Pension withdrawal tool

MK62

BritishInvestor said:

MK62 said:

BritishInvestor said:

NedS said:

BritishInvestor said:

gm0 said:

There is a fair amount of analysis out there on cash reserves and how long the market takes to regain prior highs (inflation adjusted) which can regularly be 5-7+ years in prior cycles.  So 1-2 years income cash will "help" but not solve - you sleep at night as you have a prop to short term spending and can avoid selling at what you think is the bottom or well down the down ramp.  You likely *should* rebalance into equities but this requires bravery (and bonds/cash/gold) beyond sitting on your hands alone.

My own view (and plan) is that it helps to have some cash as this gives you time - several years (with some spending pruning) to react to events and to wait and see more of the sequence without ravaging your equities holding. That feels a lot better even if it doesn't solve the "selling low" problem entirely.  So it does also help with the survivability of the full drawdown but this is non trivial to model out for the general case/all cohorts.

If you take a simple case of 
£100k starting pot, split into 60% equities, 40% bonds, with annual rebalancing
Every year £3k is taken out at the same time as rebalancing
If an equity crash happens in year 1 (30% fall), the withdrawal money is likely to come from the bonds, and you will most likely be buying equities as part of the rebalancing. If equities carry on falling the same may be true in year 2.
If both equities and bonds fall that may well imply we are in serious trouble (e.g. WW1), and this might well take longer than 1-2 years to play out.
So I wonder in what scenario the 1-2 year cash bucket really works, other than acting as a comfort blanket (which I can understand)

If equity markets have fallen 30% and I have 2 years of cash, I would be drawing on that cash, reducing spending where I can whilst looking to replenish the cash from any natural yield from the bonds and equity. I would also be re-balancing, maybe even looking to increase equity holdings to 65:35 or 70:30 given the size of the drop. At 50% plus equity drop I'm all in on equity, or at least 80:20.

"reducing spending where I can"
I don't understand why you would want to base a retirement income based on what the market is doing, surely you just want to get on with it and enjoy life?

To a certain extent, that's unavoidable with a DC pension (often backed with a S&S ISA)

If you have a variable amount which needs to last an unknown number of years, then at least to a certain degree, you are forced to base your income on "what the market is doing".

The only way round that is by purchasing an annuity......assuming your pot is big enough to produce a viable income using this option.....many won't be, hence the move towards drawdown (and many of the owners of pots which might be big enough, are unwilling to exchange that pot for the rates currently on offer).

As to a cash buffer once in drawdown......it's one of those instances where if you actually need one, you'll thank God you had one.....but you might not actually need one. I see the cash buffer as a degree of sequence risk control......which comes at a cost if that poor sequence never materialises......I'm not prepared to take the risk that it won't though.

As for "not in my lifetime"........a classic black swan fallacy imho......not having seen something before is no guarantee that it won't happen in the future. Fair enough, no guarantee it will either....so "do you feel lucky"?

"As for "not in my lifetime"........a classic black swan fallacy imho......not having seen something before is no guarantee that it won't happen in the future. Fair enough, no guarantee it will either....so "do you feel lucky"? "

If you feel this worried about what "could" happen, then I can't see why you wouldn't want to secure all/most of your retirement income and hope nothing untoward happens with the provider - a safety-first approach which I fully accept.

If however, you think your retirement journey has a reasonable chance of giving us something that is not significantly worse than the worst we've seen over the last ~120 years, I'm not sure why you can't build a robust plan that is unlikely to require any spending adjustments irrespective of what the underlying market is doing.

You'd have to define reasonable.......and what withdrawal rate would you apply at the start so that the plan was robust and unlikely to require any spending adjustments, irrespective of what the market is doing?

PS.....I don't feel that worried, as my plan is both cash buffered and caters for withdrawal adjustments as, when and if the need arises (I hope it doesn't tbh)

Notepad_Phil

BritishInvestor said:

If you feel this worried about what "could" happen, then I can't see why you wouldn't want to secure all/most of your retirement income and hope nothing untoward happens with the provider - a safety-first approach which I fully accept.

