Depletion of pot in retirement

jamesd

SouthCoastBoy said:

does anybody have any indications what is a safe withdrawal rate for somebody based in UK? I am not solely invested in UK equities but I guess around 50% of my portfolio is.

Yes, covered in Drawdown: safe withdrawal rates. After allowance for costs, 3.2% increasing with inflation each year for 30 years at 60:40 equities:bonds. Or initially 5% with Guyton-Klinger rules, 40 years, 65:35. Both UK investments.

Assuming that you stop at 55 and your wife 60, that you each will get £9,000 state pension and using 68 state pension age. Also assuming investments grow with inflation to keep everything in todays money. That's 12+7 years of 9k, £171,000, to deduct from the pot as a state pension substitute.

Wife gets DB of 7.5k at 60 dropping to 6k at 65. For simplicity I'll value this using 3.2% for the 4% rule on 6k, making it worth an extra £6000 / 0.032 = £192k in the pot for safe withdrawal income calculation.

For the pot that's 500k + 200k + 300k - 171k +192k = 1021k.

Using G-K at 5% that's initially £51.5k a year usually increasing with inflation but possibly with extra cuts or increases. Plus two state pensions or their equivalent (assuming wife work is at least as much) of 9k each takes you to £69.5k variable a year.

Using 4% rule reduced from 3.2% to 3% for the age that's £30.63k a year increasing with inflation. Plus two state pensions or their equivalent (assuming wife work is at least as much) of 9k each takes you to £48.63k a year.

You could use 4% rule for core spending and G-K for less sensitive. After state pension age you'll have 2x9k + 6k = 24k of effectively guaranteed income. Say you want at least 35k with minimal variability. You could use 4% rule for the 11k difference, G-K for the rest. 4% rule this costs 11k / 0.03 = 367k of the pot leaving 654k for G-K, which produces £654k * 0.05 = £32.7k. Total £67.7k. You should replace 4% rule with state pension deferral once you're old enough.

Of course 6k can come from your wife's DB but I added the effective value of that to the starting capital so I can't count it here because that would be double counting. But I can undo that addition of £192k, cutting the initial pot to £829k. That reduces the shortfall from 11k to 5k. Using 4% rule for that costs 5k / 0.03 = £167k leaving £662k for G-K. That can start at £662k * 0.05 = £33.1k plus the 35k for a total of £68.1k a year.

Instead of using the 4% rule, cash could be set aside to pay for deferring. With £9k initial state pension, getting a 5k increase is 55.6%. At 5.8% a year that takes 9.6 years and would reduce initial capital by 9.6 * £9,000 = £86,400. Less than the earlier ways.

While I've used cash for some things because  it has no pure investment risk, it's not entirely safe. I assumed that it could grow with inflation and that's currently unlikely. For this outline this doesn't make much difference unless we think about high inflation.

Those numbers or the approach using different numbers should give you the answer to your I would really like to retire but not sure if I can afford it question.

BritishInvestor

FatherAbraham said:

SouthCoastBoy said:

Unfortunately I don't have a DB pension and therefore have the risk of running out of money.

Congratulations for acknowledging the risk of depletion - some people don't even analyse that far.
You can, of course, buy yourself a defined-benefit pension. It's called an annuity, and it guarantees that the income will be reliable for as long as you live.
Looking at the prices of annuities, and in particular, how they've changed over the last decade, gives some harsh insight into the increasing cost of income generation. A lot of people prefer not to look at this uncomfortable picture.
Annuity rates give insight into income-generation level with a large pool of longevity risk, which is a fairly efficient way to deal with highly-variable lifetimes. Carrying longevity risk on a single life tends to mean that one ought to build in a depressing amount of safety margin.
I think you're right to be careful in this area.  Mistakes in withdrawal rate don't become apparent until the situation is unsalvageable.  It's notable that people who're quite dogmatic about simpler rules, such as the good old, bad old 4% rule, often haven't done much contemporary analysis 

"Looking at the prices of annuities, and in particular, how they've changed over the last decade, gives some harsh insight into the increasing cost of income generation. A lot of people prefer not to look at this uncomfortable picture.
Annuity rates give insight into income-generation level with a large pool of longevity risk, which is a fairly efficient way to deal with highly-variable lifetimes. Carrying longevity risk on a single life tends to mean that one ought to build in a depressing amount of safety margin."

