Pension Returns

Notepad_Phil

Nick9967 said:

Notepad_Phil said:

You're planning on taking out £486,000 (presumably valued in today's money) but you've not specified how much you have in your initial pot.

Theoretically, with a constant 2.5% real return on your investments you could manage those drawdowns if you started out with something like £375,000, however even just a few years of underperformance at the beginning would throw that completely out and so I'd want to hold quite a bit more (unless you have some leeway over how much you can drawdown) and would probably hold at least a few years in cash.

You're right i missed pot starting point !  
it should be circa £325,000 

 

Does that mean that your withdrawals are not to be increased by inflation?

If they are, then my quick excel calculations would indicate that a starting pot of £325,000 would run out several years early if you use a constant 2.5% real return.

It may be that you really do just want to take out £20k in year 22 rather than the approx £30k that you'd need if you were accounting for inflation, in which case you may well be okay but personally I'd be worried about a poor sequence of returns during the early year.

GSP

Something to consider.
If for example you transferred a db pension into a dc pension and withdrew flexi drawdown, percentages can be completely opposite to calendar years or any other point in time. The main thing is what your pot was worth when you ‘went in’, and that is your starting point to base all growth calcs thereafter. Some time ago I done some analysis where my pot fell 10% Dec YoY, but grew 10% Aug YoY.

Nick9967

Notepad_Phil said:

You're right i missed pot starting point !  
it should be circa £325,000 

 

Does that mean that your withdrawals are not to be increased by inflation?

If they are, then my quick excel calculations would indicate that a starting pot of £325,000 would run out several years early if you use a constant 2.5% real return.

It may be that you really do just want to take out £20k in year 22 rather than the approx £30k that you'd need if you were accounting for inflation, in which case you may well be okay but personally I'd be worried about a poor sequence of returns during the early year.

I'm at a bit of a standstill really as far as sequence of returns,
I run 3 spreadsheets now each with a different sequence, one with a flat growth of 5% for all 22 years, one with a sequence starting badly but averaging 4.5% the other averaging  5.3% but with poor years spread in each third of the 22 year cycle.
My withdrawals stay the same with the exception of the middle sequence where the poor years are at the very beginning, my strategy for that is either to delay retirement by 2 years (or whatever is required) or still retire and use some of my cash reserve to cover the couple of bad years, and make no drawdown at all.
The problem is the annual returns are so "finger in the air" change these and the whole picture changes dramatically.
As far as I can see following the 4% withdrawal safe line is built around a pot lasting from retirement to death and not what I need which is for the pot to last 22 years from 58 to 80 with varied withdrawals, so I'm unsure what growth rate (inc. inflation) is best for me to use.

SouthCoastBoy

The way I have mitigated a crash at the start of retirement is currently I hold about 15 years worth of cash (about 40% of my pot) so I would use that initially, I will look at releasing equity when the prices are high. I'm using this strategy as currently very low inflation and therefore real value of cash is not being eroded too much. If inflation creeps up I will be investing in inflation proof equities to ensure I am not losing too much. It's all about timing though as don't want to be late. 

sheslookinhot

What are “inflation proof equities” ?

JoeCrystal

sheslookinhot said:

What are “inflation proof equities” ?

Defensive stocks maybe???

dunstonh

As far as I can see following the 4% withdrawal safe line is built around a pot lasting from retirement to death and not what I need which is for the pot to last 22 years from 58 to 80 with varied withdrawals, so I'm unsure what growth rate (inc. inflation) is best for me to use.

There is no safe withdrawal rate.  There are some models that claim SWR and use 4% but its just wording that would never be allowed in the retail market.  it also uses a range of assumptions that may not be appropriate.

Why do you only need your pension to last until age 80?   

You should use a growth rate that is consistent with your underlying assets and knock off a chunk to play it safe.

That is a chart that shows someone drawing 4.25% a year (0.36% per month) since Jan 90 based on sector average returns of the 20-60 shares sector (extra 0.25% to cover platform charge).   If there was a dot.com style crash now (or near future) then this pot would likely start the cycle of falling values heading to zero as 20 years of inflation is unlikely to see the withdrawal amount being sufficient and there would be a need to increase it. Therefore speeding up the erosion.  Indeed, the individual may have already had to start eroding the capital long before now.  Or you may be lucky enough to have a frugel lifestyle where the state pension increases are enough or even better, a defined benefit pension with its annually increasing secure income along with the state pension.

Notepad_Phil

Nick9967 said:

As far as I can see following the 4% withdrawal safe line is built around a pot lasting from retirement to death and not what I need which is for the pot to last 22 years from 58 to 80 with varied withdrawals, so I'm unsure what growth rate (inc. inflation) is best for me to use.

