How long pension pot might last - sense check of calculations

getting_better_2

Hi All,

Following some really helpful advice over the last couple of weeks, I've started pulling together a spreadsheet plan of how far my pension pot will take me...

Based on some fairly simple numbers of:

4% growth
3% inflation
3.5% drawdown

My calculations show pot running out after approx 33-34 years does that sound about right? ( current calc based on starting to draw at 58 so would be good until 91/92 which feels suitably ambitious)

Also does growth of 1% above inflation sound realistic, especially as by the time of drawing down I'll presumably have a very low risk investment

Thanks in advance for any thoughts

coyrls

Calculations assuming a constant growth rate and a constant rate of inflation are not useful for calculating a sustainable withdrawal rate.

getting_better_2

Oh, OK.

What is the best way to estimate a sustainable withdrawal rate?

I realise higher/lower growth/inflation at various points will obviously have an impact, I'm just hoping to work out a bit of a "if all else is equal..." approximation 

I've seen 3.5% quoted before, I've just never looked behind the headline figure to understand it a little better

QrizB

getting_better_2 said:

What is the best way to estimate a sustainable withdrawal rate?

With the (not-insignificant) proviso that it uses US data, not UK, you might like to give cFIREsim a spin.

It takes a little bit of working out (not the most intuitive of interfaces) but 20-30 minutes should let you gwet an idea og what works and what doesn't.

Albermarle

So called Safe Withdrawal Rates are based on historical data, and are not guaranteed for the future. However they can be used as a guideline.
They are based on the 3.5% ( or similar figure ) increasing with inflation and that there is only a 5% chance ( or thereabouts) of ever running out of money , The idea is that it takes account of good and bad times . There is a good chance you might even end up with more money that you started with, but the idea is to keep the withdrawal rate at a level that , historically at least , would mean the chances of you running out would be maybe as low as 5%.

especially as by the time of drawing down I'll presumably have a very low risk investment

The Safe Withdrawal Rates are usually based on a medium risk portfolio with 50 or 60% equity . A too 'low risk' portfolio would most likely run out quicker over a long period of time due to lack of growth.

SouthCoastBoy

I don't think they are bad assumptions, I would put inflation figures higher for the next 4 or 5 years but maybe that's me being negative, for example I have inflation around 12, 10, 8, 7 ,6 for next 5 years.

High inflation in retirement can be difficult. If you are in work there is a decent chance wages keep up, in retirement especially with a dc pension I think it is a different ball game

Thrugelmir

getting_better_2 said:

Also does growth of 1% above inflation sound realistic, especially as by the time of drawing down I'll presumably have a very low risk investment

I doubt you'll find many commentators forecasting a growth rate 1% above inflation at the current time. A low risk investment may do little else than match inflation with no real growth to speak of, i.e. capital preservation. 

JohnWinder

My sense of it is that you’ve undertaken a good exercise, but it has little use because the growth/inflation figures are likely to vary so much over the period, and although they will have an annual average such as you’ve chosen, the order in which those different growth and inflation results occur can have a massive impact, a la sequence of returns (risk).

If you wish to go with that approach, I think you have to tweak it such that you repeat it every year during drawdown with updated outcomes and new short term projections; thus you can monitor how well your spending can be maintained or how to adjust your spending for best outcome. How to do it is referred to as variable percentage withdrawal.

The other informative guide is to look at a chart of the enormous range of final portfolio values when you assume the type of variables you have used, which suggests that as a planning tool your spreadsheet isn’t much use. Help me see I’m mistaken.

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

https://engaging-data.com/visualizing-4-rule/

DT2001

Thrugelmir said:

getting_better_2 said:

Also does growth of 1% above inflation sound realistic, especially as by the time of drawing down I'll presumably have a very low risk investment

I doubt you'll find many commentators forecasting a growth rate 1% above inflation at the current time. A low risk investment may do little else than match inflation with no real growth to speak of, i.e. capital preservation. 

Over a 30 year period what would you suggest?

DT2001

getting_better_2 said:

Hi All,

Following some really helpful advice over the last couple of weeks, I've started pulling together a spreadsheet plan of how far my pension pot will take me...

Based on some fairly simple numbers of:

4% growth
3% inflation
3.5% drawdown

My calculations show pot running out after approx 33-34 years does that sound about right? ( current calc based on starting to draw at 58 so would be good until 91/92 which feels suitably ambitious)

Also does growth of 1% above inflation sound realistic, especially as by the time of drawing down I'll presumably have a very low risk investment

Thanks in advance for any thoughts

How flexible can you be with drawdown as you can deal better with poor early returns if you do not draw down a fixed % each year.
Is it your intention to reduce your drawdown at SPA? If so you can probably draw more early.

Thrugelmir

DT2001 said:

Thrugelmir said:

getting_better_2 said:

Also does growth of 1% above inflation sound realistic, especially as by the time of drawing down I'll presumably have a very low risk investment

I doubt you'll find many commentators forecasting a growth rate 1% above inflation at the current time. A low risk investment may do little else than match inflation with no real growth to speak of, i.e. capital preservation. 

Over a 30 year period what would you suggest?

Focus on the investments you hold. As this is something you have control over. Rather expend energy on something you don't.