Foolishness of the 4% rule

[Deleted User]

Stargunner said:

Deleted_User said:

Stargunner said:

DairyQueen said:

Audaxer said:

Deleted_User said:

DB+State pension monies which trickle in from 60-67 years of age, the better!

Delaying state pension to 70 makes sense for everyone who can get by without drawing it. 

As deferring the new state pension increases at I think around 5.8% per year, I'm wondering how long it would take to recoup the missed pension if you have deferred it for say 4 years from age 66 to 70?

I happened to be reading about this today. AJ Bell have crunched the numbers and they are quoted on this link.

Assuming inflationary increases at 2.5%, SPA of 66, and 4 year deferral, the break even is age 81. Quids in if you live to 90 and centenarians are laughing all the way to the bank.

That is the gamble as we don’t know how long we will still be here

Not really a “gamble”.  You are guaranteed a decent inflation protected raise in perpetuity.  Unless you consider fear of dying young and missing out on a few quid as a “gamble”.  And even then you should be able to safely spend more in your late 60s from your DC pot then you would have being able to draw from your state pension.  

For every year you defer you are giving up around £9k per year of income. For every year you defer you will get around £500 added to your pension when you decide to take it. 

The more you spend from your DC pot the more it will go down, so why would you want to do that.

If you deferred for 3 years and then died 10 years later you would of missed out on around £27k of income from the 3 years that you deferred and gained around £15k extra pension income. Your beneficiaries would be missing out on around £12k

If your objective is to maximize inheritance than its a different equation.  In many cases the spouse will have plentiful provision for a reduced level of needed  expenditure after you pass away and children can take care of themselves passed the age of 25. 

Then its an issue of how much you can afford to spend safely. The prospect, amounting almost to a terror, of living too long makes necessary the keeping of the entire principal intact to the very end, so that, as a final wind-up, the savings of a lifetime, which the owner does not dare to enjoy, will pass as an inheritance to others. In view of these facts, it is surprising that so few have undertaken to enjoy, without fear, the fruits of the limited competency they have succeeded in accumulating. This can be done only through DB, state pension or annuities.

Why exist on £ 6000, assuming 3% SWR  on £ 200,000, and then live in fear, when inflation protected £ 11,600 may be obtained annually by buying an annuity with a 5.8% rate, equivalent to delaying your state pension for 1 year? You thus get an effective annuity for all of life and minus all the fear. 

I picked 200k to better illustrate the point; its more like 30k for 3 years of pension delay but the exact same ratio applies. If your objective is to spend as little as possible and have a large vanity inheritance then you might also benefit from delaying pension but its a much more complicated discussion.

Stargunner

Mordko can you please explain how this works because I don’t understand how if I defer my state pension for 1 year it would give me an inflation protected pension of £11600.
I also don’t know what you mean by £30k for a 3 year pension deferral.

Stubod

..I presume £30k is approximately what you would need in saving, (to live off) if you were to delay your SP by 3 years.

ie if you had a "spare" £30k at 66(/67), then you could use it to fund a 3 year deferral of your SP. Your SP would then be worth an extra 5% per annum (for 3 years). If you were to buy an index linked annuity it would cost significantly more than this. On face value a bit of a no brainer if you have the spare cash, BUT if you pop your clogs early then your spouse loses out as there is no "pay out" if you don't take your SP....ie if you go after 3 years your spouse has effectively lost the £30k you would have got from taking your SP on time..

michaels

I am going to need to look at this. Tax imications come into it. DW is older but odds say will live longer, she will ne er be a tax payer so the 30k to pay for deferal would come from my taxed drawdown.... 

Thrugelmir

Stubod said:

..I presume £30k is approximately what you would need in saving, (to live off) if you were to delay your SP by 3 years.

ie if you had a "spare" £30k at 66(/67), then you could use it to fund a 3 year deferral of your SP. Your SP would then be worth an extra 5% per annum (for 3 years). If you were to buy an index linked annuity it would cost significantly more than this. On face value a bit of a no brainer if you have the spare cash, BUT if you pop your clogs early then your spouse loses out as there is no "pay out" if you don't take your SP....ie if you go after 3 years your spouse has effectively lost the £30k you would have got from taking your SP on time..

You could opt for an annuity with payment guarantees or even joint life. . 

[Deleted User]

Stargunner said:

Mordko can you please explain how this works because I don’t understand how if I defer my state pension for 1 year it would give me an inflation protected pension of £11600.
I also don’t know what you mean by £30k for a 3 year pension deferral.

I am trying to illustrate 5.8% annual inflation protected increase in perpetuity.  And I used the same rate but for a 200k fund. Lets make this more specific. 

Lets say that your state pension is (very roughly) 10k per year and count everything in todays GBP.  By delaying pension for 3 years you are paying 30k for an annuity starting at age 70 and paying you 1842 GBP per annum (5.8%, compounded). Thats guaranteed and inflation protected. 

Now, if you just squirrel away this 30k over 3 years,  and try to draw from that fund using SWR of 3%, you can draw 900GBP. Less than half.  Not guaranteed.  

And if you have specific health reasons to believe that you may not last then you don’t do this. 

Madrick

With the calculations on the pros and cons of deferred State Pension, are we also factoring in the annual growth of at least 2.5% increase.

Is the 5.8% on top of that or is it combined with the increase that everyone gets anyway? 🤔

NedS

Madrick said:

With the calculations on the pros and cons of deferred State Pension, are we also factoring in the annual growth of at least 2.5% increase.

Is the 5.8% on top of that or is it combined with the increase that everyone gets anyway? 🤔

I believe that by deferring you are getting 5.8% of whatever the state pension is that year/at that time. So if the state pension is 2.5% (or more) higher next year, you are getting 5.8% of that higher value if you were to defer again next year.

But for the sake of simple calculations, you can ignore the affect of inflation, as in comparison your SWR would also increase with inflation each year.

Stargunner

Madrick said:

With the calculations on the pros and cons of deferred State Pension, are we also factoring in the annual growth of at least 2.5% increase.

Is the 5.8% on top of that or is it combined with the increase that everyone gets anyway? 🤔

From the government website

If you reach State Pension age on or after 6 April 2016

Your State Pension will increase every week you defer, as long as you defer for at least 9 weeks.

Your State Pension increases by the equivalent of 1% for every 9 weeks you defer. This works out as just under 5.8% for every 52 weeks.

The extra amount is paid with your regular State Pension payment.

Example:You get £179.60 a week (the full new State Pension).

By deferring for 52 weeks, you’ll get an extra £10.42 a week (just under 5.8% of £179.60).

This example assumes there is no annual increase in the State Pension. If there is an annual increase, the amount you could get could be larger.

Albermarle

This example assumes there is no annual increase in the State Pension. If there is an annual increase, the amount you could get could be larger.

With the current 'Triple Lock ' in place it will be significantly higher than inflation most years .