Pension Drawdown Calculators

Pat38493

How useful are the pension drawdown calculators on the various websites - for example there is one on which.co.uk (possibly you have to be a member to use it)?

Just for fun I plugged in the CETV value of my deferred DB pension.  

According to this calculator, if I selected the middle risk option, and the “middling” growth assumptions, I could pay myself the same pension that my pension provider is quoting me at 65, but I could retire at 55, and the money would last more than 50 years!

Even if I selected cautious investing and “pessimistic” growth, the money would last over 30 years at that drawdown rate.

However that said - the figures it presented over the 40 years available for “pension pot” looked a bit weird because in the first 20 years, the pension pot was growing faster than I was taking out, but then it suddenly starts shrinking even though the drawdown rate hasn’t changed - I guess this must be something to do with the assumptions it’s making but it seems strange.

Anyway - if these numbers are even anything close to realistic it actually could be a good thing to cash in DB pension.  However as I’ve read on many threads here, I wouldn’t be allowed to do that because…. Stuff.

Edit - I guess the evolution of the numbers is because I selected to increase the drawdown 2% per year for inflation and at a certain point after 18 years or so the drawdown exceeds the growth in the model behind these numbers.

dunstonh

How useful are the pension drawdown calculators on the various websites - for example there is one on which.co.uk (possibly you have to be a member to use it)?

I would estimate that some are completely and utterly pointless whilst others could be very good.

Even if I selected cautious investing and “pessimistic” growth, the money would last over 30 years at that drawdown rate.

What drawdown rate did you use?   Someone in their 50s is probably better to be using around 2% p.a.

However that said - the figures it presented over the 40 years available for “pension pot” looked a bit weird because in the first 20 years, the pension pot was growing faster than I was taking out, but then it suddenly starts shrinking even though the drawdown rate hasn’t changed - I guess this must be something to do with the assumptions it’s making but it seems strange.

Garbage in, garbage out.  If the assumptions are rubbish then the whole thing will be.

Usually, things like this have to do with poor inflation figures being input.

Edit - I guess the evolution of the numbers is because I selected to increase the drawdown 2% per year for inflation and at a certain point after 18 years or so the drawdown exceeds the growth in the model behind these numbers.

Only 2%?  Inflation is going to get close to 10% this year.

Pat38493

dunstonh said:

How useful are the pension drawdown calculators on the various websites - for example there is one on which.co.uk (possibly you have to be a member to use it)?

I would estimate that some are completely and utterly pointless whilst others could be very good.

Even if I selected cautious investing and “pessimistic” growth, the money would last over 30 years at that drawdown rate.

What drawdown rate did you use?   Someone in their 50s is probably better to be using around 2% p.a.

However that said - the figures it presented over the 40 years available for “pension pot” looked a bit weird because in the first 20 years, the pension pot was growing faster than I was taking out, but then it suddenly starts shrinking even though the drawdown rate hasn’t changed - I guess this must be something to do with the assumptions it’s making but it seems strange.

Garbage in, garbage out.  If the assumptions are rubbish then the whole thing will be.

Usually, things like this have to do with poor inflation figures being input.

Edit - I guess the evolution of the numbers is because I selected to increase the drawdown 2% per year for inflation and at a certain point after 18 years or so the drawdown exceeds the growth in the model behind these numbers.

Only 2%?  Inflation is going to get close to 10% this year.

I put in a pot of 750K and the drawdown was 31.5K so about 4.1%.  

If I put in a drawdown rate of 2% it says my money will never run out and actually I would be a millionaire even if I die at 110! (again only on the middle or higher investment risk and growth options).

It doesn't give a huge amount of detail about the model (for example you can select cautious, moderate, or adventurous, but it doesn't tell you what this actually means in detail).

It states
"That’s assuming that once you retire, your cash investment grows at an average of 0.50% a year, fixed interest at 4.75% a year and equities at 7.25% a year."

"Our projections are based on the following assumptions: returns are calculated on a monthly basis; asset allocation is re-balanced back to your desired proportions on an annual basis; income is subtracted monthly from the cash weighting in the portfolio; if there is insufficient cash, it is taken from the fixed interest and equity weightings in proportion with the asset allocation; returns are assumed to be net of fund ongoing charges; we have factored in an ongoing Sipp charge of 0.3%, deducted annually."

This is for the middle selected options moderate risk and "middling" assumptions.

.... along with all the usual disclaimers.

I take your point about inflation but I am not retiring this year and historically inflation average seems to have been about 2%, but probably you are right that this is an "optimistic" view.

All that said, Which is a pretty long standing reputable organisation who I think have been running a money magazine and service for many years, so I would hope that anything they put out is not total garbage - at least not based on history.  Of course if the future is massively different from the past no model will be correct.

