Have 10% inflation and falling markets affected your drawdown plan?

bostonerimus

Times are tough and look as if they will stay that way for at least a couple of years. If you are in drawdown inflation and the drop in the markets are two enormous challenges when you have to live off your investments. So have recent events affected you plan? Are you reducing spending, living more off cash reserves or just sticking to your plan because such hard times were baked into it?

Audaxer

I personally think that unless you have DB and/or State Pensions to cover a good part of your income, it is best to have a good cash buffer. Anyone that is fully invested and still comfortable taking a 4% or even 3.5% plus inflation 'safe withdrawal rate is very brave in my opinion.

I worked out some rough figures for someone planning for example a 4% "safe withdrawal rate" rising with inflation from a £100k pot at the start of this year. Let's say their pot has now fallen 15%, and also take account of inflation having risen 10%. If they stick to their drawdown plan of taking £4,000 plus inflation (£4,400) from their pot which has now fallen to £85k, that would mean their first withdrawal would actually amount to 5.18% of the reduced balance, leaving a pot of only £80.6k.

The original plan might still work in the long term, depending on sequence of returns, but I personally would feel safer with a cash buffer to draw from in loss years, especially early in retirement.

bostonerimus

Audaxer said:

I personally think that unless you have DB and/or State Pensions to cover a good part of your income, it is best to have a good cash buffer. Anyone that is fully invested and still comfortable taking a 4% or even 3.5% plus inflation 'safe withdrawal rate is very brave in my opinion.

I worked out some rough figures for someone planning for example a 4% "safe withdrawal rate" rising with inflation from a £100k pot at the start of this year. Let's say their pot has now fallen 15%, and also take account of inflation having risen 10%. If they stick to their drawdown plan of taking £4,000 plus inflation (£4,400) from their pot which has now fallen to £85k, that would mean their first withdrawal would actually amount to 5.18% of the reduced balance, leaving a pot of only £80.6k.

The original plan might still work in the long term, depending on sequence of returns, but I personally would feel safer with a cash buffer to draw from in loss years, especially early in retirement.

Exactly, we are in a scary practical laboratory and not "Monte Carlo". So are people using their cash, sticking to 4% plus inflation, trimming that or using Guyton Klinger to modulate their withdrawals? I have that DB pension you mention, and although the Cost of Living Adjustment in July was 5%, I feel lucky. I'm making up the difference between the 5% and current inflation by doing things like not using the tumble dryer and breaking out the clothes horses. I get a cheque each month so I don't have to think about my income much, but those on drawdown from DC pensions will have to be careful not to be swallowed by sequence of returns.

squirrelpie

We have a DB pension each plus our State Pensions, so what I draw from my SIPP is largely optional. And I happen to have a decent amount of cash, to the extent that they've been nagging me to invest it. So I'm not terribly worried by the present inflation, and happen to intend to take next year's withdrawals from an ISA instead. But yes, I'd certainly look at Guyton-Klinger or something similar rather than rely on a mindless 3.5% or something. The DB pensions haven't announced their increments yet, but I expect it to be 10.1%.

Sea_Shell

As you may know we are in that position, if we were to work on a Day 1 basis, ie our position now.    Although our withdrawal rate only needs to be 3%, of our reduced pot. (~£17,000)

We have one DC pension pot in drawdown at the moment, with others waiting in the wings, along with S&S ISAs as back up.

at least 9 years until DB or SP

We have a £50k cash buffer.

We have overspent our annualised 3% this month by about £1000, as we've had £4000 of work done on house stuff.

This month we did re-invest the DD back into an identical fund (timed for the same day), due to the falls, so it's as if we never touched it.   Will probably do the same again in November.

We haven't made any real lifestyle changes yet, but we could reduce our spending a bit, if push really came to shove.  

In a really tight spot, I think we could get our annual spend under £13k, even with inflation!

Linton

No changes, plan remains the same.  Income at the moment exceeds expenditure and we have 10 years + in cash and safish investments.  May rebalance towards more dividend/interest income at the next review at the end of the tax year.

pensionpawn

Audaxer said:

I personally think that unless you have DB and/or State Pensions to cover a good part of your income, it is best to have a good cash buffer. Anyone that is fully invested and still comfortable taking a 4% or even 3.5% plus inflation 'safe withdrawal rate is very brave in my opinion.

