Dynamic spending rules for retirement drawdown pros/cons and alternatives?

GazzaBloom

I've been musing on the Guyton drawdown rules and also the Vanguard Dynamic Spending rules for retirement drawdown and they both come up against the same issue in extreme prolonged bouts of difficult market conditions (eg like starting retirement in the late 60s), both sets of rules will see the portfolio survive but with long periods of reduced withdrawal to probably unsustainable levels and a dramatic loss of purchasing power against a period of rising inflation, which would make for a pretty miserable retirement.

Aside from taking chances with the luck of not hitting an early retirement poor sequence of returns, or, working for longer than desired and building a portfolio of such scale that your withdrawal rate is so small, and so allows you keep the money in low volatility investments/accounts, what are the alternatives for those who may retire with a reasonable pension pot but need it to keep generating future growth with a sizeable percentage in the equity market?

My situation, like many others I guess, is looking how to to best navigate the gap between a desired early retirement age and state pension age when the SP will provide the extra fixed income to allow withdrawals from DC pensions to reduce significantly.

I think some part time work or an additional income stream from a side hustle may be part of the answer that many of these modelled rules based systems don't allow for.

What's anyones thoughts or experience with using rules based drawdown strategies?

squirrelpie

You can always buy an annuity if you want certainty?

MK62

As squirrelpie has said, an annuity is always an option now that rates have improved (quite considerably).

I looked at GK rules, but discarded them for the reasons you stated.......however, if you are going down the drawdown route, you are probably going to have to accept at least some level of withdrawal variability.....I'm using a cash buffer to reduce that variation, but there's no guarantee if we hit a prolonged multi-year market slump or a prolonged period of negative real returns (ie inflation higher than portfolio returns). For this reason, I'm actively considering an annuity atm, at least for part of our income.......rates have improved to the point where they are at least a viable alternative.....

PS - dependant on actual age, if I was approaching retirement now, and was looking to bridge the gap to SP, I'd probably be looking at a ladder of savings bonds, probably funded from TFC......or else a "ladder" of gilts if no more TFC was available. If it was a double digit year gap to SP, I might be looking at a fixed term annuity of equivalent duration.

DT2001

I think it depends on the timescale between retirement and SPA. I have been keeping a cash fund that would cover most of the SP amount equivalent times the number years to go. As we get closer to SPA I’m reducing this - my OH is happy working at the moment but if that changes I’m in a position to cover all basic costs from DB, cash, FIT and rental income.
Thereafter I was looking at natural income.

With the latest rise in annuity rates I would/might have considered a fixed term method. I am now only 3 years from SPA and OH 9 (small DB due in 2 years) so probably past the time when it was most appropriate.

GazzaBloom

Thanks, I'm looking at potentially 8 years between a desired retirement and SP, it will be 3 years after that that my wife's SP kicks in. 

Ref cash buffer, yes I will have a cash buffer, looking at accumulating 3 years worth of of drawdown to cover inflation adjusted expenditure (using (hoping we return to) a 2.5% inflation escalation for household expenses) So, expected portfolio at point of retirement will be around 85% stocks funds and 15% cash, which will earn the BOE base rate within my pension wrapper (confirmed by provider).

But, I am torn between taking withdrawals at 85/15 mix of cash/stocks each year and rebalance at the end of each year, or holding the cash back to draw only in market downturns. But, what is the trigger to switch to cash? a 10% drop in the market, 20%? and when do you switch back? I'm leaning to a drawdown mix and rebalancing. The cash gets eaten up slowly or grows in good years when rebalanced until the market crashes and the rebalance sees cash being used to top up the stocks. 

I hadn't really thought about a part annuity, the thought of giving my money to an insurance company to take the same risks I can take myself but I get to keep the pot at the end if death comes sooner than expected, doesn't really sit well with me.

Ref bond ladders etc, I don't really like bonds and only really seem to have access to bonds funds in my pension. Maybe the day will come when I would prefer bonds to cash, but I don't currently. 

DT2001

Fixed term annuity and you get funds back but guarantee your income for x number of years?

Can you define what sequence of return you want/need to avoid and then tweak your strategy - an annuity (even fixed term) guarantees some income and mitigates part of the risk. It comes down to the level of risk/reward you want to take.

Linton

I have always taken the position that given the plans show that there is sufficient money to last my lifetime, I should never need to cut back on my standard of living or delay planned major expenditure because of short term events.  So dynamic spending rules are totally unacceptable

The problem is how best to a manage one's finances to meet that objective.   Annuities could well be part of the solution but they are too inflexible on their own for one-off major items.  In any case until very recently they were expensive.

Pat38493

GazzaBloom said:

Thanks, I'm looking at potentially 8 years between a desired retirement and SP, it will be years after that that my wife's SP kicks in. 

