safety do you want to include?

Before inflation but after fees are taken off I estimate my fund has grown by c15% in the last three years since I started. It’s 5/10 risk strategy.

Long term average on that sort of risk profile would be around 5.5%.   Knock off 2% for inflation and you have 3.5%.  Knock off any extra you feel happy with for margin of error.

"The OP does say that the adviser did say that it is just the start."
It's really easy to pick holes in someone else's work, but I'm not aware of many planners working in the retirement planning space that would operate this way, especially given that it's not the start of the relationship (I believe).

BritishInvestor

jamesd said:

GSP said:

From what I can see, he has used real return of 1% throughout based on 2% inflation throughout, outgoings of £36,000 throughout and pension when it kicks in in 9 years time of £9k throughout. He has also combined my fund with my wife’s, though that does not start until two years time.

Constant 36,000 is not consistent with the research on real spending, which shows substantial drops: "The next chart below shows that, from age 65, spending typically declines progressively and is about 35% lower at age 80" and your spending pattern seems to be that of those whose spending drops more. So you might build in a spending drop of say 3% a year from 65, ceasing at some spending floor. What that will do is allow shifting more spending to earlier ages.

Combining your wife's pot is OK for quick and dirty but not for tax effect on income planning when there are two personal allowances.

1% is too low for growth of  your investment mixture but there are reasons to expect less over the next ten yeas so you might use 1% plus inflation followed by 3% plus inflation and anticipate 1% more than those.

"1% is too low for growth of  your investment mixture "
Without knowing more about the exact investment mixture and fees, I'm not sure it's possible to say at this stage. As mentioned previously, I benchmark cashflow assumptions against Timeline and (as you know) the inputs can have a big impact on success rate.

BritishInvestor

GSP said:

Linton said:

I used 3% inflation and a1% real return for my spreadsheet retirement plan 15 years ago and still use the same assumptions. Assuming average returns would be foolish.....
- average means a 50% chance of being wrong. Way too high for comfort given that by the time any failure becomes really obvious it will be too late to do anything about it.
- you need some way of allowing for crashes.
- the future may be very different to the past.
- when drawing down one is likely to invest more cautiously than when accumulating.
People retiring now may be fooled by the returns they have had over the past 12 years. I believe  these are historically unprecedented.

Yes agree, drawdown seems like walking a tightrope. Any plans, projections are probably out of date after a couple of months on occasions. There’s too many outside factors ‘upsetting’ the numbers.

That's why you are paying someone to manage the retirement planning/withdrawal strategy, and why the financial plan is not set in stone, it's constantly changing. 

Linton

GSP said:

Linton said:

GSP said:

Are the any FA’s or advice suggesting ‘enjoy‘ your fund in good growth, tighten your belts in bad times, and avoid pound cost ravaging at all costs?

That is basically what the Guyton-Klinger rules for drawdown do - see https://finalytiq.co.uk/guyton-klinger-sustainable-withdrawal-rules/ for example.  The advantage is that your safe (based on historical data) drawdown rate increases by perhaps1.5-2%%. 

The disadvantage is that if drawdown is  a significnt part of your retirement income varying expenditure can be difficult to manage.  You dont want to be switching between a champagne lifestyle and living on the breadline - it's probably not as bad as that but hopefully you get the picture.   Also it can make long-term planning difficult. One way of avoiding changing income is to maintain a cash buffer to use when share prices collapse. However the cash buffer is providing neither significant income nor growth and reduces the effective drawdown rate.   Any rules like this require you to have good knowledge of your finances and the ongoing time and inclination to carry out the management perhaps on a monthly basis.  This may become more difficult as you get into real old age.

That’s good to know thanks Linton. I appreciate my FA’s concern about withdrawing too quickly, but I have never heard him say ‘enjoy‘ your money for a while times are good. I’m all for caution, but surely you need to try and enjoy the good times as well, rather than leaving a large sum.
I think switching between lifestyles is part and parcel of drawdown. If we had lived on another planet we would have never have known about the big fall in Spring as markets have recovered since then. It seems to be about choosing your time, and protecting your fund when you need to.

I do not find in practice the question of balancing spending now versus later is a great problem, unless of course spending now means a binge causing a significant reduction in capital.

In my view the sole purpose of a pre-retirement plan is to give you the confidence to make the jump.  It isnt a strait jacket that will constrain you for the rest of your life.   Within a year the plan will probably be wrong, in 5 years it could be totally irrelevent.  This isnt a disaster, it just means you need to replan.  Actually because my plan is almost completely automated thanks to MS Money's Lifetime Planner I update it daily!

What I found is that in practice you have to start off with pretty pessimistic assumptions and at your planned rate of expenditure - without this you could well not have had the courage to retire.  In most cases the disasters your plan mitigates do not happen and you start to accumulate more capital than planned.

So the budget constraints relax but that doesnt mean that you make a step change in standard of living.  It just means gradual relatively small changes eg spending £10 on bottles of wine rather than £6, not having to think too much about the cost when eating out or perhaps extra week-end breaks away.  Increasing capital also gives you the opportunity to consider major expenses outside the base plan - long-haul holiday, replacement car etc etc. 