I'm not sure that the price of annuities necessarily has much of a bearing on determining safe withdrawal rates, which tend to be determined by historical extreme events.

The difference in SWR between a 30 year and 44 year retirement was around 0.45% in the example I looked at recently so the "safety" margin might not be as bad as feared.

BritishInvestor

LHW99 said:

Stubod said:

..........a more definitive answer .........

Maybe..... but only if they have a crystal ball and can predict what the stock market will do over maybe 20-30 years.

It's perfectly possible to build a robust retirement plan without this.

BritishInvestor

cfw1994 said:

AnotherJoe said:

I dont think it makes sense to have one withdrawal rate.

You're going to get (presumably) SP at 66, 67, right? Maybe two SP's if you live with someone.

So you could (for example) take a higher % to start with) and then drop to cater for SP.

And maybe you'd like a higher % initially and then a lower one at SP age and then a lower one at (say) age 80 when you arent going on many world cruise or hiking holidays etc. For those who jump in and say they still walk the pennine way every week aged 95, its a fact, peoples spending does drop off in later life.

And then theres the element of choice, eg maybe markets drop and you can reduce expenditure for a while to cater for that rather than dig too much into your pot.

You could model this in a spreadsheet or there are services you can use - retireeasy for example, so much a month, use it for a couple of months to get you started, or theres a couple of free charting tools (grrr senior moment forget the names) which use previous history of stock market performance to show how you'd have done in previous times as a rough judge of how risky your plans are - eg maybe you'd run out of money in 90% of past scenarios or 1%.

Or pay an IFA for a couple of hours work to run up some projections with you.

TL:DR Too simplistic to have one rate over your lifetime.

p.s. Why on earth is 50% your portfolio UK shares? That isn't going to do your withdrawal rate any favours.

I'm at a similar age to SCB, with a plan to stop my regular paid employment next May....so treat my words with the knowledge that I am Captain Theory on this stuff....
.....but I agree 100% with AnotherJoe here.   

There are so many articles and analyses on the SWR, including some good stuff shown by people on this forum....& yes, if you want a SWR, go with 3%.   Maybe 3.5%.....maybe 4-5% if you have flexibility.   
Oh wait - maybe....maybe...a bit more, if you genuinely can and will rein things in if funds underperform.

However, my personal expectation is that the years from mid-50s to around 65-70 will be the more expensive ones, with more exotic travel (except...Covid....!).  Once I hit the 65-70'ish age, I expect us to be travelling less....then from 80 onwards, if still around, & unless we are particularly fortunate, the costs for things will drop.  Clearly health care could impact that....but hard to plan for that (our plan is the property is the flexible pot of last resort....)
Or to put it another way, the Go-Go, Slow-Go, and No-Go years.....
So: my personal spreadsheet allows me to factor in a plan to reduce the money needed whenever I feel appropriate.
Of course you cannot take 15% out in the first 10 years and realistically hope for things to still look rosy....but 5% is feasible (in my humble and theoretical opinion!)

Will it be right?   Who knows: only time will tell.
Can and WILL we adjust if we need to?   Absolutely yes.   Flexibility is the name of the game!

Oh, final comment - of course none of us know if we might slide into a lengthy flat depression.   No-one expected Covid, and when it struck and markets dropped, no-one knew that within 6 months, monies would be back up or even above the highs before the 'crash'.  I remain an optimist, and whilst some firms will struggle or disappear entirely due to the horrendous impact of Covid, others will thrive.

A worse depression than we've experienced over the last 120 years? Surely if that's a genuine fear you'd look to secure income rather than take investment risk (and hope your annuity provider doesn't go under:))

gm0

Welcome indeed

Does SouthCoastBoy *really* want to see how deep this rabbit hole goes.  Is today the day to discuss sequence of return in deaccumulation and ravaging.  Few of us have thought about the difference between buying through volatility in accumulation (good) and in selling through volatility in de-accumulation (bad) until we get close to retirement.  Or I was just dense on personal finance and it was obvious to everyone else.