NedS

Pat38493 said:

dunstonh said:

How useful are the pension drawdown calculators on the various websites - for example there is one on which.co.uk (possibly you have to be a member to use it)?

I would estimate that some are completely and utterly pointless whilst others could be very good.

Even if I selected cautious investing and “pessimistic” growth, the money would last over 30 years at that drawdown rate.

What drawdown rate did you use?   Someone in their 50s is probably better to be using around 2% p.a.

However that said - the figures it presented over the 40 years available for “pension pot” looked a bit weird because in the first 20 years, the pension pot was growing faster than I was taking out, but then it suddenly starts shrinking even though the drawdown rate hasn’t changed - I guess this must be something to do with the assumptions it’s making but it seems strange.

Garbage in, garbage out.  If the assumptions are rubbish then the whole thing will be.

Usually, things like this have to do with poor inflation figures being input.

Edit - I guess the evolution of the numbers is because I selected to increase the drawdown 2% per year for inflation and at a certain point after 18 years or so the drawdown exceeds the growth in the model behind these numbers.

Only 2%?  Inflation is going to get close to 10% this year.

I put in a pot of 750K and the drawdown was 31.5K so about 4.1%.  

If I put in a drawdown rate of 2% it says my money will never run out and actually I would be a millionaire even if I die at 110! (again only on the middle or higher investment risk and growth options).

It doesn't give a huge amount of detail about the model (for example you can select cautious, moderate, or adventurous, but it doesn't tell you what this actually means in detail).

It states
"That’s assuming that once you retire, your cash investment grows at an average of 0.50% a year, fixed interest at 4.75% a year and equities at 7.25% a year."

"Our projections are based on the following assumptions: returns are calculated on a monthly basis; asset allocation is re-balanced back to your desired proportions on an annual basis; income is subtracted monthly from the cash weighting in the portfolio; if there is insufficient cash, it is taken from the fixed interest and equity weightings in proportion with the asset allocation; returns are assumed to be net of fund ongoing charges; we have factored in an ongoing Sipp charge of 0.3%, deducted annually."

This is for the middle selected options moderate risk and "middling" assumptions.

.... along with all the usual disclaimers.

I take your point about inflation but I am not retiring this year and historically inflation average seems to have been about 2%, but probably you are right that this is an "optimistic" view.

All that said, Which is a pretty long standing reputable organisation who I think have been running a money magazine and service for many years, so I would hope that anything they put out is not total garbage - at least not based on history.  Of course if the future is massively different from the past no model will be correct.

I've highlighted some terms above.

Ultimately, you are giving up a guaranteed inflation-linked income for something based on assumptions, projections, models, calculations, reputations... you get the point?

That may seem like a good idea right now, where markets have pretty much only gone in one direction for the last 10 years, but how are those assumptions, projections, models and calculations looking if you were to transfer your DB pension and your pot halves in value (or more) in the next few years and we then experience a prolonged period of subdued growth with high inflation? I can assure you that Which will not be standing by their projections and underwriting your pension should it fall short of their projections.

Far better to keep your DB pension which combined with your state pension will hopefully give you a really secure income in retirement and then additionally invest into a DC/SIPP which you can draw down flexibly to cover more discretionary spending in retirement where you have the ability to reduce drawdown when things go pear-shaped without significantly impacting your basic standards of living.

Pat38493

NedS said:I've highhted some terms above.

Ultimately, you are giving up a guaranteed inflation-linked income for something based on assumptions, projections, models, calculations, reputations... you get the point?

That may seem like a good idea right now, where markets have pretty much only gone in one direction for the last 10 years, but how are those assumptions, projections, models and calculations looking if you were to transfer your DB pension and your pot halves in value (or more) in the next few years and we then experience a prolonged period of subdued growth with high inflation? I can assure you that Which will not be standing by their projections and underwriting your pension should it fall short of their projections.

Far better to keep your DB pension which combined with your state pension will hopefully give you a really secure income in retirement and then additionally invest into a DC/SIPP which you can draw down flexibly to cover more discretionary spending in retirement where you have the ability to reduce drawdown when things go pear-shaped without significantly impacting your basic standards of living.

Thanks - yes I understand and actually this is exactly what I am planning to do right now - I also have a DC pot and fully accrued state pension so I am well aware that what you advocate is the go to strategy that everyone "must" follow.  However sometimes I like to play devil's advocate to test my own position.

I would hope that the assumptions in that model are based on historical trends over a long period and not just wild guesses, but for sure you would have to validate that.

