4% Drawdown If Preservation Of The Capital Is Not A Concern ?

Qyburn

jamesd said:

Qyburn said:  

I'm thinking similar, starting from 65 and planning for 35 years retirement. It seems an absurdly simple view so I wondered if we're missing something.

You're missing sequence of returns risk. 

Could you explain that a bit? I thought this sequence of return risk referred to taking a fixed amount early on if the market dipped. The effect being that you took too high a percentage at that time, depleting your fund irreversibly.

"Divide by number of years" would mean taking 1/35th in the first year, 1/34th of what's left in the second year etc. During a dip those amounts would scale in line with the fund, wouldn't (I think) impact the future viability.

MK62

There appears to be a disparity here from the get go.........

pmt(3%,35,-100,0,1)=4.52%.
Assuming a portfolio worth £100k, the initial withdrawal would be £4520

This is clearly at odds with the £100000/35=£2857 for the first withdrawal of the 1/N plan (2.857%)

In the pmt example given, the second withdrawal was given as

pmt(3%,34,-100,0,1)=4.59%. If the portfolio value is now worth £90k (after the previous withdrawal and a poor year) then the withdrawal would be £4131 (if you're really accounting to the nearest pound!)

The portfolio value after the first withdrawal would be £100000-£2857=£97143. After applying the indicated 3% growth, the portfolio value would be £100057, so the second withdrawal would be £100057/34=£2943.

Even if the portfolio had fallen to £90000 as indicated, the resultant withdrawal would be £90000/34=£2647.

Hoenir

Qyburn said:

jamesd said:

Qyburn said:  

I'm thinking similar, starting from 65 and planning for 35 years retirement. It seems an absurdly simple view so I wondered if we're missing something.

You're missing sequence of returns risk. 

Could you explain that a bit? I thought this sequence of return risk referred to taking a fixed amount early on if the market dipped. The effect being that you took too high a percentage at that time, depleting your fund irreversibly.

"Divide by number of years" would mean taking 1/35th in the first year, 1/34th of what's left in the second year etc. During a dip those amounts would scale in line with the fund, wouldn't (I think) impact the future viability.

Accounting for inflation would reduce the buying power of the money though. Then there's the possibility of requiring a lump sum for an unexpected financial outlay. Markets fluctuate daily for all sorts of reasons. An unfortunate timing of a series of withdrawals could impact the final outcome. 

MK62

Hoenir said:

Qyburn said:

jamesd said:

Qyburn said:  

I'm thinking similar, starting from 65 and planning for 35 years retirement. It seems an absurdly simple view so I wondered if we're missing something.

You're missing sequence of returns risk. 

Could you explain that a bit? I thought this sequence of return risk referred to taking a fixed amount early on if the market dipped. The effect being that you took too high a percentage at that time, depleting your fund irreversibly.

"Divide by number of years" would mean taking 1/35th in the first year, 1/34th of what's left in the second year etc. During a dip those amounts would scale in line with the fund, wouldn't (I think) impact the future viability.

Accounting for inflation would reduce the buying power of the money though. Then there's the possibility of requiring a lump sum for an unexpected financial outlay. Markets fluctuate daily for all sorts of reasons. An unfortunate timing of a series of withdrawals could impact the final outcome. 

....but the same is true of any variable withdrawal plan......

Hoenir

MK62 said:

Hoenir said:

Qyburn said:

jamesd said:

Qyburn said:  

I'm thinking similar, starting from 65 and planning for 35 years retirement. It seems an absurdly simple view so I wondered if we're missing something.

You're missing sequence of returns risk. 

Could you explain that a bit? I thought this sequence of return risk referred to taking a fixed amount early on if the market dipped. The effect being that you took too high a percentage at that time, depleting your fund irreversibly.

"Divide by number of years" would mean taking 1/35th in the first year, 1/34th of what's left in the second year etc. During a dip those amounts would scale in line with the fund, wouldn't (I think) impact the future viability.

Accounting for inflation would reduce the buying power of the money though. Then there's the possibility of requiring a lump sum for an unexpected financial outlay. Markets fluctuate daily for all sorts of reasons. An unfortunate timing of a series of withdrawals could impact the final outcome. 

....but the same is true of any variable withdrawal plan......

The suggestion was for a fixed withdrawal. Fund divided by number of years remaining. 

Itsme01x

Qyburn said:

Itsme01x said:

I will shall share what my plan is.  I don't look at %ages to start my fund spending in retirement.  I look at years that I expect to live. From retiring at 67 I have calculeted a DC pot.  I am 58, so have an idea of the size of my pot.  I then take that pot and hope to live until age 98.  That gives 31 years to finance. I then divide the 31 years into my pot.  

I'm thinking similar, starting from 65 and planning for 35 years retirement. It seems an absurdly simple view so I wondered if we're missing something.

Itsme01x said:

I do hope to retire earlier than 67 and am building up a 'cash' pot to bridge the gap.
My state pension will kick in at age 67.
 

For those "early years" it might be worth taking from your DC instead of savings, unless you're DB fully uses your personal allowance. I'm in that position, living off savings with no income, so I'm taking a £16,750 UFPLS late this tax year, to be spent next year but using this years PA.

