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

Smudgeismydog

Happy New Year MetaPhysical, and I couldn’t agree with you more.

Whilst the calculations, projections and analysis I have also considered are of course helpful, they can also be paralysing. My husband died aged 37, so I will be taking early retirement too, particularly as they never had the chance.

Best wishes
x

GazzaBloom

MetaPhysical said:

Happy New Year all.  May god/providence bless you with health, happiness and financial well being for you and those you hold dear.

I think the bottom line is that no one knows.  There are always unknown's in life; how long will we live, what will growth be like, how low or high will inflation be, how many crashes in the markets, how long will we stay healthy etc etc.

What we *do* know with 100% certainty is that we are not getting any younger and I want to enjoy my go-go years in the 58-70 range if I get the opportunity.  My wife died at 51.  My fiancee's mum was diagnosed with MND at 74 in October  and these sorts of shattering news and life events bring home why it is important to enjoy your life to the fullest you can.  So, I am retiring when I am 58 and I am going to take 5% and let the pieces fall where they may and adjust accordingly.  I have my DB and SP of me and my soon-to-be-wife (and her small pensions and her SP) to fall back on if the DC pot should deplete. 

You nearly always regret the things you didn't do, not the ones you did.  "ars longa vita brevis"

Agreed. I have crunched the numbers over and over, checked and cross checked using software modelling tools and tomorrow, I hand my notice in at work, giving 12 months notice of retirement at the end of 2024. I will commence drawdown at 5% from our DC pots in the new tax year 2025 having just turned 58 when I do.

My cousin's husband died at age 56 and a colleague I was working with on a project died at age 66 a few years ago.

Uncertainly over market performance and fear of crashes is one thing but seeing a colleague go from a meeting in my office, appearing perfectly healthy and happy in mid November to dying in hospital 6 weeks later on Boxing Day 2018 is far scarier and more sobering.  

It's time to take the red pill, unplug from the Matrix and end this subservient nonsense and live what days I have left on my terms as best I can.

Bostonerimus1

OldScientist said:

Linton said:

Cus said:

Personally I think a lot of the SWR thinking is just an attempt to feel in control of the uncontrollable, or worse trying to convince yourself that you can retire and start at 5% because the graphs say so. 

Reality might be that you should just assume no growth above inflation. Divide your pot by the number of years of retirement, and that's it. If things go better in the first few years then divide again.
Problem with this approach is that this just pushes retirement back for many, hence the comfort in SWR numbers etc

I agree very much that SWR thinking is a way of giving you the confidence to jump in a situation where the future is unknown. Whether that works for you is a matter of your psychology and ability to accept uncertainty. Some people will find a rigid pre-defined mechanistic approach helpful, others may worry more about the fundamental basis and details of the approach than the inherent uncertainty of planning the future. You need to find what works for you.

It would be interesting to know how people’s views on the way to manage the uncertainty have changed after they have retired or whether they are continuing to use the same methods they used when deciding to do so.

Highly variable stock/bond portfolios are not a good tool to provide a constant income (whether inflation adjusted or not). One way to reduce uncertainty is to provide an income floor in addition to SP and any DB pensions (search for floor and upside) through either
1) a ladder of inflation linked gilts (benefits: provides legacy before term of ladder expired, downside: could outlive planned ladder duration)
2) An RPI protected annuity (benefits: provides higher income than ladder for single retiree, while providing similar income to ladder for couple or with long guarantee period; downside notwithstanding FSCS protection, possibility of insurance company default).

Withdrawals from the remaining portfolio can be made using a variable approach (ranging from simple percentage of portfolio, Bogleheads VPW, G-K, etc.).

In both cases, flooring (currently) provides an income that is a little higher than worst historical case SWR, but well below even median cases (in other words, certainty can cost).

Ensuring a good guaranteed income floor was the foundation ;-) of my retirement plan and I started that when I was 25 and left the UK for the USA. I read a book (it was before the internet) for expats and it advised to pay voluntary NI while overseas, so that's what I did and I will now qualify for full UK SP as well as US social security so that's a good inflation linked base. Additionally I took my final job with a government agency in part because it had a good DB plan and other retirement benefits to further increase my income floor. I also made sure I had no debt and had paid off my mortgage to reduce my need for income in retirement. The result is that my guaranteed income floor is higher than my income needs and I don't have to withdraw from my DC pensions and other investments.

