Pension Drawdown Calculators

OldScientist

Pat38493 said:

OldScientist said:

Pat38493 said:

dunstonh said:

whilst I picked way to optimistic, I wonder if you have picked the worst case year to measure it on.  Or maybe that other model is wrong, but that model claims to have incorporated the real historical inflation into all its calculations as well.

Below is a £750k with values adjusted for inflation and starting at age 55 with the maximum amount you could draw each year without the money running about before age 98 (it assumes £1 left in the post at age 98).  Green indicates the best period, red the worst.  The purple line shows your £31,500 draw



It indicates that only in 26% of time periods a £31,500 draw would have been sustainable without running out of money.  That is based on a 50/50 mixed asset portfolio. 
 So, apart from the post WWI boom the period of globalisation in recent times the rest of the periods failed or only just made it.  Globalisation is now in decline.   Commodities are heavily controlled by China and Russia.  So, does that bode well for pushing limits?

The same charting but assuming age 87 as the point of running out:
That is a 52% success rate.

Very interesting.  The other model I mentioned shows 44% compared to your model 26% based on the same numbers plugged in, and they don’t give enough information to analyse why your model is significantly different to theirs as the high level claims seems the same.

Actually - the other model claims to be looking at 121 years of data, but, it does not make sense to include data for times which goes outside the period you are requesting and would require forecasting - e.g. according to their description, if I am looking over 43 years, they should only be looking at retirement dates up to 1979.  Maybe this is automatically done behind the scenes but it doesn’t specifically say that.

The 2020finance site uses the Barclay's dataset of returns and inflation (there's some information towards the bottom) which is a well regarded dataset, although there are arguably better ones. The inflation values are quite optimistic compared to the ones held by the ONS (prior to 1949 there was no single official measure of inflation in the UK and there are at least 4 different attempts to estimate historical inflation).

I note 2020finance say that "in simulations that go beyond the present year, it will wrap back to 1928 and count up from there" which may explain why there are 122 simulations regardless of what duration you set.

Dunstonh - please satisfy my curiosity - what package are you using there (and are the years on the x-axis start years)?

Thanks I had not spotted the details at the bottom that you can open up.

Can you help me understand what it means by:
"The numbers this calculator outputs are not inflation adjusted, they are nominal values. The numbers don’t translate to actual purchasing power in the starting year of the simulation. However, this calculator does adjust the withdraw amount by the CPI each year of the simulation."

The "starting year of the simulation" means right now today or means 1928.

Also I now not clear why they claim it uses data across 120 years, but then in the details it implies that all simulations start in 1928.

I was also curious about the software that Dunstonh is using - it looks quite useful but it probably costs a fortune  

"The numbers this calculator outputs..." means that the values are the actual number of pounds at any given time but not adjusted for inflation (so they don't necessarily indicate the real value of the pot - e.g. for a retiree starting in 1992, a pension pot worth £100k would have been considered very large, whereas 30 years later, £100k is a nice sum, and above the average size, but not enormous). Most other calculators (e.g. cfiresim) work in real values since they then indicate whether purchasing power of the pot is maintained.

I'm not entirely sure whether they mean 1928 or not - the earliest data they have is 1900 (so the text may be correct, or may be a hangover from an earlier version).

OldScientist

Pat38493 said:

Albermarle said:

Some may "front load" their drawdowns at 4, 5 maybe even 6%: I feel it is important to have a plan how you will manage if (when!) you do need to pull up the drawbridge if (when!) markets fall on you.   

You will know there is a regular ( long and detailed ) poster on the forum ( although has been quiet for a few weeks now ) who says that by using Guyton-Klinger rules ( which basically seems to mean adjusting withdrawal rates regularly as markets rise and fall ) you can easily and safely take 5% pa increasing with inflation , and even a bit more .

However the poster above says 2% might even be a struggle in certain circumstances. Or Dunstons graphs saying 4% with no inflation could mean disaster .

As you say Nobody will know until we have the benefit of 20:20 hindsight, of course - the accurate calculator is only backward looking 

Thankyou to everyone who replied with their different perspectives - this is really helpful for me.

 I had a look at those rules and yes they look quite good.  However, the issue of whether it's a good idea to cash in my DB scheme is somewhat of a side issue if I look at the most obvious scenario.

According to my calculations, my current DB and state pension combined, would give me an pension of about 31K in today's terms, from age 67.  By an amazing coincidence, although this is a massive cut compared to what I earn now, it's almost exactly the amount to cover my current planned outgoings, assuming that we downsize the house and pay off the mortgage, (which we are planning to do anyway).   This includes "savings" for holidays and everything that I am spending now except costs that are directly related to holidays.  In fact it also includes quite a few discretionary items that in reality I probably wouldn't miss much.

So if I start from the assumption that this 31K will be sufficient, and taking into account that my wife has a gold plated NHS DB pension fully accrued on MHO status, the key question is - how early can I "risk" to retire.

I have 2 DC pots with a combined value today of £303K.  I am putting £1700 per month into one of them right now and intend to continue doing so until I retire (unless I think I will breach the LFA whereupon I will study the situation again, but there is 7% matching so for sure I would at least continue with that).

