Pension Drawdown Calculators

Albermarle

Pat38493 said:

Albermarle said:

Pat38493 said:

OldScientist said:

Pat38493 said:

BritishInvestor said:

Thrugelmir said:

OldScientist said:

Thrugelmir 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).

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. 

There are always uncertainties -

There are known challenges, the uncertainty lies in their resolution.  Historic datasets unfortunately don't guide you where it's best to invest for the future. Use of US centric websites is where many people trip up as well. 

"Use of US centric websites is where many people trip up as well. "

Yep, and even more so if it's a 100% equity dataset such as the S&P.

OK but just so I understand - how is this relevant because I assume that you can still choose to invest in funds that have a lot of US assets - not living in the US doesn't mean you can't take advantage of US returns?

Yes you can, but historically there are two differences:

1) US assets have their returns in dollars - over the last century or so, the gradual fall of the pound against the dollar has meant that pound returns of US assets are slightly higher (less than 10 basis points).

2) Much more importantly, UK inflation has averaged about 5% compared to about 3% for the US and means you don't quite get the inflation-adjusted withdrawal rates you'd hope. Taking the UK results as a lower bound and the US ones as an upper bound is likely to be sensible enough in interpreting historical results.

Hmm ok thanks.  Is anyone on this thread aware of any UK centric  calculators (or even software that you can buy) which allow you to program mixed scenarios of DB and DC benefits like cfire does?  I’m pretty sure there must be software that IFAs use for that but I’ve now idea how expensive it is to use.   That said, cfire seems to expose enough of its workings in csv files that you could reverse engineer a spreadsheet and then plug in higher inflation values on some of the years.

Also, if the US simulation in cfire is 100%, this effectively means the lower bound is ok?

I do not know if these would be any good for you .
Retirement Planning Spreadsheet for Couples (and Individuals) | whatapalaver
Plan for Retirement | Retirement Planner | Planning a Retirement | RetireEasy

Thanks I will take a look at those - retireeasy looks interesting but it's not immediately obvious from the "about" pages whether they use historical data modelling as part of the input into the assumed inflation and growth rates.

I have not looked into them in detail, as I am not a 'details/spreadsheet ' type person . I am more in the camp of this poster.

Pat, retire when you want. Do some simple maths, put away the crystall ball. Be prepared to reduce spending in a major downturn and if the worse happens get a part time job.

BritishInvestor

BritishInvestor said:

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. 

A few more references for those that are interested.


https://rationalreminder.ca/podcast/135

The impact of adding small cap to historical sustainability (Bengen interview)

"Yes. I threw in another asset class, excuse me, small cap stocks who has small cap stocks. I chose them as kind of a proxy for a lot of other asset classes. One, because I had a higher rate of return than large cap stocks by about 2%. So they're added in return, and they didn't have a perfect correlation with large cap stocks, so they added some diversification value. And that worked out pretty well. It raised, I think my early work indicator on 4.1, 4.2, and this brought up to almost 4.5. So it was a pretty substantial increase perspective withdrawal rates with that change."


The relationship between SWR, CAPE and inflation

So the quoting of a 4% rule or four and a half percent rule, I think on a necessarily focus people on a worst case scenario, I think they could be probably more optimistic unless we get into a situation where PEs go to 100, or inflation comes in a big way. That really concerns me, inflation more than anything else.



Bengen's article
https://www.fa-mag.com/news/choosing-the-highest--safe--withdrawal-rate-at-retirement-57731.html

Figure 10 is the interesting one, and goes back to my point yesterday

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

"Unfortunately, as Michael observed in his 2008 article, the “CAPE needle” has been jammed against the upper valuation stops for almost all of the last 25 years. As a result, almost the only choice for safe withdrawal rates has been the highest CAPE value in each table."


A Vanguard article on Sequence of Returns Risk

https://corporate.vanguard.com/content/dam/corp/research/pdf/Safeguarding-retirement-in-a-bear-market-US-ISGSRBM_062020_A4_Online.pdf

Figure 1 shows a 50/50 portfolio and how it was impacted in 1973. You can see how brutal that period was.


S&P drawdowns
https://awealthofcommonsense.com/2022/01/this-is-normal/

• The average drawdown over this 94 year period is -16.5%.
• In 59 out of those 94 years, losses were in excess of 10%.
• In 24 out of those 94 years, losses were in excess of 20%.
• In 10 out of those 94 years, losses were in excess of 30%.
• In 6 out of those 94 years, losses were in excess of 40%.

"Now here’s where things get interesting — we already know the stock market is up 3 out of every 4 years on average. So even with all of these downturns, most of the time the market finishes the year with a gain."

Pat38493

I had a look at the "Timeline" system and had a play around - looks like you can use it with a small number of "customers" for free but you have to pay a fortune (£100 per month) to use it as a professional.

Anyway it seems quite good and the default options use mainly UK  based in investments although you can program custom ones and I guess if you pay a lot of money you can automatically import all the information about current funds (at least that's my impression).

Anyway from messing around with it looks like it will do what I am needing - the only thing I couldn't find so far is any way to model a future expected tax free lump sum from a DB pension income - if you try to put it as a one off income, it assumes it is taxable.

It also doesn't have the ability to model scenarios like property, downsizing your house to free up capital and suchlike - at least not that I found so far. 

I took a different tack on this app and I model myself and my wife as a couple, and put all of our stuff in, with balanced portfolio and £62K net of joint annual income.  On what I've put in so far it says I could retire at 57 with 99% success, or 55 with 85% success - however I need to play about some more to make sure I have input everything properly.

By the way this was with selecting the default longevity options which required the income for 47 years from my 57 retirement, and with me taking my DB pension early on a reduced rate.  If I select to take the DB pension at NRA, which most people seem to assume is the best, I only get about 50% probability of success.