Some things to consider amongst all the concentration on DC pensions and SWR are; annuities might be a relatively expensive way to ensure retirement income, but they certainly reduce all the worry and anguish about SWR which is valuable to many people; a long term approach to retirement planning makes it far easier than waiting until you are in your 40s or 50s; and reducing your need for income can make the projections look a lot better.

RogerPensionGuy

Nice thread and many good points to log in the head.

I have a few strategies that I'll probably follow. 

Trying to predict how long a SIPP may last paying out and what % maybe available over the many years hopefully is just not simple to work out. I think sequencing of markets ups and downs will only be know way down the road and trying accurately plan just doesn't look possible with much accuracy if SIPP investments and value is too close to an optimistic draining plan.

It sorta reminds me of F1 racing cars a while back, they would make the engine and other parts just strong heavy enough to get to the finish line and just enough fuel also, the fuel could run out and engine explode at or after the line as the race was completed. 

Using the F1 analogy above I plan to complete all 40 laps in my normal happy driving style and if I should actually get to the finish line on the 40th lap, the car design and fuel load would indeed allow another 20 laps to be achieved or even 30 could be possible. 

During the race although my car can do 180MPH lap times with fairly high risk on corners, I plan to drive it a bit gently and 150MPH lap times will be just fine for me.

If the race tracks are all closed for any period of years whereby driving that SIPP F1 car just looks to painful(big and/or long market downturns etc) the car will be parked up and not used, I'll use one of my cars to generate what I need, these cars are called DC pensions, State pensions, ISAs, premium bonds, NS&I products and any other various stable liquid cash available. 

With reference to me watching much youtubes about pensions etc, if I only need 2 or 3% average return over them 40 laps, I wouldn't be holding too much volatile investments that have long term historical returns of 7% I would be more than happy picking more typical rock solid returns of say 4 or 4.5%

To use a similar analogy, many road car drivers are very concerned about EV battery electric cars and their range causing anxiety, this range anxiety is pretty much how how I feel about a potential long period of no paid employment/retirement, although historically an EV with a 150 Mile Range would of been perfectly okay for me 99.99% over the last 40 years, if I do buy an electric EV car it will need to be over 300 Miles Range and probably 330 to cater for any unexpected stuff on the road.

I'm aware me getting a 300/330 Miles Range EV car is pretty wasteful on many many front, but like a DC pot, after I don't need the car anymore, it probably has good tax efficient value for other.

Think I'll stop drinking wine now and have a few coffees. 

Cheers and HNY Roger. 

MetaPhysical

GazzaBloom said:

<snip>

It's time to take the red pill, unplug from the Matrix and end this subservient nonsense and live what days I have left on my terms as best I can.

I could not have put it better myself.  Because that's exactly what the rat race is.  I have had a good career, have big qualifications and multinational experiences to look back on, earned good money.  But do I want to continue this past 58?  No, thank you.  A new chapter beckons for me/us.

OldScientist

michaels said:

OldScientist said:

Just to illustrate the effect of making some choices (with apologies to the OP since it doesn't cover their scenario). Let's assume a 67 year old couple with combined state pensions of £21k (and no other guaranteed income). Assume they have a portfolio with £500k invested 30% UK stocks, 30% US stocks, and 40% UK gilts. Ignore the effects of fees and taxes. Also assume that both survive to 100 (i.e. a 33 year planning period), although some scenarios are affected more by the death of a parter than others. Modelling has been done using the historical returns at macrohistory.net.

If they decided to use a constant inflation adjusted withdrawal amount of 3.5% (slightly above the historical SAFEMAX), the outcomes at 0th (worst case), 10th, 25th, 50th (median), and 75th percentiles for portfolio value (upper panel) and total income, (i.e., combination of portfolio withdrawals and state pension (lower panel) are shown below



In most retirements they have a steady (inflation adjusted) income of just under £40k with final portfolio values (in real terms) that vary from 0 (in less than 10% of cases) to £500k (median case) to more than twice the original value (75th percentile). In the worst retirements, the portfolio was exhausted (i.e., no legacy) and the retirees would have had to rely on their state pensions for the last 5 or so years.