Of course the next great crash will eventually happen, but unless you have been particularly unfortunate in your timing you should have sufficient slack in your plan for it not to be a life-changing problem.

For these reasons I have never bothered with complex drawdown strategies - I just drawdown what I need. Of course some people may need to develop their plan to a high level of detail in order to be happy making the jump, but in the end the effect is psychogical rather than practical.

GSP

dunstonh said:

but I have never heard him say ‘enjoy‘ your money for a while times are good.

You would hope not as averaging means you need the profits in the good years to offset the negative years.   If you spend the excess in good years then you head to trouble if you don't hold a cash pot to draw on instead during negative/nothing years.

 I’m all for caution, but surely you need to try and enjoy the good times as well, rather than leaving a large sum.

If you don't mind erosion of the fund then you can draw a little more. However, as your date of death is unknown, this is a difficult one to manage in terms of how much you draw in that erosion.   Too much too quickly and you can create a spiral effect that drains the money far too quickly.   

If we had lived on another planet we would have never have known about the big fall in Spring as markets have recovered since then. It seems to be about choosing your time, and protecting your fund when you need to.

In the past when statements were annual, many drops and recoveries occurred between statement dates and were just not seen by people.  I had someone recently say that their pension had never dropped before and they wanted to move it.   I took a look at and their fund had dropped plenty of times.  They just hadn't looked when it had.   The more you see the values, the more noticeable the volatility will be.    And the more worried people often become when they follow it more closely than they should.

That last bit is definitely true, but at the same time following closely helps you understand just how volatile the fund balances can be and gives them awareness.

GSP

BritishInvestor said:

dunstonh said:

You are not paying him to do  ‘a quick and dirty cashflow projection'”, you are paying him to create a robust retirement plan that stops you having to spend time fretting and posting on here!

The OP does say that the adviser did say that it is just the start.

Is a real return of 1% throughout realistic? Is that too safe?

What investment assets are you using?  are you at the lower risk end or the higher risk end?    What margin of safety do you want to include?

Before inflation but after fees are taken off I estimate my fund has grown by c15% in the last three years since I started. It’s 5/10 risk strategy.

Long term average on that sort of risk profile would be around 5.5%.   Knock off 2% for inflation and you have 3.5%.  Knock off any extra you feel happy with for margin of error.

"The OP does say that the adviser did say that it is just the start."
It's really easy to pick holes in someone else's work, but I'm not aware of many planners working in the retirement planning space that would operate this way, especially given that it's not the start of the relationship (I believe).

Nope, I am into my fourth year and the first I have seen of this. Even his words quick and dirty and using just a few metrics to base my future on does seem ‘a bit light’. That’s where I am going to try develop my own spreadsheets, as I know myself better. I won’t try and work it so I get the answer  I want. I’d prefer something that reflects more the truth, good or bad.

jamesd

GSP said:

It seems with drawdown you have to be flexible and react when necessary. ... Pound cost ravaging appears deadly to the pot. Those withdrawals at this time have to be the minimal, perhaps just drawing very small monthly amounts if you need to get by until the fund recovers somewhat. Maybe take a loan out!
At the other end of the scale and in my other thread on drawdown of £750k, we don’t want to die ‘rich’ either.

You only have to be as flexible as required by whatever drawdown rules you're using. Pound cost ravaging is only a problem if you're not using a safe withdrawal rate or Guyton's sequence of returns risk reduction method.

Even without a formal method you'd just draw the income from cash and bonds when equities are down. No need to make big spending reductions (if using SWR).

dunstonh

GSP said:

BritishInvestor said:

dunstonh said:

You are not paying him to do  ‘a quick and dirty cashflow projection'”, you are paying him to create a robust retirement plan that stops you having to spend time fretting and posting on here!

The OP does say that the adviser did say that it is just the start.

Is a real return of 1% throughout realistic? Is that too safe?

What investment assets are you using?  are you at the lower risk end or the higher risk end?    What margin of safety do you want to include?

Before inflation but after fees are taken off I estimate my fund has grown by c15% in the last three years since I started. It’s 5/10 risk strategy.

Long term average on that sort of risk profile would be around 5.5%.   Knock off 2% for inflation and you have 3.5%.  Knock off any extra you feel happy with for margin of error.

"The OP does say that the adviser did say that it is just the start."
It's really easy to pick holes in someone else's work, but I'm not aware of many planners working in the retirement planning space that would operate this way, especially given that it's not the start of the relationship (I believe).

Nope, I am into my fourth year and the first I have seen of this. Even his words quick and dirty and using just a few metrics to base my future on does seem ‘a bit light’. That’s where I am going to try develop my own spreadsheets, as I know myself better. I won’t try and work it so I get the answer  I want. I’d prefer something that reflects more the truth, good or bad.

Some advisers and some consumers really buy into the cashflow software and take it to an extreme.   Others do a basic cashflow planning as they have no need to go so in-depth.  Over the years I have seen cashflow planning outputs that were highly detailed but reality turned out to be nothing of the sort.  Indeed, I don't think I have ever seen a long term cashflow planner reflect anything close to reality.    So, personally, I don't put much faith in the comprehensive cashflow planning model unless it is something that is continuously updated on a very regular basis.  However, sensible cashflow planning can be very useful.