Drawdown : Safe Withdrawal Rate and SP/DB factored In

dunstonh

Yes but if you are bridging an income for some years before one or both those pensions kick in, you shouldn't be constrained to a 3% withdrawal rate as once you have those guaranteed incomes in play, you might be only withdrawing 1% or less.

Correct.  "Funding the gap" as it is frequently referred to means you need to model things differently.

DT2001

NedS said:

There are a number of ways you can approach this depending on your circumstances.

How old are you, and how many years do you need to cover between early retirement and DB/SP kicking in?

Will DB+SP be enough, or are you looking for a portion of your DC investments to remain at SP age to top up DB/SP income?

I prefer the "pots" approach, so I would mentally put aside the amount you need between early retirement and DB/SP into a "pot", and maybe look to invest that in individual government gilts or other fixed rate investments in a bond ladder type arrangement.

The remainder (another "pot") can then be invested for the longer term to provide that top up income to supplement your DB/SP.

With respect to asset allocation, you can view the DB/SP as guaranteed fixed income/bonds (low risk) and your DC investments as the risky portion of your portfolio, which may allow you to hold a higher percentage of equity in your DC investments that you otherwise would - as long as you are able to handle the additional volatility (e.g, by having the ability to flexibly vary your income if needed).

However, Safe Withdraw Rates do not consider what income you need, they only consider what income may be sustainable from any given pot.

I am 62. DB is in payment and SP is due in 3.5 years. At the moment I have £35k to cover SP in cash however as OH enjoys and continues to work I’ll invest some of this as time goes on.

I have guesstimated  my ‘necessary’ expenditure and anything above that we will allocate as we want. We love travel and watching sport so can flex our spend.

DT2001

dunstonh said:

If I value the SP at say £300k (being roughly a 3% return on ‘capital’) and the DB at say £150k to reflect only partial inflation protection it gives me a ‘guaranteed’ income pot of 46% of the total. My take is that this is the non equity element of my income generation. Do others agree with this thought process? Guyton Kinger look to 65/35 as a starting point and a 15% swing in allocation depending on their estimation of whether equities are overvalued.

Why would you put any capital value on something that has no capital value.  

I wouldn't be too worried about the occasional times that they do not keep up with inflation as any forecasting will be wrong and by a margin greater than the rate of inflation.

Any thoughts on, in particular, how we should treat DB/SP income in respect of equity/bond/cash ratio and people’s ranking of priorities in retirement.

You don't.

If you need £x a year income, you deduct the DB and SP from that need.  That leaves you the shortfall figure.     
You then address the shortfall from the invested assets and leave the secure income out of the equation.

Ideally, you want the target lump sum able to produce that £x from less than 3.5% of the lump sum (3% if retiring in in your 50s. Even less if you are a cautious investor).

I wanted to put a capital value on the DB/SP (although I know it does not have one) as I was suggesting treating that source as the equivalent of ‘guaranteed’ bond/gilts and then increasing my equity holding.

As I am happy to have a variable income and expect to need less later in life (as we travel less) I was looking at a higher % and as such a  higher ratio of equity.

Pat38493

DT2001 said:

dunstonh said:

If I value the SP at say £300k (being roughly a 3% return on ‘capital’) and the DB at say £150k to reflect only partial inflation protection it gives me a ‘guaranteed’ income pot of 46% of the total. My take is that this is the non equity element of my income generation. Do others agree with this thought process? Guyton Kinger look to 65/35 as a starting point and a 15% swing in allocation depending on their estimation of whether equities are overvalued.

Why would you put any capital value on something that has no capital value.  

I wouldn't be too worried about the occasional times that they do not keep up with inflation as any forecasting will be wrong and by a margin greater than the rate of inflation.

Any thoughts on, in particular, how we should treat DB/SP income in respect of equity/bond/cash ratio and people’s ranking of priorities in retirement.

You don't.

If you need £x a year income, you deduct the DB and SP from that need.  That leaves you the shortfall figure.     
You then address the shortfall from the invested assets and leave the secure income out of the equation.

Ideally, you want the target lump sum able to produce that £x from less than 3.5% of the lump sum (3% if retiring in in your 50s. Even less if you are a cautious investor).

I wanted to put a capital value on the DB/SP (although I know it does not have one) as I was suggesting treating that source as the equivalent of ‘guaranteed’ bond/gilts and then increasing my equity holding.

As I am happy to have a variable income and expect to need less later in life (as we travel less) I was looking at a higher % and as such a  higher ratio of equity.

This kind of makes sense and there was a thread about this a while ago, but you nevertheless have to keep in mind that those income streams won't start for quite a few years and therefore there is a chance of running out of money before your DB/SP starts.

