Retirement planning dilemma

GazzaBloom

I have a retirement planning dilemma and not sure how I figure out the optimised way forward. Any thoughts welcome:

My wife and I currently have £310K in DC Pension/SIPP/S&S ISA invested in 100% low fee stock index funds and hope to get to a combined retirement pot of £550K

At that point, whenever that is, I plan to either retire early or look at a reduced income job, either part time hours/lower pay locally (I currently have a fair commute for work and have had enough of travelling).

My wife finished work this year as she needs to care for her aging/ill health Mum more and more.

I an 56 in March 2023 and my wife is 53 in April 2023.

We have £6K coming in from a final salary pension that I have already started taking and 61% of that final salary sum will increase each year with CPI capped at 5%.

We are set to get full state pensions at age 67.

We are mortgage and debt free and have £15K emergency cash in easy access Cash ISA.

I can comfortably salary sacrifice £40K per year (with the employer contributions) and also save another £10-15K a year after tax.

In retirement we expect to need to drawdown £28K a year before tax (in today's money) which is around 5% of the total target £550K drawdown pot, to add to the final salary pension payments to meet our after tax retirement income needs. (this drawdown can reduce significantly when the SPs kick in) 

My plan has always been to use next year's salary sacrifice onwards to start to accumulate cash with my pension up to the £40K tax advantageous threshold and pay in £2,880 into my wife SIPP so she get's the £720 HMRC top up and save any extra in the S&S ISA.

The aim was to have the £550K target as 85% (£467.5K) in low cost 100% stock index funds and 15% as cash (£82.5K - roughly 2-3 years of retirement drawdown needs).

OK, so the dilemma I have is that my December salary sacrifice payment has now cleared and it's time to decide where to direct the 2023 pension payments. As above the plan was to start the cash accumulation from January, having left it towards the end of retirement accumulation, so inflation doesn't start to erode the buying power of the cash pile, until as late as possible, as my wages increase pretty much in line or in excess of CPI each year, so that has been my hedge against inflation.

But, with markets down, and in all possibility set to continue down into next year and maybe for some time, the golden opportunity of continuing to buy more stock fund units at reduced prices is really tempting. Opportunity's like this don't come round every year. But, that would mean I would need to sell down some stock funds at the point of retirement, to give me the cash buffer of 2/3 years of expenses. I have been buying 100% index funds month in month out for years and it feels odd to be looking at changing this habit.

The 2/3 years worth of cash is planned to be used for drawdown in future years, such as this year, when the markets are down and the stock funds are losing value and help me sleep at night in retirement.

Would you keep buying the discounted stock funds next year or stick to the plan and start the cash accumulation? Or do something entirely different? Aviva have confirmed they pay BOE base rate interest on cash held inside the DC pension wrapper, so currently 3%.

First world problem I know, with so many people facing hardship with the cost of living and expected economic downturn.

Pat38493

As other posters will I'm sure have figured out I am a bit new to pension planning so my opinion might be taken with a pinch of salt, but from everything I've read and calculated, if you are planning a long retirement on drawdown, I would carry on putting your contributions heavily into equities.

In fact, I haven't really seen a clear statistical case for keeping a large multi year cash buffer and when I have used a few of the available modelling tools, it seemed to me that keeping a cash buffer always leaves you worse off over a 30-40 year retirement unless you magically know that you are going into an SOR period at that point.

I guess having it though gives you a much higher sense of security and you have to be quite brave to tolerate large drops in your fund early in retirement, even if history says you will be ok.

By the way I assume you were somehow forced by a fixed date to take the DB pension you are taking, otherwise I would also wonder why you have put your DB pension into payment when you are high paid employment (or is that your wife's DB scheme)?

GazzaBloom

Pat38493 said:

As other posters will I'm sure have figured out I am a bit new to pension planning so my opinion might be taken with a pinch of salt, but from everything I've read and calculated, if you are planning a long retirement on drawdown, I would carry on putting your contributions heavily into equities.

In fact, I haven't really seen a clear statistical case for keeping a large multi year cash buffer and when I have used a few of the available modelling tools, it seemed to me that keeping a cash buffer always leaves you worse off over a 30-40 year retirement unless you magically know that you are going into an SOR period at that point.