Therefore the key question is, with a 303K pot expected to grow to £348K by the time I am 55 (assuming 0 growth during next 2 years) could this be enough to already stop work at 55, or if not, when would it be safe to do so?

I would hope to have something like the £31K per year from 55 to 67, so I would have to withdraw roughly £31K in first 10 years then about 10K in the following 2 years if I cash in the DB scheme at 65.

All the above would have to be adjusted for inflation I guess - it's all in today's terms.

It would also be nice to have 100K or so on retirement to buy a new car and a few luxury things but it's not a must.

Further - I am open to the idea that during first 10 years, I might still do some consulting work or need to earn some money in some other way if I want to have a more expensive holiday or the economy looks bad or whatever - I am not necessarily planning to never work again. 

However to be honest, I've been working for the same company for 30 years and although I am financially secure and have a really good job, I don't really enjoy it anymore - I just need the money   .  Therefore the other way I look at it is that if I have that baseline comfort that I can cover my expenses by retirement funds, I can then take some risks to do what I want to do rather than staying in the same job because I am very well paid.

If you are happy to potentially completely spend down your DC pot in those 12 years, then plugging in £350k for pot size, 31k for annual withdrawal and using 60% stocks, 20% bonds, and 20% cash portfolio, the 2020finance calculator gives a historical failure rate of just over 20%. If you can chip the spending down to £26k then this halves the historical failure rate to 10% (I note that the failure rates don't change a lot with asset allocations between 40% an 80% stocks). Another alternative is to retire later, a 10 year spend (with £31k on a £350k pot) survived 90% of the time, 9 year spend 94% of the time, and 7 years nearly 100% of the time (of course, you would have longer to build up the pot, so if markets are kind might have more than £350k). Of course, this excludes any consideration of taxes or fees and the 2020finance calculator assumes solely UK stocks (a more diverse portfolio may have improved things).

In my view, spending budget really is the most important thing to tie down - it sounds like you've already had a hard look at your expenses and categorised them into must have and discretionary, but a second look (particularly any work related expenses) might not do any harm together with an assessment of likely income from consultancy (I'm no expert, but I suspect that it is better to establish consultancy immediately after retirement while people in your line of work still remember who you are, rather than later!).

Thrugelmir

OldScientist said:

Pat38493 said:

Albermarle said:

Some may "front load" their drawdowns at 4, 5 maybe even 6%: I feel it is important to have a plan how you will manage if (when!) you do need to pull up the drawbridge if (when!) markets fall on you.   

You will know there is a regular ( long and detailed ) poster on the forum ( although has been quiet for a few weeks now ) who says that by using Guyton-Klinger rules ( which basically seems to mean adjusting withdrawal rates regularly as markets rise and fall ) you can easily and safely take 5% pa increasing with inflation , and even a bit more .

However the poster above says 2% might even be a struggle in certain circumstances. Or Dunstons graphs saying 4% with no inflation could mean disaster .

As you say Nobody will know until we have the benefit of 20:20 hindsight, of course - the accurate calculator is only backward looking 

Thankyou to everyone who replied with their different perspectives - this is really helpful for me.

 I had a look at those rules and yes they look quite good.  However, the issue of whether it's a good idea to cash in my DB scheme is somewhat of a side issue if I look at the most obvious scenario.

According to my calculations, my current DB and state pension combined, would give me an pension of about 31K in today's terms, from age 67.  By an amazing coincidence, although this is a massive cut compared to what I earn now, it's almost exactly the amount to cover my current planned outgoings, assuming that we downsize the house and pay off the mortgage, (which we are planning to do anyway).   This includes "savings" for holidays and everything that I am spending now except costs that are directly related to holidays.  In fact it also includes quite a few discretionary items that in reality I probably wouldn't miss much.

So if I start from the assumption that this 31K will be sufficient, and taking into account that my wife has a gold plated NHS DB pension fully accrued on MHO status, the key question is - how early can I "risk" to retire.

I have 2 DC pots with a combined value today of £303K.  I am putting £1700 per month into one of them right now and intend to continue doing so until I retire (unless I think I will breach the LFA whereupon I will study the situation again, but there is 7% matching so for sure I would at least continue with that).

Therefore the key question is, with a 303K pot expected to grow to £348K by the time I am 55 (assuming 0 growth during next 2 years) could this be enough to already stop work at 55, or if not, when would it be safe to do so?

I would hope to have something like the £31K per year from 55 to 67, so I would have to withdraw roughly £31K in first 10 years then about 10K in the following 2 years if I cash in the DB scheme at 65.

All the above would have to be adjusted for inflation I guess - it's all in today's terms.

It would also be nice to have 100K or so on retirement to buy a new car and a few luxury things but it's not a must.

Further - I am open to the idea that during first 10 years, I might still do some consulting work or need to earn some money in some other way if I want to have a more expensive holiday or the economy looks bad or whatever - I am not necessarily planning to never work again. 

However to be honest, I've been working for the same company for 30 years and although I am financially secure and have a really good job, I don't really enjoy it anymore - I just need the money   .  Therefore the other way I look at it is that if I have that baseline comfort that I can cover my expenses by retirement funds, I can then take some risks to do what I want to do rather than staying in the same job because I am very well paid.

