How Much to Accumulate for Retirement? (Excel analysis)

Secret2ndAccount

NoMore said:

I think you've scared the OP off! six pages in and he's never responded.

That's because his question was about spreadsheets, and nobody has attempted to answer it since page 1

michaels

Secret2ndAccount said:

NoMore said:

I think you've scared the OP off! six pages in and he's never responded.

That's because his question was about spreadsheets, and nobody has attempted to answer it since page 1

How Much to Accumulate for Retirement? (Excel analysis) - Page 4 — MoneySavingExpert Forum

Secret2ndAccount

I knew if I said that somebody would find the 1 post that did contain a spreadsheet. Thought it would come in handy - saves reading the other 6 pages.

OldScientist

jamesd said:

OldScientist said:

Further to my post above, if the withdrawal rule is omitted, so an inflation increase is always added (which G-K appear to advocate in their 2006 paper), then to avoid failures (i.e. where the money runs out), the initial withdrawal has to be dropped to 3.6% and the historical mean, max and min withdrawals turned out as follows (same portfolio as before)...

While the lowest withdrawal is still 1.5%, this now occurs during a lot fewer retirements. Not entirely unexpectedly, it appears that the trade off is between a higher initial spend but more likely to have to drop this significantly at a later date or a lower initial spend and less likely to have to drop the withdrawals.

I didn't notice such an implication in the 2006 paper. I'm also confident that Guyton disagrees with the idea of not skipping the inflation increases because he's said in interviews that small cuts are important and that's how the small cuts are made.

In an interview with Kitces, Guyton mentioned providing a sample withdrawal policy statement and he provided one that's an example of the type his firm uses today, with the withdrawal rule present. And of course the withdrawal rule featured in that discussion as necessary.

Don't skip the withdrawal rule. It's arguably the most important of them all and it makes a bigger difference than a large but temporary cut just when markets are down.

I think the confusion arises over the statement, "Accordingly, we will no longer apply the inflation rule when the capital preservation rule is also in force" (page 55 of the paper). Many thanks for the reference to the sample withdrawal policy statement - for me, that is probably the clearest statement of the order in which to do things (it is noteworthy that the order is to some extent reversed from Table 5 in the 2006 paper).

OldScientist

DT2001 said:

MK62 said:

....and for me, that kind of income variation is far too much - hence why I use my own "version" of variable withdrawal rather than G-K, or any of the other "oven-ready" methods. My take on this is a bit like yours, but my final conclusion is that 5.5% is just too high an initial withdrawal rate.......it might work out (and indeed has in the past), but the risk of failure, imho, is just too high, and, again imho, failure doesn't just mean exhausting the pot.....income reducing to little more than a quarter of the starting figure is a failure in my book......though I accept that this could be a viable method for anyone whose overall position can cope with that magnitude of income variation (mine can't).

I agree that none of us should, as you describe it, use an “oven-ready” method. I reckon, at worst, We’ll be reliant on our pot for 40% of our maximum number so can take a riskier option, if we want.

It is a balancing act and is affected by other options/circumstances and willingness/ability to be flexible e.g. can you downsize, move to a cheaper area, would you, would you take in a lodger or do Airbnb, do want to leave a legacy. Maybe most importantly when do you want to retire.

So getting back to the original question of how much to accumulate I’d suggest reading a few of the threads on this forum and you’ll find some that will resonate with you and then research further.
My mother lived quite happily on her SP plus £50k inheritance for 20 years and her care home fees are covered by selling her property. Our plans will cost more, we’ll retire before SPA and be able to help our children with finances. No easy answer.

Agree with all of this... I think the first question that has to be asked is "how much income do I think I need/want in retirement?" because without a reasonable answer to that question, everything else is fairly pointless.

OldScientist

MK62 said:

....and for me, that kind of income variation is far too much - hence why I use my own "version" of variable withdrawal rather than G-K, or any of the other "oven-ready" methods. My take on this is a bit like yours, but my final conclusion is that 5.5% is just too high an initial withdrawal rate.......it might work out (and indeed has in the past), but the risk of failure, imho, is just too high, and, again imho, failure doesn't just mean exhausting the pot.....income reducing to little more than a quarter of the starting figure is a failure in my book......though I accept that this could be a viable method for anyone whose overall position can cope with that magnitude of income variation (mine can't).

This is why an assessment of spending needs (ranging from essential to nice to have), then a consideration of non-portfolio sources of income (i.e. state pension, DB pensions, annuities) and then finally income from the portfolio.

We are currently in the very nice position that roughly 120% of our essential and desirable spending is covered by my DB pension - however, in the event of high inflation (the pension is only fully index-linked to 5%) or my death that may no longer be the case (assuming that either occur before we receive the state pension), although in the latter case, term life insurance will cover at least some of the gap in income for my OH. For us then, income from the portfolio can be very variable indeed since we are currently only using it for luxuries and legacy (and given our retirement has nicely coincided with COVID very little in the way of luxuries!).

Audaxer

OldScientist said:

MK62 said:

....and for me, that kind of income variation is far too much - hence why I use my own "version" of variable withdrawal rather than G-K, or any of the other "oven-ready" methods. My take on this is a bit like yours, but my final conclusion is that 5.5% is just too high an initial withdrawal rate.......it might work out (and indeed has in the past), but the risk of failure, imho, is just too high, and, again imho, failure doesn't just mean exhausting the pot.....income reducing to little more than a quarter of the starting figure is a failure in my book......though I accept that this could be a viable method for anyone whose overall position can cope with that magnitude of income variation (mine can't).

This is why an assessment of spending needs (ranging from essential to nice to have), then a consideration of non-portfolio sources of income (i.e. state pension, DB pensions, annuities) and then finally income from the portfolio.

We are currently in the very nice position that roughly 120% of our essential and desirable spending is covered by my DB pension - however, in the event of high inflation (the pension is only fully index-linked to 5%) or my death that may no longer be the case (assuming that either occur before we receive the state pension), although in the latter case, term life insurance will cover at least some of the gap in income for my OH. For us then, income from the portfolio can be very variable indeed since we are currently only using it for luxuries and legacy (and given our retirement has nicely coincided with COVID very little in the way of luxuries!).

I think the fact your DB pension is index-linked to 5% is pretty good and as it already more than covers you spending needs, I think you would be okay even with higher inflation. As you say, that is a very nice position to be in, where I would want to hold a healthy cash balance for the possible luxury spend, although I know some in that situation may take more risk with a higher equity percentage.

jamesd

OldScientist said:

I think the confusion arises over the statement, "Accordingly, we will no longer apply the inflation rule when the capital preservation rule is also in force" (page 55 of the paper). Many thanks for the reference to the sample withdrawal policy statement - for me, that is probably the clearest statement of the order in which to do things (it is noteworthy that the order is to some extent reversed from Table 5 in the 2006 paper).

The rest of that paragraph in the paper explains the reasoning, that it makes no difference to success rate but hurts income if both capital preservation rule (upper guardrail) and withdrawal rule (skip inflation if there's a negative return) are applied. But there's definitely plenty of scope to get things wrong even with a few fairly simple rules and calculations!

That interview with Kitces also clarifies how the 10% cut or increase is applied:

"And one other thing is it doesn't matter so much when inflation is really low, you know, like almost non-existent, but the reduction is 10% off of what the next year's withdrawal would have been had you gotten an increase for inflation. So it's a 10% real reduction rather than a 10% nominal reduction, which the real reduction is actually a smaller decrease in dollar terms."

So, work out what the new income would have been if the inflation increase had happened, then do the upper guardrail cut to that if needed, else consider whether the withdrawal rule means you don't get the inflation increase.