How Much to Accumulate for Retirement? (Excel analysis)

BritishInvestor

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Yes, incorrect. SWR allows the pot to be drawn down if required (unless you have explicitly specified a legacy amount in your modelling). 

OldScientist

BritishInvestor said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Yes, incorrect. SWR allows the pot to be drawn down if required (unless you have explicitly specified a legacy amount in your modelling). 

While the UK SWR for a 30 year retirement period is around 3.0-3.5% depending on asset allocation (e.g. see paper by Estrada at https://blog.iese.edu/jestrada/files/2018/03/MaxWR.pdf), historically the final pot ranged from 0 to more than 6 times the original (in real-terms) again dependent on asset allocation. Historically, in order to leave a minimum of about half the original pot (in real terms), the withdrawal would have had to have been  1.7-2.2% although the largest pot would then have been about 10 times the initial value. The latter values are my own calculations using UK returns and inflation from https://www.macrohistory.net - this dataset gives slightly more pessimist outcomes than that mostly used in the literature, see https://www.london.edu/-/media/files/faculty and research/subject areas/global investments yearbook.pdf, but $6k per year is a bit much for my retirement budget!

BritishInvestor

OldScientist said:

BritishInvestor said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Yes, incorrect. SWR allows the pot to be drawn down if required (unless you have explicitly specified a legacy amount in your modelling). 

While the UK SWR for a 30 year retirement period is around 3.0-3.5% depending on asset allocation (e.g. see paper by Estrada at https://blog.iese.edu/jestrada/files/2018/03/MaxWR.pdf), historically the final pot ranged from 0 to more than 6 times the original (in real-terms) again dependent on asset allocation. Historically, in order to leave a minimum of about half the original pot (in real terms), the withdrawal would have had to have been  1.7-2.2% although the largest pot would then have been about 10 times the initial value. The latter values are my own calculations using UK returns and inflation from https://www.macrohistory.net - this dataset gives slightly more pessimist outcomes than that mostly used in the literature, see https://www.london.edu/-/media/files/faculty and research/subject areas/global investments yearbook.pdf, but $6k per year is a bit much for my retirement budget!

"historically the final pot ranged from 0 to more than 6 times the original (in real-terms) again dependent on asset allocation"

That's the key takeaway - the vast range of historical (and therefore future?) outcomes. We just don't know whether we are going to be the lucky 6x starting pot, or running out way before we wanted to.






"but $6k per year is a bit much for my retirement budget!"

I wonder if there's enough of a market for DIY investors to pay for a tool that contained this data....

Audaxer

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

Robert_McGeddon

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

Yes to SoR being important.

Additionally, the ability to "rein in" outgoings during years of poor investment returns is also important.  Several of the SWR methodologies suggest changes if returns are other than expected.  SWR is a guide, not a mandate - in a 30 year retirement flexing income (up as well as down) should be expected.

Audaxer

Robert_McGeddon said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

Yes to SoR being important.

Additionally, the ability to "rein in" outgoings during years of poor investment returns is also important.  Several of the SWR methodologies suggest changes if returns are other than expected.  SWR is a guide, not a mandate - in a 30 year retirement flexing income (up as well as down) should be expected.

I agree, but if you keep a good cash buffer you may not have to reduce income in loss years. 

BritishInvestor

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

I'm not sure the cash buffer is going to be a massive help (certainly not if you take it from the equity allocation).

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

Audaxer

BritishInvestor said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

I'm not sure the cash buffer is going to be a massive help (certainly not if you take it from the equity allocation).

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

If for example I needed £4,000 a year income from a pot of £120,000, I would prefer to have £100,000 invested and take a 4% withdrawal rate with a cash buffer of £20,000. With the whole £120,000 invested, the £4,000 income would mean a withdrawal rate of 3.33%. Some may prefer that option, but the buffer option would feel safer to me. 

pensionpawn

I've just, at a high level, had a similar discussion with a colleague at work. The first time someone has actually asked for tips on retirement as essentially he wants out asap! As others have mentioned, first calculate how much you need in retirement (to cover mandatory expenditure) and then modify that to a realistic "how much do I want" in retirement, to cover treats (eating out, holidays, Sky World etc...) You also need to factor in how much state pension (full hopefully) you will have access to and when that will kick in. A vitally important part of pension planning is, if applicable, to approach it as a couple. That way there are two personal allowances to consider giving you a tax free income of £25k1 pa after taking your 25% tax free lump sum (TFLS) or £33k5 tax free pa via the UFPLS (uncrystallised funds pension lump sum) method of withdrawal. My target has always been to aim for both myself and my wife to each be able to safely draw down, as a minimum, our personal tax allowances until around 85. If your incomes are considerably different, or there may be considerable gaps due to say maternity leave, it may be worth  favouring boosting the smaller pot in order to achieve that goal. However pension planning is unique to everyone and it may be  more advantageous to continue to build the larger pot because the employers contributions are higher, minimising higher rate PAYE, and in some cases employers contribute some of their own NI savings due to salary sacrifice. Another golden rule, if personal circumstances permit, is to contribute from your salary at least the minimum to trigger the maximum employer contribution. Finally a word on the safe withdrawal rate (SWR). Some people want to preserve their pension pot and some, including myself, will run it down over the course of their retirement. Of course we don't know when our last day will be so we're all rolling the dice on this one. I want the option to retire asap, which for most (until 2028) is 55, as for me, with three grown up children, two of whom now own their own houses and the youngest has just 18 months left at university, time together with them and my wife is more important than continuing to work to boost our pension pots even higher. For those on average incomes with medium size families with years out due to maternity or unemployment, you will have to work longer to achieve the similar size pension pots as those with higher incomes, less (no) children and unbroken income (contributions). For me and my wife, our bodies started to creak from turning 50 and this has not improved by our mid 50's. As we go through our 60's & 70's (hopefully) I don't see us becoming more athletic / healthier unless we retire early from our jobs and spend more time making the adjustments to our lifestyles that we want to do, though don't currently have the time and energy to do so. That is also the time when our retirement income will be most useful as from personal family experience as you get older, you're less active and spend less (with the possible exception of on health care). So personally I don't want to work longer for a huge pension pot that I'm unlikely to need. Our legacy to our children will be our reasonably large house and any unspent pension income. Our house also doubles up as a last resort wealth asset for us. A very fiscally astute good friend of mine just recently confided that he has built up such a large pension pot, by his mid 50's that he's now staring at the possibility of LTA tax issues. I don't believe, giving his spending profile during his accumulation years, he will have any chance of spending even half of what he has. I don't have any need, or desire, to be the richest person in the graveyard! Each to our own though...

Linton

BritishInvestor said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

I'm not sure the cash buffer is going to be a massive help (certainly not if you take it from the equity allocation).

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

 - None of the strategies tested matched what it is proposed here that one does with a buffer. ie use it for covering crashes
 - The strategies were mostly tested when bond returns were of some significance - one of the major reasons for choosing a cash buffer is that safe bonds now seem to be sub-optimal.  If bond were returning say 5% the need for cash would be significantly reduced.
 - In retirement I would think most people are prepared to sacrifice returns if necessary to reduce risk

If having a large cash buffer enables you to sail through a crash worry-free when you would otherwise lie awake at night then a cash buffer is a massive help.