If you are happy to potentially completely spend down your DC pot in those 12 years, then plugging in £350k for pot size, 31k for annual withdrawal and using 60% stocks, 20% bonds, and 20% cash portfolio, the 2020finance calculator gives a historical failure rate of just over 20%. If you can chip the spending down to £26k then this halves the historical failure rate to 10% (I note that the failure rates don't change a lot with asset allocations between 40% an 80% stocks). Another alternative is to retire later, a 10 year spend (with £31k on a £350k pot) survived 90% of the time, 9 year spend 94% of the time, and 7 years nearly 100% of the time (of course, you would have longer to build up the pot, so if markets are kind might have more than £350k). Of course, this excludes any consideration of taxes or fees and the 2020finance calculator assumes solely UK stocks (a more diverse portfolio may have improved things).

Given the current uncertainties that exist. Better to spend time looking out of the window. Than getting too buried in historical probability for a short term forecast. The risks are weighted heavily to the downside. Events in Ukraine haven't changed the other major issues on the agenda. Just compounded the complexity in addressing them. 

Pat38493

OldScientist said:

Pat38493 said:

OldScientist said:

Pat38493 said:

dunstonh said:

whilst I picked way to optimistic, I wonder if you have picked the worst case year to measure it on.  Or maybe that other model is wrong, but that model claims to have incorporated the real historical inflation into all its calculations as well.

Below is a £750k with values adjusted for inflation and starting at age 55 with the maximum amount you could draw each year without the money running about before age 98 (it assumes £1 left in the post at age 98).  Green indicates the best period, red the worst.  The purple line shows your £31,500 draw



It indicates that only in 26% of time periods a £31,500 draw would have been sustainable without running out of money.  That is based on a 50/50 mixed asset portfolio. 
 So, apart from the post WWI boom the period of globalisation in recent times the rest of the periods failed or only just made it.  Globalisation is now in decline.   Commodities are heavily controlled by China and Russia.  So, does that bode well for pushing limits?

The same charting but assuming age 87 as the point of running out:
That is a 52% success rate.

Very interesting.  The other model I mentioned shows 44% compared to your model 26% based on the same numbers plugged in, and they don’t give enough information to analyse why your model is significantly different to theirs as the high level claims seems the same.

Actually - the other model claims to be looking at 121 years of data, but, it does not make sense to include data for times which goes outside the period you are requesting and would require forecasting - e.g. according to their description, if I am looking over 43 years, they should only be looking at retirement dates up to 1979.  Maybe this is automatically done behind the scenes but it doesn’t specifically say that.

The 2020finance site uses the Barclay's dataset of returns and inflation (there's some information towards the bottom) which is a well regarded dataset, although there are arguably better ones. The inflation values are quite optimistic compared to the ones held by the ONS (prior to 1949 there was no single official measure of inflation in the UK and there are at least 4 different attempts to estimate historical inflation).

I note 2020finance say that "in simulations that go beyond the present year, it will wrap back to 1928 and count up from there" which may explain why there are 122 simulations regardless of what duration you set.

Dunstonh - please satisfy my curiosity - what package are you using there (and are the years on the x-axis start years)?

Thanks I had not spotted the details at the bottom that you can open up.

Can you help me understand what it means by:
"The numbers this calculator outputs are not inflation adjusted, they are nominal values. The numbers don’t translate to actual purchasing power in the starting year of the simulation. However, this calculator does adjust the withdraw amount by the CPI each year of the simulation."

The "starting year of the simulation" means right now today or means 1928.

Also I now not clear why they claim it uses data across 120 years, but then in the details it implies that all simulations start in 1928.

I was also curious about the software that Dunstonh is using - it looks quite useful but it probably costs a fortune  

"The numbers this calculator outputs..." means that the values are the actual number of pounds at any given time but not adjusted for inflation (so they don't necessarily indicate the real value of the pot - e.g. for a retiree starting in 1992, a pension pot worth £100k would have been considered very large, whereas 30 years later, £100k is a nice sum, and above the average size, but not enormous). Most other calculators (e.g. cfiresim) work in real values since they then indicate whether purchasing power of the pot is maintained.

I'm not entirely sure whether they mean 1928 or not - the earliest data they have is 1900 (so the text may be correct, or may be a hangover from an earlier version).

Hi - I had a play around with this Cfiresim that you mentioned.

Question - in that Cfire, if I want to add adjustments for my DB pension and my state pension, starting at a future date 10 or 12 years later, should the numbers I put in there be the current state pension 9364 or whatever, or should it be what I think will be the state pension in 2036?  It's not clear whether the tool attempts to adjust the input value for inflation already to the time when the benefit will kick in.