Have you recently had a look at the rates for inflation-proof annuities - they're generally not very good, so you'd need to have accumulated a lot more money which means that you'd either need to have worked longer to get that money together or to have had a lower lifestyle during your workng life and put the savings into your retirement.

Personally I prefer having retired in my mid-fifties with a cash buffer and live with the risk than having had to work for umpteen more years to get the types of money that I'd need if most of my retirement income was to be from annuities.

BritishInvestor

NedS said:

BritishInvestor said:

NedS said:

If equity markets have fallen 30% and I have 2 years of cash, I would be drawing on that cash, reducing spending where I can whilst looking to replenish the cash from any natural yield from the bonds and equity. I would also be re-balancing, maybe even looking to increase equity holdings to 65:35 or 70:30 given the size of the drop. At 50% plus equity drop I'm all in on equity, or at least 80:20.

"reducing spending where I can"
I don't understand why you would want to base a retirement income based on what the market is doing, surely you just want to get on with it and enjoy life?

Yes, indeed. But if my DC funds have just plummeted 30% or more, I'm probably going to be asking myself do I need to take that expensive Caribbean holiday this year or could we maybe get by with a trip to the Canaries instead. I wouldn't want to be hammering that 2 year cash buffer unnecessarily hard whilst markets are massively down and before I know if this is going to be a 3 month Covid-crash or a much longer more drawn out event like the 2008 GFC or 2000 tech bubble bursting. If I have flexibility built into my plan to help cope with unprecedented events, why would I not use that flexibility during an unprecedented event? So during the recent events, my plan tells me I would have drawn income from my cash reserves during Q2, re-balanced into equities at the end of March (probably 70:30), not booked a Caribbean holiday in March or April for this summer and re-balanced back to the original 60:40 whilst replenishing the cash buffer at the end of the year.

" why would I not use that flexibility during an unprecedented event? "
How do you know ahead of time that it is going to be an unprecedented event? And which unprecedented events are you referring to?

"or a much longer more drawn out event like the 2008 GFC or 2000 tech bubble bursting."
Why do you think these would have required significant changes to your strategy, given a robust plan?
https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/

BritishInvestor

shinytop said:

Imagine if you had the choice of using the same amount of money to have either:

1. A frugal retirement with a near zero chance of running out of money, no chance of ever having to cut back at all in bad times and a high chance of dying with more than you started with;

2. A good retirement with a very small chance of running out of money, a moderate chance of having to cut back a bit in bad times and a moderate chance of spending most of your money before you die; or

3. A profligate retirement (to begin with) with a good chance of running out of money, a good chance of having to cut back a lot in bad times and a very good chance of spending most if not all of your money before you die.

IMO too many people are choosing 1.  I'm more a 2. sort of person. 

Yep, I think most people tend to be #2

BritishInvestor

MK62 said:

BritishInvestor said:

MK62 said:

BritishInvestor said:

NedS said:

BritishInvestor said:

gm0 said:

There is a fair amount of analysis out there on cash reserves and how long the market takes to regain prior highs (inflation adjusted) which can regularly be 5-7+ years in prior cycles.  So 1-2 years income cash will "help" but not solve - you sleep at night as you have a prop to short term spending and can avoid selling at what you think is the bottom or well down the down ramp.  You likely *should* rebalance into equities but this requires bravery (and bonds/cash/gold) beyond sitting on your hands alone.

My own view (and plan) is that it helps to have some cash as this gives you time - several years (with some spending pruning) to react to events and to wait and see more of the sequence without ravaging your equities holding. That feels a lot better even if it doesn't solve the "selling low" problem entirely.  So it does also help with the survivability of the full drawdown but this is non trivial to model out for the general case/all cohorts.

