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

Itsme01x

NoMore said:

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. 

The direct 1/31 would do me for a few years, to begin with. I can have a nice holiday or two from it. Also, as noted it is much less than the 4%, so if I want or need some extra, then I can use it.  It is a simpler way of seeing am I able to retire than the 1/n etc and other formulas that are here and elsewhere.  Not saying they are wrong and if you can input your own figures in to the formulas and use them - then that is great.  But as a basis, the age method is easy to understand and gives you a good basis to yes or no.  

PS:  I do have a spreadsheet and have also worked out my expenditure - I quite like James Shack's free spreadsheets for current expendure and looking ahead with pots and future expenditure.  As others have said, it does depend on your own circumstances and as Tyson once said, 'everybody has a plan until they get hit for the first time'.

Bostonerimus1

Itsme01x said:
.  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.

I'm confused by this, the "4% rule" uses historical US markets data and sets various parameters so that there's maybe a 95% chance of you not running out of money. It also has that 4% initial withdrawal growing by inflation each year so with 3% inflation after 10 years you'll be withdrawing 5.3% of the initial value of your pension pot.  There are many scenarios where a 4% SWR will leave you with a very large pot when you die.

michaels

Bostonerimus1 said:

Itsme01x said:
.  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.

I'm confused by this, the "4% rule" used historical US markets data and sets various parameters so that there's maybe a 95% chance of you not running out of money. There are many scenarios where a 4% SWR will leave you with a very large pot when you die.

Seems fairly obvious, do any of us want to run the risk of running out of money in our dotage?

NoMore

If following the 4% rule (not a recommendation btw) then once you have 25 times your required yearly income, you can retire, you've just converted this to 31 times (3.2% SWR, ironically that's close to the recommended SWR for UK). If your in the ball park of 25 to 30 times your requirements then yes I would agree you can probably retire, however which drawdown method you choose is then the debate.

Also any plan ignoring inflation is doomed to fail IMO.

Bostonerimus1

michaels said:

Bostonerimus1 said:

Itsme01x said:
.  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.

I'm confused by this, the "4% rule" used historical US markets data and sets various parameters so that there's maybe a 95% chance of you not running out of money. There are many scenarios where a 4% SWR will leave you with a very large pot when you die.

Seems fairly obvious, do any of us want to run the risk of running out of money in our dotage?

The "it does leave no pot left" phrase is the source of my confusion. It seems to imply that the 4% rule is designed to leave you with no pot after say 30 years, whereas it is designed to stop you from running out of money - which is sort of the opposite.

jamesd

4% leaves no money at the end only if you live through times matching or worse than the worst historic sequence. That's so unlikely that around 98% of the time at the end of a 30 year plan you end up with more than you started with, ignoring inflation decreasing its real value.

If your plan is prudent you're also likely to die before the end.

Variable rules like Guyton-Klinger do better at spending your money while you're alive but you still have the dying before the end problem.

Blanchett tried tackling the die before the end problem by reducing the required success rate and hence boosting the initial income.

Bostonerimus1

Tools to help you die with nothing are giving your money away and annuities.

GazzaBloom

Bostonerimus1 said:

Tools to help you die with nothing are giving your money away and annuities.

Or a visit to your local Ferrari dealership with your 25% TFLS 

OldScientist

Having backtested a rather large number of different withdrawal approaches (we all need a hobby!), I think drawdown methods can be broadly placed in three categories

Inflation-adjusted withdrawals (IAW)
Which includes the 'classic' constant inflation adjusted withdrawals (i.e., Bengen) or one with a pre-planned reduction (e.g., by adjusting by 1 percentage point less than inflation) to match the reduction in expenditure with age that has been observed in some studies.
The advantage is that this approach provides a known real income that does not vary from year to year. Implementation is relatively simple needing only the previous year's withdrawal amount and inflation.
The disadvantages are that firstly if conditions are worse than those seen historically, the portfolio can fall to zero before the end of the planning period and, secondly, any legacy can vary from 0 (or close to zero) to, in real terms, many times the original portfolio.