There are a few other points - DB pension is not fully protected - as pointed out above inflation could be 10% this year and the DB pension rises are usually capped at either 2.5% or 5% as I understand.  This is also an assumption in the sense that stock market returns could continue to exceed inflation and you could end up worse of in a DB scheme if there is a prolonged period of high inflation and stock markets still grow faster than inflation?

Also the drawdown rate is relevant in that if for example I have already included a significant discretionary  spend  in my drawdown rate, there could be plenty of scope to adjust drawdowns lower if things are not going according to expectations.

Here is another interesting one that claims to be based entirely on historical data of the last 122 years rather than forecasts.

https://www.2020financial.co.uk/pension-drawdown-calculator/

This attempts to model - with a certain pot, inflation proof drawdown rate, and time period, looking at data of the last 122 years, what are the chances that you will run out of money within that time period.

If I plug the same numbers in there, it claims
- 57% chance of running out of money in 50 years
- 46% chance of running out of money within 40 years
- 27% chance of running out of money in 30 years

However if I reduced my drawdown to the amount I think I could "manage" with rather than what I woudl ideally like - it then shows 0% chance of running out of money in 30 years and about 6% chance of running out in 50 years.

This is not based on forecast but based (at least according to the description) on what would have happened in any of the last 122 years if I had retired with that pot - so for example in 27% of the last 122 years, retiring at that point in time would have meant I ran out of money within 30 years.

This puts it into a better perspective, but even then, as I point out above I assume that if you were using a pot you would not just sit there and wait to run out of money - you would reduce your drawdown rate if market conditions were bad for a few years.

This model actually is predicated on the ideas that
- There is a huge element of blind luck in exactly when you retire - in some years you could end up a millionaire over your retirement, in other years you could run out of money before you die.
- At no point in the last 122 years would you have been able to tell in advance by the current economic statistics at that time, whether your retirement investment environment would be good or bad.

I can also see an argument that if you are looking over a 50 years retirement, 122 years is actually not a big sample but I don't know much about the data before year 1900.

Of course as I'm sure you will point out, if market conditions in the next 50 years are radically different to the prior 122 years then this model is worthless.

Thrugelmir

The 122 years of data is itself derived from a constructed academic database not an actively traded fund. It's a guide not a gospel as a consequence. 

Albermarle

This puts it into a better perspective, but even then, as I point out above I assume that if you were using a pot you would not just sit there and wait to run out of money - you would reduce your drawdown rate if market conditions were bad for a few years.
There is a huge element of blind luck in exactly when you retire - in some years you could end up a millionaire over your retirement, in other years you could run out of money before you die.

In reality , not many people would draw exactly the same % for 40 years . Many life/world changing events could happen in that time . Also as discussed many times on this forum , an ability to reduce/stop withdrawals during prolonged market downturns , especially if these downturns are near the start of the drawdown , can have a positive effect on the long term result.
So having a separate DB income and/or substantial cash savings and /or a willingness to adapt spending for a period can all help. 
Not sure if you have seen this drawdown calculator out of interest . No idea if it is any better or worse than others.
Vanguard - Retirement Nest Egg calculator

Pat38493

Albermarle said:

This puts it into a better perspective, but even then, as I point out above I assume that if you were using a pot you would not just sit there and wait to run out of money - you would reduce your drawdown rate if market conditions were bad for a few years.
There is a huge element of blind luck in exactly when you retire - in some years you could end up a millionaire over your retirement, in other years you could run out of money before you die.

In reality , not many people would draw exactly the same % for 40 years . Many life/world changing events could happen in that time . Also as discussed many times on this forum , an ability to reduce/stop withdrawals during prolonged market downturns , especially if these downturns are near the start of the drawdown , can have a positive effect on the long term result.
So having a separate DB income and/or substantial cash savings and /or a willingness to adapt spending for a period can all help. 
Not sure if you have seen this drawdown calculator out of interest . No idea if it is any better or worse than others.
Vanguard - Retirement Nest Egg calculator

Thanks yes these are good points.  The Vanguard one you link above seems to work very similar to the Which one I mentioned earlier - on the default investment settings, it predicted that the pot would not shrink at all during the first 20 years or so, and would still have plenty left after 50 years.  

In the end it depends as all things on your individual situation on whether you would you swap a guaranteed income of x, for a specific range of probabilities of being better or worse off within certain ranges.

In my case my wife has an fully accrued NHS 95 pension as well, and will actually be better off than me in retirement terms, so this could also play into the scenario in the end.

Of course I always keep in mind that these are based on all sorts of assumptions that might or might not be close to what really happens.

dunstonh

I put in a pot of 750K and the drawdown was 31.5K so about 4.1%.  

That is high for someone in their 50s and leaves no room for inflation increases.

