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

OldScientist

MK62 said:

OldScientist said:

 Since all of our expenditure (essential and everyday discretionary) is currently covered by a (partly inflation capped) DB pension, then this variability doesn't matter too much to us at the moment.

In that case, pretty much any "reasonable" drawdown plan will work for you, since the consequences of plan failure are nothing like as severe as they'd be for someone totally reliant on investments, such as DC pensions etc, and hence you could probably accept more plan risk.

I suppose we'll nearly all have at least some level of "DB" type pension in the end, in the form of the state pension - but for many that won't even cover essential spending, let alone everyday discretionary.

Agreed - our current plan works because our expenditure is not too far from Seashell's, but supported in a very different way. The 'interesting' part of our plan is what happens if I die before my OH receives the state pension since the DB pension then halves. Currently, the shortfall is covered by two term life insurance policies (one level and one reducing) and, more recently, an inflation linked bond ladder configured to pay out towards the end of that period to help out in case current levels of inflation are sustained and the residual insurance money is then insufficient.

With recent increases in annuity rates (according to https://www.hl.co.uk/retirement/annuities/best-buy-rates, these are 3.5% and 4.2% for a single life RPI annuity at 60 and 65, respectively - of course a joint annuity with 100% survivor benefit would pay less than this) for those with insufficient guaranteed income, they are probably more attractive compared to portfolio withdrawals than they have been for more than a decade. With the real interest rates on inflation linked bonds hovering around 0%, the rates available through self-annuitization by constructing a 25 or 30 year bond ladder (rates of 4% or 3.33%, respectively) are also comparable with/higher than 'safe' withdrawal rates, so are equally as attractive.

OldScientist

Albermarle said:

MK62 said:

OldScientist said:

 Since all of our expenditure (essential and everyday discretionary) is currently covered by a (partly inflation capped) DB pension, then this variability doesn't matter too much to us at the moment.

In that case, pretty much any "reasonable" drawdown plan will work for you, since the consequences of plan failure are nothing like as severe as they'd be for someone totally reliant on investments, such as DC pensions etc, and hence you could probably accept more plan risk.

I suppose we'll nearly all have at least some level of "DB" type pension in the end, in the form of the state pension - but for many that won't even cover essential spending, let alone everyday discretionary.

Even if a DB pension is nowhere near large enough to cover essentials, it still reduces pressure on the DC pension/SWR significantly, unless you are walking a very tightrope.  Then if you add in later one or two state pensions, it reduces the pressure even more of course,

Agreed. For example, a UK couple at state pension age with £1m requiring an income of £40k, are (historically) in trouble with their 4% withdrawal. Factor in two state pensions (approx 20k) and the withdrawals drop nicely to a conservative 2%. If instead, they use half their portfolio to buy two single life inflation protected annuities (one each) at 4.2%, they have an income of £41k and a residual portfolio of £500k. Even an early death of one of the couple, once any guarantee period expires, will leave the survivor with an income of just over £20k and the potential for up to another £15k on a 3% portfolio withdrawal. One downside is the reduction in legacy if both of them die young (before the, now unneeded, portfolio has a chance to grow).

gm0

Another primarily DC example started this year

Short term nominal performance since inception down -2.21% - 14/2 to today on cash and holdings in pensions
Comparison for acc units with FT for same dates VLS80 -4.13%, VLS60 -6.74%)

Notional target initial WR was 3.2% drawing on current value of crystallised pots. 
Variable. To be kept > nominal growth to age 75. And sub HRB.  Sorry Rishi. 
I drew half i.e. one of the two pots only this year due to other priorities and foot dragging in getting the other setup.  Need to fix the balance before tax year end.
Income assigned wrapped cash is buffered between rebalancing events (so no sales monthly) and part of overall cash buffer
Income is topped up from unwrapped reserves in early years (unwrapped/isa first and directionally pension last)
2xSP and a small DB turn up later and then this other consumption of assets outside pension diminishes

I re-invested in stages from Feb 2022 to now - ongoing which explains the milder than packaged fund decline
Personal inflation rate I'd wildly guess ~7% due to mix of spending. 
Reconciliation in January will reveal all once I disentangle pre-committed 2023 spending and other confounding factors

My perspective is that markets are still within the possible envelope that the plan was developed to support.