Glad we are thinking along the same lines. The age method (insert copyright symbol  ) and withdrawel means that you will have no pot left to give as an inheritance.  It also gives you the (same) set spend each year and does not show any inflationary increase you may want to factor in and/or any portfolio increases that you may gain.  For me that is an easy and great starting point and basis.  As an aside, I dont think a lot of people realise that the 4% SWR guide assumes the same - while not running out within the stated time period, it does leave no pot left.

My DB's start at 65, and virtually use up all of personal allowance, even if I retire at that age.  My plan is to retire at 64 or even 62    I will definatley be looking at DC £16,750 UFPLS and then work it out compared to spending savings until DBs and SP kick in.  Who knows, a new Government may even raise the personal tax allowance before that time! 

Itsme01x

To reply to some of the other points raised above and to add to my notes in my original post that gives some context of my age method for retirement:

My DB's and SP will cover all of my my esssential/core spend (I know that I am fortunate)
I will not be taking a falling frational spend each year of 1/35th , then 1/34th, then 1/33th I will just be taking the 1/35th (or in my case 1/31th) as each year - keeping it very simple and a good guide to at lest start with and the early years.
As commented the 1/31th will work out less than 4% SWR, so any issues with a falling market and/or high inflation gives lee-way with the withdrawel sum and any guard rails that you may wish to use.
I am older, so have a good idea of the size of my pot now and in the near future.  I do not have an aim of the size of the pot of money I need before I retire.  I am saving extra (salary sacrifice - started last year) and it will be what it will be.
I (have told myself that) am not working until I am 67. I am old school and 65 was bad enough.  So my goal is 64. 
If I have some good portfolio investment years, then I will retire at 62.


Interesting discussion and different view points, as always put forward - and things to consider

OldScientist

MK62 said:

There appears to be a disparity here from the get go.........

pmt(3%,35,-100,0,1)=4.52%.
Assuming a portfolio worth £100k, the initial withdrawal would be £4520

This is clearly at odds with the £100000/35=£2857 for the first withdrawal of the 1/N plan (2.857%)

In the pmt example given, the second withdrawal was given as

pmt(3%,34,-100,0,1)=4.59%. If the portfolio value is now worth £90k (after the previous withdrawal and a poor year) then the withdrawal would be £4131 (if you're really accounting to the nearest pound!)

The portfolio value after the first withdrawal would be £100000-£2857=£97143. After applying the indicated 3% growth, the portfolio value would be £100057, so the second withdrawal would be £100057/34=£2943.

Even if the portfolio had fallen to £90000 as indicated, the resultant withdrawal would be £90000/34=£2647.

There is no disparity at all. The 3% (in this example) is the expected growth not the actual growth (the expected growth is what you expect the portfolio to grow by in advance - e.g., VPW uses the historical average real growth of an internationally diversified portfolio which depends on the asset allocation).

1/N only applies where the expected growth is 0%. For example, pmt(0%,35,-100,0,1)~2.86%. This is why I said that 1/N is a special case of the pmt approach which makes an implicit assumption of 0% returns.

Edit (hopefully for clarity!): The pmt formula is used to determine the percentage of the portfolio to be withdrawn - the 'assumed return' in that formula merely changes the percentages but has no effect on the realised returns. You can equally use a fixed percentage of portfolio, RMDs (which are effectively 1/(life expectancy) and alluded to in an earlier post by 2 January at 7:08PM ) or make up your own sequence (e.g., 3.6%, 3.8%, 4.0%, etc.) there is nothing mathematically special about either 1/N or pmt-based approaches.

NoMore

Itsme01x said:

To reply to some of the other points raised above and to add to my notes in my original post that gives some context of my age method for retirement:

My DB's and SP will cover all of my my esssential/core spend (I know that I am fortunate)
I will not be taking a falling frational spend each year of 1/35th , then 1/34th, then 1/33th I will just be taking the 1/35th (or in my case 1/31th) as each year - keeping it very simple and a good guide to at lest start with and the early years.
As commented the 1/31th will work out less than 4% SWR, so any issues with a falling market and/or high inflation gives lee-way with the withdrawel sum and any guard rails that you may wish to use.
I am older, so have a good idea of the size of my pot now and in the near future.  I do not have an aim of the size of the pot of money I need before I retire.  I am saving extra (salary sacrifice - started last year) and it will be what it will be.
I (have told myself that) am not working until I am 67. I am old school and 65 was bad enough.  So my goal is 64. 
If I have some good portfolio investment years, then I will retire at 62.


Interesting discussion and different view points, as always put forward - and things to consider

So you’re just taking 1/31 of the initial pot size every year ? No inflation increase ? Surely by the 31st year the buying power of that amount will be way lower than original due to the compounded inflation ? The 4% rule includes you increasing the initial amount by inflation each year to avoid this. 

jamesd

In drawdown discussions fixed is normally taken to be starting at some Pound amount and never changing it except to increase by inflation every year. The 4% rule approach.

Varying by pot value or some other rule produces varying income and spending power, not fixed, so these are all called variable.

Few or no people here who retired early have regretted it so a strong bias towards retiring as early as you think you can is likely to be good.