SWR Question

Pat38493

Deleted_User said:

Canadian spreadsheets in the linked finiki can be adapted to UK. They calculate the additional  “bridging” withdrawals until such a time when state pension becomes available. 

This particular method is based on variable percentage withdrawal method (VPW), designed to guarantee you don’t run out of money until the end. https://www.finiki.org/wiki/Variable_percentage_withdrawal

I downloaded this spreadsheet and took a look.  There is an accumulation sheet which seems to make it's own assumption about what your required spending should be in retirement - there is no input field to enter required spend in retirement but it suggests that I should put half my salary into my pension for the next few years (which is more than the annual allowance in the UK), so for sure that part would need tweaking.

In fact it appears that it's assuming I want to have the same spending power in retirement as I do now so I want to reduce my income in order to equalize my income in retirement with my current (which is usually not the case) but maybe I am not following it - there are a lot of hidden formulas behind blank cells.

The retirement calculator if I pretend I'm already retired which seems to be the only way to get any useful results, suggests a 5.1% withdrawal in the first year if I key in roughly my situation.  This reminds me of an accountant I used to know - just trust me, this is the amount of money we need....  I would need to understand all the stuff  behind before trusting this for sure.

Looking at the tables on the page you linked and the data sheets, my impression is that if there was a stock market crash during retirement, it would instruct you to take a dramatic "pay cut" immediately, which might not have been fully necessary in the long term, so you would have to be prepared to make big spending adjustments in bad years.  However it's probably worth using as one tool.

[Deleted User]

Pat38493 said:

Deleted_User said:

Canadian spreadsheets in the linked finiki can be adapted to UK. They calculate the additional  “bridging” withdrawals until such a time when state pension becomes available. 

This particular method is based on variable percentage withdrawal method (VPW), designed to guarantee you don’t run out of money until the end. https://www.finiki.org/wiki/Variable_percentage_withdrawal

I downloaded this spreadsheet and took a look.  There is an accumulation sheet which seems to make it's own assumption about what your required spending should be in retirement - there is no input field to enter required spend in retirement but it suggests that I should put half my salary into my pension for the next few years (which is more than the annual allowance in the UK), so for sure that part would need tweaking.

In fact it appears that it's assuming I want to have the same spending power in retirement as I do now so I want to reduce my income in order to equalize my income in retirement with my current (which is usually not the case) but maybe I am not following it - there are a lot of hidden formulas behind blank cells.

The retirement calculator if I pretend I'm already retired which seems to be the only way to get any useful results, suggests a 5.1% withdrawal in the first year if I key in roughly my situation.  This reminds me of an accountant I used to know - just trust me, this is the amount of money we need....  I would need to understand all the stuff  behind before trusting this for sure.

Looking at the tables on the page you linked and the data sheets, my impression is that if there was a stock market crash during retirement, it would instruct you to take a dramatic "pay cut" immediately, which might not have been fully necessary in the long term, so you would have to be prepared to make big spending adjustments in bad years.  However it's probably worth using as one tool.

Sorry, but none of it is correct. You need to spend quite a bit of time understanding the logic behind this tool.  Everything is transparent. You need to understand the workings and read discussions in the references. The exact opposite of someone telling you “just trust me”.  The tool includes a “stress test” and a buffer designed to ensure that you are cushioning reduction in expenditure during downturns.  

Pat38493

Deleted_User said:

Pat38493 said:

Deleted_User said:

Canadian spreadsheets in the linked finiki can be adapted to UK. They calculate the additional  “bridging” withdrawals until such a time when state pension becomes available. 

This particular method is based on variable percentage withdrawal method (VPW), designed to guarantee you don’t run out of money until the end. https://www.finiki.org/wiki/Variable_percentage_withdrawal

I downloaded this spreadsheet and took a look.  There is an accumulation sheet which seems to make it's own assumption about what your required spending should be in retirement - there is no input field to enter required spend in retirement but it suggests that I should put half my salary into my pension for the next few years (which is more than the annual allowance in the UK), so for sure that part would need tweaking.