If you get into "backtesting" literature you can check out your preferred magic drawdown plan against "known market risk" i.e. stuff that's already happened to all prior cohorts.  A lot of US data.  Some international data.  Wars.  Great depression. 1970s Inflation.  A lot of eras when stockmarkets were smaller and different.   And so you can argue endlessly about what "shouldn't count" until the cows come home or just use it all as better than just guessing.  Or look for the consensus conclusions of other people keener to run the data science in academic or financial advice circles.

And of course "backtesting" doesn't predict the future. But you can be wrong in a crowd if you pick a plan that would *never* have failed before - any cohort, any start date.  Bad news is.  Could still fail in a different future. But more likely than not it is too conservative and Battersea dogs Home or your heirs will be happy when you have a surplus at the end

If that isn't satisfying then get into the stuff where people have lowered returns or looped round horrid bits and created "stress" markets out of historic data. And then run MC random return simulations against a plan - portfolio, rebalancing, extraction, safe amount calculation - what is the range of outcomes within a certain normal distribution range.  FlexibleRetirementPlanner (free) does that and plots a nice graph.

A lot of people have had a shtick selling simplified answers to this one.  And a lot are bunk - or sorta true for very specific assumptions only and thus not useful. 

Help is available

earlyretirementnow blog has done brain meltingly large amounts of modelling and blogging about this.  Not definitive alone but a fair guide to why a load of ideas just don't really help.   There are good shorter articles on monevator blog as well that explore the subject. 

Some people speak highly of Abraham Okusanya's book as an entry point but I found out about it after it was useful to me and went straight to McClung Living off Your Money which is the best money I have spent on pension planning so far - challenging read though it certainly is the first time.  Good practices instead of bad ones can sweat marginal gains in maximum safe WR across known market risk i.e. history.  I am talking about ~0.25% increased WR here or there not magic.  Which you can take as slightly more income - or an expected slightly lower risk of depletion for the same income.

And if you get to the bottom of that ramp. Then Taleb is waiting for you with a Black Swan event.   Distributions are not normal.  Fat tails exist. Known risk is not all the risk there is.  Thanks Taleb.

jamesd

gm0 said:

Taleb is waiting for you with a Black Swan event.   Distributions are not normal.  Fat tails exist. Known risk is not all the risk there is.  Thanks Taleb.

Some examples that have happened not so long ago:

1. Greece cut its state pensions as part of the conditions for the bailout from years of misrepresenting its economic performance that let it join the Euro zone without really qualifying.

2. Argentina confiscated all private pensions and said some sort of state pension would be paid to the owners.

3. Hungary and Bulgaria have done similar things while Poland, Ireland and France have taken money from a subset.

4. Russia and China confiscated everything in their stock markets after communist revolutions.

Your money is yours. Until your government decides to take it. Neither pension nor non-pension money are assured protection from that. Where you live can make a huge difference.

LHW99

BritishInvestor said:

LHW99 said:

Stubod said:

..........a more definitive answer .........

Maybe..... but only if they have a crystal ball and can predict what the stock market will do over maybe 20-30 years.

It's perfectly possible to build a robust retirement plan without this.

Indeed it is, but a plan which will understandably have to adapt to circumstances, rather than being "definitive"

Thrugelmir

LHW99 said:

BritishInvestor said:

LHW99 said:

Stubod said:

..........a more definitive answer .........

Maybe..... but only if they have a crystal ball and can predict what the stock market will do over maybe 20-30 years.

It's perfectly possible to build a robust retirement plan without this.

Indeed it is, but a plan which will understandably have to adapt to circumstances, rather than being "definitive"

If the team at the BOE (some 300 people) cannot forecast the short term future with any degree of accuracy. Then there's little hope for any of us relying on an abacus. 

AnotherJoe

BritishInvestor said:

AnotherJoe said:

I dont think it makes sense to have one withdrawal rate.

You're going to get (presumably) SP at 66, 67, right? Maybe two SP's if you live with someone.

So you could (for example) take a higher % to start with) and then drop to cater for SP.

And maybe you'd like a higher % initially and then a lower one at SP age and then a lower one at (say) age 80 when you arent going on many world cruise or hiking holidays etc. For those who jump in and say they still walk the pennine way every week aged 95, its a fact, peoples spending does drop off in later life.