Concerns

Sustained inflation and better inflation choices around hedging assets  
Portfolio FX behaviour in some scenarios (equities unhedged and USD content)

Coincidentally monevator covered the inflation/linkers topic this week with a reprise of the RLG Sterling hedged short duration World Index Linkers fund suggestion

Overall though I can't count -2.2% as a terrible result for 2022.

Perhaps I survive my avoid "bad DIY" choices first test.  But there are less thant fully understood risks no doubt still embedded in what I have done which could play out medium term.  With unluckier timing of setup trades (Q4 2021) or mildly different choices around bonds it could have been quite different this year to the tune of >10% still before inflation.  I did not buy my long term full quota of bonds yet (or at all) - I am about 6% FI / bonds presently via the multi-asset 

Portfolio

20% Cash (buffer, current bonds substitute, some investible)

Passive global equities index trackers (Developed large cap world equities) - 59% assets.

Made up:

28% L&G Global Ethical - FTSE4Good with the ethical knockouts @0.06%)

31% Global developed passive index trackers (~@0.12) made up of:
50:50 VEVE ETF and blended L&G World ex UK + L&G UK FTSE AllShare TR insured funds pair.
UK at ~2x ~10% in the L&G bit.  Aggregate UK home market bias across all the trackers is up ~1-2% from a simple at global weight. So between mild and irrelevant.

Extended and tilted as follows:

9% multi-asset fund (L&G Multi-asset 3 @0.13%)  40% equities 13% alts, the rest bonds and credit of various sorts)
This fund appealed as possible volatility reducer, for the mixed bonds, diversification and cheapish access to the mixed FI alts, property elements. A 5-10 year experiment for its affect on returns and portfolio volatility. Seems cheap for what you get pre-packaged. Is it cheerful ? Value unproven as to whether actually any good for my intended purpose. We shall see by 2030 or so.

Some additional equity diversification choices and small geographic tilts

3% Small Cap equities (L&G @0.22%) - diversify equity list beyond global large cap
2% Emerging markets equities (L&G @0.25%) - diversify beyond global large cap developed

2% Asia Pac ex Japan (Vanguard VAPX @0.15%)
2.5% Europe (Vanguard VERX @0.11%)
1% Korea (iShares IKOR @0.74%)

These tilts are in progress % will go up closer to 5% for europe over UK and selective asia in aggregate later

Overall portfolio costs are: 0.2% inclusive of platform costs, trades, fund charges, but excluding unbundled fund transaction costs

bostonerimus

OldScientist said:

Albermarle said:

MK62 said:

OldScientist said:

 Since all of our expenditure (essential and everyday discretionary) is currently covered by a (partly inflation capped) DB pension, then this variability doesn't matter too much to us at the moment.

In that case, pretty much any "reasonable" drawdown plan will work for you, since the consequences of plan failure are nothing like as severe as they'd be for someone totally reliant on investments, such as DC pensions etc, and hence you could probably accept more plan risk.

I suppose we'll nearly all have at least some level of "DB" type pension in the end, in the form of the state pension - but for many that won't even cover essential spending, let alone everyday discretionary.

Even if a DB pension is nowhere near large enough to cover essentials, it still reduces pressure on the DC pension/SWR significantly, unless you are walking a very tightrope.  Then if you add in later one or two state pensions, it reduces the pressure even more of course,

Agreed. For example, a UK couple at state pension age with £1m requiring an income of £40k, are (historically) in trouble with their 4% withdrawal. Factor in two state pensions (approx 20k) and the withdrawals drop nicely to a conservative 2%. If instead, they use half their portfolio to buy two single life inflation protected annuities (one each) at 4.2%, they have an income of £41k and a residual portfolio of £500k. Even an early death of one of the couple, once any guarantee period expires, will leave the survivor with an income of just over £20k and the potential for up to another £15k on a 3% portfolio withdrawal. One downside is the reduction in legacy if both of them die young (before the, now unneeded, portfolio has a chance to grow).

