Retirement income and drawdown.

Jaco70

I have two questions, vaguely related.

1). I saw on a pension company website that their estimated income required for a couple to retire 'comfortably' was £ 54,400. They didn't make it clear if that was pre or post tax? Seems a very high figure (to achieve) if after tax.

2). If you enter figures into a drawdown calculator online (eg. 500k pot, 4% drawdown), it gives you a figure for annual income and an age where they expect the pot to run out. If the money is left invested rather than taking an annuity, and you're only drawing 4% pa, why does it ever run out? Wouldn't the company handling the funds expect to average a better return than 4% long term?

Sorry that the queries are probably a bit simplistic, but if you don't ask....

jaypers

Unfortunately it isn’t an exact science. Some years it will achieve above the 4% and others maybe less. Possible it could do incredibly well, or conversely it could do badly. The issue is that as you draw funds, if the markets are under stress you are withdrawing against a lower unit value and you then need more units to raise the same amount of cash. One strategy is to have a backup fund and you stop withdrawing during times of stress and you draw down only when things are good. 

zagfles

1) Ignore. We've had several discussions here on about the ridiculous spending amounts the PLSA think people need. They are an industry body representing pension schemes so I guess they have a vested interested in getting people to save more. See these threads

https://forums.moneysavingexpert.com/discussion/comment/79774315#Comment_79774315

https://forums.moneysavingexpert.com/discussion/6282632/actual-spending-in-retirement-against-expectations/p7

Linked in one of  those threads I think is a Which? survey which has much more sensible figures

2) Not 4% above inflation. 

Linton

Jaco70 said:

I have two questions, vaguely related.

1). I saw on a pension company website that their estimated income required for a couple to retire 'comfortably' was £ 54,400. They didn't make it clear if that was pre or post tax? Seems a very high figure (to achieve) if after tax.

2). If you enter figures into a drawdown calculator online (eg. 500k pot, 4% drawdown), it gives you a figure for annual income and an age where they expect the pot to run out. If the money is left invested rather than taking an annuity, and you're only drawing 4% pa, why does it ever run out? Wouldn't the company handling the funds expect to average a better return than 4% long term?

Sorry that the queries are probably a bit simplistic, but if you don't ask....

1) The only think that matters is what income you need in retirement to live comfortably.  It would be foolish to base your retirement on what other people need.  The best starting point to decide what income you need is what you are actually spending now minus the expenses that wont apply in retirement.

2) When talking about drawdown, x% normally means x% of initial pot subsequently adjusted for inflation.   So your pot does at least need to rise with inflation in the long term and needs to be large enough so you can withstand below inflation or negative returns in the short to medium term. 

dunstonh

1). I saw on a pension company website that their estimated income required for a couple to retire 'comfortably' was £ 54,400. They didn't make it clear if that was pre or post tax? Seems a very high figure (to achieve) if after tax.

Its a made up figure. So, it doesn't really matter if its pre-post tax.

People in London have a greater requirement than those in rural areas.   Those with a consumer lifestyle will need more than those that do not.

2). If you enter figures into a drawdown calculator online (eg. 500k pot, 4% drawdown), it gives you a figure for annual income and an age where they expect the pot to run out. If the money is left invested rather than taking an annuity, and you're only drawing 4% pa, why does it ever run out? Wouldn't the company handling the funds expect to average a better return than 4% long term?

You are forgetting inflation.  4% doesn't leave you enough to cover inflation.  Its likely the calculator is showing 4% annually increased with inflation (most calculators will do this as default)   And starting at a high 4% means you need consistently high returns and that just isnt going to happen.

Also, if you are inputting a figure of 4% then why are they giving you an income and age where they expect it to run out?  Or is that in addition to the 4% figure?  (i.e. one line showing the income you can take to run the fund out at a certain age - hopefully longer than life expectancy. i.e. 10% of life expectancy and another line showing you what 4% indexed looks like and when that runs out).

Pat38493

The figures quoted on that website are indeed after tax, but in the end they are very vague averages based on a lot of assumptions that many would disagree with.

The only way to really know what you need is to plan out your own retirement and analyse what you are spending today and what you think you will need.