If they chose a variable withdrawal method (I've used a constant percentage of portfolio of 3.5% but smoothed the portfolio value over the previous 3 years - I note that a higher percentage could be used which would increase initial income at the expense of later income).



In this approach, the portfolio was not exhausted and the range of final values is narrower (from about £200k to just under £1000k). However, the income was considerably lower in the worst case retirement falling to about £27k in the middle years of retirement, while median cases saw higher income.

For the final example, the couple decided to use half of their portfolio to purchase a joint annuity with RPI protection and 100% survivor benefits (but no guarantee period). According to moneyhelper annuity tool, this has a payout rate of 3.73%. Therefore annuity income is a constant inflation adjusted £9.325k per year. Combining this with the state pension and portfolio withdrawals (from a residual pot of £250k and using the variable method as described above) gave the following outcomes



The first thing to note is that the portfolio available for legacy was now much smaller (halved) but was not exhausted in any case. Alternatively, the payout rate for an annuity with a 20 year guarantee period (i.e., to provide a bit more legacy in the event of early death of both retirees) has a rate of 3.67% (i.e., not a lot less that without a guarantee).
The second thing to note is that while the income was still variable, the range was now more constrained than without the annuity - in the worst historical retirement case, the income fell to just under £35k in the middle years of the retirement before recovering towards the end. However, the upside income (i.e., the 75th percentile) was reduced.

Which of these approaches is 'best' is likely to vary from retiree to retiree depending on their requirements - each has its own advantages and disadvantages that ought to be considered.

Your posts are always well constructed and informative.

A high level rule of thumb might be that one holds a mixture of stocks and bond in some sort of trade off between overall gains and volatility.  With a fixed DB/SP component of retirement income, is there an argument that the remaining subject to volatility pot should be more skewed towards equities than the modelled 60/40 portfolios as effectively a proportion of the overall pension is already completely protected against volatility so the bond holding in the variable bit is effectively superfluous?

You're right, if you consider the annuity to consist entirely of bonds (not a bad assumption), then having (in the above example) spent half the portfolio on an annuity suggests that holding 100% equities in the residual portfolio would be called for. As a consequence, with a variable withdrawal approach, the income will have more volatility (even with the smoothing) - whether this is acceptable will depend on the requirements of the retiree. It is also important to consider what happens if one person dies - the overall guaranteed income would be reduced since the SP pension contribution would be halved (although the annuity income would stay the same), so the portfolio income potentially then becomes more proportionately important. The other consideration is one of risk aversion - while the income floor is a definite psychological boost, some retirees might be nervous about large drops in their 'upside' income.

However, just for interest I reran the last case with 100% stocks (50% UK and 50% US) and, surprisingly (at least to me), the results indicate that the worst case was no worse than worst case with 60/40 (I note that the bonds used in the previous example were 15-20 year maturity which have had some lengthy poor periods in the past, e.g. post WWII) and the performance was much better at higher percentiles.

Hoenir

RogerPensionGuy said:

It sorta reminds me of F1 racing cars a while back, they would make the engine and other parts just strong heavy enough to get to the finish line and just enough fuel also, the fuel could run out and engine explode at or after the line as the race was completed. 

Reminds me of a day I had at Silverstone for a high performance driving course many years ago. Williams and McLaren had hired the full circuit for the day. Both Senna and Hill were out on the track , coming in and out of the pits for changed wings, tyres  and other engine adjustments. We were in the offices above the pit lane for the classroom sessions. So had a perfect vantage point of the activity. Damon Hill we were told clocked 82 full laps during the course of the day. 

Unlike investors, F1 teams can take every opportunity to put the odds firmly in their favour before putting a car on the starting grid. By not leaving any aspect to chance. Mitigating the possibility of not reaching the finishing line. 

OldScientist

Bostonerimus1 said:

OldScientist said:

Linton said:

Cus said:

Personally I think a lot of the SWR thinking is just an attempt to feel in control of the uncontrollable, or worse trying to convince yourself that you can retire and start at 5% because the graphs say so. 