Also - looking at the CSV file that you can export from that tool - it looks like if you program an income adjustment, the model adds those amounts back into the pot and assumes you will get the same return on them which is not quite correct?

cfw1994

BritishInvestor said:

cfw1994 said:

Calculators for the future are, let's be honest, pretty close to crystal ball gazing.   
If anyone thinks they can guarantee their funds according to any tool predicting the next 20-40 years, good luck 🤣

Of course, if you want to "guarantee" not running out of funds, you should probably pick 2% as a drawdown number.   Should beat any foreseeable issues in the future.  
I know one or two regulars here pontificate widely & deeply on many topics regarding drawdown methods, etc, with their words of advice, or dark & stormy warnings.....but then only drawdown that kind of number. 
It is always easy to play safe whilst mouthing dire warnings to everyone else 👀

However....
...as I was reminded once again this week, when I heard of a former fantastic colleague of mine passing away at a similar age to me (not forgetting Shane Warne today - RIP)..... the one certainty is that we will all ultimately pass on, and some will have had no retirement years at all 😳

If you manage to find a job you love so that it is really your life, then well done - crack on with it 👍😎

If not, then do some sums, prepare to be flexible, & live your best life! 
Some may "front load" their drawdowns at 4, 5 maybe even 6%: I feel it is important to have a plan how you will manage if (when!) you do need to pull up the drawbridge if (when!) markets fall on you.   
Check you have full State Pension, & factor that in.....should be a nice boost in your late 60s

I suspect many (like me) who have packed in the day job over the past couple of years will need to pay very close attention to their funds - it does feel like a textbook situation where the 'sequencing risk' needs accounting for.   Belts are being gently tightened here...but not yet at the point of charging friends to mow their lawns (or worse 🤣)

Nobody will know until we have the benefit of 20:20 hindsight, of course - the accurate calculator is only backward looking 🤷‍♂️

"Of course, if you want to "guarantee" not running out of funds, you should probably pick 2% as a drawdown number.   Should beat any foreseeable issues in the future.  "

Very much depends on personal setup.

1. Paying excessive fees
2. Having a portfolio that consists of shares with high valuations that could suffer if sustained inflation were to occur.

Can make a "guaranteed" 2% look questionable, especially if you are planning for decent longevity.

" it does feel like a textbook situation where the 'sequencing risk' needs accounting for."

For someone with a diversified portfolio (which, let's not forget, is still in positive territory over the last year),  it doesn't (yet)

Just to bring some reality into this theoretical discussion: you are suggesting that someone with £1million might struggle to make it last, when they only take £20k a year from it?
You must despair at people who take 3-5% pa!
Please show your workings 🤣

I suggest to people - do some sums, prepare to be flexible, check your State pension is "paid up" and in the mix......

You also don't think the events and impact to the markets of the past couple of years, when balanced with the uncertain medium term for investors, make this a classic possibility that SORR might be worth being aware of?
I guess we will have to agree to disagree then: but that is fine: nobody here has a real crystal ball 🤷‍♂️

As I said above: "Nobody will know until we have the benefit of 20:20 hindsight" 😉

Pat38493

OldScientist said:

Pat38493 said:

Albermarle said:

Some may "front load" their drawdowns at 4, 5 maybe even 6%: I feel it is important to have a plan how you will manage if (when!) you do need to pull up the drawbridge if (when!) markets fall on you.   

You will know there is a regular ( long and detailed ) poster on the forum ( although has been quiet for a few weeks now ) who says that by using Guyton-Klinger rules ( which basically seems to mean adjusting withdrawal rates regularly as markets rise and fall ) you can easily and safely take 5% pa increasing with inflation , and even a bit more .

However the poster above says 2% might even be a struggle in certain circumstances. Or Dunstons graphs saying 4% with no inflation could mean disaster .

As you say Nobody will know until we have the benefit of 20:20 hindsight, of course - the accurate calculator is only backward looking 

Thankyou to everyone who replied with their different perspectives - this is really helpful for me.

 I had a look at those rules and yes they look quite good.  However, the issue of whether it's a good idea to cash in my DB scheme is somewhat of a side issue if I look at the most obvious scenario.

According to my calculations, my current DB and state pension combined, would give me an pension of about 31K in today's terms, from age 67.  By an amazing coincidence, although this is a massive cut compared to what I earn now, it's almost exactly the amount to cover my current planned outgoings, assuming that we downsize the house and pay off the mortgage, (which we are planning to do anyway).   This includes "savings" for holidays and everything that I am spending now except costs that are directly related to holidays.  In fact it also includes quite a few discretionary items that in reality I probably wouldn't miss much.

So if I start from the assumption that this 31K will be sufficient, and taking into account that my wife has a gold plated NHS DB pension fully accrued on MHO status, the key question is - how early can I "risk" to retire.

I have 2 DC pots with a combined value today of £303K.  I am putting £1700 per month into one of them right now and intend to continue doing so until I retire (unless I think I will breach the LFA whereupon I will study the situation again, but there is 7% matching so for sure I would at least continue with that).

Therefore the key question is, with a 303K pot expected to grow to £348K by the time I am 55 (assuming 0 growth during next 2 years) could this be enough to already stop work at 55, or if not, when would it be safe to do so?

I would hope to have something like the £31K per year from 55 to 67, so I would have to withdraw roughly £31K in first 10 years then about 10K in the following 2 years if I cash in the DB scheme at 65.

