How long pension pot might last - sense check of calculations

getting_better_2

Thanks for the replies. Some really interesting info.

Overriding theme seems to be I'm oversimplifying and the variation in returns is too great to really plan for.

I like the idea of "3.5% drawdown wouldn't run out 95% of the time"... Given that it is uncertain, that's a nice way of thinking of it.

I guess the only way to eliminate the uncertainty is to go with an annuity however generally, these seem to have much lower returns, especially when factoring in inflation and the desire to leave something for spouse.

All in I guess it's a case of aiming to max contributions, aim for lifetime allowance if at all possible and hope for the best. Beyond that it's guesswork

AndrewB22

1% growth above inflation and 3.25% index-linked drawings does last, on average, 35 years, so your numbers don’t seem implausible. Over a 35 year period, that would be a worse investment return than any in history (assuming you invested in a medium risk portfolio including a majority of equities), so it would seem reasonably prudent. It’s lower than the medium assumptions proposed by the FCA, the regulator, based on comprehensive economic analysis. 

The FCA suggests 3% to 5% real growth (that is, above inflation). 

But as others have said in this thread, it’s more complicated than that.  If the market falls sharply the day after you take your pension, say by 50%, it could take most of the rest of your life for your funds to recover.  You might then worry and either feel poor or change your investment strategy in an unhelpful way. You don’t want to spend retirement worrying about money. 

JohnWinder pointed you at the Vanguard stuff on varying your drawdown, which reduces the likelihood of running out. Essentially these are strategies which reduce your income slightly if investment returns are bad.  Making dynamic adjustments to your drawdown strategy in response to events. Little reductions of say 1% in your drawdown if investment returns are poor have a big impact in how long your funds last. Strategies like that help because rather than the pensioner dramatically adjusting their income (and suffering an unnecessary dip in standard of living) they give confidence that small adjustments will probably be enough in the long term. 

My own modelling works through different scenarios, mostly downside scenarios, to see what impact they have. One is where the investment portfolio halves the day I retire. How long do my funds last?  What would I do?  Having a plan for that will mean that if it happened I wouldn’t panic. Err, panic as much. 

But as I say, your central assumptions are likely to be prudent. It’s what you do if those assumptions are badly wrong that needs thought. Very unlikely things happen all the time and it would be good to know what you’d do. 

I think your original question was more a maths check: had you done your sums right?  The simple answer to that is yes. But it’s not the right question. 

DT2001

Thrugelmir said:

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. 

Sorry but I do not understand what you mean The OP has a portfolio and is asking what are reasonable assumptions for a plan going forward. I know they do not control returns/inflation etc however we need to plan to cope with the unknown so what do you suggest?

cfw1994

DT2001 said:

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.

I feel this is key to it.  Those are things you can most definitely influence.
Do you have 2-4years ‘cash’ funds you can access to avoid drawing down if markets are not behaving kindly?
Many can start with more than 3.5% if they can reduce the draw dramatically when SP kicks in.

Inflation is a tricky one.  Could be 10% by the end of the year, but the question is more about your ‘personal’ inflation rate.  Somethings we cannot impact: council tax, energy prices.  Some we can: defer capital purchases, shop around for insurance, the holidays we chose to have, even the shops we visit for food & the food we buy…

Given how none of us have a crystal ball, plan as best you can & be flexible.  Good luck!

Albermarle

I like the idea of "3.5% drawdown wouldn't run out 95% of the time"... Given that it is uncertain, that's a nice way of thinking of it.

Although these types of figures are often quoted , you should be aware that 'Safe Withdrawal Rates' are the subject of some controversy , not least in many discussions on this forum . One minority view is that because they are based on history, and we can not predict the future will be the same , then there is no such thing as a SWR . Another view is that by varying withdrawal income in line with market movements , you can go to over 5% .

This might be useful ( similar in content to a link already posted )

Setting a strategy for retirement withdrawals | Vanguard

getting_better_2

Thanks. Interesting stuff.

The idea of potentially increasing/decreasing withdrawal rates according to market makes sense but it's led me to another thought... If you start out using drawdown, can you then purchase an annuity at a later date?

My thinking is that it's all well and good in the early days tracking growth, deciding how much to take etc but what about further down the line when there's an ever increasing chance of losing capacity (or losing marbles depending on levels of P.C.!)...there must be a point where just having a fixed income becomes the better choice?

Notepad_Phil

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 dare say that someone with 100% bonds might have thought they held a very low risk investment, but they may just be starting to think from recent bond performance that that's not necessarily always true, so what do you consider as a very low risk investment and will that enable you to take a drawdown of 3.5%?

I've been early retired for several years and have hopefully another two to three decades before I pop my clogs, so the equity component of my portfolio is currently not much different from the one I used to allow my early retirement.

Sea_Shell

AIUI, an annuity can be bought at any time, as long as you're eligible, with a pot of cash from anywhere, so pension/savings/house sale/inheritance etc.

You get quotes, you choose, you buy!!  


As for SWR, We're going for the "flexible spends" route and will tighten or loosen our belts as things unwind ... or is that unravel 😉

But using 3% as a "starter for 10" 😎

westv

Albermarle said:

I like the idea of "3.5% drawdown wouldn't run out 95% of the time"... Given that it is uncertain, that's a nice way of thinking of it.

Although these types of figures are often quoted , you should be aware that 'Safe Withdrawal Rates' are the subject of some controversy , not least in many discussions on this forum . One minority view is that because they are based on history, and we can not predict the future will be the same , then there is no such thing as a SWR . Another view is that by varying withdrawal income in line with market movements , you can go to over 5% .

This might be useful ( similar in content to a link already posted )

Setting a strategy for retirement withdrawals | Vanguard

I always think the "S" in "SWR" should really be "suggested" rather than "safe".

As regards using historic figures for the SWR, it just seems the people who say we can't use history as a guide for the future are the same people who say we shouldn't think that "this time it's different".
With the SWR something had to be used and, apart from sticking a finger in the air and guessing, you have to start with something.

barnstar2077

getting_better_2 said:

Thanks. Interesting stuff.

The idea of potentially increasing/decreasing withdrawal rates according to market makes sense but it's led me to another thought... If you start out using drawdown, can you then purchase an annuity at a later date?

My thinking is that it's all well and good in the early days tracking growth, deciding how much to take etc but what about further down the line when there's an ever increasing chance of losing capacity (or losing marbles depending on levels of P.C.!)...there must be a point where just having a fixed income becomes the better choice?

I am a long way off making the decision, but I am toying with the idea of deferring my state pension to offset any later loss of marbles (or just so I don't have to worry about the stock market.)