I guess having it though gives you a much higher sense of security and you have to be quite brave to tolerate large drops in your fund early in retirement, even if history says you will be ok.

By the way I assume you were somehow forced by a fixed date to take the DB pension you are taking, otherwise I would also wonder why you have put your DB pension into payment when you are high paid employment (or is that your wife's DB scheme)?

I decided to take the DB pension early with a commencement lump sum as we wanted to spend some money on the house on long overdue renovations, I ran some calcs and even with the reduced benefits paid out at 55 and the PCLS it was going to be some time after age 65 when leaving it until then before the crossover point when would have been more beneficial.

Pat38493

GazzaBloom said:

Pat38493 said:

As other posters will I'm sure have figured out I am a bit new to pension planning so my opinion might be taken with a pinch of salt, but from everything I've read and calculated, if you are planning a long retirement on drawdown, I would carry on putting your contributions heavily into equities.

In fact, I haven't really seen a clear statistical case for keeping a large multi year cash buffer and when I have used a few of the available modelling tools, it seemed to me that keeping a cash buffer always leaves you worse off over a 30-40 year retirement unless you magically know that you are going into an SOR period at that point.

I guess having it though gives you a much higher sense of security and you have to be quite brave to tolerate large drops in your fund early in retirement, even if history says you will be ok.

By the way I assume you were somehow forced by a fixed date to take the DB pension you are taking, otherwise I would also wonder why you have put your DB pension into payment when you are high paid employment (or is that your wife's DB scheme)?

I decided to take the DB pension early with a commencement lump sum as we wanted to spend some money on the house on long overdue renovations, I ran some calcs and even with the reduced benefits paid out at 55 and the PCLS it was going to be some time after age 65 when leaving it until then before the crossover point when would have been more beneficial.

Not sure exactly how that could be and you are now paying tax at your marginal tax rate (possibly 40%?) on the DB income that you can’t avoid whereas you could have taken tax free cash from your DC if you needed the cash but anyway that’s water under he bridge and not relevant to your main question.  

As said I am not totally clear on he need for a large cash float unless you have a crystal ball but I suspect I am in a minority and may change my mind as I become more educated on these topics. 

GazzaBloom

Pat38493 said:

GazzaBloom said:

Pat38493 said:

As other posters will I'm sure have figured out I am a bit new to pension planning so my opinion might be taken with a pinch of salt, but from everything I've read and calculated, if you are planning a long retirement on drawdown, I would carry on putting your contributions heavily into equities.

In fact, I haven't really seen a clear statistical case for keeping a large multi year cash buffer and when I have used a few of the available modelling tools, it seemed to me that keeping a cash buffer always leaves you worse off over a 30-40 year retirement unless you magically know that you are going into an SOR period at that point.

I guess having it though gives you a much higher sense of security and you have to be quite brave to tolerate large drops in your fund early in retirement, even if history says you will be ok.

By the way I assume you were somehow forced by a fixed date to take the DB pension you are taking, otherwise I would also wonder why you have put your DB pension into payment when you are high paid employment (or is that your wife's DB scheme)?

I decided to take the DB pension early with a commencement lump sum as we wanted to spend some money on the house on long overdue renovations, I ran some calcs and even with the reduced benefits paid out at 55 and the PCLS it was going to be some time after age 65 when leaving it until then before the crossover point when would have been more beneficial.

Not sure exactly how that could be and you are now paying tax at your marginal tax rate (possibly 40%?) on the DB income that you can’t avoid whereas you could have taken tax free cash from your DC if you needed the cash but anyway that’s water under he bridge and not relevant to your main question.  

As said I am not totally clear on he need for a large cash float unless you have a crystal ball but I suspect I am in a minority and may change my mind as I become more educated on these topics. 

Yes you're right on the net DB amount but my calcs were on the gross sums before tax, the PCLS was tax free though. As you say it's done, for right or wrong, we now have a house brought bang up to date ready for retirement. I have also had a relative and colleague pass away at age 56 and 64 which has shown that there are some things that no amount of retirement planning can deal with, so there was a little bit of spend it while we need it thinking, and the DB pension is a tap that never turns off.