Without knowing what you expect your average or minimum spend to be, it's hard to comment much further because this gives an indication of how big your pot is in relation to the spending plan that you hope for.  For example if you are saying you can live perfectly fine on your DB+SP after they kick in so you are happy to risk the possibility of your entire fund being exhausted at that time, this is relevant information for any comments to be made.  

DT2001

enthusiasticsaver said:

All these suggested drawdown percentages are only a guideline as no one knows exactly how the market will perform, inflation rates etc etc. We draw 4% per year from now until our SPs kick in (2024 and 2026) and then we will probably stop drawing on investments so then 2%  possibly for 2 years then nothing. We did not draw at all through 2020-2022 and lived off savings so our current drawdown is actually to replace those savings rather than to cover expenditure.  Our main income is DBs.  We don't yet get SPs but will treat them as we do our DBs which are guaranteed inflation linked income. 

Am I to understand that you do not have a figure in mind that you will need in income to cover outgoings? Even if you were self employed and used to erratic income surely you have a ballpark figure in mind which you would not want to go below? I personally would not want to go any higher than 60% equities and luckily we do not need to increase our risk level to possibly achieve higher growth. 

I will admit I am very vague on income required. I know that SP and DB will cover ‘basic’ spend.
As my OH is still happy working I do not know how much support our children will need when she retires (2 at Uni at the moment, 1 at school and the other still at home). I also want to move to a smaller , better insulated property. 2% drawdown on the £520k would be fine as a minimum and I am quite happy to vary spending in line with returns on the hope that over 10 years it will balance out.

Pat38493

DT2001 said:

enthusiasticsaver said:

All these suggested drawdown percentages are only a guideline as no one knows exactly how the market will perform, inflation rates etc etc. We draw 4% per year from now until our SPs kick in (2024 and 2026) and then we will probably stop drawing on investments so then 2%  possibly for 2 years then nothing. We did not draw at all through 2020-2022 and lived off savings so our current drawdown is actually to replace those savings rather than to cover expenditure.  Our main income is DBs.  We don't yet get SPs but will treat them as we do our DBs which are guaranteed inflation linked income. 

Am I to understand that you do not have a figure in mind that you will need in income to cover outgoings? Even if you were self employed and used to erratic income surely you have a ballpark figure in mind which you would not want to go below? I personally would not want to go any higher than 60% equities and luckily we do not need to increase our risk level to possibly achieve higher growth. 

I will admit I am very vague on income required. I know that SP and DB will cover ‘basic’ spend.
As my OH is still happy working I do not know how much support our children will need when she retires (2 at Uni at the moment, 1 at school and the other still at home). I also want to move to a smaller , better insulated property. 2% drawdown on the £520k would be fine as a minimum and I am quite happy to vary spending in line with returns on the hope that over 10 years it will balance out.

Does your OH have full SP as well or only you?  Does OH have any other retirement assets?  If not you would need to think about contingency if you were to die first.

This last post where you mention 2% withdrawal would have a good chance to leave your fund balance higher than where you started after 10 years and you could probably go with a fairly safe mix.

There’s a lot of posters who have a low appetite for volatility on this thread - if you were only taking out 2% per year and wanting your capital to last all they way through retirement, if I was you I would be looking to go 80% equities, but I’m sure others will disagree.  You need to be able to tolerate some volatility.

If you are not that bothered about capital depletion and you are trying to bridge 10 years, you could start with a 10% withdrawal. 

However if you exhaust your capital you will end up living on less than £20k per year if your OH doesn’t have any pension assets - that’s pretty low.

DT2001

Pat38493 said:

DT2001 said:

dunstonh said:

If I value the SP at say £300k (being roughly a 3% return on ‘capital’) and the DB at say £150k to reflect only partial inflation protection it gives me a ‘guaranteed’ income pot of 46% of the total. My take is that this is the non equity element of my income generation. Do others agree with this thought process? Guyton Kinger look to 65/35 as a starting point and a 15% swing in allocation depending on their estimation of whether equities are overvalued.

Why would you put any capital value on something that has no capital value.  

I wouldn't be too worried about the occasional times that they do not keep up with inflation as any forecasting will be wrong and by a margin greater than the rate of inflation.

Any thoughts on, in particular, how we should treat DB/SP income in respect of equity/bond/cash ratio and people’s ranking of priorities in retirement.

You don't.

If you need £x a year income, you deduct the DB and SP from that need.  That leaves you the shortfall figure.     
You then address the shortfall from the invested assets and leave the secure income out of the equation.

Ideally, you want the target lump sum able to produce that £x from less than 3.5% of the lump sum (3% if retiring in in your 50s. Even less if you are a cautious investor).

I wanted to put a capital value on the DB/SP (although I know it does not have one) as I was suggesting treating that source as the equivalent of ‘guaranteed’ bond/gilts and then increasing my equity holding.

As I am happy to have a variable income and expect to need less later in life (as we travel less) I was looking at a higher % and as such a  higher ratio of equity.

