SWR Question

Pat38493

Deleted_User said:

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.

The conclusion is based on modelling using the spreadsheet VPW that you linked, plus the Timeline planning tool, cfire sim, and one or others that I can’t remember.

What I found is that in Timeline and Cfiresim - my probability of success based on historical scenarios was higher if I take the DB early compared to later.  SOR creates additional scenarios where the fund runs out before DB kicks in.

For the VPW sheet, when I plugged in the DB early at age 57 figures, I got no warnings.  When I plug in the DB late figure with everything else the same - I am getting red messages like “not enough funds to bridge in loss situation” or words to that effect.  This is the same effect - major crash in the first or second year will cause issues for running out of money.

For VPW though - from what I understood so far, the warning doesn’t mean I will literarily run out of money as the model makes this impossible.  It means there is not enough funds to meet the rules to provide the “theoretical bridge amount” without using more than half of the current portfolio amount.  I am not sure exactly what that means as I haven’t got that far yet.

Of course these models could all be “wrong” - I have a few more years to research it further.  These models are based mainly on a constant withdrawal rate in real terms so obviously if I say I will use VPW it’s maybe not the same, but as I said it is giving red warnings about the crash.

Additionally I have only modelled DB at 55, 57 and 65.  I also of course have the option to trigger it at any intervening time as a middle path.

[Deleted User]

Interesting. Pretty sure its not the intended effect for VPW. There is no way they would push users to take DB pension early under pretences that it gives a higher probability of success.  Fairly simple calcs show the exact opposite. 

Intuitively it’s obvious too; DB pension growing with CPI for life is a good way of ensuring one won’t run out of money by living too long.  If the DB component is reduced then one has to make provisions from the invested portfolio and effectively hold back a larger contingency than is likely needed to account for low probability scenarios. Assuring a certain level of income from invested portfolio over 10 years is far easier and cheaper than providing for scenarios with individuals potentially living past 100. 

You can always ask the developer (longinvest on the message board). 

Pat38493

Deleted_User said:

Interesting. Pretty sure its not the intended effect for VPW. There is no way they would push users to take DB pension early under pretences that it gives a higher probability of success.  Fairly simple calcs show the exact opposite. 

Intuitively it’s obvious too; DB pension growing with CPI for life is a good way of ensuring one won’t run out of money by living too long.  If the DB component is reduced then one has to make provisions from the invested portfolio and effectively hold back a larger contingency than is likely needed to account for low probability scenarios. Assuring a certain level of income from invested portfolio over 10 years is far easier and cheaper than providing for scenarios with individuals potentially living past 100. 

You can always ask the developer (longinvest on the message board). 

I would think that this depends on the commutation factors you are getting for taking your DB pension early which could be different per scheme.

In other posts even in recent days here, it was stated that the purpose of commutation is not to "reduce" the amount of money that you get, but to try as best as possible to ensure that you get the same amount of money over your remaining average life.  Therefore if this was done perfectly, it should even out. 

The flip side to your argument is that when taking DB late, you will take a lot more out of your portfolio in first 10 years and that money will not be able to take advantage of years when the markets do a lot better than the DB inflation increases.

Obviously you have to keep in mind that if you live beyond 100 you are going to have to take other measures.

This highlights another aspect of this spreadsheet - if you download the back testing sheet as well and play around with it for a while, in the vast majority of cases it ends up saying that you spend more money in your later years of retirement than the earlier years - in fact this is baked in to their tables.  This is certainly very safe and sensible but it's the polar opposite of what many retirees might initially want - they will say they want to spend more money in the early years whilst they are move fit, mobile and healthy (with the exception of month or year 1 of your retirement where you get a pretty big amount well above 4%).

Tools like Timeline and CFiresim tend to model the scenario over a fixed period of years and they don't care if you accidently live till 110.  Timeline even calculates an "adjusted success rate" which is the chance of your portfolio running out, AND you still being alive, at that year.

Even in VPW model, those calculations with DB late, for me at least, are throwing red alarms are over a fixed period of years - that's why I guess they are suggesting you need an annuity to cover living longer than expected regardless of what the spreadsheet is telling you - they have massaged the figures there so that you nearly run out of money around 100 years old by the looks of it.

It's not actually totally clear what the red alarms even mean as I said above as it clearly doesn't mean your fund is going to end up totally exhausted during the bridging period.

I have also been trying to get to grips with all the postings on the "forward test" thread and the use of this 6 months cash "cushion" which are quite mind bending.

I will join that other forum and post a question maybe at some point, but I need to study it a bit more first.

