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

MetaPhysical

Hi Smudge,
I am a [youthful 🤣] 56 into the gym, biking and travel (cruises especially).  Yes, when I remarry it will all continue as is.  I have had a very hard time this last ten years with an extremely demanding daughter who lost her mum that has exhausted me.  I am coming out of that now as she gets older.  I am remarrying in another year or so.  That's the time to finish work.  I am also in a demanding technical sales job that is forever changing and evolving and I am finding it difficult to keep pace as I get older and have other, personal life priorities.  Hence me getting my financial situation on a trajectory.  

MetaPhysical

stuhse said:

I believe your plan will work, it's similar to what I have in mind.

If you are happy with a 50k a year income I believe it will look like this.
From 58 to 67 top your 24k income up with 26k from your 500k pot.  This will use 9x24k= 226k.
From 67 onwards you will have 24k plus 10k state?..so going forward will only need 16k a year  from your remaining 274k pot....it will last well into your eighties at that rate, by which time 34k should be enough ?

Alternatively at around 67 you could use the remainder of your pot to buy an annuity.   226k currently would get you 10k ish a year, and you can sit back and relax with an index linked future of 24 k plus 10k state plus 10k annuity ?

Precisely. Also, don't forget, that there should be on average 4% growth of the investments during that time as well.

Some of my man maths.... Let's assume the first drawdown payment of 26k from the 500k pot.   Ignoring fund charges for the sake of this discussion.

500k - 26k = 474k

Now, add back, after a year on average 4% due to growth of the market.  That adds 18.96k *back* to the pot leaving it at 492.96k. So the 26k has only in effect "cost" me about 7k.

Year 2, take another 26k + 3% inflation so take 26780, therefore:
492.96 - 26.78 = 466.18k
Now add 4% back to 466.18k = 484.82k

So, after two generous drawdowns totalling 52k in two years, the pot has only eroded by about 15k, again assuming a growth of 4%.

The situation repeats.

Again, big caveat is that the market DOES indeed grow.  And on historical precedent it always has, even with world wars and global pandemics factored in.  The biggest danger is a crash early on.  Which makes me think a three year buffer of cash from my ISA, or maybe taken out as maybe a lump of tax free cash on a market high, is a good thing.

MetaPhysical

This is a calculator I have done to calculate over 25 years with a very simplistic mechanism assuming the withdrawal rate remains static at 26k.  I will also do another version to factor in inflation on the yearly payment.  Making small changes at the beginning results in massive changes at the end.  Conversely, the pot stays quite large until the latter years when it erodes quite quickly due to the diminishing capital.

Initial capital sum		500000				Pot size
Withdrawal amount		26000				Withdrawal
	Starting SUM ('000's)	Leaves	Growth	Result after year
YEAR 1	500000	474000	0.04	492960
YEAR 2	492960	466960	0.04	485638.4
YEAR 3	485638.4	459638.4	0.04	478023.936
YEAR 4	478023.936	452023.936	0.04	470104.8934
YEAR 5	470104.8934	444104.893	0.04	461869.0892
YEAR 6	461869.0892	435869.089	0.04	453303.8527
YEAR 7	453303.8527	427303.853	0.04	444396.0069
YEAR 8	444396.0069	418396.007	0.04	435131.8471
YEAR 9	435131.8471	409131.847	0.04	425497.121
YEAR 10	425497.121	399497.121	0.04	415477.0059
YEAR 11	415477.0059	389477.006	0.04	405056.0861
YEAR 12	405056.0861	379056.086	0.04	394218.3295
YEAR 13	394218.3295	368218.33	0.04	382947.0627
YEAR 14	382947.0627	356947.063	0.04	371224.9452
YEAR 15	371224.9452	345224.945	0.04	359033.943
YEAR 16	359033.943	333033.943	0.04	346355.3008
YEAR 17	346355.3008	320355.301	0.04	333169.5128
YEAR 18	333169.5128	307169.513	0.04	319456.2933
YEAR 19	319456.2933	293456.293	0.04	305194.545
YEAR 20	305194.545	279194.545	0.04	290362.3268
YEAR 21	290362.3268	264362.327	0.04	274936.8199
YEAR 22	274936.8199	248936.82	0.04	258894.2927
YEAR 23	258894.2927	232894.293	0.04	242210.0644
YEAR 24	242210.0644	216210.064	0.04	224858.467
YEAR 25	224858.467	198858.467	0.04	206812.8057

MetaPhysical

stuhse said:

Yes but also you have to factor in inflation, you will need more money as time goes buy.  Ironically though, if you play it to keep your income just below 50270, the 40 % ,  in year 1 you need 26k to balance your 24k,  however in year 2 your 24k will go up by inflation, but the 40% threshold is apparently set to stay for a few years., so you will need less to balance.  