Percentage of portfolio (PoP) withdrawals
These include constant PoP (which is the simplest withdrawal method of all requiring only the amount in the portfolio), natural yield and the various approaches which change the percentage with time (including 1/N, VPW, etc.).
The advantage is that the portfolio cannot be prematurely depleted (although it can get small) and the range of legacy values is small than for the inflation-linked approaches.
The disadvantage is that the income will vary with portfolio size (e.g., if there has been a 50% reduction in portfolio since the previous year, then the withdrawal will also decrease by a similar amount).

Hybrid withdrawal methods
These essentially fall into two sub-categories. Methods that start with a constant inflation withdrawal approach and allow variation in withdrawal depending on portfolio performance (e.g., Guyton Klinger and Carlson's endowment formula) or ones that start with a percentage of portfolio approach and limit the year-to-year variation in income (e.g., Vanguard Dynamic withdrawals, see https://www.vanguardinvestor.co.uk/articles/latest-thoughts/retirement/flexible-approach-support-retirees-good-bad-times and PV smoothing, where the portfolio value is averaged over the previous N years). As might be expected, these approaches share many of the characteristics of the two 'purer' approaches. For example,
the year-to-year variation in income is smaller than for PoP methods, but larger than for IAW
the range of legacies is larger than for PoP methods, but smaller than for IAW
the possibility of the portfolio becoming exhausted before the end of the planning period is higher than for PoP, but smaller than for IAW.
One disadvantage of hybrid methods is that they are all more complicated to implement than either PoP or IAW methods.

Different retirees

Retirees also fit into different categories that might (very, very roughly) be divided into three types.

For retirees whose income is largely derived from sources of guaranteed income (i.e., SP, DB pension, or annuities), then the choice of withdrawal approach may largely rest on considerations of legacy and simplicity since it is relatively unimportant whether the portfolio is prematurely exhausted or that portfolio income is variable. However, I note that in this scenario, it may be more likely that portfolio withdrawals will be made on an ad hoc basis to cover expenditure that cannot be covered by the regular income (new roof, boiler, etc.) than on a regular basis.

For retirees who have a moderate amount of guaranteed income (perhaps covering 'essential' or 'core' spending), then the choice may lie between a PoP method (and accepting variability in discretionary income) or a hybrid withdrawal method that allows a compromise between income variability, risk of premature portfolio depletion, and legacy considerations.

For retirees who have small amount of income derived from guaranteed sources compared to their overall expenditure, and are unwilling (or unable) to add to this using an RPI annuity or inflation-linked gilt ladder, and who, consequently, do not wish to allow much variability in portfolio income, have the choice of using IAW and risking premature portfolio depletion or using a hybrid method that allows a small amount of flexibility (the Vanguard Dynamic approach, smoothing, and endowment formula can all be tailored to do this) and, thereby, decreasing (but not removing) the probability of portfolio depletion.

Steve_666_

GazzaBloom said:

Ivkoto said:

This may be useful in your case

https://youtu.be/eIUgjib_fm4?si=x7M-m1VsxC391J4s

I watched that. I like James Shack, he presents well with some conviction but seems to be recommending global index funds to beat holding the S&P500 (sounds sensible) and factor investing to beat both (hmmmm...)

The factor investing video he points to at the end of the video spends a lot of time suggesting that factor investing carries some significant risks of long periods of under performance and is probably not suitable for most people.

It's quite a confusing set of messages and for the first time I have watched one of his videos where I sense he may be running out of content with out recycling old themes and is making videos to keep his YouTube click rate up. Something I have noticed with several financial YouTubers recently.

 

DIY factor investing seems  complex, difficult and time consuming. Would a strategy of taking the long term investment pot and splitting it into the market leaders, low cost ETFs a better mech?

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