If you take a simple case of 
£100k starting pot, split into 60% equities, 40% bonds, with annual rebalancing
Every year £3k is taken out at the same time as rebalancing
If an equity crash happens in year 1 (30% fall), the withdrawal money is likely to come from the bonds, and you will most likely be buying equities as part of the rebalancing. If equities carry on falling the same may be true in year 2.
If both equities and bonds fall that may well imply we are in serious trouble (e.g. WW1), and this might well take longer than 1-2 years to play out.
So I wonder in what scenario the 1-2 year cash bucket really works, other than acting as a comfort blanket (which I can understand)

If equity markets have fallen 30% and I have 2 years of cash, I would be drawing on that cash, reducing spending where I can whilst looking to replenish the cash from any natural yield from the bonds and equity. I would also be re-balancing, maybe even looking to increase equity holdings to 65:35 or 70:30 given the size of the drop. At 50% plus equity drop I'm all in on equity, or at least 80:20.

"reducing spending where I can"
I don't understand why you would want to base a retirement income based on what the market is doing, surely you just want to get on with it and enjoy life?

To a certain extent, that's unavoidable with a DC pension (often backed with a S&S ISA)

If you have a variable amount which needs to last an unknown number of years, then at least to a certain degree, you are forced to base your income on "what the market is doing".

The only way round that is by purchasing an annuity......assuming your pot is big enough to produce a viable income using this option.....many won't be, hence the move towards drawdown (and many of the owners of pots which might be big enough, are unwilling to exchange that pot for the rates currently on offer).

As to a cash buffer once in drawdown......it's one of those instances where if you actually need one, you'll thank God you had one.....but you might not actually need one. I see the cash buffer as a degree of sequence risk control......which comes at a cost if that poor sequence never materialises......I'm not prepared to take the risk that it won't though.

As for "not in my lifetime"........a classic black swan fallacy imho......not having seen something before is no guarantee that it won't happen in the future. Fair enough, no guarantee it will either....so "do you feel lucky"?

"As for "not in my lifetime"........a classic black swan fallacy imho......not having seen something before is no guarantee that it won't happen in the future. Fair enough, no guarantee it will either....so "do you feel lucky"? "

If you feel this worried about what "could" happen, then I can't see why you wouldn't want to secure all/most of your retirement income and hope nothing untoward happens with the provider - a safety-first approach which I fully accept.

If however, you think your retirement journey has a reasonable chance of giving us something that is not significantly worse than the worst we've seen over the last ~120 years, I'm not sure why you can't build a robust plan that is unlikely to require any spending adjustments irrespective of what the underlying market is doing.

You'd have to define reasonable.......and what withdrawal rate would you apply at the start so that the plan was robust and unlikely to require any spending adjustments, irrespective of what the market is doing?

PS.....I don't feel that worried, as my plan is both cash buffered and caters for withdrawal adjustments as, when and if the need arises (I hope it doesn't tbh)

"You'd have to define reasonable"
History has thrown us some real stinkers. If it's much worse than those, the withdrawals strategy/valuation won't be top of the list, IMO. 
"and what withdrawal rate would you apply at the start so that the plan was robust and unlikely to require any spending adjustments, irrespective of what the market is doing?"
SWR implies 100% success based on historical data. I would guess most use a 90% success rate as a reasonable starting rate - see shinytop's comment.

BritishInvestor

Notepad_Phil said:

BritishInvestor said:

If you feel this worried about what "could" happen, then I can't see why you wouldn't want to secure all/most of your retirement income and hope nothing untoward happens with the provider - a safety-first approach which I fully accept.

Have you recently had a look at the rates for inflation-proof annuities - they're generally not very good, so you'd need to have accumulated a lot more money which means that you'd either need to have worked longer to get that money together or to have had a lower lifestyle during your workng life and put the savings into your retirement.

Personally I prefer having retired in my mid-fifties with a cash buffer and live with the risk than having had to work for umpteen more years to get the types of money that I'd need if most of my retirement income was to be from annuities.

"Have you recently had a look at the rates for inflation-proof annuities - they're generally not very good, so you'd need to have accumulated a lot more money which means that you'd either need to have worked longer to get that money together or to have had a lower lifestyle during your workng life and put the savings into your retirement."
Yep, but what's the alternative for those expecting a reasonable chance of tin-hat time? If you look at current SWRs, make an adjustment for armageddon etc, you'd be surprised how low they are.

"Personally I prefer having retired in my mid-fifties with a cash buffer and live with the risk than having had to work for umpteen more years to get the types of money that I'd need if most of my retirement income was to be from annuities."
I think that's a pragmatic view.