All the above would have to be adjusted for inflation I guess - it's all in today's terms.

It would also be nice to have 100K or so on retirement to buy a new car and a few luxury things but it's not a must.

Further - I am open to the idea that during first 10 years, I might still do some consulting work or need to earn some money in some other way if I want to have a more expensive holiday or the economy looks bad or whatever - I am not necessarily planning to never work again. 

However to be honest, I've been working for the same company for 30 years and although I am financially secure and have a really good job, I don't really enjoy it anymore - I just need the money   .  Therefore the other way I look at it is that if I have that baseline comfort that I can cover my expenses by retirement funds, I can then take some risks to do what I want to do rather than staying in the same job because I am very well paid.

If you are happy to potentially completely spend down your DC pot in those 12 years, then plugging in £350k for pot size, 31k for annual withdrawal and using 60% stocks, 20% bonds, and 20% cash portfolio, the 2020finance calculator gives a historical failure rate of just over 20%. If you can chip the spending down to £26k then this halves the historical failure rate to 10% (I note that the failure rates don't change a lot with asset allocations between 40% an 80% stocks). Another alternative is to retire later, a 10 year spend (with £31k on a £350k pot) survived 90% of the time, 9 year spend 94% of the time, and 7 years nearly 100% of the time (of course, you would have longer to build up the pot, so if markets are kind might have more than £350k). Of course, this excludes any consideration of taxes or fees and the 2020finance calculator assumes solely UK stocks (a more diverse portfolio may have improved things).

In my view, spending budget really is the most important thing to tie down - it sounds like you've already had a hard look at your expenses and categorised them into must have and discretionary, but a second look (particularly any work related expenses) might not do any harm together with an assessment of likely income from consultancy (I'm no expert, but I suspect that it is better to establish consultancy immediately after retirement while people in your line of work still remember who you are, rather than later!).

Well I guess there is nothing which is zero risk - on the one hand, I could wait several more years till I'm 58 or 60.  On the other hand, a withdrawal rate of 24K gives 100% on those models.  

If the economy goes so badly that my withdrawal rate would have to go a lot below 24K, I suspect that retirement planning will be the least of the issues generally.

I could make an additional 7K a year just by driving a taxi or shelf stacking or whatever, so I would think that the risk of ending up living in a cardboard box is pretty low.

Pat38493

cfw1994 said:

BritishInvestor said:

cfw1994 said:

Calculators for the future are, let's be honest, pretty close to crystal ball gazing.   
If anyone thinks they can guarantee their funds according to any tool predicting the next 20-40 years, good luck 🤣

Of course, if you want to "guarantee" not running out of funds, you should probably pick 2% as a drawdown number.   Should beat any foreseeable issues in the future.  
I know one or two regulars here pontificate widely & deeply on many topics regarding drawdown methods, etc, with their words of advice, or dark & stormy warnings.....but then only drawdown that kind of number. 
It is always easy to play safe whilst mouthing dire warnings to everyone else 👀

However....
...as I was reminded once again this week, when I heard of a former fantastic colleague of mine passing away at a similar age to me (not forgetting Shane Warne today - RIP)..... the one certainty is that we will all ultimately pass on, and some will have had no retirement years at all 😳

If you manage to find a job you love so that it is really your life, then well done - crack on with it 👍😎

If not, then do some sums, prepare to be flexible, & live your best life! 
Some may "front load" their drawdowns at 4, 5 maybe even 6%: I feel it is important to have a plan how you will manage if (when!) you do need to pull up the drawbridge if (when!) markets fall on you.   
Check you have full State Pension, & factor that in.....should be a nice boost in your late 60s

I suspect many (like me) who have packed in the day job over the past couple of years will need to pay very close attention to their funds - it does feel like a textbook situation where the 'sequencing risk' needs accounting for.   Belts are being gently tightened here...but not yet at the point of charging friends to mow their lawns (or worse 🤣)

Nobody will know until we have the benefit of 20:20 hindsight, of course - the accurate calculator is only backward looking 🤷‍♂️

"Of course, if you want to "guarantee" not running out of funds, you should probably pick 2% as a drawdown number.   Should beat any foreseeable issues in the future.  "

Very much depends on personal setup.

1. Paying excessive fees
2. Having a portfolio that consists of shares with high valuations that could suffer if sustained inflation were to occur.

Can make a "guaranteed" 2% look questionable, especially if you are planning for decent longevity.

" it does feel like a textbook situation where the 'sequencing risk' needs accounting for."

For someone with a diversified portfolio (which, let's not forget, is still in positive territory over the last year),  it doesn't (yet)

Just to bring some reality into this theoretical discussion: you are suggesting that someone with £1million might struggle to make it last, when they only take £20k a year from it?
You must despair at people who take 3-5% pa!
Please show your workings 🤣

I suggest to people - do some sums, prepare to be flexible, check your State pension is "paid up" and in the mix......

