What Drawdown Strategy Would You Do?

GSP

I’m 60, my wife is 55 so a number of year’s still to go until we reach our state pension ages where we have 4 years to make up the full SP quota.

We are both in drawdown and I have £630k, of which £175k uncrystallised, £455k crystallised.
My wife has £143k, of which £135 uncrystallised, £8k crystallised and has just used her personal allowance for this tax year.

We intend to enjoy the money (withdrawing between £35k-£39k p.a. using tax free and tax allowances where possible), dwindle it down so not look for any large growth, and maybe leave around £200k as that will provide a little income alongside our SP’s. Our children will receive this plus the house when we go. We may receive £500k in 3 inheritances over the next 10 to 15 years or so, but should not rely on that. 

We have met a couple of IFA’s (as our current one is retiring anytime now), and during these visits it was noticeable how they made us aware of other products our current IFA has never mentioned. In particular Fixed Term Annuity’s, which seem attractive in our circumstances. Like many I was a little spooked losing 20% at it’s worst last year, and this product may take out some of the anxiety when the markets move the wrong way too much. 

We have chosen one of the IFA’s and will be meeting him again soon to transfer our funds over and sort out a plan for us going forward.

I can imagine there will be a number of options, and expect 5 IFA’s being asked the same question would come out with 5 slightly different results. I expect there are different suggestions on what to do with the current £78k tax free we have between us. There is also the need to protect my wife’s fund enough for tax efficient purposes, given the lower amount in there.

There was a recent thread on here about Fixed Term Annuities and a poster called David said he had just gone in for a plan for 3 years with no income but receiving 15% over the 3 years which might be usable for us somewhere within the numbers.

There is probably a drawdown strategy name for this, but at one of these meetings it was also suggested that the fund could be split into 3 pots. One where we had 5 years cash, next to another which had more stable investments (whatever they are lately!) and a third pot for high risk equities. I think the idea was if/as/when the equities had reached a certain performance level, money ‘made’ would then be passed into the middle pot with more ‘stable’ investments, and when numbers reached a certain point funds would then top up the cash pot.

As I say there are probably many ways in which people would go about this and it would be interesting to hear any thoughts on what any of you might do in the circumstances.

Thank you.

gm0

Would be good to boost your understanding of drawdown and approaches you could take before leaping on an annuity as the answer.  Better informed preferences for adviser discussion and a bit less product led.

Would suggest a scan through Michael McClung Living off your money - Amazon UK. 

For a full survey of a selection of common methods from the literature to manage drawdown including:

- Fixed indexed (4% rule)
- Variable % withdrawal
- Pots
- Capped and collared variable income
- Extended Mortality tables
- GuytonKlinger

- Mixing in guaranteed elements (annuities, bond ladders)

which is where the fixed term annuity idea comes in pre SP probably).

- His own suggestions such as Prime Harvesting.

- And a load of other ideas from the investing internet some of which fall by the testing wayside quite quickly.

A lot of comparative testing and sensitivity analysis.  Probably more than you want. US and non-US data set tests. 
It's not a UK specific implementation cookbook but as good a testing survey of the drawdown planning literature as I have yet found.  Doesn't cover exactly the same ground as Early Retirement Now - drawdown blog series. 
But for what it does cover I prefer the approach.

You can adjust the balance of risk between the "risk of running out" in the next 40 years and the "risk of dying with a larger than necessary pot unspent i.e. too much possible income foregone". 

And those method choices will work as well as they do for your retirement and specific investment return sequence i.e. the path you are on rather than any sum of all paths / median.

Very much the best £30 I spent on thinking about drawdown. 

GSP

gm0 said:

Would be good to boost your understanding of drawdown and approaches you could take before leaping on an annuity as the answer.  Better informed preferences for adviser discussion and a bit less product led.

Would suggest a scan through Michael McClung Living off your money - Amazon UK. 

For a full survey of a selection of common methods from the literature to manage drawdown including:

- Fixed indexed (4% rule)
- Variable % withdrawal
- Pots
- Capped and collared variable income
- Extended Mortality tables
- GuytonKlinger

- Mixing in guaranteed elements (annuities, bond ladders)

which is where the fixed term annuity idea comes in pre SP probably).

- His own suggestions such as Prime Harvesting.

- And a load of other ideas from the investing internet some of which fall by the testing wayside quite quickly.

A lot of comparative testing and sensitivity analysis.  Probably more than you want. US and non-US data set tests. 
It's not a UK specific implementation cookbook but as good a testing survey of the drawdown planning literature as I have yet found.  Doesn't cover exactly the same ground as Early Retirement Now - drawdown blog series. 
But for what it does cover I prefer the approach.

You can adjust the balance of risk between the "risk of running out" in the next 40 years and the "risk of dying with a larger than necessary pot unspent i.e. too much possible income foregone". 

And those method choices will work as well as they do for your retirement and specific investment return sequence i.e. the path you are on rather than any sum of all paths / median.

Very much the best £30 I spent on thinking about drawdown. 

Thanks gm0 and that’s the thing with so many options, what are the best one(s).

