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

bostonerimus

What's your budget? and how long do you want your investments to last?

tacpot12

While I would agree that there is no withdrawal rate that is 100% safe, and that 4% would be too high for the UK, if the retirement arrangements were the same as they are in the USA, but they are not. The state pension, any DB pensions and/or any other retirement provision that you may have changes the 'SWR' radically. I have calculated my SWR to age 100 as being over 5% using cFIREsim and making allowances for the different rates of return, but most importantly for the other income I am due from my state pension, 2 db pensions and rental property. I would recommend using cFIREsim to estaimate your own SWR based on your retirement provisions and your own expectations of life expectancy. 

Linton

A couple of points hopefully relevent to this discussion.....

1) The assumption is often made, including here, that a DB pension is "safe" and equivalent to the state pension.  It could be, but only if uncapped.  If a year of inflation occurs with say 10% inflation and a nowadays rather generous 5% cap then the pension loses 5% in real value.  Not just during  the one year but for every succeeding year for the rest of your life.  The value of the DB pension will never increase in real terms to what it started as.

So if you have a capped DB pension, particularly if the cap is as low as 2.5%, it would be prudent to assume that its real value decreases over time.

2) If you are basing your retirement on SWRs derived from historical  data then you are likely to find that for most people most of the time it will prove to be extremely pessimistic.  The reason being that SWRs are determined by simulations that start during just 2 short periods in the past 150 years (around 1910 and 1965).  If your retirement did not start in those critical periods cfiresim shows that you would be likely to die with perhaps 3X the wealth you started with.

Audaxer

Albermarle 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

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.

Ah right, I assumed he just meant he expected it to grow by that amount.

itsmeagain

Audaxer said:

Albermarle 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

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.

Ah right, I assumed he just meant he expected it to grow by that amount.

Neither said or implied. It's only £25k PIA each per year (without any interest).

Mick70

Sorry the 600k est by 2027 was based on me still working another 4 year and putting away £50k a year.
thank you for the replies , food for thought , have a good weekend all 

eastcorkram

Not really relevant to the thread I know, but I'm amazed how anyone somehow ends up already in receipt of a DB pension paying £29k a year at the age of 53 

german_keeper

Do you need to get involved in SWR and all that Mick? Looks like we are in a similar position, albeit with rather lower numbers! We both have DB pensions, mine uncapped CPI missus RPI capped at 10%, and 2 full state pensions. We also both have a small DC pot. When we get to SPA we will have more money than we have ever had and none of the expense of bringing up 3 kids. So the plan has always been just to drawdown the DC pots between retirement and SPA.

I retired last year and missus in January this year. So far we have even gone against the original plan. We have no idea how much lower our bills will be without the kids at home. Eldest daughter has been gone a few years, younger daughter has just moved out. And the lad has decided belatedly at the age of 20 that university is for him and he goes in September. So instead of taking out the original planned amount from my DC I am just going to take £300 per month to keep me just below PTA. Between us we will have about £28k pa gross and net. Hopefully this will be enough even with paying £2,880 into our DC for the tax relief. If not I will take more out of my DC and pay a bit of tax.  Mrs GK won't be paying tax until SPA and worst case for me is that at some point I will pay a bit at 20%. I am desperately hoping that a Labour govt will increase PTA or the Tories will have a change of heart. 

I think what I mean is that in the position you are in, unlike those who only have a DC pot, you have plenty of leeway just to take things as they come rather than plan to the nth degree.

enthusiasticsaver

I don’t think there is such a thing as a blanket SWR. Too many variables like age, investment growth and other current and future sources of income and anticipated lifestyle spending like long haul holidays which may tail off as you get older. 

We worked out ours by taking anticipated expenditure in first 10 years of retirement, subtracting DB pensions and working out difference up until SP age. We were prepared to take out 5% from the portfolio for a maximum of 5 years until SP kicks in for my husband when we would then reduce to 2.5% for a further 2 years then stop drawing altogether when my SP kicks in. Maximum of 30% over the 7-8 years of early retirement  ignoring growth. However COVID happened shortly after retirement meaning we drew nothing for two years and savings covered our additional  needs in 2022. This is the first year we are taking out 5% and will do the same next year but then growth has been lower than expected. 

 Surely the point is for the pot plus other sources of income to cover your expenditure needs throughout your lifetime. If people keep to 3% then the pot should remain intact but that defeats the purpose of our saving for retirement in the first place unless you require it to be passed on as inheritance. 

gm0

The correct WR for an individual to pick of depends on needs, pot, plan duration and many other things. So guidance in the form of exact % applicable to different uses is elusive. 5-10 year bridge then bonus. 40+ year full retirement.  5% fine for one.  A tad challenging to justify for the other.

And yet a valid max number can be calculated (thus setting a range) for a WR to be fire proof or not - for all start dates and thus actual sequences in the historic market data. For given assumptions on portfolio, plan duration, indexation, balancing, costs etc.
This can be calculated and is knowable.  Always gets to the end - or does not.  A fact of arithmetic. 
This *specific* plan worked out or did not - in the world that already happened for these exact assumptions.  And that is all it shows

I find it plausible that a plan, a technique or a parameter (like a WR%) that already failed a lot - has a lesser chance of working in an unknown future than one that does mostly work in the historic record. 

That relationship is a predictive intuition and unprovable. It will likely not be true for all plans at all times. Luck will interfere and a historically bad plan will luck out for some people some of the time. Yet in general I am happy to run with the idea that the already failed is a rough guide to excluding ideas likely to do so again - while accepting its limitations. 

After that the rest is just arithmetic. It doesn't care whether you agree. It is not subject to alternative facts and opinions.  It is valid in its own terms and *only* for those exact assumptions.  Not beyond them.  Not for similar sounding plans.
Just for the one tested and the exact assumptions used.

The relevant "rule of thumb" how that feeds into planning is the one about not doing the "same thing again" and expecting "a different result".  Does it tell you what will happen - no.  Can it tell you that a given idea or plan is plausible or very probably poorly judged - absolutely it can.

If you don't like backtesting on the grounds that the future will be wild and different and rhyme less.  Then the chances of success in a given inflation and returns environment (distributions and random sequences of each) can be demonstrated via Monte Carlo simulation without recourse to historic market data as an input.   So no more arguments about world wars, great depressions and modern communications and how it's all different this time.  Just statistics about distributions of returns and inflation arriving in random sequences and income extracted and indexed

So again - a plan can be evaluated for how well it works/responds to a range of possible future environments.  The effectiveness of the plan based on a desired indexed income of size x on a pot y can be simulated tens of thousands of times to profile it against randomly excellent, good and terrible sequences within statistical ranges for inflation indexation and asset class returns.

Say an early massive crash, prolonged slump, sharp recovery after assets are already mostly sold for income which in our contrived example restores the "long term average return" to something like the expected one but not the fortunes of this particular extremely unlucky pensioner cohort who are a "failing retirement" in testing terms indicating that we are indeed above MSWR as they don't make it to the end.

A good MC sim outcomes heatmap - for well chosen ranges will plot out (in a fairly frightening fashion) how nasty it could mathematically get for different ranges in how the world turns out medium to long term in markets (long term asset returns and volatility ranges) and inflation.  As a way of scaring yourself a little to visualise otherwise abstract (to most) statistics it is most helpful. 

Now again there are many potential critiques of such a testing method - better mathematicians than I am would be all over it. 
Fat tails vs normal distributions, lack of randomness in real world sequence - but critique alone without improved alternatives offered is not going to help any one very much.  A better mousetrap please.  Not just commentary on the wrong kind of cheese.