Reality might be that you should just assume no growth above inflation. Divide your pot by the number of years of retirement, and that's it. If things go better in the first few years then divide again.
Problem with this approach is that this just pushes retirement back for many, hence the comfort in SWR numbers etc

I agree very much that SWR thinking is a way of giving you the confidence to jump in a situation where the future is unknown. Whether that works for you is a matter of your psychology and ability to accept uncertainty. Some people will find a rigid pre-defined mechanistic approach helpful, others may worry more about the fundamental basis and details of the approach than the inherent uncertainty of planning the future. You need to find what works for you.

It would be interesting to know how people’s views on the way to manage the uncertainty have changed after they have retired or whether they are continuing to use the same methods they used when deciding to do so.

Highly variable stock/bond portfolios are not a good tool to provide a constant income (whether inflation adjusted or not). One way to reduce uncertainty is to provide an income floor in addition to SP and any DB pensions (search for floor and upside) through either
1) a ladder of inflation linked gilts (benefits: provides legacy before term of ladder expired, downside: could outlive planned ladder duration)
2) An RPI protected annuity (benefits: provides higher income than ladder for single retiree, while providing similar income to ladder for couple or with long guarantee period; downside notwithstanding FSCS protection, possibility of insurance company default).

Withdrawals from the remaining portfolio can be made using a variable approach (ranging from simple percentage of portfolio, Bogleheads VPW, G-K, etc.).

In both cases, flooring (currently) provides an income that is a little higher than worst historical case SWR, but well below even median cases (in other words, certainty can cost).

Ensuring a good guaranteed income floor was the foundation ;-) of my retirement plan and I started that when I was 25 and left the UK for the USA. I read a book (it was before the internet) for expats and it advised to pay voluntary NI while overseas, so that's what I did and I will now qualify for full UK SP as well as US social security so that's a good inflation linked base. Additionally I took my final job with a government agency in part because it had a good DB plan and other retirement benefits to further increase my income floor. I also made sure I had no debt and had paid off my mortgage to reduce my need for income in retirement. The result is that my guaranteed income floor is higher than my income needs and I don't have to withdraw from my DC pensions and other investments.

Some things to consider amongst all the concentration on DC pensions and SWR are; annuities might be a relatively expensive way to ensure retirement income, but they certainly reduce all the worry and anguish about SWR which is valuable to many people; a long term approach to retirement planning makes it far easier than waiting until you are in your 40s or 50s; and reducing your need for income can make the projections look a lot better.

There's an interesting article (written from a US perspective, but still helpful) at https://www.kitces.com/blog/retirement-spending-increase-financial-advisor-client-guardrails-guaranteed-income/ . For me, the terminology of 'core' and 'adaptive' to describe spending (rather than essential and discretionary) is an interesting development.

Having retirement money turn up from a DB pension definitely helps a tightwad (like me) actually spend and the same may be true for annuities.

Another consideration with annuities is cognitive function - I don't know how long I will be capable of withdrawing money from my portfolio. While I've made it as easy as possible since it is implemented in a spreadsheet (I'm using a variant of Bogleheads VPW), information still needs to be drawn from a number of sources (e.g., different investment platforms) and entered correctly. I've steadily made the process simpler as retirement has progressed and we've actually implemented our plans.

RogerPensionGuy

Hoenir said:

RogerPensionGuy said:

It sorta reminds me of F1 racing cars a while back, they would make the engine and other parts just strong heavy enough to get to the finish line and just enough fuel also, the fuel could run out and engine explode at or after the line as the race was completed. 

Unlike investors, F1 teams can take every opportunity to put the odds firmly in their favour before putting a car on the starting grid. By not leaving any aspect to chance. Mitigating the possibility of not reaching the finishing line. 

Noted, but my main slant on it is, creating big margins, ie, need/want/spend 30K PA, investments could probably cater for 45K PA, so 30K should never be an issue and unless very unlucky with markets sequencing, after 5 or 7 years in retirement, the spend taps can be opened much more if you like to.