Everything old is new again. This sort of hybrid approach seems pretty obvious and with annuity rates creeping up it looks more and more attractive. An interesting question is now what asset allocation you have for the DC money left over after you have bought your annuities. My approach has been to think of the DB/annuity as a fixed income allocation and so 90% of my DC and other investments is in equities. 

Of course the problem is easy with 1M and only needing to generate 20k. If you start with a big pot and a low need for income then everything is sweetness and light. The same old issues would come into play if you needed to generate 20k from 500k or less.

pensionpawn

We have both qualified for full SP's from 67. Our repayment mortgage runs until we are 75. We took out a joint decreasing term life assurance policy that in addition to clearing the mortgage would also provide for the balance of (lost) SP between 67 and 75. From 75 onwards, in the unlikely event that the DC pots are completely exhausted, there would be plenty of equity in the house to top up a single SP if necessary. That is more appealing to me (from a legacy perspective) than throwing a considerable amount of money at an annuity which may only pay out for a few months instead of a number of years... Slightly off topic however it's part of our 'retire as early as possible" strategy.

[Deleted User]

pensionpawn said:

That is more appealing to me (from a legacy perspective) than throwing a considerable amount of money at an annuity which may only pay out for a few months instead of a number of years... Slightly off topic however it's part of our 'retire as early as possible" strategy.

You can buy an annuity with a guaranteed minimum payout, eg 10 years. 

Albermarle

gm0 said:

Another primarily DC example started this year

Short term nominal performance since inception down -2.21% - 14/2 to today on cash and holdings in pensions
Comparison for acc units with FT for same dates VLS80 -4.13%, VLS60 -6.74%)

Notional target initial WR was 3.2% drawing on current value of crystallised pots. 
Variable. To be kept > nominal growth to age 75. And sub HRB.  Sorry Rishi. 
I drew half i.e. one of the two pots only this year due to other priorities and foot dragging in getting the other setup.  Need to fix the balance before tax year end.
Income assigned wrapped cash is buffered between rebalancing events (so no sales monthly) and part of overall cash buffer
Income is topped up from unwrapped reserves in early years (unwrapped/isa first and directionally pension last)
2xSP and a small DB turn up later and then this other consumption of assets outside pension diminishes

I re-invested in stages from Feb 2022 to now - ongoing which explains the milder than packaged fund decline
Personal inflation rate I'd wildly guess ~7% due to mix of spending. 
Reconciliation in January will reveal all once I disentangle pre-committed 2023 spending and other confounding factors

My perspective is that markets are still within the possible envelope that the plan was developed to support.

Concerns

Sustained inflation and better inflation choices around hedging assets  
Portfolio FX behaviour in some scenarios (equities unhedged and USD content)

Coincidentally monevator covered the inflation/linkers topic this week with a reprise of the RLG Sterling hedged short duration World Index Linkers fund suggestion

Overall though I can't count -2.2% as a terrible result for 2022.

Perhaps I survive my avoid "bad DIY" choices first test.  But there are less thant fully understood risks no doubt still embedded in what I have done which could play out medium term.  With unluckier timing of setup trades (Q4 2021) or mildly different choices around bonds it could have been quite different this year to the tune of >10% still before inflation.  I did not buy my long term full quota of bonds yet (or at all) - I am about 6% FI / bonds presently via the multi-asset 

Portfolio

20% Cash (buffer, current bonds substitute, some investible)

Passive global equities index trackers (Developed large cap world equities) - 59% assets.