If I put in a drawdown rate of 2% it says my money will never run out and actually I would be a millionaire even if I die at 110! (again only on the middle or higher investment risk and growth options).

This suggests the assumptions used in that modeller are not taking inflation into account or are using too high growth rates.

"That’s assuming that once you retire, your cash investment grows at an average of 0.50% a year, fixed interest at 4.75% a year and equities at 7.25% a year."

Returns do not work that way though.   The chart below shows 1st Jan 2000 to 31 Dec 2009 with 100% equities (so the 7.25% a year example) drawing that £31.5k (4.1%) on £750k




Your £750k would have fallen to £300k by Feb 2009 and your draw rate is no longer 4.1% but over 10%.   And that assumes a level withdrawal with no increases for inflation. There would be no chance for inflation increases with this example (if they had been included, the money would be close to running out within 15 years)

Just consider someone that has not invested before watching their money fall from £750k to £300k in the first decade.    Most people that haven't invested before would be panicking seeing it fall from £750k to £720k

If I put the same figures into a basic modeller, it doesn't show anything like that.  On another, that includes annual increases at inflation, it shows that running out of money is likely between years 14 and 36 only getting a consistently better than average return would stop the money from running out.   If you needed a 5% a year increase to cover inflation, this is what you are looking at:

Forget the palest blue as that is statistically rare.  it's the very best consistent and the very worse consistent.   The darkest blue is the statistically likely range and shows money running out around year 18.

Pat38493

dunstonh said:

I put in a pot of 750K and the drawdown was 31.5K so about 4.1%.  

That is high for someone in their 50s and leaves no room for inflation increases.

If I put in a drawdown rate of 2% it says my money will never run out and actually I would be a millionaire even if I die at 110! (again only on the middle or higher investment risk and growth options).

This suggests the assumptions used in that modeller are not taking inflation into account or are using too high growth rates.

"That’s assuming that once you retire, your cash investment grows at an average of 0.50% a year, fixed interest at 4.75% a year and equities at 7.25% a year."

Returns do not work that way though.   The chart below shows 1st Jan 2000 to 31 Dec 2009 with 100% equities (so the 7.25% a year example) drawing that £31.5k (4.1%) on £750k




Your £750k would have fallen to £300k by Feb 2009 and your draw rate is no longer 4.1% but over 10%.   And that assumes a level withdrawal with no increases for inflation. There would be no chance for inflation increases with this example (if they had been included, the money would be close to running out within 15 years)

Just consider someone that has not invested before watching their money fall from £750k to £300k in the first decade.    Most people that haven't invested before would be panicking seeing it fall from £750k to £720k

If I put the same figures into a basic modeller, it doesn't show anything like that.  On another, that includes annual increases at inflation, it shows that running out of money is likely between years 14 and 36 only getting a consistently better than average return would stop the money from running out.   If you needed a 5% a year increase to cover inflation, this is what you are looking at:

Forget the palest blue as that is statistically rare.  it's the very best consistent and the very worse consistent.   The darkest blue is the statistically likely range and shows money running out around year 18.

Sorry you've lost me a bit - is your graph above showing that the Which calculation is wrong, or are you saying that your graph is  based on real history from 2000 to 2009 and showing that if I had retired in 2000, this is not what would have happened?  I think it's the latter?  However the Which model doesn't claim that the fund is 100% in stocks and of course you have picked the period that shows a massive collapse in value early in the retirement.

I guess this is because as pointed out above, is there is a big collapse in value early in the retirement years it will never recover if you are continually taking amounts out.

The Which model allowed you to pick an inflation value rather then forecasting - I picked 2%.  Of course if I picked 5% it would look more like your second chart above.  However keeping in mind that I am not obliged to increase my drawdown by inflation every year - I could rather cut discretionary spending if needed.

Again I am not claiming this would be my good decision - just trying to understand all the angles on it.

Notepad_Phil

Pat38493 said:
All that said, Which is a pretty long standing reputable organisation who I think have been running a money magazine and service for many years, so I would hope that anything they put out is not total garbage - at least not based on history. 

You would hope so wouldn't you.

Unfortunately, they've still got the video up of retirees talking about managing their money in which the very first retiree says that drawing down 10% from his fund every year is a good figure to work on  !!! As no other percentage figure is then talked about or written about on the page then people could very easily go away with the thought that 10% is some safe guideline to aim for to get enough money through your retirement. https://www.which.co.uk/money/pensions-and-retirement/starting-to-plan-your-retirement/how-much-will-you-need-to-retire-atu0z9k0lw3p#headline_2 .

I emailed them last year about this (with no reply) and from what I can see, there's been next to no changes made to the page since.