The 4% SWR over a lifetime is based on US data and is higher than what UK data suggests.

Personally I'd be happy to rely on a 4% SWR to last 22 years, but you're talking about a 6.15% withdrawal rate for the first 5 years - so if markets fall say 15% and remain low over that 5 year period then your pot will be at nearly half of its initial £325,000, which then has to last another 17 years.

If you're happy to reduce your drawdowns during market downturns then there are ways to attempt to make a pot sustainable (e.g. Guyton-Klinger) but if the withdrawals are set in stone then you either have to have a lot more in cash to hopefully cover any down periods, or a lot more in investments so that you get down towards a 4% withdrawal rate.

I've been early-retired for several years now and before deciding that yes, I could retire, I checked that we could survive the reductions in drawdown amounts that would be necessary to live through an immediate 50% drop in world stockmarkets followed by only inflationary rises from then on. For us it meant that at the start of retirement we held a lot more in cash then most and obviously we'd have a lower standard of living if my pessimistic forecast ever came about. But knowing that we would still be okay meant that I could stop the 'just one more year' syndrome and just get on with enjoying retirement.

Nick9967

dunstonh said:

As far as I can see following the 4% withdrawal safe line is built around a pot lasting from retirement to death and not what I need which is for the pot to last 22 years from 58 to 80 with varied withdrawals, so I'm unsure what growth rate (inc. inflation) is best for me to use.

There is no safe withdrawal rate.  There are some models that claim SWR and use 4% but its just wording that would never be allowed in the retail market.  it also uses a range of assumptions that may not be appropriate.

Why do you only need your pension to last until age 80?   

You should use a growth rate that is consistent with your underlying assets and knock off a chunk to play it safe.

That is a chart that shows someone drawing 4.25% a year (0.36% per month) since Jan 90 based on sector average returns of the 20-60 shares sector (extra 0.25% to cover platform charge).   If there was a dot.com style crash now (or near future) then this pot would likely start the cycle of falling values heading to zero as 20 years of inflation is unlikely to see the withdrawal amount being sufficient and there would be a need to increase it. Therefore speeding up the erosion.  Indeed, the individual may have already had to start eroding the capital long before now.  Or you may be lucky enough to have a frugel lifestyle where the state pension increases are enough or even better, a defined benefit pension with its annually increasing secure income along with the state pension.

In answer to the "why only till 80" , essentially I have a combination of:

• A second property (which we own) that will be available to sell at the very latest the 21/22 point, past this means there would be some records broken for longevity! so I'm ok with that. After paying tax on the profit I'll have sufficient to see us through, minimum another £250k in cash 
• A younger wife's SP and smallish LGPS will have started by then 

My pot growth rates are predicted to include 2% inflation ,i.e. they are gross,  I take inflation off at my cost level i.e. I have 3 sets on monthly outgoing costs one from 58 to 71 second from 72 to 80 (which is at the first minus 7%) the third from 80 - ?? (which is from the second level -7%) annually increasing from year 1 (58) by 2% to allow for inflation- the basis of my results is what cash is left monthly after (net income - expenditure)
I'm not sure I'm missing anything from expenditure , if i am that may be an issue of course:
BUT when i consider currently I finance a family of 4 (2 teenagers 13/17) and pay a £300 mortgage and live well on £3300 pm then i consider my expenses are if anything over egged, and i should be able to be comfortable in my retirement;
My starting expenses point is:
£3,299 £39,588

	Monthly	Annual
Water	£65	£780
Gas	£65	£780
Elec	£80	£960
Council Tax	£220	£2,640
House Ins.	£35	£420
Broadband	£35	£420
TV Package	£50	£600
Mobiles	£50	£600
TV License	£15	£180
Life Ins	£12	£144
Car Ins x 2	£50	£600
Car Tax x 2	£42	£504
MOT & Service	£55	£660
Xmas	£125	£1,500
Holiday	£400	£4,800
Calamity Savings	£150	£1,800
Hobby x2	£100	£1,200
Fuel	£150	£1,800
Food	£400	£4,800
Clothing	£100	£1,200
Dental	£50	£600
Replacement  Car	£200	£2,400
Monthly spending adhoc	£500	£6,000
University 2022-2029	£350	£4,200

I've learnt a lot from this sight in the past 12 months and its been invaluable, I've come to the conclusion the more detail I add and the more open I am the useful the feedback is hence my openness about monthly ex's etc

SouthCoastBoy

With regards to university, I have found this has cost me approx £7200 annually per person, so may be something worth considering. It is very depdendent where the university is, unfortunately both my children chose expensive university cities in respect to accommodation.