When it comes to my meeting shortly with the new IFA, he will be better placed than me and having seen clients on their paths decide what is the best strategy for us. It comes down to trust, but mostly experience.

Reaching out on this forum, that’s what I would be interested in a number of views by members and what they would do with my situation and how these were similar, or quite varied.

If there was a stand out response, I could bring that to the table to discuss.

Linton

A sensible option in my view is to use more than one strategy to improve reliability of income by diversification.  I use a 4 pots approach.  One of the pots is for income funds from which I take the natural income to cover day to day expenss..  In parallel the other 3 pots are cash, growth and lower risk investments.  One-off major expenses and possibly shortfalls in day to day income are taken from cash.  The 3 non-income pots are rebalanced once a year.

One advantage of this type of approach is that there is no reason to get spooked by whatever the market does.  Income funds dont stop producing income just because the markets fall and say 5 years cash and 5 years low risk investments mean that there is 10 years for the far more volatile growth pot to recover from a major event.

westv

It's a pity that jamesd seems to have gone for good now.

GSP

Linton said:

A sensible option in my view is to use more than one strategy to improve reliability of income by diversification.  I use a 4 pots approach.  One of the pots is for income funds from which I take the natural income to cover day to day expenss..  In parallel the other 3 pots are cash, growth and lower risk investments.  One-off major expenses and possibly shortfalls in day to day income are taken from cash.  The 3 non-income pots are rebalanced once a year.

One advantage of this type of approach is that there is no reason to get spooked by whatever the market does.  Income funds dont stop producing income just because the markets fall and say 5 years cash and 5 years low risk investments mean that there is 10 years for the far more volatile growth pot to recover from a major event.

This is really useful, thanks Linton.
Your first paragraph sounds more or less what my new IFA was suggesting as an option.
I wonder if a fixed term annuity for 3 years where no income is taken but guarantees 15% could form part of a mix perhaps?

Yes your second paragraph sounds really good as well as I’m waiting for another collapse of sorts we have been ‘promised’ by some commentators.

Sharktail

GSP said

I wonder if a fixed term annuity for 3 years where no income is taken but guarantees 15% could form part of a mix perhaps?

Out of interest where is this option available?
thanks

Linton

GSP said:

Linton said:

A sensible option in my view is to use more than one strategy to improve reliability of income by diversification.  I use a 4 pots approach.  One of the pots is for income funds from which I take the natural income to cover day to day expenss..  In parallel the other 3 pots are cash, growth and lower risk investments.  One-off major expenses and possibly shortfalls in day to day income are taken from cash.  The 3 non-income pots are rebalanced once a year.

One advantage of this type of approach is that there is no reason to get spooked by whatever the market does.  Income funds dont stop producing income just because the markets fall and say 5 years cash and 5 years low risk investments mean that there is 10 years for the far more volatile growth pot to recover from a major event.

This is really useful, thanks Linton.
Your first paragraph sounds more or less what my new IFA was suggesting as an option.
I wonder if a fixed term annuity for 3 years where no income is taken but guarantees 15% could form part of a mix perhaps?

Yes your second paragraph sounds really good as well as I’m waiting for another collapse of sorts we have been ‘promised’ by some commentators.

Since the 2008 crash annuities have only been worth considering in the past few months.  I think they now have a place but it  has been too short a time to have thought through what that place is.  Certainly when one reaches say an age of around 85 they seem to be very attractive.  Earlier, I dont know.

I can't support you in "waiting for another collapse".  "Some commentators" have no more insight into the future than anyone else and I suspect their predictions are driven more by the number of readers/viewers they can attract rather than a desire to help investors navigate the market's rises and falls.  After all, if they really knew the future the last things they should do is to tell everyone else.  On the other hand if their income is determined by their audience share....

Better in my view to try to develop a strategy that can cope reasonably well with whatever happens barring "the end of the world as we know it" scenarios and then accept events with little more than a shrug of he shoulders.

GSP

Sharktail said:

GSP said

I wonder if a fixed term annuity for 3 years where no income is taken but guarantees 15% could form part of a mix perhaps?

Out of interest where is this option available?
thanks

https://forums.moneysavingexpert.com/discussion/6416590/fixed-term-annuity-calculator-and-any-thoughts/p1

In this thread sharktail. On the first page look for poster David99m. I tried to contact him about more on this but he never came back to me.

OldMusicGuy

I've just taken out an RPI linked annuity with part of my DC pot as rates were so good it was a great opportunity to get some secure income as a base in addition to SP (I have no DB pensions). I have left the rest invested slightly more aggressively than I previously had it so that this will provide funds we can use as needed later in life. I don't plan to touch this for 10 to 15 years at least.

Annuities are definitely worth considering at present IMO as part of your retirement strategy but it depends on your circumstances and risk appetite. 

JohnWinder

There is a series of posts by a very smart man who discusses different withdrawal strategies, looking at how they would have fared under past conditions and how they might do in future. There’s a lot of material, but it’s coherent, and you can dip in and out as you wish: https://earlyretirementnow.com/safe-withdrawal-rate-series/
You’ll come out a lot better informed on the other side.