Gary1984

If it's failing in the bridging period before DB starts you should consider creating a fixed term savings ladder so you're less affected by market crashes. Rates are pretty good right now as well.

[Deleted User]

Its true that the purpose of commutation is to accurately transfer funds to account for provision of the pension in later years.

The problem for you is that actuarial calculations account for average life expectancy.  That works out for a large pension fund. The higher the number of retirees, the closer they get to average duration.  A single person isn’t particularly likely to have average life expectancy.  When you throw a die, the average roll might be 3.5.  I throw 4, 5 and 6 too.  You have a decent chance of living longer than average.  Running out of money isn’t my idea of a happy retirement. 

Nobody “massaged” VPW to run out at 100. Its the basic concept behind VPW, so you don’t end up with too much on your death bed.  Of course there is a small chance of getting to 101, which is where annuity at 80 comes in. 

Investment-based drawdowns should always be designed for potentially larger drawdowns in the later years under typical scenarios. That’s because you have to provide for atypical scenarios.

All your comments appear to make me wonder if you have a clear objective.  Mine is to not run out of money too early while maximizing safe spending and not having too much left over after the end. Thats the ideology behind VPW. 

Pat38493

Deleted_User said:

Its true that the purpose of commutation is to accurately transfer funds to account for provision of the pension in later years.

The problem for you is that actuarial calculations account for average life expectancy.  That works out for a large pension fund. The higher the number of retirees, the closer they get to average duration.  A single person isn’t particularly likely to have average life expectancy.  When you throw a die, the average roll might be 3.5.  I through 4, 5 and 6 too.  You have a decent chance of living longer than average.  Running out of money isn’t my idea of a happy retirement. 

Nobody “massaged” VPW to run out at 100. Its the basic concept behind VPW, so you don’t end up with too much on your death bed.  Of course there is a small chance of getting to 101, which is where annuity at 80 comes in. 

Investment-based drawdowns should always be designed for potentially larger drawdowns in the later years under typical scenarios. That’s because you have to provide for atypical scenarios.

All your comments appear to make me wonder if you have a clear objective.  Mine is to not run out of money too early while maximizing safe spending and not having too much left over after the end. Thats the ideology behind VPW. 

Mine is mainly the same except that I would like ideally to have a pot left at the end to pass on.  Therefore it's more along the lines that in the worse case scenario, I would expect to almost run out of money at the end, but in median or high scenarios, I would have some pot left to pass on (or even pass on 10 years before I go or whatever).

Perhaps that means this particular model is not really the best for me.

At least, I would maybe not follow this model slavishly because probably if my retirement happened to coincide with boom times in the early years, I would end up with a lot of money I don't need being withdrawn each year.  Therefore I would probably set a maximum and minimum withdrawal in addition to using this type of approach (and in worst case end up being a higher rate taxpayer in some years when that's not needed either).

Linton

Another factor to consider is inflation. If you have an uncapped DB pension it makes sense to have as much of your "pot" as possible with that benefit.  Otherwise there is more pressure on your investments to provide future inflation matching.

On the other hand if the cap is at say 2-3% it may be preferable to ensure you have more invested money as that should provide better long term protection.

Pat38493

Linton said:

Another factor to consider is inflation. If you have an uncapped DB pension it makes sense to have as much of your "pot" as possible with that benefit.  Otherwise there is more pressure on your investments to provide future inflation matching.

On the other hand if the cap is at say 2-3% it may be preferable to ensure you have more invested money as that should provide better long term protection.

It's all capped at 5% RPI statutory in deferment.  Post retirement about a quarter of it is fixed 3% pa increase and the rest is RPI capped 5%.

Pat38493

michaels said:

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

I was looking at this sheet this evening.  On the first sheet what is the meaning of the sections called “safe cons amounts conditional on S&P 500 drawdown”, with various columns for different % levels.  Is this relating somehow to the market performance during the start year or suchlike?

michaels

Pat38493 said:

michaels said:

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

I was looking at this sheet this evening.  On the first sheet what is the meaning of the sections called “safe cons amounts conditional on S&P 500 drawdown”, with various columns for different % levels.  Is this relating somehow to the market performance during the start year or suchlike?

I think it is suggesting that if you start your drawdown during a period when the S&P has fallen back from its peak level then historically you would have been able to withdraw slightly more  (logically it sounds reasonable and helps with the situation where if you retire in a year when markets are high your big pot gives a high annual amount at a given SWR whereas if you retire a year later when markets are say down 20% then your safe withdrawal amount based on a percentage alone is also 20% smaller - ie if markets are not as 'high' then they are likely to perform 'better' going forward - of course it contradicts efficient market theory)