This kind of makes sense and there was a thread about this a while ago, but you nevertheless have to keep in mind that those income streams won't start for quite a few years and therefore there is a chance of running out of money before your DB/SP starts.

Without knowing what you expect your average or minimum spend to be, it's hard to comment much further because this gives an indication of how big your pot is in relation to the spending plan that you hope for.  For example if you are saying you can live perfectly fine on your DB+SP after they kick in so you are happy to risk the possibility of your entire fund being exhausted at that time, this is relevant information for any comments to be made.  

Thank you for the VPW suggestion, I will research.

DB is in payment and SP in 3.5 years. Gap covered by £35k in cash. OH still working so that £35k will be drip fed into the market as long as she carries on.


OH’s income is sporadic and she now only takes on work she enjoys. Covid changed everything, we were drifting into semi retirement and then faced a point with minimal income and a portfolio 20% down. Then OH found a new contract that she really enjoyed - full time, which has opened up new opportunities so forecasting/planning is difficult. My best, current, guess is that 
I will reach SP at or about the time OH retires. I will then try and balance drawing as much as possible (which we will include passing excess to our children) with keeping enough to cope with longevity. If I increase my equity holding it will increase returns IF I accept higher income volatility.

Pat38493

DT2001 said:

Thank you for the VPW suggestion, I will research.

DB is in payment and SP in 3.5 years. Gap covered by £35k in cash. OH still working so that £35k will be drip fed into the market as long as she carries on.


OH’s income is sporadic and she now only takes on work she enjoys. Covid changed everything, we were drifting into semi retirement and then faced a point with minimal income and a portfolio 20% down. Then OH found a new contract that she really enjoyed - full time, which has opened up new opportunities so forecasting/planning is difficult. My best, current, guess is that 
I will reach SP at or about the time OH retires. I will then try and balance drawing as much as possible (which we will include passing excess to our children) with keeping enough to cope with longevity. If I increase my equity holding it will increase returns IF I accept higher income volatility.

Sorry I was getting confused because you mentioned things evening out over 10 years so I assumed you were trying to bridge 10 years till retirement.

So to recap, you are early 60s in age, your DB is already in payment and you just need to bridge 3.5 years till SP.

You have £520K in SIPPS and ISA plus 35K cash (or is the 35K included in the 520)?

You still didn't mention if your OH has full State Pension and/or any other retirement provision.  If you engaged an IFA I think they would stress the importance of planning your retirement as a couple rather than individually (unless you think the relationship is in trouble or suchlike), and also planning what if scenarios for whichever one of you would die first.

All that said, if your OP was proposing a 5% withdrawal just for a few years and then going down to less than 3%, you will probably be fine and you will more than likely end up with more money than you started.

As regards investment mix - this depends partly on your risk appetite, and your tolerance for volatility.  If I've understood your situation correctly, personally I would look to invest it long term in 80/20 equities bonds.  Maybe de-risk it for a few years in the early part and then step up again.  This is statistically likely to give you the best long term performance over several decades, based on historical analyses of the last 100+ years (always noting that past performance is no guarantee of future succes etc).  

However if you are high in equities you need to accept that there will be times when your balance takes a steep dive and it will then recover again.  If that type of situation will cause you to lose sleep at night, or even worse cause you to change your investment mix at market low and crystallise losses, you need to be more heavily in safer investments.  This will partly depend on your psychological attitude to risk and volatility.

MK62

You can get very bogged down researching into this, and there are quite a few viable looking drawdown strategies......but they all have the same thing in common......they are just educated guesses, based on a certain set of assumptions arrived at using historical data. In the end, this problem is unsolvable in any definitive way - simply too many unknown (and unknowable) variables (timeframe, returns and sequence of, inflation and sequence of etc) 

So you have to plan on an estimated probability basis, based on certain assumptions, which essentially means, be prepared to change those assumptions....

Linton

MK62 said:

You can get very bogged down researching into this, and there are quite a few viable looking drawdown strategies......but they all have the same thing in common......they are just educated guesses, based on a certain set of assumptions arrived at using historical data. In the end, this problem is unsolvable in any definitive way - simply too many unknown (and unknowable) variables (timeframe, returns and sequence of, inflation and sequence of etc) 

So you have to plan on an estimated probability basis, based on certain assumptions, which essentially means, be prepared to change those assumptions....

Yes, to plan and manage retirement you have to make a number of assumptions about the future.   These will of necessity  prove to be inaccurate, a problem which is not resolved by spending a long time researching the past. So it is prudent to be somewhat pessimistic.

 Given the assumptions it is straightforward to develop a spreadsheet model showing assets, investment returns, income, and expenditure. But then it is essential to monitor your model against reality annually and change the numbers appropriately. It may be necessary to change assumptions but I am still using the same ones I started with 20 years ago.

In my experience you dont need anything more complex than that.