I have wrestled with the cash buffer drag and agree that the raw modelled sums may work better without one but come to the conclusion that it's far easier to see it as unnecessary when earning and accumulating but envisage that in drawdown it's a whole different psychological ballgame when at the next bear market or black swan event you are looking at taking your drawdown from a 100% stocks portfolio that has already suddenly dropped 25% in a matter of days or weeks and may fall another 20%.

Some would say that 85% in equities is plenty heavy enough perhaps too heavy for some.

Audaxer

GazzaBloom said:

Would you keep buying the discounted stock funds next year or stick to the plan and start the cash accumulation? 

I would stick to your plan to accumulate more cash, as you are already a bit high risk at 85% equity.

tacpot12

 GazzaBloom said:

...

... it's a whole different psychological ballgame when at the next bear market or black swan event you are looking at taking your drawdown from a 100% stocks portfolio that has already suddenly dropped 25% in a matter of days or weeks and may fall another 20%.

I'm in drawdown with my pension and have been pleased with my choice to invest in income-producing funds and ITs, as these have continued to pay dividends through pandemic and cost-off living crisis. They don't get the capital growth that accumulation funds get, but they come with a lot less worry. 

My retirement plan is basically the same as yours, but I'm drawing down already and have been three years. I have two DB pensions and a full state pension that means I'm happy to draw down some capital, but so far I haven't needed to. The income returns have been sufficient for me current needs.

GazzaBloom

tacpot12 said:

 GazzaBloom said:

...

... it's a whole different psychological ballgame when at the next bear market or black swan event you are looking at taking your drawdown from a 100% stocks portfolio that has already suddenly dropped 25% in a matter of days or weeks and may fall another 20%.

I'm in drawdown with my pension and have been pleased with my choice to invest in income-producing funds and ITs, as these have continued to pay dividends through pandemic and cost-off living crisis. They don't get the capital growth that accumulation funds get, but they come with a lot less worry. 

My retirement plan is basically the same as yours, but I'm drawing down already and have been three years. I have two DB pensions and a full state pension that means I'm happy to draw down some capital, but so far I haven't needed to. The income returns have been sufficient for me current needs.

Thanks, it's good to hear from someone in drawdown as many of us here are still on the Acc side.

We're not invested in particularly high income generating funds so dividend income alone would not be sufficient for our needs so we will need to sell down capital.

Do you have a cash buffer? How is your drawdown managed, do you draw a lump sum at the start of year or take a sum monthly for example?

Audaxer

tacpot12 said:

 GazzaBloom said:

...

... it's a whole different psychological ballgame when at the next bear market or black swan event you are looking at taking your drawdown from a 100% stocks portfolio that has already suddenly dropped 25% in a matter of days or weeks and may fall another 20%.

I'm in drawdown with my pension and have been pleased with my choice to invest in income-producing funds and ITs, as these have continued to pay dividends through pandemic and cost-off living crisis. They don't get the capital growth that accumulation funds get, but they come with a lot less worry. 

I am retired and have the same view of dividend producing funds and ITs. I'm much happier to take dividends when I need to as opposed to selling from growth funds if value has fallen.

zagfles

GazzaBloom said:

But, with markets down, and in all possibility set to continue down into next year and maybe for some time, the golden opportunity of continuing to buy more stock fund units at reduced prices is really tempting. Opportunity's like this don't come round every year.

Why do you think markets are "down"? Which markets and what timescale?

GazzaBloom

zagfles said:

GazzaBloom said:

But, with markets down, and in all possibility set to continue down into next year and maybe for some time, the golden opportunity of continuing to buy more stock fund units at reduced prices is really tempting. Opportunity's like this don't come round every year.

Why do you think markets are "down"? Which markets and what timescale?

Not sure if you are being serious or not but I mean this year and funds such as global equity index funds such as VWRL, Vanguard LifeStrategy, the S&P500, Nasdaq, Europe, Japan, pretty much all tech stock funds, small cap funds, bond funds, gilt funds and pension multi asset default funds etc.

Pretty much everywhere except the UK trackers which are holding up in single digits due to dividends and energy stocks.