I worked out some rough figures for someone planning for example a 4% "safe withdrawal rate" rising with inflation from a £100k pot at the start of this year. Let's say their pot has now fallen 15%, and also take account of inflation having risen 10%. If they stick to their drawdown plan of taking £4,000 plus inflation (£4,400) from their pot which has now fallen to £85k, that would mean their first withdrawal would actually amount to 5.18% of the reduced balance, leaving a pot of only £80.6k.

The original plan might still work in the long term, depending on sequence of returns, but I personally would feel safer with a cash buffer to draw from in loss years, especially early in retirement.

With respect to inflation, I don't view it as an annual erosion of our cash holdings. £100k doesn't fall to £90k in 12 months, and although food and energy costs more they aren't our big ticket items. So we're just "Keep Calm and Carry On" mentality at the moment. My wife recently retired and she's accessing her DC pot maximising her tax allowance via UFPLS. What she doesn't need / spend will be returning to her SIPP (it will be less than £2880). We have a 40:60 split cash / funds. I have reduced my hours at work (so satisfying as the !!!!!! and pressure just falls away) and this has reduced my desperation (if that is the right word) to retire myself as I have much more spare time to enjoy and I can guarantee that my wife's SIPP trickle charges by £3600 each year, in addition to adding 12% to mine. I'm happy with that level as I'll only pay tax on the way out if I up the percentage. We have both qualified for full SPs. Since last year (new windows and doors) we have been focusing on essential capital projects before I decide to fully retire and I draw less than my wage. Future cost saving investments like a new boiler / Powerwall, and essentials like a new fence / shed / sofas. My aim has always been to minimise the mandatory outgoings in retirement which means a combined drawdown of just under £30k tax free pa should work for us.

bownyboy

We FIRE'd with big fanfare at the end of April this year and went off for two months travelling around Europe. Then we had a hot summer so lots of activities, socialising, trips, parties etc. It was great. 

Meanwhile the markets were tanking and we were spending our 1 year cash of expenses much quicker than planned (we were having fun!). 

So after 6 months I was offered a 4 month contract which I decided to take which will refill the cash balance to give us another year of living expenses. 

This means we won't need to touch the SIPPs / ISAs for another year. Hopefully by April 2024 things might be back on a more even keel, but who knows. 

Mothman

Will continue to drawdown from my pension each year to use my personal allowance, this immediately gets reinvested back into an ISA whilst markets are negative. My target income rate is 2.7%+RPI and my cash buffer should last me at least 4yrs unless inflation is rampant, after which time I will be a forced seller of assets even if markets haven't recovered.

Audaxer

pensionpawn said:

Audaxer said:

I personally think that unless you have DB and/or State Pensions to cover a good part of your income, it is best to have a good cash buffer. Anyone that is fully invested and still comfortable taking a 4% or even 3.5% plus inflation 'safe withdrawal rate is very brave in my opinion.

I worked out some rough figures for someone planning for example a 4% "safe withdrawal rate" rising with inflation from a £100k pot at the start of this year. Let's say their pot has now fallen 15%, and also take account of inflation having risen 10%. If they stick to their drawdown plan of taking £4,000 plus inflation (£4,400) from their pot which has now fallen to £85k, that would mean their first withdrawal would actually amount to 5.18% of the reduced balance, leaving a pot of only £80.6k.

The original plan might still work in the long term, depending on sequence of returns, but I personally would feel safer with a cash buffer to draw from in loss years, especially early in retirement.

With respect to inflation, I don't view it as an annual erosion of our cash holdings. £100k doesn't fall to £90k in 12 months

I agree. In the example above, I haven't eroded the pot value by inflation - I've just increased the initial income withdrawal by 10% to take account of inflation.

D924

Yearly living costs at a bare minimum for survival are now 20% of my capital instead of 7-8% so it's pretty much over for me unless the market rebounds hard within the next year.

And I'm also unemployable due to 2 years out of work thinking I had FIRE'd.