Absolutely.  And that makes it quite difficult to write a formula to balance all these things.

ewaste

Inflation and the sequencing of that inflation as well as classic Sequence of Returns Risk are the boogeymen. If you happen to have poor sequencing of either or perhaps both this go wrong very quickly. 

It's important to prepare yourself and understand variable withdrawal rate strategies or have one of your own. Would you be prepared to seriously reduce or even stop withdrawals if needed?

MetaPhysical

ewaste said:

Inflation and the sequencing of that inflation as well as classic Sequence of Returns Risk are the boogeymen. If you happen to have poor sequencing of either or perhaps both this go wrong very quickly. 

It's important to prepare yourself and understand variable withdrawal rate strategies or have one of your own. Would you be prepared to seriously reduce or even stop withdrawals if needed?

Yes, of course.  I would not religiously take out 26k per year come what may.  I am just illustrating "on average" what can happen.  As we all know, life does not work out that way sometimes.  You can win big, or lose big, depending on what is, in effect, luck.  You could be lucky there is no global pandemic or war in Ukraine in your first couple of years in retirement.  On the other hand, that is exactly what many have just encountered.

stuhse

The great things you have are a really good index linked base level income, and a huge pot to bridge the gap to state pension.   Your worst case scenario is being on above the uk national average wage at 67. Presumably you have a house bought and paid for...so in reality far more disposable income than most.
Most likely you will be able to enjoy an income just below the 40% threshold for the rest of your life. 

Another thought If you need some extra money you can with draw your tax free portion as and when....your plan of taking some of this at the start appears to make sence. 

MetaPhysical

Updated Excel with randomised inflation and growth numbers across 30+ years.  Have a play here:
https://1drv.ms/x/s!AmKMkhwWN6vZlsRZmz89tjjUIE6S0g?e=lqApc0

jim8888

Generally speaking, I think your plan is a good framework to stay within and that you can afford to withdraw more than the 4% guideline. I did read "Die With Zero" which was entertaining, but left me with Zero strategies to actually achieve the stated ambition. All you can do, I think, is have a general plan and stay flexible. Paying 20% tax is a lot better than paying 40% tax, for example, so one of the things I'm considering is maximising income at the lower tax band this year. I don't actually need that extra income and I'm still not sure if I'll do this, but I feel thinking hard and making projections on it won't hurt. You do seem to have quite a lot of change coming your way - and, compared to working life, retirement is a massive change in loads of ways, certainly not just financial ones. I did massive amounts of financial planning prior to retiring and no planning whatsoever on what to do with my time when I got there! The more solid your plans are - how much will you travel, where will you live, what car will you drive - might help determine your financial approach   

QrizB

MetaPhysical said:

The oft-discussed 4% rule seems to apply to those that want to preserve the capital sum.  I am not interested in doing that ... of course I want this money to last as long as possible and I'd like to live well until the state pension kicks in nine years after I retire.

As mentioned by the very first reply, the 4% rule isn't designed to preserve thew capital sum; it's a value that's been back-tested against the last century or so of US economic data to give a very low risk of a 65-year-old American running out of money before they die.

For a 58-year-old Brit, there's a higher chance of running out at 4%; 3.5% is often mentioned as safer. And there's a higher chance again if you're commencing drawdown at 58.

MetaPhysical said:

So my rationale is that I can draw much more heavily on the DC scheme than 4% with a view to keeping out of the higher rate tax band.  My DB and late wife's pensions amount to about £24000ish per annum as an income stream guaranteed for life and index linked.  So I was thinking of taking as much as 8% out of the DC at 58 (of which 25% will be tax free if I forgo the lump sum).  That would equate to a 40k withdrawal on 500k of which 30k would be taxable.  This, added to the DB money would total 54k per annum of income.

So, starting with a £600k pot, £24k pa of index-linked DB income and a further £10k of SP from age 67, you're looking for £64k gross?

I've plugged those numbers into cFIREsim (link) which uses US data for a US retiree. That shows you running out of DC money in 95 out of 109 cycles, sometimes as early as Year 7 and usually by Year 15. This might still meet your retirement goals, but gives you a more realistic model than a simple Excel spreadsheet does.

Feel free to use the linked model as a starting point and see how variations in drawdown strategy affect the DC pot survival statistics. I also might've made some silly mistakes with entering your data, so you should check for those too.