Simmerely, planing for 30 years of funding is possibly hopefully too tight, so planning for 40 or 42 years gives another nice margin and again, unless sequencing is very unlucky, any easy ploy to open the taps after a few years if margin is super safe.

michaels

OldScientist said:

michaels said:

OldScientist said:

Just to illustrate the effect of making some choices (with apologies to the OP since it doesn't cover their scenario). Let's assume a 67 year old couple with combined state pensions of £21k (and no other guaranteed income). Assume they have a portfolio with £500k invested 30% UK stocks, 30% US stocks, and 40% UK gilts. Ignore the effects of fees and taxes. Also assume that both survive to 100 (i.e. a 33 year planning period), although some scenarios are affected more by the death of a parter than others. Modelling has been done using the historical returns at macrohistory.net.

If they decided to use a constant inflation adjusted withdrawal amount of 3.5% (slightly above the historical SAFEMAX), the outcomes at 0th (worst case), 10th, 25th, 50th (median), and 75th percentiles for portfolio value (upper panel) and total income, (i.e., combination of portfolio withdrawals and state pension (lower panel) are shown below



In most retirements they have a steady (inflation adjusted) income of just under £40k with final portfolio values (in real terms) that vary from 0 (in less than 10% of cases) to £500k (median case) to more than twice the original value (75th percentile). In the worst retirements, the portfolio was exhausted (i.e., no legacy) and the retirees would have had to rely on their state pensions for the last 5 or so years.

If they chose a variable withdrawal method (I've used a constant percentage of portfolio of 3.5% but smoothed the portfolio value over the previous 3 years - I note that a higher percentage could be used which would increase initial income at the expense of later income).



In this approach, the portfolio was not exhausted and the range of final values is narrower (from about £200k to just under £1000k). However, the income was considerably lower in the worst case retirement falling to about £27k in the middle years of retirement, while median cases saw higher income.

For the final example, the couple decided to use half of their portfolio to purchase a joint annuity with RPI protection and 100% survivor benefits (but no guarantee period). According to moneyhelper annuity tool, this has a payout rate of 3.73%. Therefore annuity income is a constant inflation adjusted £9.325k per year. Combining this with the state pension and portfolio withdrawals (from a residual pot of £250k and using the variable method as described above) gave the following outcomes



The first thing to note is that the portfolio available for legacy was now much smaller (halved) but was not exhausted in any case. Alternatively, the payout rate for an annuity with a 20 year guarantee period (i.e., to provide a bit more legacy in the event of early death of both retirees) has a rate of 3.67% (i.e., not a lot less that without a guarantee).
The second thing to note is that while the income was still variable, the range was now more constrained than without the annuity - in the worst historical retirement case, the income fell to just under £35k in the middle years of the retirement before recovering towards the end. However, the upside income (i.e., the 75th percentile) was reduced.

Which of these approaches is 'best' is likely to vary from retiree to retiree depending on their requirements - each has its own advantages and disadvantages that ought to be considered.

Your posts are always well constructed and informative.

A high level rule of thumb might be that one holds a mixture of stocks and bond in some sort of trade off between overall gains and volatility.  With a fixed DB/SP component of retirement income, is there an argument that the remaining subject to volatility pot should be more skewed towards equities than the modelled 60/40 portfolios as effectively a proportion of the overall pension is already completely protected against volatility so the bond holding in the variable bit is effectively superfluous?

You're right, if you consider the annuity to consist entirely of bonds (not a bad assumption), then having (in the above example) spent half the portfolio on an annuity suggests that holding 100% equities in the residual portfolio would be called for. As a consequence, with a variable withdrawal approach, the income will have more volatility (even with the smoothing) - whether this is acceptable will depend on the requirements of the retiree. It is also important to consider what happens if one person dies - the overall guaranteed income would be reduced since the SP pension contribution would be halved (although the annuity income would stay the same), so the portfolio income potentially then becomes more proportionately important. The other consideration is one of risk aversion - while the income floor is a definite psychological boost, some retirees might be nervous about large drops in their 'upside' income.

However, just for interest I reran the last case with 100% stocks (50% UK and 50% US) and, surprisingly (at least to me), the results indicate that the worst case was no worse than worst case with 60/40 (I note that the bonds used in the previous example were 15-20 year maturity which have had some lengthy poor periods in the past, e.g. post WWII) and the performance was much better at higher percentiles.

I wonder if the stock/bond split is a separate issue?  Part of the reason it works well in the US centric base case was I think there was some inverse correlation during the 'worst' stock/inflation performance periods; this may not apply so strongly once you add some UK equities and wholly UK bonds?