Made up:

28% L&G Global Ethical - FTSE4Good with the ethical knockouts @0.06%)

31% Global developed passive index trackers (~@0.12) made up of:
50:50 VEVE ETF and blended L&G World ex UK + L&G UK FTSE AllShare TR insured funds pair.
UK at ~2x ~10% in the L&G bit.  Aggregate UK home market bias across all the trackers is up ~1-2% from a simple at global weight. So between mild and irrelevant.

Extended and tilted as follows:

9% multi-asset fund (L&G Multi-asset 3 @0.13%)  40% equities 13% alts, the rest bonds and credit of various sorts)
This fund appealed as possible volatility reducer, for the mixed bonds, diversification and cheapish access to the mixed FI alts, property elements. A 5-10 year experiment for its affect on returns and portfolio volatility. Seems cheap for what you get pre-packaged. Is it cheerful ? Value unproven as to whether actually any good for my intended purpose. We shall see by 2030 or so.

Some additional equity diversification choices and small geographic tilts

3% Small Cap equities (L&G @0.22%) - diversify equity list beyond global large cap
2% Emerging markets equities (L&G @0.25%) - diversify beyond global large cap developed

2% Asia Pac ex Japan (Vanguard VAPX @0.15%)
2.5% Europe (Vanguard VERX @0.11%)
1% Korea (iShares IKOR @0.74%)

These tilts are in progress % will go up closer to 5% for europe over UK and selective asia in aggregate later

Overall portfolio costs are: 0.2% inclusive of platform costs, trades, fund charges, but excluding unbundled fund transaction costs

Looks like a very good result, even with the caveats. Plus you have extremely low costs. Clearly from this and other posts you have spent a lot of time on detailed research of options, so I guess this is your reward.
I am about 7% down since Valentines Day. Although I reduced bondholdings last year, I did not go far enough.....
My costs are a bit higher as I have some property funds/infrastructure funds/ wealth preservation trusts, which have survived quite well, so worth the extra costs so far.
I have switched some US equity to being hedged, in case the Dollar starts to weaken.

bostonerimus

pensionpawn said:

We have both qualified for full SP's from 67. Our repayment mortgage runs until we are 75. We took out a joint decreasing term life assurance policy that in addition to clearing the mortgage would also provide for the balance of (lost) SP between 67 and 75. From 75 onwards, in the unlikely event that the DC pots are completely exhausted, there would be plenty of equity in the house to top up a single SP if necessary. That is more appealing to me (from a legacy perspective) than throwing a considerable amount of money at an annuity which may only pay out for a few months instead of a number of years... Slightly off topic however it's part of our 'retire as early as possible" strategy.

I think this is perfectly on topic as it's about how you are planning for retirement income. What if house prices crash?

pensionpawn

Deleted_User said:

pensionpawn said:

That is more appealing to me (from a legacy perspective) than throwing a considerable amount of money at an annuity which may only pay out for a few months instead of a number of years... Slightly off topic however it's part of our 'retire as early as possible" strategy.

You can buy an annuity with a guaranteed minimum payout, eg 10 years. 

No doubt that appeals to some however surely that will have been factored into the price....? Lower monthly payments (just like index linking and / or surviving spouse payments)?

pensionpawn

bostonerimus said:

pensionpawn said:

We have both qualified for full SP's from 67. Our repayment mortgage runs until we are 75. We took out a joint decreasing term life assurance policy that in addition to clearing the mortgage would also provide for the balance of (lost) SP between 67 and 75. From 75 onwards, in the unlikely event that the DC pots are completely exhausted, there would be plenty of equity in the house to top up a single SP if necessary. That is more appealing to me (from a legacy perspective) than throwing a considerable amount of money at an annuity which may only pay out for a few months instead of a number of years... Slightly off topic however it's part of our 'retire as early as possible" strategy.

I think this is perfectly on topic as it's about how you are planning for retirement income. What if house prices crash?

Been there on steroids from 1989 - 1996! I am convinced that we'll see house prices fall in the near future however if they fell by the amount necessary to rule out the possibility of topping up a full SP by a small amount for 10 - 15 years then I respectfully suggest that the country will be in a much worse position than us!