the "safe" 4% drawdown rule - flexible if receiving a DB pension also ?

Mick70

Morning all.
Have read a few threads on here discussing safe withdrawl rates of your pension pot etc, and often they become too complex for somebody like myself to follow , however I often see 4% being referred to

Quick question on my scenario, if dont mind 

Age 53 , would like to retire in 4 years , at age 57. when my wife will turn 60.
Wont get full state pension until say 67

Currently receive a DB pension (had protected rights before forced out) of £29.5k (rises inflation/capped at 5%)


My DC pot and isa savings currently come to £200k. and my wife's is same (hers half cash)  - so in total £400k.
I am hoping that we can get that pot value up to £600k come 2027.

so in 4 year , if i expect my DB to then be £32k pa.  would i still use the 4% rule on the 600k (which would give 24k pa and increase that by say 2% pa), or because i am half funded by my DB pension , and we will get state pensions 10 year into our retirement  does that mean you can afford to use a higher % , say 5%, then reduce it to 3% once both get state pensions ?


thanks any advice , wasn't sure how flexible this 4% scenario is meant to be

many thanks
mick

Gary1984

There will be different ways of doing this but you could think of your pension of being 2 different pots.

The amount in the first pot is: State Pension Amount x no. of years to state pension.  The second pot is whatever is left after you deduct pot 1. 

Each year you then take the state pension equivalent from pot 1 and 4% from pot 2.

OldScientist

The 4% 'rule' (which really only applies to historical US retirees - at 3.0-3.5%, it is a bit less for historical UK retirees, largely because inflation in the UK was worse than inflation in the US during the 20th century) includes increasing withdrawals by inflation each year - so fixed withdrawals in real terms.

The question you might like to ask yourself, is how much of your 'essential' expenditure (however you might like to define that) will be covered by your 32k DB pension and, in 7-10 years by your state pensions? The answer to that question is slightly more complicated by the inflation cap on your DB pension (since it will decrease in real terms if inflation remains above 5%).

If the answer to that question is 'yes our essential spending is covered', then variable withdrawals from your pot will make a lot of sense, ranging from a simple fixed percentage of the remaining pot, to an increasing percentage of the pot, e.g. VPW see https://www.bogleheads.org/wiki/Variable_percentage_withdrawal ), or more complex approaches with guardrails (google Guyton-Klinger) or smoothing (google Vanguard dynamic spending).

Audaxer

Mick70 said:

Morning all.
Have read a few threads on here discussing safe withdrawl rates of your pension pot etc, and often they become too complex for somebody like myself to follow , however I often see 4% being referred to

Quick question on my scenario, if dont mind 

Age 53 , would like to retire in 4 years , at age 57. when my wife will turn 60.
Wont get full state pension until say 67

Currently receive a DB pension (had protected rights before forced out) of £29.5k (rises inflation/capped at 5%)


My DC pot and isa savings currently come to £200k. and my wife's is same (hers half cash)  - so in total £400k.
I am hoping that we can get that pot value up to £600k come 2027.

so in 4 year , if i expect my DB to then be £32k pa.  would i still use the 4% rule on the 600k (which would give 24k pa and increase that by say 2% pa), or because i am half funded by my DB pension , and we will get state pensions 10 year into our retirement  does that mean you can afford to use a higher % , say 5%, then reduce it to 3% once both get state pensions ?


thanks any advice , wasn't sure how flexible this 4% scenario is meant to be

many thanks
mick

I wouldn't be expecting a £400k investment pot to rise by as much as 50% to £600k in 4 years. It might do, but it pretty hopeful in my opinion.

It depends how much income you need in retirement, but I would have thought with a £29.5k DB pension and your SP to come 10 years after you retire, and your wife's SP coming 3 years earlier, that alone is quite a large income. So I think you could take a higher percentage when you retire at 57, but I would not base it on your joint pot being as much as £600k. 

DT2001

https://forums.moneysavingexpert.com/discussion/6434957/drawdown-safe-withdrawal-rate-and-sp-db-factored-in#latest

I started the above thread a short time ago and there are some very good ideas that may be of help to you.

Personally I’d look initially at your expected expenditure when you retire. Do you see an even spend or more upfront (long haul travel before, say, 75 or expensive hobbies). Then I would look to cover the years between retirement and SPA with one pot of money (at todays figures £10k x 10 years and £10k x 7 years) which in effect replaces the SP and the residual pot geared to your spending plan. So you could front load quite heavily if you expect to only need DB/SP  + a small amount post SPA.

