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

Hoenir

RogerPensionGuy said:

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.

Theory is fine. The practical application will be far more challenging. Choice of investments and the precise timing of decisions will be critical. The only certainty when investing is uncertainty. Just when you start to relax the floor can be suddenly taken away from underneath you. 

Itsme01x

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.  At this timje the %age withdrawel works out to be c3.2%.  

Some notes:
I appreciate that an event(!) could drop DC pot before retirement and have worked different scenarios between a 20% to 40% drop.
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.
I am lucky and have a small DB pension that doesnt cover all of the essential spend, but means I will not worry.
My wifes pension is all DB and combined with mine, if she passes before me, will cover all of the essential spend and vice versa. 
I do not need to leave an inheritance (to a DS), so can spend all of my pension pot money, if needed. 
The inheritance to DS will be the value of the house.  Mortgage paid off last year.
If I live beyond 98 years, I will probably be a bit ga-ga, so will not worry too much.  Life is about experiences, I already have had lots!
 

Bostonerimus1

OldScientist said:

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 my guaranteed income will cover my spending comfortably my asset allocation elsewhere is 90% equities and 10% bonds. I can be sanguine about the ups and downs of the markets which is a nice place to be in retirement.

Bostonerimus1

OldScientist said:

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.

An interesting article, but also a bit annoying and one of the reasons I will never use a financial advisor - I don't want anyone to tell me how much to spend. I've read a lot of Kices and Pfau over the years and became a bit disenchanted by what they were selling to US retirees and the whole shift in the US to DC pensions that the UK has sadly followed. So I went in my own direction with a goal to have a SWR of 0% rather than a percentage derived from Monte Carlo models of historical data.

jamesd

Linton said;

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.

With something like £10,000-£15,000 of combined VCT dividends and ISA peer to peer lending interest all free of tax I do like having core needs covered that way even though neither is guaranteed. I'll like it even more with state pension plus deferral.

Beyond that, I'm just running to a relaxed plan because my spending is below my potential spending so I'm routinely underspending, while not depriving myself.

Maybe also some annuity buying when those can compete with deferring and SWRs. SWRs are a good tool but I have no inheritance motive so annuitizing will gradually look better for my circumstances.

Approaching six years into retirement the sequence of return risk aspect has been somewhat unfavourable, delivering a bout of moderately high inflation in the early years that bumps up the downside risk a bit. But markets have been benign enough.

MK62

OldScientist said:

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.

As well as your own cognitive function, for those with any dependants or a partner/spouse, you also need to consider what would happen in the event of your untimely demise especially if that were sudden and unexpected........your plan might seem logical and straightforward, but is everyone who depends on the income from that plan up to speed on it.........what seems logical and straightforward to you, might seem scarily complicated to another, especially one who has little interest in all this and just leaves it to you.......from this perspective, it's not hard to see why annuities might be an attractive option, if nothing else, they can certainly simplify things.

OldScientist

Bostonerimus1 said:

OldScientist said:

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 my guaranteed income will cover my spending comfortably my asset allocation elsewhere is 90% equities and 10% bonds. I can be sanguine about the ups and downs of the markets which is a nice place to be in retirement.

We have a (roughly) 10 year period before state pensions where, in the event of my death, guaranteed income streams will be insufficient for my OH's needs and therefore for that period our equities are around 65%. Once SP has kicked in, equities will be allowed to ramp up (by spending from fixed income, and if equity returns are higher than those for fixed income, by not rebalancing).

onejrmmrj

OP

To deviate from the other comments, you mention a fiancee. Are you certain the pension from your late wife will continue if you remarry or cohabit? Many pensions would stop. How big a hole would it leave in your plans?

Bostonerimus1

OldScientist said:

Bostonerimus1 said:

OldScientist said:

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 my guaranteed income will cover my spending comfortably my asset allocation elsewhere is 90% equities and 10% bonds. I can be sanguine about the ups and downs of the markets which is a nice place to be in retirement.

We have a (roughly) 10 year period before state pensions where, in the event of my death, guaranteed income streams will be insufficient for my OH's needs and therefore for that period our equities are around 65%. Once SP has kicked in, equities will be allowed to ramp up (by spending from fixed income, and if equity returns are higher than those for fixed income, by not rebalancing).

I retired 10 years ago with a 65% equity allocation after many years of a conventional 60/40 ish split. It has now drifted up to 90% with a combination of no rebalancing and extra deposits into equity funds. Part of my motivation was the "rising equity strategy" for retirees suggested by Pfau as well as my comfortable guaranteed income floor. It's nice when you can implement a strategy by basically doing nothing.

OldScientist

MK62 said:

OldScientist said:

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.

As well as your own cognitive function, for those with any dependants or a partner/spouse, you also need to consider what would happen in the event of your untimely demise especially if that were sudden and unexpected........your plan might seem logical and straightforward, but is everyone who depends on the income from that plan up to speed on it.........what seems logical and straightforward to you, might seem scarily complicated to another, especially one who has little interest in all this and just leaves it to you.......from this perspective, it's not hard to see why annuities might be an attractive option, if nothing else, they can certainly simplify things.

You're quite right... one advantage of SP, DB pension, and annuities is that the income just turns up (or at least should do!) with no requirement for anyone to do anything. This is as simple as it gets.

Alternatively, gilt ladders take some work to set up, but once up and running should be as simple as an annuity (in that income turns up - however, closure of accounts after death could be a problem).

Having a relatively simple set of investments is also useful (we're not quite down to a 2 or 3-fund portfolio, but we're heading in the right direction), but withdrawals do take a bit of effort. While the natural yield approach is effectively a percentage of portfolio method with the percentage 'chosen' by company boards and the coupons on bonds (which means the income is potentially highly variable) it does have a certain simplicity.

I think having the plan (however simple or complex) written down for the not-interested party is essential. Which reminds me, I need to update our documents!