You also don't think the events and impact to the markets of the past couple of years, when balanced with the uncertain medium term for investors, make this a classic possibility that SORR might be worth being aware of?
I guess we will have to agree to disagree then: but that is fine: nobody here has a real crystal ball 🤷‍♂️

As I said above: "Nobody will know until we have the benefit of 20:20 hindsight" 😉

I have read up about SORR and as I understand it's the risk that a number of very bad years when you are in the first years of retirement, combined with continuing to withdraw money during those years, can lead to a situation which cannot be recovered.

I guess this can be mitigated by having enough cash to stop withdrawals for a few years, or in my situation, potentially be changing strategy and taking the DB pension earlier with an ERF in order to minimise withdrawals from the DC pot.

The outlook seems to be on the negative side in many areas right now, but it's impossible to know when the "big correction" will come - I think that many including me expected the pandemic to cause a big downward adjustment that would take years to recover but this didn't seem to happen - in fact if anything the markets seemed to do better during covid, which still puzzles me to be honest.

Thrugelmir

Pat38493 said:

OldScientist said:

Pat38493 said:

Albermarle said:

Some may "front load" their drawdowns at 4, 5 maybe even 6%: I feel it is important to have a plan how you will manage if (when!) you do need to pull up the drawbridge if (when!) markets fall on you.   

You will know there is a regular ( long and detailed ) poster on the forum ( although has been quiet for a few weeks now ) who says that by using Guyton-Klinger rules ( which basically seems to mean adjusting withdrawal rates regularly as markets rise and fall ) you can easily and safely take 5% pa increasing with inflation , and even a bit more .

However the poster above says 2% might even be a struggle in certain circumstances. Or Dunstons graphs saying 4% with no inflation could mean disaster .

As you say Nobody will know until we have the benefit of 20:20 hindsight, of course - the accurate calculator is only backward looking 

Thankyou to everyone who replied with their different perspectives - this is really helpful for me.

 I had a look at those rules and yes they look quite good.  However, the issue of whether it's a good idea to cash in my DB scheme is somewhat of a side issue if I look at the most obvious scenario.

According to my calculations, my current DB and state pension combined, would give me an pension of about 31K in today's terms, from age 67.  By an amazing coincidence, although this is a massive cut compared to what I earn now, it's almost exactly the amount to cover my current planned outgoings, assuming that we downsize the house and pay off the mortgage, (which we are planning to do anyway).   This includes "savings" for holidays and everything that I am spending now except costs that are directly related to holidays.  In fact it also includes quite a few discretionary items that in reality I probably wouldn't miss much.

So if I start from the assumption that this 31K will be sufficient, and taking into account that my wife has a gold plated NHS DB pension fully accrued on MHO status, the key question is - how early can I "risk" to retire.

I have 2 DC pots with a combined value today of £303K.  I am putting £1700 per month into one of them right now and intend to continue doing so until I retire (unless I think I will breach the LFA whereupon I will study the situation again, but there is 7% matching so for sure I would at least continue with that).

Therefore the key question is, with a 303K pot expected to grow to £348K by the time I am 55 (assuming 0 growth during next 2 years) could this be enough to already stop work at 55, or if not, when would it be safe to do so?

I would hope to have something like the £31K per year from 55 to 67, so I would have to withdraw roughly £31K in first 10 years then about 10K in the following 2 years if I cash in the DB scheme at 65.

All the above would have to be adjusted for inflation I guess - it's all in today's terms.

It would also be nice to have 100K or so on retirement to buy a new car and a few luxury things but it's not a must.

Further - I am open to the idea that during first 10 years, I might still do some consulting work or need to earn some money in some other way if I want to have a more expensive holiday or the economy looks bad or whatever - I am not necessarily planning to never work again. 

However to be honest, I've been working for the same company for 30 years and although I am financially secure and have a really good job, I don't really enjoy it anymore - I just need the money   .  Therefore the other way I look at it is that if I have that baseline comfort that I can cover my expenses by retirement funds, I can then take some risks to do what I want to do rather than staying in the same job because I am very well paid.

If you are happy to potentially completely spend down your DC pot in those 12 years, then plugging in £350k for pot size, 31k for annual withdrawal and using 60% stocks, 20% bonds, and 20% cash portfolio, the 2020finance calculator gives a historical failure rate of just over 20%. If you can chip the spending down to £26k then this halves the historical failure rate to 10% (I note that the failure rates don't change a lot with asset allocations between 40% an 80% stocks). Another alternative is to retire later, a 10 year spend (with £31k on a £350k pot) survived 90% of the time, 9 year spend 94% of the time, and 7 years nearly 100% of the time (of course, you would have longer to build up the pot, so if markets are kind might have more than £350k). Of course, this excludes any consideration of taxes or fees and the 2020finance calculator assumes solely UK stocks (a more diverse portfolio may have improved things).

In my view, spending budget really is the most important thing to tie down - it sounds like you've already had a hard look at your expenses and categorised them into must have and discretionary, but a second look (particularly any work related expenses) might not do any harm together with an assessment of likely income from consultancy (I'm no expert, but I suspect that it is better to establish consultancy immediately after retirement while people in your line of work still remember who you are, rather than later!).

If the economy goes so badly that my withdrawal rate would have to go a lot below 24K, I suspect that retirement planning will be the least of the issues generally.

