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How long pension pot might last - sense check of calculations

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  • Thrugelmir
    Thrugelmir Posts: 89,546 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Photogenic
    DT2001 said:
    DT2001 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?
    Use your own time productively. Portfolio's can contain any permutation of investments. 
  • MacMickster
    MacMickster Posts: 3,646 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    Personally, I would always begin by working out your number (or rather numbers).  How much do you need, after tax, to live the lifestyle that you want and, should the worst come to the worst, how much do you need for a basic standard of living.

    If you are considering retiring at 58 then the state pension will contribute towards that number after 9 or 10 years so a straight percentage of your pot being drawn down annually is a pointless calculation. Everyone has their own ideas on managing their pot, but personally I would effectively treat it as 2 pots - one for the period to state pension age and another thereafter.

    If you believe in safe withdrawal rates then you can apply that to your second pot when your state pension kicks in, but if you don't need the full 3.5% or 4% to meet yor number then don't draw it all.  Your pre state pension pot is likely to be in much lower risk investments (or even a fixed term annuity) as it is needed over a much shorter period of time.

    "When the people fear the government there is tyranny, when the government fears the people there is liberty." - Thomas Jefferson
  • Albermarle
    Albermarle Posts: 27,795 Forumite
    10,000 Posts Seventh Anniversary Name Dropper
    If you start out using drawdown, can you then purchase an annuity at a later date?

    As already said, yes you can . Also be aware that annuity rates also fluctuate with market/economic conditions . Recently they have been at a very low level, but have increased significantly this year already ( it is mainly related to the outlook for rising interest rates).

    Also obviously the rates get better as you get older . Rates also improve if you have a level annuity( no inflation increases) and no spouse payments on your death . The main drawback is that there is nothing left to leave to heirs , whereas with drawdown you would hope there would be .

    You can a have a drawdown pot and an annuity at the same time.

  • NedS
    NedS Posts: 4,496 Forumite
    Fifth Anniversary 1,000 Posts Photogenic Name Dropper
    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

    Seems sensible to me.
    WRT to SWR, I guess one way of looking at it is that the cost of purchasing that last 5% of certainty is increasingly expensive. Simplistic SWR studies are often based on fixed assumptions (drawing a SWR rate that rises with inflation), something in reality I guess most people will not blindly follow (if your pot is plummeting and at high risk of running out, would you continue to blindly drawdown your 'SWR' or reduce your spending?). More complex models allow for flexibility in the withdraw rate to accommodate market moves, so if you have some flexibility to tighten your belt or increase your income from a part time job during times of market stress, then you can likely increase that 'safe 95% of the time' to something approaching 100% (depending upon your degree of flexibility).

  • Personally, I would always begin by working out your number (or rather numbers).  How much do you need, after tax, to live the lifestyle that you want and, should the worst come to the worst, how much do you need for a basic standard of living.

    If you are considering retiring at 58 then the state pension will contribute towards that number after 9 or 10 years so a straight percentage of your pot being drawn down annually is a pointless calculation. Everyone has their own ideas on managing their pot, but personally I would effectively treat it as 2 pots - one for the period to state pension age and another thereafter.

    If you believe in safe withdrawal rates then you can apply that to your second pot when your state pension kicks in, but if you don't need the full 3.5% or 4% to meet yor number then don't draw it all.  Your pre state pension pot is likely to be in much lower risk investments (or even a fixed term annuity) as it is needed over a much shorter period of time.

    I probably leapt in with my question rather than explaining my method but this isn't far from what I've done 

    Basic plan is to be spending (or have a budget to spend) slightly more than I currently am from 58-68 then once SP kicks in that will reduce what I need to fund myself by £9k and I'm assuming my spending also drops by £10k at that point to

    All very much ifs and buts however I guess I have my number in terms of spending, my reasoning for asking about withdrawal rates was to work back from there to see what size pot would need to be in order to fund retirement given x.x% drawdown

    I do feel much better educated (thank you everyone) however ultimately it seems hitting lifetime allowance of £1m (and a bit) is target number 1... At 3.5% that's likely to fund the 68+ bit but not enough for 58-68... I feel I ought to focus more on getting to £1m and worry how to draw it at that point
  • Albermarle
    Albermarle Posts: 27,795 Forumite
    10,000 Posts Seventh Anniversary Name Dropper
    Personally, I would always begin by working out your number (or rather numbers).  How much do you need, after tax, to live the lifestyle that you want and, should the worst come to the worst, how much do you need for a basic standard of living.

