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

bostonerimus

BarbaraG2000 said:

We retired 15 months ago with a portfolio of ISA’s and pensions from which we were taking 3% annually - initially from the ISA’s.  

We also have several DB pensions plus full state pension entitlement, which will come into play at various points between February 2025 and September 2031 (if all left to normal pension age), the total of which in today’s money, after tax, is roughly equal to the 3% we are currently taking.  That’s why we settled on that figure.

The plan is that as each DB pension comes online, we would reduce the amount we’re taking from the ISA’s so that our total income remains the same, adjusted for inflation.

As things have turned out - we have not increased the amount we’re taking since last year, but the same amount in cash terms now equates to 3.5%. We’re managing fine with the same cash amount though - because there is plenty of slack and we can be more frugal when we need to.

We will carry on as we are for now - we do have some cash reserves as well and haven’t needed to touch them. We’ll leave the monthly withdrawal level the same until we have reason to increase it. It’s 27 months till the first DB pension kicks in, it would be great if we can make it all the way to then without giving ourselves a pay rise.

3% sounds like a conservative drawdown as you have DB and SP coming on line soon. It's a well thought out and sustainable plan. I'm drawing a DB pension now that covers half my spending and I cover the rest with income from a rental property (FYI I have kept the rent the same for the last 5 years). SP will be a surplus.

BarbaraG2000

@bostonerimus Exactly - if we expected the 3% (now 3.5% after this year’s falls - having previously recovered COVID losses and gone above pre-Covid level) to last us our lifetime, we might be on a sticky wicket.  But we will only be drawing routinely on it for another 9 years, and at decreasing levels through that period.

After that, it goes back into “don’t touch” mode until such time as one or other of us have care needs which exceed our DB & SP income. Or we fancy a round the world trip, or decide to start helping the nephews and nieces (we have no kids, so no branch of Bank of Mum and Dad here.)

Albermarle

 Exactly - if we expected the 3% (now 3.5% after this year’s falls - having previously recovered COVID losses and gone above pre-Covid level) to last us our lifetime, we might be on a sticky wicket

The SWR takes into account down periods, so in theory at least 3%/3.5% for Life should still be OK. Only if the downturn/high inflation persists for a long time, should it really come under pressure.

bostonerimus

Albermarle said:

 Exactly - if we expected the 3% (now 3.5% after this year’s falls - having previously recovered COVID losses and gone above pre-Covid level) to last us our lifetime, we might be on a sticky wicket

The SWR takes into account down periods, so in theory at least 3%/3.5% for Life should still be OK. Only if the downturn/high inflation persists for a long time, should it really come under pressure.

This period of high inflation combined with a drop in the stock markets is going to stress drawdown plans...and particularly the psychology of retirees taking out the money. But the statistics of the data behind a withdrawal rate of something like 3% include some years of poor returns and high inflation, the problem comes when the length and the depth of these negative economic factors really go beyond those included in the drawdown plan and that's difficult to evaluate. So I think it's prudent to adopt a variable withdrawal and reduce that amount you have to sell into a falling market. However, inflation makes that even more tricky. So perhaps people are reducing sequence of return issues by spending from cash reserves and reducing their spending where they can.

westv

How did markets perform during the decade of 70s inflation?

Albermarle

bostonerimus said:

Albermarle said:

 Exactly - if we expected the 3% (now 3.5% after this year’s falls - having previously recovered COVID losses and gone above pre-Covid level) to last us our lifetime, we might be on a sticky wicket

The SWR takes into account down periods, so in theory at least 3%/3.5% for Life should still be OK. Only if the downturn/high inflation persists for a long time, should it really come under pressure.

This period of high inflation combined with a drop in the stock markets is going to stress drawdown plans...and particularly the psychology of retirees taking out the money. But the statistics of the data behind a withdrawal rate of something like 3% include some years of poor returns and high inflation, the problem comes when the length and the depth of these negative economic factors really go beyond those included in the drawdown plan and that's difficult to evaluate. So I think it's prudent to adopt a variable withdrawal and reduce that amount you have to sell into a falling market. However, inflation makes that even more tricky. So perhaps people are reducing sequence of return issues by spending from cash reserves and reducing their spending where they can.

I agree with all that, but was worth pointing out that the idea of SWR is not to panic when the first downturn comes along. as regular downturns are part of the script.