In fact it appears that it's assuming I want to have the same spending power in retirement as I do now so I want to reduce my income in order to equalize my income in retirement with my current (which is usually not the case) but maybe I am not following it - there are a lot of hidden formulas behind blank cells.

The retirement calculator if I pretend I'm already retired which seems to be the only way to get any useful results, suggests a 5.1% withdrawal in the first year if I key in roughly my situation.  This reminds me of an accountant I used to know - just trust me, this is the amount of money we need....  I would need to understand all the stuff  behind before trusting this for sure.

Looking at the tables on the page you linked and the data sheets, my impression is that if there was a stock market crash during retirement, it would instruct you to take a dramatic "pay cut" immediately, which might not have been fully necessary in the long term, so you would have to be prepared to make big spending adjustments in bad years.  However it's probably worth using as one tool.

Sorry, but none of it is correct. You need to spend quite a bit of time understanding the logic behind this tool.  Everything is transparent. You need to understand the workings and read discussions in the references. The exact opposite of someone telling you “just trust me”.  The tool includes a “stress test” and a buffer designed to ensure that you are cushioning reduction in expenditure during downturns.  

Well if none of what I said is correct, can you tell me where in the model for “accumulation” I can tell it what I think my required spend will be?  I put in my information into the yellow fields as instructed, and it told me I have to put over 50% of my salary into pension and calculated some numbers that says I will get the same spend before tax in retirement as my current spend after putting that amount, so it’s trying to balance it out.  Perhaps the statement in the instructions that I should only change fields in yellow is misleading?

Leaving that aside as the discussion was more about withdrawal models I guess, I am looking into this a bit more.

I keyed in some figures as if I have just retired and it told me my income would be 41694.

I then pretended there was a stock market crash as per the boxes marked “after loss” and keyed in the crashed value for the following year, and it now told me my income is 33000 - that’s quite a big reduction from one year to the next - is that typical in retirement that I have to take a 19.5% gross cut in withdrawals after a crash even when 16K of the money is covered by guaranteed income for most of the retirement and SP is also kicking in later?

I will read up on some of the surrounding materials.  I did see in the instructions it also recommends a 5 month cash buffer so this would make up the difference in that scenario.

[Deleted User]

I never used accumulation model because I don’t care about modelling accumulation. My ideology for that was to live well without wasting money, to invest what’s left over and it worked out fine. 

The “crash” model assumes a 50% loss in the stock market. Its a bad scenario; quite rare. Your income projection has been cushioned as the recommended withdrawal didn’t go down as much. But it is a VARIABLE model. In the real world any retiree on a budget would reduce expenditure if his liquid assets are crushed like this.  

You might want to read discussions in the thread which is linked in the wiki. All these topics have been discussed, as well as other issues you should understand before using. 

You may have mentioned but I don’t remember… How many years do you need to bridge?  If its a relatively short duration, like 5 years, then putting the bridging fund into a cash-like form could be the simplest answer. And then you don’t need to model a bear market. You just need to account for potential inflation. 

[Deleted User]

Perhaps the statement in the instructions that I should only change fields in yellow is misleading?

You can change the modelling assumptions  once you REALLY understand how it works and why. 

Pat38493

Deleted_User said:

I never used accumulation model because I don’t care about modelling accumulation. My ideology for that was to live well without wasting money, to invest what’s left over and it worked out fine. 

The “crash” model assumes a 50% loss in the stock market. Its a bad scenario; quite rare. Your income projection has been cushioned as the recommended withdrawal didn’t go down as much. But it is a VARIABLE model. In the real world any retiree on a budget would reduce expenditure if his liquid assets are crushed like this.  

You might want to read discussions in the thread which is linked in the wiki. All these topics have been discussed, as well as other issues you should understand before using. 

You may have mentioned but I don’t remember… How many years do you need to bridge?  If its a relatively short duration, like 5 years, then putting the bridging fund into a cash-like form could be the simplest answer. And then you don’t need to model a bear market. You just need to account for potential inflation. 

