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

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  • Albermarle
    Albermarle Posts: 27,675 Forumite
    10,000 Posts Seventh Anniversary Name Dropper
    Sea_Shell said:
    So easy to get caught up in analysis paralysis.

    If the numbers "feel" right and appear to make sense, go for it 😎

    That's what we did.   Plan's holding up so far, after 4 years 🤞
    Just read your nuts thread. Not all of it obviously as it is quite a long thread.

    I have a lot more than you (not boasting), probably double, I am older, can probably retire but too frightened or unsure / worried to do so.

    If I bought an annuity it would be enough (and a bit more) but I just can’t give that much money to an insurer.

    i will be one more year until I’m 80 at this rate, how do I get myself out of this.

    I am sure my health would improve if I could get the courage to retire. Financial services, not customer facing, more like programming, compressed hours, not physically demanding, finding the job stressful and I find myself dreading every day.

    Help! :)


    You are not alone in this . See the posts from @southcoastboy.

    It is more of an anxiety issue than about money.

    You might benefit from reading this thread, where the poster actually retired with less than SeaShell, I think.
    A Paupers Pension Tale (Not many nuts to dig up) — MoneySavingExpert Forum
  • GazzaBloom
    GazzaBloom Posts: 820 Forumite
    Fifth Anniversary 500 Posts Photogenic Name Dropper
    Sea_Shell said:
    On that point.   I'm not sure an IFA would (can?) actually tell you, "Yes, you have enough to retire!!"

    You're unlikely to get the "official" rubber-stamp you seek.

    ATEOTD They can't know how much you'll choose (or have to) to spend in retirement.


    I agree, I'm not sure what else an IFA could tell over and above what the Timeline app is telling me, which is a software tool developed for advisors anyway
  • FIREDreamer
    FIREDreamer Posts: 983 Forumite
    500 Posts Second Anniversary Name Dropper Photogenic
    Albermarle said:u
    Sea_Shell said:
    So easy to get caught up in analysis paralysis.

    If the numbers "feel" right and appear to make sense, go for it 😎

    That's what we did.   Plan's holding up so far, after 4 years 🤞
    Just read your nuts thread. Not all of it obviously as it is quite a long thread.

    I have a lot more than you (not boasting), probably double, I am older, can probably retire but too frightened or unsure / worried to do so.

    If I bought an annuity it would be enough (and a bit more) but I just can’t give that much money to an insurer.

    i will be one more year until I’m 80 at this rate, how do I get myself out of this.

    I am sure my health would improve if I could get the courage to retire. Financial services, not customer facing, more like programming, compressed hours, not physically demanding, finding the job stressful and I find myself dreading every day.

    Help! :)


    You are not alone in this . See the posts from @southcoastboy.

    It is more of an anxiety issue than about money.

    You might benefit from reading this thread, where the poster actually retired with less than SeaShell, I think.
    A Paupers Pension Tale (Not many nuts to dig up) — MoneySavingExpert Forum
    Wow, I am rich in comparison to that but still finding it difficult to press the button. Sigh.
  • OldScientist
    OldScientist Posts: 817 Forumite
    Fourth Anniversary 500 Posts Name Dropper
    edited 16 July 2023 at 9:54AM
    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?


    I think there are several implied questions in your post. Here's an answer to one of them.

    Another alternative as a drawdown method is Carlson's endowment method (described in the McClung's book). Here the withdrawals are a combination of inflation adjusted withdrawals (IAW) and a percentage of portfolio method. For example, assuming a 50/50 mix of IAW (say 3%) and percentage of portfolio (also say 3%) with a £100k portfolio you would initial withdraw £1.5k of IAW (100k*0.03*0.5) and £1.5k of PoP (100k*0.03*0.5). If inflation is 10% over the following year and the portfolio falls from £100k to £90k, at the start of the second year you would withdraw IAW=15k*1.1=£1.65k and PoP=90*0.03*0.5=£1.35k, i.e. a total of (coincidentally in this example) £3.0k (although in real terms this would only be worth £2.7k).

    Here is a bad historical example (70% UK stocks, 30% UK cash, using parameters as above, except PoP was 4% instead of 3% for an initial withdrawal of 3.5%)


    Here is the same case using the Vanguard Dynamic approach (using their recommended 5.0/2.5 for upside and downside variations)


    I don't know which of these is preferable - the Vanguard approach delivers a smoother decline and more income over the first 20 years, but less over the final 20 years. With the endowment approach, while some money remains in the portfolio, the income will not fall below the IAW amount (i.e. 1.5% in this case). The Vanguard approach doesn't react as strongly to the drop in portfolio value over the first 4 years, so may require more 'nerve' in poor conditions to keep on withdrawing the planned amount.


    edited for a factor of 10 error in the amounts in £

  • WYSPECIAL
    WYSPECIAL Posts: 733 Forumite
    Part of the Furniture 500 Posts Name Dropper Combo Breaker
    edited 16 July 2023 at 8:37AM

    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.
    No you don’t. There are no pockets in a shroud.
    If you let an insurance company take the risks and it all goes wrong then it’s their problem not yours.
  • MK62
    MK62 Posts: 1,740 Forumite
    Seventh Anniversary 1,000 Posts Name Dropper
    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?