OldScientist

A day late for halloween, but here are a selection of horrid UK retirements (each with a 3% inflation adjusted withdrawal, 60% stocks, 20% bonds, and 20% cash). The real value of the portfolio is plotted as a function of time)

Retired in 1972 (just in time for the oil crash and subsequent inflation). Portfolio down to about 30% of initial value in real terms within 3 years of retirement. However, after the scary first decade, the 80s and 90s were good to this retiree (falling bond rates and good stock market returns).


Retired in 1937 (WWII, post war austerity and high inflation in late 50s and early 60s). Portfolio didn't quite last until the world cup in 1966. The portfolio was down to about half of its initial value in the first 4 years or so where it at least stabilised for a bit. Post war was unpleasant.


And retired in 1911 (WWI, massive inflation at the end of WWI followed, luckily, by a period of deflation in the early 20s). Not too bad for the first 4 years, followed by a scary drop to 30% of the initial value 10 years after retirement from which the portfolio never recovered. This would have been a gruelling retirement (leaving aside WWI and the start of WWII).

Thankfully, so far, current events have yet to match these.

Don't have nightmares - do sleep well

bostonerimus

OldScientist said:

A day late for halloween, but here are a selection of horrid UK retirements (each with a 3% inflation adjusted withdrawal, 60% stocks, 20% bonds, and 20% cash). The real value of the portfolio is plotted as a function of time)

Retired in 1972 (just in time for the oil crash and subsequent inflation). Portfolio down to about 30% of initial value in real terms within 3 years of retirement. However, after the scary first decade, the 80s and 90s were good to this retiree (falling bond rates and good stock market returns).


Retired in 1937 (WWII, post war austerity and high inflation in late 50s and early 60s). Portfolio didn't quite last until the world cup in 1966. The portfolio was down to about half of its initial value in the first 4 years or so where it at least stabilised for a bit. Post war was unpleasant.


And retired in 1911 (WWI, massive inflation at the end of WWI followed, luckily, by a period of deflation in the early 20s). Not too bad for the first 4 years, followed by a scary drop to 30% of the initial value 10 years after retirement from which the portfolio never recovered. This would have been a gruelling retirement (leaving aside WWI and the start of WWII).

Thankfully, so far, current events have yet to match these.

Don't have nightmares - do sleep well

Yes 3% would have survived most of the really bad years - the graphs show that the retiree would have been ok for at least 30 years except for 1937. I find it hard to believe that retiring in 2021/22 will be worse than in 1937, but I'd still find it hard to keep ploughing ahead with 3% plus inflation right now.

BarbaraG2000

I suppose given that inflation is at 10% and it’s a year since we started drawing from our ISA’s, we “should” increase our monthly withdrawal by 10% to compensate.  But we are not feeling the pinch, so we are leaving it as it is. So in a sense that partly compensates for the fall in the value of our portfolio - we are not taking as much out as we might have done without the fall. And we are coping with that by being a bit more cautious with discretionary spending.

Either side of retiring, we made some decisions which were basically trading some capital now for reduced outgoings later.  It was time to change the car, so I went for an EV; we put solar panels and a battery in; and I invested in the first Ripple wind cooperative. I’ve also been a bit canny with energy tariffs. Taken together, those decisions have reduced our outgoings by something like £3,000 per year.

bostonerimus

BarbaraG2000 said:

I suppose given that inflation is at 10% and it’s a year since we started drawing from our ISA’s, we “should” increase our monthly withdrawal by 10% to compensate.  But we are not feeling the pinch, so we are leaving it as it is. So in a sense that partly compensates for the fall in the value of our portfolio - we are not taking as much out as we might have done without the fall. And we are coping with that by being a bit more cautious with discretionary spending.

Either side of retiring, we made some decisions which were basically trading some capital now for reduced outgoings later.  It was time to change the car, so I went for an EV; we put solar panels and a battery in; and I invested in the first Ripple wind cooperative. I’ve also been a bit canny with energy tariffs. Taken together, those decisions have reduced our outgoings by something like £3,000 per year.

Very prudent. I remember when markets were all "go go" that some people advocated investing over paying down a mortgage etc. and that looked like a smart move then. Well I suppose it's swings and roundabouts and all those gains can now be spent on higher mortgage payments. I looked at mortgage rates around 3% and thought that it was a good time to pay down the mortgage so I could go into retirement entirely debt free and not be a slave to increasing interest rates. I think that predictability of income needs is a very important part of retirement planning and having a massive and potentially variable payment like a mortgage just stresses the plan unnecessarily.