You are buying stakes in trading Companies not the economy per se. Buy in at a high price and short term returns maybe disappointing. 

Pat38493

Thrugelmir said:

Pat38493 said:

OldScientist said:

Pat38493 said:

Albermarle said:

Some may "front load" their drawdowns at 4, 5 maybe even 6%: I feel it is important to have a plan how you will manage if (when!) you do need to pull up the drawbridge if (when!) markets fall on you.   

You will know there is a regular ( long and detailed ) poster on the forum ( although has been quiet for a few weeks now ) who says that by using Guyton-Klinger rules ( which basically seems to mean adjusting withdrawal rates regularly as markets rise and fall ) you can easily and safely take 5% pa increasing with inflation , and even a bit more .

However the poster above says 2% might even be a struggle in certain circumstances. Or Dunstons graphs saying 4% with no inflation could mean disaster .

As you say Nobody will know until we have the benefit of 20:20 hindsight, of course - the accurate calculator is only backward looking 

Thankyou to everyone who replied with their different perspectives - this is really helpful for me.

 I had a look at those rules and yes they look quite good.  However, the issue of whether it's a good idea to cash in my DB scheme is somewhat of a side issue if I look at the most obvious scenario.

According to my calculations, my current DB and state pension combined, would give me an pension of about 31K in today's terms, from age 67.  By an amazing coincidence, although this is a massive cut compared to what I earn now, it's almost exactly the amount to cover my current planned outgoings, assuming that we downsize the house and pay off the mortgage, (which we are planning to do anyway).   This includes "savings" for holidays and everything that I am spending now except costs that are directly related to holidays.  In fact it also includes quite a few discretionary items that in reality I probably wouldn't miss much.

So if I start from the assumption that this 31K will be sufficient, and taking into account that my wife has a gold plated NHS DB pension fully accrued on MHO status, the key question is - how early can I "risk" to retire.

I have 2 DC pots with a combined value today of £303K.  I am putting £1700 per month into one of them right now and intend to continue doing so until I retire (unless I think I will breach the LFA whereupon I will study the situation again, but there is 7% matching so for sure I would at least continue with that).

Therefore the key question is, with a 303K pot expected to grow to £348K by the time I am 55 (assuming 0 growth during next 2 years) could this be enough to already stop work at 55, or if not, when would it be safe to do so?

I would hope to have something like the £31K per year from 55 to 67, so I would have to withdraw roughly £31K in first 10 years then about 10K in the following 2 years if I cash in the DB scheme at 65.

All the above would have to be adjusted for inflation I guess - it's all in today's terms.

It would also be nice to have 100K or so on retirement to buy a new car and a few luxury things but it's not a must.

Further - I am open to the idea that during first 10 years, I might still do some consulting work or need to earn some money in some other way if I want to have a more expensive holiday or the economy looks bad or whatever - I am not necessarily planning to never work again. 

However to be honest, I've been working for the same company for 30 years and although I am financially secure and have a really good job, I don't really enjoy it anymore - I just need the money   .  Therefore the other way I look at it is that if I have that baseline comfort that I can cover my expenses by retirement funds, I can then take some risks to do what I want to do rather than staying in the same job because I am very well paid.

If you are happy to potentially completely spend down your DC pot in those 12 years, then plugging in £350k for pot size, 31k for annual withdrawal and using 60% stocks, 20% bonds, and 20% cash portfolio, the 2020finance calculator gives a historical failure rate of just over 20%. If you can chip the spending down to £26k then this halves the historical failure rate to 10% (I note that the failure rates don't change a lot with asset allocations between 40% an 80% stocks). Another alternative is to retire later, a 10 year spend (with £31k on a £350k pot) survived 90% of the time, 9 year spend 94% of the time, and 7 years nearly 100% of the time (of course, you would have longer to build up the pot, so if markets are kind might have more than £350k). Of course, this excludes any consideration of taxes or fees and the 2020finance calculator assumes solely UK stocks (a more diverse portfolio may have improved things).

In my view, spending budget really is the most important thing to tie down - it sounds like you've already had a hard look at your expenses and categorised them into must have and discretionary, but a second look (particularly any work related expenses) might not do any harm together with an assessment of likely income from consultancy (I'm no expert, but I suspect that it is better to establish consultancy immediately after retirement while people in your line of work still remember who you are, rather than later!).

If the economy goes so badly that my withdrawal rate would have to go a lot below 24K, I suspect that retirement planning will be the least of the issues generally.

You are buying stakes in trading Companies not the economy per se. Buy in at a high price and short term returns maybe disappointing. 

Interestingly in that CFire model, in my scenario, I can remove all risk of running out of money by taking my DB pension earlier at a reduced rate - I guess this allows to avoid dipping in to the DC pot early even in historical points when there was a SORR problem this smoothes it out enough to avoid going bust.

Is this generally a good strategy if you think you are retiring at the top of the market - plan to cash in your DB scheme early and keep the capital withdrawals lower in early years?