I am hoping to retire 56 or 57 so 10-11 years to SP.  I have a DB that is worth about 16K at 57 and 24K at 65 (real terms today according to my calcs) which I can I guess take when needed - most of the modelling tools I've messed about with seems to imply I should take the DB early, contrary to "popular opinion", as it will smooth the situation in worst case scenarios.

I like this model and I might make use of it, however I do wonder a bit about reducing the withdrawal that much.

On the point about reducing withdrawals after a major crash..... in the other article about SWR generally it says that one of the issues is that you would be irrational not to reduce your withdrawal after a crash.  However, isn't there an argument that you are irrational to change your plan just because there was a crash that was within the parameters of what you stress tested in your original withdrawal plan.  You could argue that you should only reduce your withdrawals once the economic scenario departs from the worst case historical model that you stress tested against - otherwise you are being just as irrational in the opposite way as if you sell your investments after a crash.  Of course, it's careful, prudent and arguably sensible to do this and I would probably do it too, but I'm not sure it's irrational unless you are taking a call that the next years following the crash will definitely be worse than anything that's ever happened before.

The other thing is that this model doesn't allow you to specify that you are prepared to have a lower income in the later years (say after 80) in order to keep your withdrawals up in your 50s and 60s regardless of markets.  Probably it could be altered to do this.  

It also feels a bit like a fruit machine in that you put in your data each year, and presto it tells you how much you are allowed to spend - it might now know that this is my golden anniversary year and I don't want to cancel my holiday even if there's a crash or whatever.  In the first year, it actually told me to withdraw more than what I think I would actually need.  I'm not saying it's bad or wrong - I'm sure it will work great, but it may not cater for all tastes without some tweaks.

Linton

I share your wish not to have your life driven on a year by year basis by your financial model.  That is one reason why we keep a substantial buffer of cash and Wealth Preservation funds. We are not going to cancel an expensive holiday booked for a year's time just because the markets have crashed - prices may have recovered within a year.  If you know you are safe for 5-10 years there is no need to panic as you have plenty of time for economic circumstances to change or for a long term change in life style to be implemented if really necessary (which is inlikely if you have planned prudently).

As Mordko says a buffer would also deal with the question of taking your DB pension early.  Simply cover the earlier years by cash savings and very safe investments.  So your model can start say 5 years later.

You can protect yourself further by appropriate asset allocation. The Value/Growth balance is an important factor.  Growth shares may perform much better in the short term but will generally fall much further in a crash. But over the very long term you would expect the performance to be much the same. 

To provide additional stability we take a significant amount of income from dividends/interest which tends to fall less rapidly than share prices in a crash.

michaels

I find this tool useful as you can put in all sorts of other cashflows, lump sums etc and it tells you what your SWR (100%, 99%, 95% etc no failures) and annual DC withdrawals for a length of time you choose (I tend to use to age 95) would have been given your chosen asset split over the last 120 odd years.

An Updated Google Sheet DIY Withdrawal Rate Toolbox (SWR Series Part 28) – Early Retirement Now

[Deleted User]

most of the modelling tools I've messed about with seems to imply I should take the DB early, contrary to "popular opinion", as it will smooth the situation in worst case scenarios.

This is unlikely. If you read the VPW guidance, its recommended to buy an annuity with your remaining funds after a certain age.  Several reasons for that, such as “longevity insurance” and deteriorating ability to manage money.  Taking DB pension early is the exact opposite of buying an annuity in your later years. Normally delaying DB income means that you can spend more safely over your lifetime.

…but psychologically it feels better to start drawing DB early because you see a larger number in your liquid accounts and you feel richer.  So many people find ways to justify it to themselves.

[Deleted User]

It also feels a bit like a fruit machine in that you put in your data each year, and presto it tells you how much you are allowed to spend - it might now know that this is my golden anniversary year and I don't want to cancel my holiday even if there's a crash or whatever. 

Hopefully you remember your anniversary a little bit in advance and put cash aside so its not subject to market movements. Markets go up and down. No way around it.