Regarding the 4% withdrawal "rule" - as others have said it's not exact and actually for UK investors quite a few people would challenge this and say it is more like 3.5% or even 3% to be "safe".  The intention of the original 4% rule was not to make sure that the money stays forever, it was to makes sure you don't run out of money within 30 years, and it is supposedly based on the worst case scenario - worst possible sequence of market conditions - a market crash early in your retirement will hurt your spending plans a lot more than a crash in the last years of retirement if you continue to take money out at the same rate.

Jaco70

Pat38493 said:

The figures quoted on that website are indeed after tax, but in the end they are very vague averages based on a lot of assumptions that many would disagree with.

The only way to really know what you need is to plan out your own retirement and analyse what you are spending today and what you think you will need.

Regarding the 4% withdrawal "rule" - as others have said it's not exact and actually for UK investors quite a few people would challenge this and say it is more like 3.5% or even 3% to be "safe".  The intention of the original 4% rule was not to make sure that the money stays forever, it was to makes sure you don't run out of money within 30 years, and it is supposedly based on the worst case scenario - worst possible sequence of market conditions - a market crash early in your retirement will hurt your spending plans a lot more than a crash in the last years of retirement if you continue to take money out at the same rate.

Thank you, for your reply and all the others before you. I understand it much better now, and obviously I completely understand that one persons 'needs' in retirement can be very different to their neighbours.

I think that these websites, whilst useful, assume that the person using them knows the basics (ie, that drawdown includes inflation or that the retirement income is post-tax), when actually some of us are greener than that.

The one thing I did actually know is that 4% drawdown is is often thought of as too generous these days, but I didn't really comprehend why. I do now.

Thanks again.

OldScientist

Jaco70 said:

I have two questions, vaguely related.

1). I saw on a pension company website that their estimated income required for a couple to retire 'comfortably' was £ 54,400. They didn't make it clear if that was pre or post tax? Seems a very high figure (to achieve) if after tax.

2). If you enter figures into a drawdown calculator online (eg. 500k pot, 4% drawdown), it gives you a figure for annual income and an age where they expect the pot to run out. If the money is left invested rather than taking an annuity, and you're only drawing 4% pa, why does it ever run out? Wouldn't the company handling the funds expect to average a better return than 4% long term?

Sorry that the queries are probably a bit simplistic, but if you don't ask....

1) I agree with what others have said that it is what  you require for your lifestyle that is important (and the best way to find that out is to meticulously track expenditure over a year or two). If you really want to compare what other people have as income then the stats at https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2022 indicate that median after tax income in retired households was about £26k and the more detailed stats at https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/datasets/householddisposableincomeandinequality suggest after tax income of £12k, £20k, 26k, £34k and £62k for the bottom, 2nd, 3rd, 4th, and top quintiles. In other words, 'comfortable' in pension company terminology (and other surveys) means those in the top 20% of the population.

There are people on these boards (e.g., https://forums.moneysavingexpert.com/discussion/6019383/its-time-to-start-digging-up-those-squirrelled-nuts#latest ) living happy, well funded retirements on less than £20k per year.

2) Again, as others have said, the 4% refers to inflation adjusted withdrawals - it also strictly applies to historical retirees in the US with US stocks and bonds and, more importantly, US inflation. While there have been many arguments on these boards (and elsewhere), the 'safe' withdrawal rate for the UK is somewhat less and probably lies somewhere between 3% and 3.5% depending on the stock allocation (e.g., see calculator at https://www.2020financial.co.uk/pension-drawdown-calculator/#calculator ). Annuity rates for single life, inflation adjusted annuities are currently just over 4% aged 65 (joint life with 50% survivor benefits are closer to 3.5%), e.g. see https://www.hl.co.uk/retirement/annuities/best-buy-rates.

Pat38493

I am using a tool called "money dashboard" to collect all my expenditure over a couple of years - it links to your bank accounts and allows you to categorize all of your spending, in many cases automatically.

I now have almost a full year of data.  You then have to figure out which parts of it are still relevant after you retire e.g. if you have paid off your mortgage.

