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

Hoenir

MetaPhysical said:

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

Trouble is the real world isn't linear. Extrapolation does little more than provide confirmation bias. After a benign market period for markets ( for well documented reasons ). Retail investors have seemingly become complacent to the many risks that they are exposed to.  On average over centuries of data. Markets suffer downturns every 5/6 years. With the fall being 15%.  Wind back to the peak of markets in 2007 and you wouldn't have seen the  your investment return to it's former value until 2013 some 6 years later.  

OldScientist

Following on from the @QrizB  post using cfiresim, you might also be interested in a simulator that uses historical UK returns rather than those from the US. https://www.2020financial.co.uk/pension-drawdown-calculator/  . However, only one DB/state pension can be added, so it cannot quite model your situation (i.e. with DB pension and state pension later on). 

jamesd

The 4% rule doesn't apply to your whole situation. First, 4% is for US investors and it's originator added small caps in later work and now talks about his 4.5% rule. About 3.5% is right for the UK for 30 years, taking uncapped inflation increases every year. It's valid for mixtures where equities are at least 50% and better 60% of the investments.

You do not require 4% plus inflation for life. Instead you require a bridging high drawing rate that then transitions to for life once all of your income is in payment. For your age and this situation it's adequate to deduct all of the years of bridging withdrawing from your initial capital then use 3.5% or more correctly 3.2% of so for a 40 year plan that includes this bit in the bridging years too.

Adequate in part because you've written about ample safety margin from other income later on so sequence of return risk in the early years doesn't matter so much.

Because this is income you'll be relying on you might consider 50% or more of the year ahead drawing in cash savings, up to as much as two years. Replenish regularly unless markets happen to drop. If equities drop you can replenish from bonds only for a while.

You're also allowed to recalculate the safe withdrawal rate whenever you like. Use that to adjust for sustained market changes, up or down, but perhaps no more frequently than every five years to reduce income volatility.

You might also consider the Guyton-Klinger rules that bump up initial income for the UK to around 5% but sometimes skip annual inflation increases or rarely add an extra cut. Boosts if markets do well, too. It's more efficient at letting you spend more of your money before you die, unlike 4% rules which in the US ends with higher nominal (no inflation adjustment) capital at death in 98% of historic cases.

Also remember that the true SWR is the highest in the worst historic sequence. You can anticipate doing better. This and the inflation increases matter if you're comparing to annuity rates.

Finally, work has been done on increasing beyond the SWR based on your guaranteed income and income flexibility and willingness to take cuts if markets happen to do badly during your sequence. You have high guaranteed income even during the bridging.

Smudgeismydog

MetaPhysical said:

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.  

I’m so sorry to hear how tough it’s been for you and your daughter. I completely empathise with this, and also your thoughts on ensuring your finances will allow you to lead the retirement lifestyle you want. 

After working so hard to grow your assets, how do you feel you’ll mentally adjust to spending and not saving?

Ivkoto

This may be useful in your case

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

michaels

For the bridge period consider an index linked bond ladder to remove inflation and volatility risk.

MK62

MetaPhysical said:

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

As the proposed income withdrawal has now fallen from 7-8% in the original post, to 4.8% in the above spreadsheet, obviously then the lower the withdrawal, the lower the probability of plan failure......
However, in your model spreadsheet, the randomised growth assumptions are all positive......no negative return years in any of the coming 35 years is, I'd suggest, a little unrealistic. Also, if your plan is to split off sufficient capital at the start, in order to finance a 9 year bridge pension until your SP kicks in, then you won't be starting with 500k.......it'd more likely be iro £400k.

Try plugging in some real return (and possibly inflation) numbers.......a bad year to start retirement was in 2000 (not the worst though), so try plugging in the return numbers from the last 23 years and see what it looks like then.

Some quick figures, based on returns from 2000 would suggest £24000 from your DB pensions, £11500 from an SP bridge/SP (bridge for 9 years then SP itself) and £13600 from your remaining pot.......for a total starting income of around £49100 before tax.......around £43000 net (assuming 25% of both the bridge and the drawdown are tax free......the SP wouldn't be when it kicks in though)

GazzaBloom

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.

 

Linton

One warning…

Do not take the word “Safe” in SWR too seriously. The calculations are based on a single set of data. Current calculated values such as a 95% success rate are based on what happened during 2 relatively short historic periods, a few years during the Great Crash and the other in the early 1970s when low market returns coincided with high inflation.  If 1 or 3 such events had taken place in the past 100 years or the two had taken place much less than 40 years apart the SWRs would be rather different.

It would be interesting to see an SWR simulation that started just before 2001 but sadly it is too early for that.

GazzaBloom

One issue with the SWR approach for us in the UK is getting it to fit with an early retirement before state pensions and then the inclusion of state pensions down the track.

For example, I plan to retire at age 57, 10 years before SP kicks in. I have calculated our spending requirements for basic living with around 30% of that being discretionary "pocket money" and the rest to cover all foreseeable day to day annual expenses. I will have a £6K DB pension plus will need to draw £30.5K (before tax) using FAD/UFPLS taking 25% of each withdrawal as tax free. So, £36K before tax giving around £33K a year after tax. This matches our current lifestyle while I am working.

My wife's SP kicks in 3 years after mine and we have full SP forecasts so that will be around £20K in today's money once both are paying out.

So, the drawdown from DC/SIPP/ISA can drop down significantly once the SPs get going. This means my drawdown requirements are front end loaded and will be relied upon heavily for the first 10 years.

Throw that into a software model using Timelineapp retirement planning software or FiCalc and back testing against historical market data using Guytons guardrails gives a 98% change of success. This also includes some lumps of spending for car replacement, home improvements etc, that we will want to do but timing can be varied as none are particularly time critical.

All well and good, but the reality is that, if following the plan to the letter, by the time the state pensions commence we will have either just about survived a poor period of market returns by letting the guardrails trim the spending, which could see spending need to be cut quite heavily if a prolonged period of poor returns was encountered at the start of retirement...living quite a miserable first 10 years of retirement.

Or...see us build up a significant excess by the time SPs commence if there was a prolonged bull market during the first 10 years but not dare spend into that excess just in case.

The median scenario sees us keeping our starting capital fairly intact then build an excess after the SPs commence.

There is a wide range of possible outcomes as you can see below. 

We all have to go into the unknown of retirement with a plan of some sort but all plans may need to be adjusted on first contact with the enemy (erratic market returns, varying inflation, varying interest rates, accidents, illness etc). Or, throw in the towel and take an annuity, or partial annuity, which is basically letting an institution take on the market risks for you which you will ultimately pay them for doing.

So, I like the idea of re-evaluating annually as I have seen suggested in one of the threads, Year 1's plan is for a 40 year retirement, Year 2 is for a 39 year retirement etc. Update and adjust as you go.

There's always the options of taking some part time work or equity release some house value in a real emergency.