    If you are considering retiring at 58 then the state pension will contribute towards that number after 9 or 10 years so a straight percentage of your pot being drawn down annually is a pointless calculation. Everyone has their own ideas on managing their pot, but personally I would effectively treat it as 2 pots - one for the period to state pension age and another thereafter.

    If you believe in safe withdrawal rates then you can apply that to your second pot when your state pension kicks in, but if you don't need the full 3.5% or 4% to meet yor number then don't draw it all.  Your pre state pension pot is likely to be in much lower risk investments (or even a fixed term annuity) as it is needed over a much shorter period of time.

    I probably leapt in with my question rather than explaining my method but this isn't far from what I've done 

    Basic plan is to be spending (or have a budget to spend) slightly more than I currently am from 58-68 then once SP kicks in that will reduce what I need to fund myself by £9k and I'm assuming my spending also drops by £10k at that point to

    All very much ifs and buts however I guess I have my number in terms of spending, my reasoning for asking about withdrawal rates was to work back from there to see what size pot would need to be in order to fund retirement given x.x% drawdown

    I do feel much better educated (thank you everyone) however ultimately it seems hitting lifetime allowance of £1m (and a bit) is target number 1... At 3.5% that's likely to fund the 68+ bit but not enough for 58-68... I feel I ought to focus more on getting to £1m and worry how to draw it at that point
    Having some funds outside the pension also helps . It is usually recommended ( if possible )to be holding something like 3 years expenditure in cash or near cash. This means that when your pension funds have a big drop you can stop/reduce taking income from the pension and avoid selling investments when they are at a reduced level. This is even more important in the early months/years of taking the pension due to 'Sequence of Returns Risk' What Is Sequence Of Returns Risk? – Forbes Advisor
    As with all these situations, nothing is guaranteed . For example the market slump could be a long one and your cash could run out . 
  • Sea_Shell
    Sea_Shell Posts: 10,016 Forumite
    Tenth Anniversary 1,000 Posts Photogenic Name Dropper
    It's then a judgement call as to whether any particular months "drop" warrants a cash spend instead (and pause or reinvest the DD).

    This month, next, or the one after that!!!

    Also do you by month, quarter, or year?


    It's a minefield....I'm just trying not to get a leg blown off! 😉
    How's it going, AKA, Nutwatch? - 12 month spends to date = 2.60% of current retirement "pot" (as at end May 2025)
  • pensionpawn
    pensionpawn Posts: 1,016 Forumite
    Seventh Anniversary 500 Posts Name Dropper
    cfw1994 said:
    DT2001 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!
    These are important issues that I'm trying to get across to a friend. Inflation is a general measurement and we all have personal spending / outgoings profiles. Some are more exposed to general inflation than others. Also, having a cash buffer of a few years in your SIPP helps mitigate against a stagnant market. Finally, as mentioned above, full SPs allows the proportion of draw down from your fund holdings to drop considerably. We're both aiming to draw down our personal allowances as a minimum. If we're still doing this at SPA we'll reduce the impact on our SIPP by almost 77%!
  • pensionpawn
    pensionpawn Posts: 1,016 Forumite
    Seventh Anniversary 500 Posts Name Dropper
    Sea_Shell said:
    It's then a judgement call as to whether any particular months "drop" warrants a cash spend instead (and pause or reinvest the DD).

    This month, next, or the one after that!!!

    Also do you by month, quarter, or year?


    It's a minefield....I'm just trying not to get a leg blown off! 😉
    ...and of course if you're paying £2880 (£3600) gross into your SIPP each year until 75 that can top up your 'cash buffer' for future needs. Unless inflation hits 20% (then we have much bigger problems!) it's a good method of saving excess 'income'.
  • cfw1994
    cfw1994 Posts: 2,126 Forumite
    Part of the Furniture 1,000 Posts Hung up my suit! Name Dropper
    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?
    Absolutely yes, & likely part of what we may do.

    To my currently fairly lucid mind, it makes a lot of sense to consider that when you approach 70-75: annuity rates will naturally be more attractive as you are closer to shuffling off your mortal coil….you might also be less inclined (or capable) to want to manage finances so much at that stage 🤷‍♂️

    There may be some desire to have some left in a DC pot for inheritance purposes, but having an annuity  (perhaps dovetailed with SP) to ensure all regular outgoings are paid for could make good sense at that stage of the game.
    Plan for tomorrow, enjoy today!
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