BritishInvestor

cfw1994 said:

BritishInvestor said:

cfw1994 said:

Calculators for the future are, let's be honest, pretty close to crystal ball gazing.   
If anyone thinks they can guarantee their funds according to any tool predicting the next 20-40 years, good luck 🤣

Of course, if you want to "guarantee" not running out of funds, you should probably pick 2% as a drawdown number.   Should beat any foreseeable issues in the future.  
I know one or two regulars here pontificate widely & deeply on many topics regarding drawdown methods, etc, with their words of advice, or dark & stormy warnings.....but then only drawdown that kind of number. 
It is always easy to play safe whilst mouthing dire warnings to everyone else 👀

However....
...as I was reminded once again this week, when I heard of a former fantastic colleague of mine passing away at a similar age to me (not forgetting Shane Warne today - RIP)..... the one certainty is that we will all ultimately pass on, and some will have had no retirement years at all 😳

If you manage to find a job you love so that it is really your life, then well done - crack on with it 👍😎

If not, then do some sums, prepare to be flexible, & live your best life! 
Some may "front load" their drawdowns at 4, 5 maybe even 6%: I feel it is important to have a plan how you will manage if (when!) you do need to pull up the drawbridge if (when!) markets fall on you.   
Check you have full State Pension, & factor that in.....should be a nice boost in your late 60s

I suspect many (like me) who have packed in the day job over the past couple of years will need to pay very close attention to their funds - it does feel like a textbook situation where the 'sequencing risk' needs accounting for.   Belts are being gently tightened here...but not yet at the point of charging friends to mow their lawns (or worse 🤣)

Nobody will know until we have the benefit of 20:20 hindsight, of course - the accurate calculator is only backward looking 🤷‍♂️

"Of course, if you want to "guarantee" not running out of funds, you should probably pick 2% as a drawdown number.   Should beat any foreseeable issues in the future.  "

Very much depends on personal setup.

1. Paying excessive fees
2. Having a portfolio that consists of shares with high valuations that could suffer if sustained inflation were to occur.

Can make a "guaranteed" 2% look questionable, especially if you are planning for decent longevity.

" it does feel like a textbook situation where the 'sequencing risk' needs accounting for."

For someone with a diversified portfolio (which, let's not forget, is still in positive territory over the last year),  it doesn't (yet)

Just to bring some reality into this theoretical discussion: you are suggesting that someone with £1million might struggle to make it last, when they only take £20k a year from it?
You must despair at people who take 3-5% pa!
Please show your workings 🤣

I suggest to people - do some sums, prepare to be flexible, check your State pension is "paid up" and in the mix......

You also don't think the events and impact to the markets of the past couple of years, when balanced with the uncertain medium term for investors, make this a classic possibility that SORR might be worth being aware of?
I guess we will have to agree to disagree then: but that is fine: nobody here has a real crystal ball 🤷‍♂️

As I said above: "Nobody will know until we have the benefit of 20:20 hindsight" 😉

 "Please show your workings 🤣"

1. Paying excessive fees:

A couple aged 50 and 55 - 40 year retirement horizon. 50% equities (developed only)/50 global agg bonds portfolio, 2.5% fees.

£1m pot for simplicity

"In this case, the worst-case historical scenario has a single maximum sustainable spending level of £19,602 and a best-case has a level of £72,635 per year. We would be looking for a spending level that would be sustainable in most scenarios."


https://finalytiq.co.uk/withdrawal-rates-in-retirement-portfolios-is-the-4-rule-safe-for-uk-clients/

"Perhaps worryingly, Pfau’s research assumed fund charges and the adviser fee to be 0%. This is of course unrealistic, and if we were to deduct a conservative fee to account for the adviser fee, fund and platform charges, SWR for UK would be closer to 2% than 4%! (And around 3% for a 30% failure rate)."


2. Having a portfolio that consists of shares with high valuations that could suffer if sustained inflation were to occur.

30 year zero-fee, 100% DM portfolio, zero fees: 3.5% SWR.

Replace the 100% DM portfolio with 34% EM, 33% DM small, 33% DM value  4.6% SWR

Now this is an extreme example of a portfolio, and it's unlikely that someone would stick with the inevitable periods of underperformance that such a portfolio would suffer.

The complete opposite of this would be someone that invested in developed large-cap growth funds with high valuations (examples of which will no doubt have appeared in 2021 best buy lists). I've seen PEs of over 50! What would you expect to happen if we get big inflation and PE compression? Have a look at multiples in the 70s of the S&P - single digits.

https://www.multpl.com/s-p-500-pe-ratio/table/by-year

"You must despair at people who take 3-5% pa!"

It's unlikely that people on here would find themselves in either of the above positions I would expect.

"You also don't think the events and impact to the markets of the past couple of years,"

A balanced portfolio has risen over the last few years, and inflation has been, on average, benign.

"when balanced with the uncertain medium term for investors"

When is there ever not uncertainty?

"make this a classic possibility that SORR might be worth being aware of?"

A robust retirement plan would cater for this eventuality, but realistically, things have to be pretty bad to start making major adjustments, and given where we are at the moment, that's a long way from happening.


"Nobody will know until we have the benefit of 20:20 hindsight"

Not sure what the relevance is of hindsight - a lot of the above is related to historical data - how you choose to act on it might make a big difference to your chances of success.