My rough plan and take on the 4% withdrawl rule

Mick70

Morning all, hope everybody is well.

As many on here already know I work full time (but stressful job that now takes its toll) and wife is self employed.  For the past 3 years I have also received a final salary pension which is currently just short of £30k pa, this rises with rpi each April but is capped at 5% .  Unfortunately the tax man simply takes almost half of it away each year - i use the DB income to pay into my own DC and my wife's.
We (myself and spouse) have combined DC pots/ S+S Isa/ bank savings - of currently £500k.
I am 53 and spouse is 56.
We "hope" to retire together in about 3 years time (4 years max, certainly want my wife to be retired by 60 at latest as her job is physically tiring and low pay).

Using 2023 prices , our aim is for a combined overall pension (including my DB) of £55k pa.
So lets say my DB is £30k (its about 29850), then shortfall is £25kpa.

My plan was to use the 4% Withdrawl rule on our combined £500k (and then reduce it when SP kicks in, which we are both entitled to). 

So, year 1 , age 56 (or 57),  would produce £20k (500 x 4%).
Year 2 would be the initial £20k and i give a 2% pay rise , and increase that amount by 2% each year.
So, is that the correct interpretation of the 4% rule and how it works ? - it isn't simply take 4% of your remaining pot value each year ?

on my "rough diy" spreadsheet , yr 1 is £20k but by year 10 its its over £24k (as increasing 2% pa).
Then our state pensions kick in , and say if SP is £12k each, then i reduce our drawdown by £8k Each (or whatever is 2/3 of SP).  So, if our drawdown was £24k when we both receive SP then drawdown would reduce that year to £8k (£24k - £16k) and then inflate that again by 2% per year going forward.

Does that make sense, have I interpreted the 4% rule correctly ?

Thank you
Mick

NoMore

Basically yes, you initially take 4% of the pot and then next year you increase that amount by inflation (so its no longer necessarily 4% of the current pot) and continue like that every year, increasing the previous amount by inflation.

So you've interpreted it correctly (except you talk about a 'pay rise' rather than inflation increase), however if its the right way to actually drawdown your pot, I have no idea, threads like this generally go into a long debate about whether the 4% rule is a valid strategy or not. 

JohnWinder

https://www.bogleheads.org/wiki/Safe_withdrawal_rates. Try that explanation for 4% rule. It's inflation increased, not just 2% I think.

westv

It is more 3% to 3.5% for the UK.

Simon11

Based on the numbers above, I am struggling to understand why you are not retiring now!  My bags would have been packed at 50   

£55k is definitely a luxury retirement budget but money doesn't buy you good health, so take advantage now to avoid more stress for yourself and your wife continuing to do a manual based role.

leosayer

I would ignore the 4% rule and instead consider that from age 67, your combined income from DB and State Pensions will be over £50k - only a few k short of your £55k target.

The question for you both is how to fill the gap between now and age 67 whilst avoiding straying into paying higher rate tax.

I would avoid complexity around inflation and instead keep your model based on today's prices. I find FIREcalc question useful for modelling the chances of success.

Albermarle

westv said:

It is more 3% to 3.5% for the UK.

Although in this case that does not take account of the drawdown reducing dramatically when the state pensions arrive.
So in fact they could probably take more than 4% to begin with.

Gary1984

Another vote to just go now! State pension plus DB will get you to about £50k and you have enough savings/DC to bridge the gap until then. The rest of your 50s will be the best health you'll ever have again. Don't waste it doing stressful work that might kill you with a heart attack when you could spend it together enjoying life.

You've won! Go!

cloud_dog

Mick70 said:

Morning all, hope everybody is well.

As many on here already know I work full time (but stressful job that now takes its toll) and wife is self employed.  For the past 3 years I have also received a final salary pension which is currently just short of £30k pa, this rises with rpi each April but is capped at 5% .  Unfortunately the tax man simply takes almost half of it away each year - i use the DB income to pay into my own DC and my wife's.
We (myself and spouse) have combined DC pots/ S+S Isa/ bank savings - of currently £500k.
I am 53 and spouse is 56.
We "hope" to retire together in about 3 years time (4 years max, certainly want my wife to be retired by 60 at latest as her job is physically tiring and low pay).

Using 2023 prices , our aim is for a combined overall pension (including my DB) of £55k pa.
So lets say my DB is £30k (its about 29850), then shortfall is £25kpa.

My plan was to use the 4% Withdrawl rule on our combined £500k (and then reduce it when SP kicks in, which we are both entitled to). 

So, year 1 , age 56 (or 57),  would produce £20k (500 x 4%).
Year 2 would be the initial £20k and i give a 2% pay rise , and increase that amount by 2% each year.
So, is that the correct interpretation of the 4% rule and how it works ? - it isn't simply take 4% of your remaining pot value each year ?

on my "rough diy" spreadsheet , yr 1 is £20k but by year 10 its its over £24k (as increasing 2% pa).
Then our state pensions kick in , and say if SP is £12k each, then i reduce our drawdown by £8k Each (or whatever is 2/3 of SP).  So, if our drawdown was £24k when we both receive SP then drawdown would reduce that year to £8k (£24k - £16k) and then inflate that again by 2% per year going forward.

Does that make sense, have I interpreted the 4% rule correctly ?

Thank you
Mick

I may have stolen this idea from @Linton (??), but I have sectioned out our retirement in to three separate pots; early retirement up to SP age, SP age to 80, and anything else.

The main reason is that we want more income in the early retirement years than post SP, and the anything else time period.  Rightly or wrongly I have sectioned out the pots so that I can ensure the early retirement pot(s) can support the required income and term, and similar to you I have a DB pension which kicks in at age 65 and this together with SP (67 for me) will greatly reduce the drawdown requirements for our income requirements for post SP age.

dunstonh

My plan was to use the 4% Withdrawl rule on our combined £500k (and then reduce it when SP kicks in, which we are both entitled to). 

There is no 4% rule for the UK.  Plus it requires a certain asset mix that many UK investors would not feel comfortable with.     The UK is more like 3.5% post 65 and 3% post 55. 

barnstar2077

I am another advocator of you retiring now.

You say you are only keeping half of the £30k from your DB because of tax, but what if you think about it differently and thought of that £30k as your primary income?  Now all you are actually going to work for is to give the lions share of what you earn on top of that £30k to the tax man.

Would you still go to work if your salary was halved or reduced by a third etc over night?  I think most people would make other arrangements pretty quickly!

Plus, life is too short as others have said.  I had a silly accident a couple of years ago and will now be in discomfort until I get a new knee in ten to twenty years time.  You never know what might happen in life.  The chances are that you will never feel as fit and healthy as you do today.