    I think there are several implied questions in your post. Here's an answer to one of them.

    Another alternative as a drawdown method is Carlson's endowment method (described in the McClung's book). Here the withdrawals are a combination of inflation adjusted withdrawals (IAW) and a percentage of portfolio method. For example, assuming a 50/50 mix of IAW (say 3%) and percentage of portfolio (also say 3%) with a £100k portfolio you would initial withdraw £15k of IAW (100k*0.03*0.5) and £15k of PoP (100k*0.03*0.5). If inflation is 10% over the following year and the portfolio falls from £100k to £90k, at the start of the second year you would withdraw IAW=15k*1.1=£16.5k and PoP=90*0.03*0.5=£13.5k, i.e. a total of (coincidentally in this example) £30k (although in real terms this would only be worth £27k).

    I think you may have over egged the income a bit..... 😉
  • OldScientist
    OldScientist Posts: 817 Forumite
    Fourth Anniversary 500 Posts Name Dropper
    edited 16 July 2023 at 9:58AM
    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?


    Whether you would benefit from a lifetime annuity to some extent depends on, in the long term (i.e. post SP) how much you need the income from your portfolio. For example,

    1) A couple with income needs at around the minimum level defined by PLSA (i.e., £19.5k - see https://www.retirementlivingstandards.org.uk/ ) would be able to survive on their combined SP with the occasional ad hoc top up from the portfolio. The drawdown approach is then largely immaterial.

    2) A couple with moderate income needs (~£34k according to PLSA standards) are going to have to find an additional £13k per year from their portfolio or other sources to supplement the SP. The importance of drawdown method then depends on the the size of their portfolio.

    a) A couple with £1m (WR~1.3%) could almost certainly get away with an SWR approach or annuitise up to about 40% of their portfolio (payout rates for a joint RPI annuity with 100% survivor benefits taken at 59yo with a 25 year guarantee are 3.1%, with 66% survivor benefits this is very slightly higher at 3.2% - quotes from moneyhelper) with the remaining 60% invested for legacy or occasional aspirational spending.

    b) For a couple with a smaller portfolio of £400k, the SWR approach (WR~3.2%) is approaching historical 'safe' levels, while to completely cover the income requirement with the annuity would require using 100% of the portfolio. Variable drawdown methods (see earlier example) might see the portfolio income fall to about 40% of the initial amount, i.e., about £6k from the portfolio for a total income of £27k. In the worst case, where the portfolio became exhausted, the income would fall to £21k.

    A different approach might be to cover some of the additional income requirement with an annuity (e.g., spending 40% of the portfolio, i.e., £160k would give an inflation adjusted income of just under £5k), while the portfolio then could be used to give an additional £8.4k (e.g. using the Vanguard approach with a starting rate of 3.5%). In the worst case shown in an earlier post, this would have fallen to about 1.5%, i.e. about £3.6k in real terms (for a total income of 20.5+5+3.6=£29.1k - i.e., a bit higher than with the portfolio alone). I've ignored that the asset allocation in the portfolio could be a bit more aggressive after the purchase of an annuity (which would raise this a bit). In the worst case where the portfolio became exhausted, the income would fall to ~£26k. I note that in good retirements, the income would be less with the annuity than without.


    edit: ps sorry, I missed your earlier post mentioning your DB pension covering about 18% of your expenditure - is this fully inflation protected or capped? Having that in place may reduce the attractiveness/desirability of an annuity. It also, to some extent, will offset the variability in income derived from portfolio drawdown.

  • OldScientist
    OldScientist Posts: 817 Forumite
    Fourth Anniversary 500 Posts Name Dropper
    MK62 said:
    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?


    I think there are several implied questions in your post. Here's an answer to one of them.

    Another alternative as a drawdown method is Carlson's endowment method (described in the McClung's book). Here the withdrawals are a combination of inflation adjusted withdrawals (IAW) and a percentage of portfolio method. For example, assuming a 50/50 mix of IAW (say 3%) and percentage of portfolio (also say 3%) with a £100k portfolio you would initial withdraw £15k of IAW (100k*0.03*0.5) and £15k of PoP (100k*0.03*0.5). If inflation is 10% over the following year and the portfolio falls from £100k to £90k, at the start of the second year you would withdraw IAW=15k*1.1=£16.5k and PoP=90*0.03*0.5=£13.5k, i.e. a total of (coincidentally in this example) £30k (although in real terms this would only be worth £27k).

    I think you may have over egged the income a bit..... 😉
    What's a factor of 10 between friends (it was early on a Sunday)! I'll edit the original... cheers



  • GazzaBloom
    GazzaBloom Posts: 820 Forumite
    Fifth Anniversary 500 Posts Photogenic Name Dropper
    WYSPECIAL said:

    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.
    No you don’t. There are no pockets in a shroud.
    If you let an insurance company take the risks and it all goes wrong then it’s their problem not yours.
    No, but my wife and children would benefit from any remaining money rather than the insurance company if I depart this world sooner than hoped.
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