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

ader42

My logic says 2 negative years… 

GazzaBloom

Qyburn said:

By the way how are you all defining a "negative year", is it one where your investments lose value during that year, or are you including subsequent periods while it recovers?

For example lets say your value dropped during 2022, recovered during 2023 but did not reach its value from December 2021. Is that one, or two, negative years?

If drawing down and rebalancing to the 85/15 percentages between stocks/cash, does it really matter? 

If choosing to switch to draw from cash until stocks recover, in a bucket type strategy, it's more tricky and is not so clear, do you keep drawing cash until the stock recover to the previous highs? or switch when they start rising again but not yet back to previous highs?

That's market timing really isn't it?

My Timeline plan is set to draw from each of the assets by proportion and rebalance annually back to original weightings and rides through all scenarios. For me, that's a much easier way to work through year to year volatility.

Pat38493

Qyburn said:

By the way how are you all defining a "negative year", is it one where your investments lose value during that year, or are you including subsequent periods while it recovers?

For example lets say your value dropped during 2022, recovered during 2023 but did not reach its value from December 2021. Is that one, or two, negative years?

Also is a negative year in terms of net returns or just investment returns.  

2022 (and quite possibly 2023) looks a lot worse if you include inflation in the number - as far as I can tell you can't be invested in any mainstream type of diversified investments or bonds right now that have much hope of beating inflation this year (unless things change a lot in the next few months).

As far as I can see last year my investments lost the best part of 30% (since late 2021) if you factor in inflation, and in 2023 they are on track to lose another 8-10% even if nominal investment returns just remains fairly flat.

OldScientist

Qyburn said:

By the way how are you all defining a "negative year", is it one where your investments lose value during that year, or are you including subsequent periods while it recovers?

For example lets say your value dropped during 2022, recovered during 2023 but did not reach its value from December 2021. Is that one, or two, negative years?

One approach is to calculate what value you expect your portfolio to have and then compare the actual value against that. Taking a simple example (because it keeps the maths easy), where you expect the real return to be 0% over a 25 year retirement, you'd expect to be able to withdraw 4% of the portfolio per year. The real PV before the withdrawal (over the first few years) from a £100k portfolio would then be
 
      PV (£k)
0      100
1        96
2        92
3        88
4        84
5        80
etc.

The advantage is that you don't have to consider up or down years and come up with a set of criteria to define them, but can just look at where your portfolio is compared to where you would have expected it to be.

For more realistic 'expected' growth rates, you'll need to use the PMT and PV functions in a spreadsheet package, for example with a 35 year planning horizon and a 3% expected growth rate, PMT gives 4.52% withdrawals (remember this is percentage of portfolio, not inflation adjusted and is the approach behind VPW, but is useful for providing guidance on how much you'd expect to have remaining) and the PVs are

      PV (£k)
0      100.0
1        98.4
2        99.4
3        94.9
4        93.1
5        91.2

Even easier, is to just rebalance, since there is mixed evidence for the benefits of cash reserves except under low return conditions or relatively high transaction/tax costs (e.g., for a positive paper see https://www.financialplanningassociation.org/article/journal/SEP13-benefits-cash-reserve-strategy-retirement-distribution-planning which, while US based, also contains some useful references to earlier, less positive, work). In this particular paper, the method adopted was "The one-year CFR strategy includes an IP and a cash reserve of one year of real retirement income needs. The IP is used to refill the cash reserve if the balance dips below two months’ worth of forward-looking real withdrawal needs. The cash reserve is refilled if there is a need to rebalance and at least one of the asset classes’ prior year return is positive. If both asset classes’ prior year returns are negative, and there is more than two months’ of withdrawal needs, and there is a need to rebalance, then the portfolio is rebalanced but no cash refill occurs due to the potential of selling a depreciated asset."

Mick70

I'm still hoping to retire in 3-4 year time at age 56-57, And I still plan on using the 4% withdrawl rule.
However half of my pension (or slight more) will be DB (rising rpi but capped 5%pa).
At this present time I have a DB of £29.8kpa,  and with my wife have combined mixture of DC/savings of £480k - 4% of that would give us £19.2kpa and increase say 2% pa .   Then come State pension ages we could then half that withdrawl rate.
That is my plan anyway , feel free to say if sounds rubbish as I'm not as clued up as many posters on here mind.

Mick

Linton

My policy is to always take cash for expenditure from the cash and WP fund buffer as needed and then rebalance at the end of the year after analysing likely short term future income needs.  In the event of an equity crash I would expect to continue taking the required cash from the buffer but not to fully rebalance across long and short term asset classes.  Buying or selling long term investments is a major step that needs detailed analysis and I certainly would not want to do it any more frequently than once a year.