If you do as you suggest and take 5% p.a. until SPA, ignoring inflation, you draw £30k. Total income £62k. At SPA you take 3% so £18k plus £32k plus £20k, total £70k. This assumes the growth in your pot covers your drawings however it highlights increasing income at SPA when you may have preferred more earlier. So work your budget and be realistic about how flexible you can be and try oldscientist’s link to VPW.

gm0

The long term sustainability of the drawing on a DC pot is not affected *itself* by other pots or sources of guaranteed income.   A WR calculated that works for a given severity of histories or simulations works or doesn't. Just maths.

So for your personal retirement date and returns sequence (the actual path for you) a 3% 4% 5% WR and the capital depletion together lasts until death 40 years on or it doesn't - if WR was too high - and you proved to be on the unluckiest of paths (which is unknowable in advance). 

For a wide range of possible futures - the answer for fixed indexed sustainable draw is 3.0 - 3.5% (UK resident sterling). 
A lot - even most of the time - this will leave income undrawn and a larger than needed pot of residual capital at death.  And a few times it will "just make it".  Nature of the statistics.  Maximum SWR is defined around the appearance of failure paths based on the random simulation parameters or the historical records or whatever is used. 

Anything higher is above MSWR = fails sometimes.  Anything lower is just a chosen WR that worked for the test
Future circumstances will either resemble (fall within the  limits of) the market simulation - or they won't. 

Aggressively conservative simulations lead to lower MSWRs which lead to selection of lower than needed WRs for fixed indexed incomes.

In practice for the retiree with a variety of income sources the *overall* picture changes. 

Clearly if your other income DB + SP covers a lot of "essential income" need this permits a lower DC draw (if lower risk to the DC scenario is preferred) or better a variable income techniques can be used.  Or the DC pot can be invested more aggressively as less of it needs to be available in low risk assets for essential income during a bad decade.  If more risk and potential return is desired

Even if you don't swing the risk dial.  Ability to vary income with what actually happens is very helpful in managing your path along the returns journey - all the better to preserve capital by not selling too many units in market dips to sustain essential income. So that when they recover you are still invested.  Prolonged slump followed by forced selling of risk assets for income is how retirement failures via depletion happens.

Variable income will "harvest" the returns and capital better while still providing a risk managed (testable) path through the DC drawdown element.

dunstonh

Have read a few threads on here discussing safe withdrawl rates of your pension pot etc, and often they become too complex for somebody like myself to follow , however I often see 4% being referred to

Firstly there is no SWR.   It is opinion and will be very much depend on your assets and your age.  4% is considered too high for UK.    2.5%-3% if you are in your 50s rising to 3% in your low 60s rising to 3.5% in your mid to late 60s is more typical for UK.

so in 4 year , if i expect my DB to then be £32k pa.  would i still use the 4% rule on the 600k (which would give 24k pa and increase that by say 2% pa), or because i am half funded by my DB pension , and we will get state pensions 10 year into our retirement  does that mean you can afford to use a higher % , say 5%, then reduce it to 3% once both get state pensions ?

Take DB and state pension out of the equation.   e.g. if you have an income need of £35,000 a year and your state pension and DB pension will provide £25,000, then your shortfall is £10,000.     You need to factor that £10,000 shortfall into the DC pension (and other savings/investments).

thanks any advice , wasn't sure how flexible this 4% scenario is meant to be

Its a largely a made up figure. So, its as flexible as any other made up figure.

And if you are doing things like "funding the gap" or have variable cost things to pay for over the years then you need to factor capital spending into it.   So, an SWR is largely pointless then.

Beddie

If you need/want to, withdraw more than that and enjoy it as you like (within reason.) You won't need so much money in your later years, as spending activity drops, and you'll have a good income already. You won't run out!

draiggoch

Not going to comment on the SWR, do you need to look closer at the balance of provision. 

1 if the worst happened to yourself  how much of your DB will your spouse receive?
2 if your spouse has no DB pension on retirement she will have the ability to withdraw more of the DC pension within her personal tax allowance.  

Albermarle

I wouldn't be expecting a £400k investment pot to rise by as much as 50% to £600k in 4 years. It might do, but it pretty hopeful in my opinion

The OP is planning to work for another 4 years and as well as employment income, he is already receiving a significant DB pension. So I imagine that £200K rise in 5 years is more about new pension contributions, than over optimism about investment growth.

Pat38493

Audaxer said:

I wouldn't be expecting a £400k investment pot to rise by as much as 50% to £600k in 4 years. It might do, but it pretty hopeful in my opinion.

I took the post to mean that OP is still employed and will make contributions as well, so not just through growth.