NedS

BritishInvestor said:

NedS said:

BritishInvestor said:

NedS said:

If equity markets have fallen 30% and I have 2 years of cash, I would be drawing on that cash, reducing spending where I can whilst looking to replenish the cash from any natural yield from the bonds and equity. I would also be re-balancing, maybe even looking to increase equity holdings to 65:35 or 70:30 given the size of the drop. At 50% plus equity drop I'm all in on equity, or at least 80:20.

"reducing spending where I can"
I don't understand why you would want to base a retirement income based on what the market is doing, surely you just want to get on with it and enjoy life?

Yes, indeed. But if my DC funds have just plummeted 30% or more, I'm probably going to be asking myself do I need to take that expensive Caribbean holiday this year or could we maybe get by with a trip to the Canaries instead. I wouldn't want to be hammering that 2 year cash buffer unnecessarily hard whilst markets are massively down and before I know if this is going to be a 3 month Covid-crash or a much longer more drawn out event like the 2008 GFC or 2000 tech bubble bursting. If I have flexibility built into my plan to help cope with unprecedented events, why would I not use that flexibility during an unprecedented event? So during the recent events, my plan tells me I would have drawn income from my cash reserves during Q2, re-balanced into equities at the end of March (probably 70:30), not booked a Caribbean holiday in March or April for this summer and re-balanced back to the original 60:40 whilst replenishing the cash buffer at the end of the year.

" why would I not use that flexibility during an unprecedented event? "
How do you know ahead of time that it is going to be an unprecedented event? And which unprecedented events are you referring to?

"or a much longer more drawn out event like the 2008 GFC or 2000 tech bubble bursting."
Why do you think these would have required significant changes to your strategy, given a robust plan?
https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/

No changes to the strategy, just following the plan's rules based on what happens. Can a robust plan not have rules that adapt or tailor the response to different scenarios rather than static rules that blindly follow an unsustainable withdraw rate to the point you run out of cash?

gm0

I think variable income appetite (vs fixed once and indexed) is one of the most useful mitigation approaches to reduce drawdown failure risk alongside the arrival of guaranteed income be it DB or SP.   Whether this is willingness to vary is taken as a mild increase in possible WR at the same backtesting risk - or as a reduced risk (backtesting safe with a buffer to speculative/swan risk).  GK, VPW, EM with variable floor etc. etc.  Plenty of options.

It mustn't degenerate into an annually resetting plan.  Or no plan at all.   But just because flexibility is harder to do all cohort modelling on does not mean it is wrong in managing an individual journey.  We don't get the average journey.  We get the SOR we get. Once the growth assets are sold. Future excellent returns on them are irrelevant.  Selling fewer equities in the teeth of a major correction cycle is just - better. How you do that is where the fun begins. 

So the plan must seek to avoid this overselling (equity %, bonds, gold, variable income, cash buffer, even a fuse portfolio to sell for cash and rebalance into equities and carry on) there are many options and no single solution which just fixes it or works for all shapes or durations of slumps - the decade long ones are harsh..

I think I will seek to mitigate the overselling for a while. And thus need to have a point of view in advance upon the market conditions in which I would likely start to reduce or suspend draw, and burn a cash buffer as income substitution etc, prune discretionary expenditure either lightly or more harshly to stretch said buffer while looking at the next section of sequence. 

My plan is modestly conservative (in the generally racy context of drawdown) Guide rails - 3.5% WR normal target with a 2.5% floor. EM. 40 years).  Reduced WR later (IHT/spend last strategy) - post 67 & 75. Cash buffer on the front end for exactly this sort of SORR handling early on.

This won't be mechanical as the taxation, inflation and other economic conditions of the day of troubles are not known today.  So the plan won't fully survive contact with the enemy but it at least structures the thinking away from emotion and panic towards sensible actions that can be taken on the income side and the expenditure side.