Probably a 100% equity portfolio would provide better long term returns but this is irrelevent since maximising long term returns is not an objective. The provision of sufficient sustainable and stable income during the years we have left is far more important.

NoMore

Mick70 said:

I'm still hoping to retire in 3-4 year time at age 56-57, And I still plan on using the 4% withdrawl rule.
However half of my pension (or slight more) will be DB (rising rpi but capped 5%pa).
At this present time I have a DB of £29.8kpa,  and with my wife have combined mixture of DC/savings of £480k - 4% of that would give us £19.2kpa and increase say 2% pa .   Then come State pension ages we could then half that withdrawl rate.
That is my plan anyway , feel free to say if sounds rubbish as I'm not as clued up as many posters on here mind.

Mick

In a previous thread of yours, you were asked at least 3 times, what do you actually need/desire for income in retirement. You never answered. This is the number one thing to determine, you may find your already at a point where you could retire with a very comfortable living standard. 

OldScientist

Mick70 said:

I'm still hoping to retire in 3-4 year time at age 56-57, And I still plan on using the 4% withdrawl rule.
However half of my pension (or slight more) will be DB (rising rpi but capped 5%pa).
At this present time I have a DB of £29.8kpa,  and with my wife have combined mixture of DC/savings of £480k - 4% of that would give us £19.2kpa and increase say 2% pa .   Then come State pension ages we could then half that withdrawl rate.
That is my plan anyway , feel free to say if sounds rubbish as I'm not as clued up as many posters on here mind.

Mick

Looking at the table in my post upthread ( 17 July at 8:02AM ) - for the assumptions I made in that post, a 4.5% withdrawal for 10 years followed by 2% for another 30 years didn't run out of money historically.

Post SP, assuming in the long run your inflation capped DB pension is worth about 80% of its current value in real terms (i.e., about £23.8k), then provided a real income of about 20.5k+£23.8k=44.3k will cover your required lifestyle expenditure, then it may turn out that you rarely need to drawdown the DC/savings pot at all.

Mick70

NoMore said:

Mick70 said:

I'm still hoping to retire in 3-4 year time at age 56-57, And I still plan on using the 4% withdrawl rule.
However half of my pension (or slight more) will be DB (rising rpi but capped 5%pa).
At this present time I have a DB of £29.8kpa,  and with my wife have combined mixture of DC/savings of £480k - 4% of that would give us £19.2kpa and increase say 2% pa .   Then come State pension ages we could then half that withdrawl rate.
That is my plan anyway , feel free to say if sounds rubbish as I'm not as clued up as many posters on here mind.

Mick

In a previous thread of yours, you were asked at least 3 times, what do you actually need/desire for income in retirement. You never answered. This is the number one thing to determine, you may find your already at a point where you could retire with a very comfortable living standard. 

Im still struggling to work it out, I did a rough spreadsheet and it came out at £49k pa (todays values/costs) , but that was Net not Gross .   Struggling to work out how i would calculate mine to give Net amounts

Pat38493

Mick70 said:

NoMore said:

Mick70 said:

I'm still hoping to retire in 3-4 year time at age 56-57, And I still plan on using the 4% withdrawl rule.
However half of my pension (or slight more) will be DB (rising rpi but capped 5%pa).
At this present time I have a DB of £29.8kpa,  and with my wife have combined mixture of DC/savings of £480k - 4% of that would give us £19.2kpa and increase say 2% pa .   Then come State pension ages we could then half that withdrawl rate.
That is my plan anyway , feel free to say if sounds rubbish as I'm not as clued up as many posters on here mind.

Mick

In a previous thread of yours, you were asked at least 3 times, what do you actually need/desire for income in retirement. You never answered. This is the number one thing to determine, you may find your already at a point where you could retire with a very comfortable living standard. 

Im still struggling to work it out, I did a rough spreadsheet and it came out at £49k pa (todays values/costs) , but that was Net not Gross .   Struggling to work out how i would calculate mine to give Net amounts

If you mean gross amounts, you can google something like UK salary calculator - this tells you that you would need a gross income of £60713 (after clicking no NI) to achieve £49K net.  However this is just a starting point as you will get 25% tax free if the fund is in a pension pot so the real number will be probably more like £55K or so.

You can then play about with something like this UFPLS calculator to find a more accurate number for the gross withdrawals you would need:
https://www.direct.aviva.co.uk/myfuture/PensionWithdrawalTaxCalculator

Beyond that, you would need to create a spreadsheet or use a cash flow modelling tool to model your pension scenarios - you can use products like Timeline or Voyant Go for this - typically they are only available to financial advisers but you can get demo or limited time versions that can be useful for DIY planning. 

Just using 4% rule on the scenario you describe, you would probably be taking out significantly less than you can safely do in the first years.