And then theres the element of choice, eg maybe markets drop and you can reduce expenditure for a while to cater for that rather than dig too much into your pot.

You could model this in a spreadsheet or there are services you can use - retireeasy for example, so much a month, use it for a couple of months to get you started, or theres a couple of free charting tools (grrr senior moment forget the names) which use previous history of stock market performance to show how you'd have done in previous times as a rough judge of how risky your plans are - eg maybe you'd run out of money in 90% of past scenarios or 1%.

Or pay an IFA for a couple of hours work to run up some projections with you.

TL:DR Too simplistic to have one rate over your lifetime.

p.s. Why on earth is 50% your portfolio UK shares? That isn't going to do your withdrawal rate any favours.

"p.s. Why on earth is 50% your portfolio UK shares? That isn't going to do your withdrawal rate any favours."
vs what alternative?

Having 5% 

cfw1994

BritishInvestor said:

cfw1994 said:

AnotherJoe said:

I dont think it makes sense to have one withdrawal rate.

You're going to get (presumably) SP at 66, 67, right? Maybe two SP's if you live with someone.

So you could (for example) take a higher % to start with) and then drop to cater for SP.

And maybe you'd like a higher % initially and then a lower one at SP age and then a lower one at (say) age 80 when you arent going on many world cruise or hiking holidays etc. For those who jump in and say they still walk the pennine way every week aged 95, its a fact, peoples spending does drop off in later life.

And then theres the element of choice, eg maybe markets drop and you can reduce expenditure for a while to cater for that rather than dig too much into your pot.

You could model this in a spreadsheet or there are services you can use - retireeasy for example, so much a month, use it for a couple of months to get you started, or theres a couple of free charting tools (grrr senior moment forget the names) which use previous history of stock market performance to show how you'd have done in previous times as a rough judge of how risky your plans are - eg maybe you'd run out of money in 90% of past scenarios or 1%.

Or pay an IFA for a couple of hours work to run up some projections with you.

TL:DR Too simplistic to have one rate over your lifetime.

p.s. Why on earth is 50% your portfolio UK shares? That isn't going to do your withdrawal rate any favours.

I'm at a similar age to SCB, with a plan to stop my regular paid employment next May....so treat my words with the knowledge that I am Captain Theory on this stuff....
.....but I agree 100% with AnotherJoe here.   

There are so many articles and analyses on the SWR, including some good stuff shown by people on this forum....& yes, if you want a SWR, go with 3%.   Maybe 3.5%.....maybe 4-5% if you have flexibility.   
Oh wait - maybe....maybe...a bit more, if you genuinely can and will rein things in if funds underperform.

However, my personal expectation is that the years from mid-50s to around 65-70 will be the more expensive ones, with more exotic travel (except...Covid....!).  Once I hit the 65-70'ish age, I expect us to be travelling less....then from 80 onwards, if still around, & unless we are particularly fortunate, the costs for things will drop.  Clearly health care could impact that....but hard to plan for that (our plan is the property is the flexible pot of last resort....)
Or to put it another way, the Go-Go, Slow-Go, and No-Go years.....
So: my personal spreadsheet allows me to factor in a plan to reduce the money needed whenever I feel appropriate.
Of course you cannot take 15% out in the first 10 years and realistically hope for things to still look rosy....but 5% is feasible (in my humble and theoretical opinion!)

Will it be right?   Who knows: only time will tell.
Can and WILL we adjust if we need to?   Absolutely yes.   Flexibility is the name of the game!

Oh, final comment - of course none of us know if we might slide into a lengthy flat depression.   No-one expected Covid, and when it struck and markets dropped, no-one knew that within 6 months, monies would be back up or even above the highs before the 'crash'.  I remain an optimist, and whilst some firms will struggle or disappear entirely due to the horrendous impact of Covid, others will thrive.

A worse depression than we've experienced over the last 120 years? Surely if that's a genuine fear you'd look to secure income rather than take investment risk (and hope your annuity provider doesn't go under:))

Not sure I get your point there.   I never suggested a “worse depression than we've experienced over the last 120 years“, did I?

I don’t think someone aiming to retire “early” would find annuities too appealing.   Maybe in your mid-70s, perhaps....