Ref cash buffer, yes I will have a cash buffer, looking at accumulating 3 years worth of of drawdown to cover inflation adjusted expenditure (using (hoping we return to) a 2.5% inflation escalation for household expenses) So, expected portfolio at point of retirement will be around 85% stocks funds and 15% cash, which will earn the BOE base rate within my pension wrapper (confirmed by provider).

But, I am torn between taking withdrawals at 85/15 mix of cash/stocks each year and rebalance at the end of each year, or holding the cash back to draw only in market downturns. But, what is the trigger to switch to cash? a 10% drop in the market, 20%? and when do you switch back? I'm leaning to a drawdown mix and rebalancing. The cash gets eaten up slowly or grows in good years when rebalanced until the market crashes and the rebalance sees cash being used to top up the stocks. 

I hadn't really thought about a part annuity, the thought of giving my money to an insurance company to take the same risks I can take myself but I get to keep the pot at the end if death comes sooner than expected, doesn't really sit well with me.

Ref bond ladders etc, I don't really like bonds and only really seem to have access to bonds funds in my pension. Maybe the day will come when I would prefer bonds to cash, but I don't currently. 

You may want to have a read of these articles and the linked ones as they touch on a lot of the stuff you are highlighting, in particular the bit in bold.
https://www.theretirementmanifesto.com/is-the-bucket-strategy-a-cheap-gimmick/
https://earlyretirementnow.com/2023/01/25/discussing-retirement-bucket-strategies-with-fritz-gilbert-swr-series-part-55/

In historical simulations, there was often no difference between just drawing stubbornly from an 80/20 portfolio or using a cash bucket which was systematically replenished.  If you then say that you will use the cash bucket "when markets are down", you have to take a judgement call on that, which you will certainly not get 100% correct but it might be good enough to shield you against some of the issue.

The other problem with the "stubborn" approach, as discussed on a couple of recent threads, is that there were some historical scenarios where you saw a massive drop of your fund in the first couple of years, but the scenario didn't fail in the end.  However you have to be able to sleep soundly and trust in past history to blindly follow that approach.

There are other blogs by ERN talking about the exact issues you are highlighting in your OP that people talk about using these type of approaches as if it's just a little cut in spending for a year or two, but in actuality you are risking a cut that goes on for many years if you follow those rules.

I might also consider a part annuity as a way to combat the issues you are highlighting - in fact this is the only reason I would probably hire an IFA when I am actually seriously thinking of stopping work - to validate my plan and check whether they can come up with a better probability of success by using partial annuities to some extent.

Nebulous2

I'm not engaged in drawdown, as I have a DB pension, with my DC pension only having started post-retirement. 

I'm chipping in to offer some positives for the part / time job. I concluded quite quickly I wasn't ready for retirement, and took a part-time job, currently working one day a week. It will feed me into retirement more gently, and is helping to bridge the financial gap between retiring and SPA. I've had two years so far, am earning slightly over a basic state pension, so it is a good proxy for how funding will be once the SP kicks in.

 

MK62

GazzaBloom said:

But, I am torn between taking withdrawals at 85/15 mix of cash/stocks each year and rebalance at the end of each year, or holding the cash back to draw only in market downturns. But, what is the trigger to switch to cash? a 10% drop in the market, 20%? and when do you switch back? I'm leaning to a drawdown mix and rebalancing. The cash gets eaten up slowly or grows in good years when rebalanced until the market crashes and the rebalance sees cash being used to top up the stocks.

It's up to you and your plan to decide any trigger point, but it doesn't have to be a "switch" as such.....if the market is down say 10% one year that doesn't mean you have to stop withdrawals from your portfolio completely (this is especially true if, for example, the market was up say 20% the preceding year).......you can reduce the withdrawal and top up any shortfall from cash.......it's also going to depend to some degree where your cash buffer is......inside the pension and subject to income tax, or outside and tax free (for the most part at least......), and how big, relative to the whole portfolio.

There are many ways to skin this cat.......and nobody can say for sure which way will turn out best.......in reality, the chances of picking what will, in hindsight, turn out to be the best approach are pretty slim anyway tbh......

GazzaBloom

Thank you all for the comments and links to further reading, some good points to add to the musing.

The reason I am getting more serious about pinning down an early retirement date is that Timeline and FiCalc show 100% success rate with my current portfolio, remaining contributions and drawdown, suggesting I could hang up my boots at the end of 2024. However, that is with Guyton’s rules selected so I am wary.

I have around 18% of my retirement spend covered by a DB pension that is already in drawdown but the rest needs DC pension drawdown which reduces when the SPs kick in, Timeline and FiCalc do factor in the worst of market history, so it may be time to fix the date to leap into the unknown and throw the dice.