BritishInvestor

NedS said:

BritishInvestor said:

NedS said:

BritishInvestor said:

NedS said:

If equity markets have fallen 30% and I have 2 years of cash, I would be drawing on that cash, reducing spending where I can whilst looking to replenish the cash from any natural yield from the bonds and equity. I would also be re-balancing, maybe even looking to increase equity holdings to 65:35 or 70:30 given the size of the drop. At 50% plus equity drop I'm all in on equity, or at least 80:20.

"reducing spending where I can"
I don't understand why you would want to base a retirement income based on what the market is doing, surely you just want to get on with it and enjoy life?

Yes, indeed. But if my DC funds have just plummeted 30% or more, I'm probably going to be asking myself do I need to take that expensive Caribbean holiday this year or could we maybe get by with a trip to the Canaries instead. I wouldn't want to be hammering that 2 year cash buffer unnecessarily hard whilst markets are massively down and before I know if this is going to be a 3 month Covid-crash or a much longer more drawn out event like the 2008 GFC or 2000 tech bubble bursting. If I have flexibility built into my plan to help cope with unprecedented events, why would I not use that flexibility during an unprecedented event? So during the recent events, my plan tells me I would have drawn income from my cash reserves during Q2, re-balanced into equities at the end of March (probably 70:30), not booked a Caribbean holiday in March or April for this summer and re-balanced back to the original 60:40 whilst replenishing the cash buffer at the end of the year.

" why would I not use that flexibility during an unprecedented event? "
How do you know ahead of time that it is going to be an unprecedented event? And which unprecedented events are you referring to?

"or a much longer more drawn out event like the 2008 GFC or 2000 tech bubble bursting."
Why do you think these would have required significant changes to your strategy, given a robust plan?
https://www.kitces.com/blog/how-has-the-4-rule-held-up-since-the-tech-bubble-and-the-2008-financial-crisis/

No changes to the strategy, just following the plan's rules based on what happens. Can a robust plan not have rules that adapt or tailor the response to different scenarios rather than static rules that blindly follow an unsustainable withdraw rate to the point you run out of cash?

Yes, can definitely have inflation/spending rules, but are usually a bit more formal, otherwise it's very hard to see what the impact would be when evaluated against historical outcomes (if that kind of thing gives you reassurance).

BritishInvestor

gm0 said:

I think variable income appetite (vs fixed once and indexed) is one of the most useful mitigation approaches to reduce drawdown failure risk alongside the arrival of guaranteed income be it DB or SP.   Whether this is willingness to vary is taken as a mild increase in possible WR at the same backtesting risk - or as a reduced risk (backtesting safe with a buffer to speculative/swan risk).  GK, VPW, EM with variable floor etc. etc.  Plenty of options.

It mustn't degenerate into an annually resetting plan.  Or no plan at all.   But just because flexibility is harder to do all cohort modelling on does not mean it is wrong in managing an individual journey.  We don't get the average journey.  We get the SOR we get. Once the growth assets are sold. Future excellent returns on them are irrelevant.  Selling fewer equities in the teeth of a major correction cycle is just - better. How you do that is where the fun begins. 

So the plan must seek to avoid this overselling (equity %, bonds, gold, variable income, cash buffer, even a fuse portfolio to sell for cash and rebalance into equities and carry on) there are many options and no single solution which just fixes it or works for all shapes or durations of slumps - the decade long ones are harsh..

I think I will seek to mitigate the overselling for a while. And thus need to have a point of view in advance upon the market conditions in which I would likely start to reduce or suspend draw, and burn a cash buffer as income substitution etc, prune discretionary expenditure either lightly or more harshly to stretch said buffer while looking at the next section of sequence. 

My plan is modestly conservative (in the generally racy context of drawdown) Guide rails - 3.5% WR normal target with a 2.5% floor. EM. 40 years).  Reduced WR later (IHT/spend last strategy) - post 67 & 75. Cash buffer on the front end for exactly this sort of SORR handling early on.

This won't be mechanical as the taxation, inflation and other economic conditions of the day of troubles are not known today.  So the plan won't fully survive contact with the enemy but it at least structures the thinking away from emotion and panic towards sensible actions that can be taken on the income side and the expenditure side.

"GK"
"It mustn't degenerate into an annually resetting plan.  "
Do you not feel this could be the case if we have poor returns, especially at the outset?