This is a whole discussion area in itself as what one person might see as "essential expenditure" for them to feel their life is worthwhile, others would not need at all.

The other thing about 4% or 3% rules of course is that they are rarely used exactly in that way in real life because most people have some kind of state pension or other benefits that will kick in at some point during their retirement - 4% rule might not work if that's your only fund, but if you have a full state pension kicking in later, you might actually be able to draw more than 4% in the early years.

Also it's a fair point that the website discussed above almost goes out of its way to hide the information whether the figures are before or after tax - why that is I don't know but I spent quite a while on that site trying to find a definitive answer, which I think is hidden in some long document deep in the website.

Mutton_Geoff

Pat38493 said:

The figures quoted on that website are indeed after tax, but in the end they are very vague averages based on a lot of assumptions that many would disagree with.

The only way to really know what you need is to plan out your own retirement and analyse what you are spending today and what you think you will need.

Regarding the 4% withdrawal "rule" - as others have said it's not exact and actually for UK investors quite a few people would challenge this and say it is more like 3.5% or even 3% to be "safe".  The intention of the original 4% rule was not to make sure that the money stays forever, it was to makes sure you don't run out of money within 30 years, and it is supposedly based on the worst case scenario - worst possible sequence of market conditions - a market crash early in your retirement will hurt your spending plans a lot more than a crash in the last years of retirement if you continue to take money out at the same rate.

The problem with the 4% rule and other 'mericanisms is that it doesn't take into account state pension, property downsizing in later years etc. One of my biggest bugbears are FA's (not necessarily IFAs) who fail to take into account the value of the state pension pot as a cash equivalent. At £10,600 a year, that's as good as having at least £200k in an inflation proofed investment.

For my own calcs, I also plan on a higher drawdown rate in the first decade, slowing down later as there is a lot of the world I want to see before my knees creak too much.

Jaco70

OldScientist said:

Jaco70 said:

I have two questions, vaguely related.

1). I saw on a pension company website that their estimated income required for a couple to retire 'comfortably' was £ 54,400. They didn't make it clear if that was pre or post tax? Seems a very high figure (to achieve) if after tax.

2). If you enter figures into a drawdown calculator online (eg. 500k pot, 4% drawdown), it gives you a figure for annual income and an age where they expect the pot to run out. If the money is left invested rather than taking an annuity, and you're only drawing 4% pa, why does it ever run out? Wouldn't the company handling the funds expect to average a better return than 4% long term?

Sorry that the queries are probably a bit simplistic, but if you don't ask....

1) I agree with what others have said that it is what  you require for your lifestyle that is important (and the best way to find that out is to meticulously track expenditure over a year or two). If you really want to compare what other people have as income then the stats at https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2022 indicate that median after tax income in retired households was about £26k and the more detailed stats at https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/datasets/householddisposableincomeandinequality suggest after tax income of £12k, £20k, 26k, £34k and £62k for the bottom, 2nd, 3rd, 4th, and top quintiles. In other words, 'comfortable' in pension company terminology (and other surveys) means those in the top 20% of the population.

There are people on these boards (e.g., https://forums.moneysavingexpert.com/discussion/6019383/its-time-to-start-digging-up-those-squirrelled-nuts#latest ) living happy, well funded retirements on less than £20k per year.

2) Again, as others have said, the 4% refers to inflation adjusted withdrawals - it also strictly applies to historical retirees in the US with US stocks and bonds and, more importantly, US inflation. While there have been many arguments on these boards (and elsewhere), the 'safe' withdrawal rate for the UK is somewhat less and probably lies somewhere between 3% and 3.5% depending on the stock allocation (e.g., see calculator at https://www.2020financial.co.uk/pension-drawdown-calculator/#calculator ). Annuity rates for single life, inflation adjusted annuities are currently just over 4% aged 65 (joint life with 50% survivor benefits are closer to 3.5%), e.g. see https://www.hl.co.uk/retirement/annuities/best-buy-rates.

Thank you for your very detailed explanation. Would I be correct in thinking that the large difference between quintile 4 (34k) and quintile 5 (62k) is because the top one is skewed by having the likes of Bernie Eccleston, Rod Stewart etc in there?