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

handful

This was a very interesting read, thanks to those that contributed. I have some similarities in my own circumstances to the OP in that I am looking to retire early but now at the point that I want it to be sooner rather than later. I will probably post a thread at some point with my own situation so as not to hijack this thread.

Qyburn

Itsme01x said:

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.  

I'm thinking similar, starting from 65 and planning for 35 years retirement. It seems an absurdly simple view so I wondered if we're missing something.

Itsme01x said:

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.
 

For those "early years" it might be worth taking from your DC instead of savings, unless you're DB fully uses your personal allowance. I'm in that position, living off savings with no income, so I'm taking a £16,750 UFPLS late this tax year, to be spent next year but using this years PA.

Bostonerimus1

OldScientist said:

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!

With any retirement income plan I think it's good to have a pretty automatic selling/withdrawal method that happens on a regular schedule whether the source is DC or DB/SP/annuities. The advantage of the DB etc source is that it might be index linked, you know how much you will be getting and the amount won't vary with the markets. I have most of my money in 3 funds, but there are still small amounts in separate accounts with other providers from the jobs I've had over the years that have slightly different tax treatments and so can't be easily transferred. I plan to withdraw from those first to clean things up for my heirs. I have also done a detailed estate plan and will so that my assets pass to a trust when I die and appointed a good friend in the US as trustee to distribute the money to my heirs.

I will eventually have to make withdrawals as mandated by the US tax authorities and I will start by just depositing all dividends and interest into a cash account. I also have to think about US estate tax issues and so will probably be increasing my annual gifts to family and charity to keep me below some thresholds. But if I return to the UK it will get ferociously complicated, but I hope to reduce the estate in a controlled manner over the next 30 or so years (hopefully it's at least that long) and that's where my guaranteed index linked income sources will be very useful.

jamesd

Qyburn said:

Itsme01x said:

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.  

I'm thinking similar, starting from 65 and planning for 35 years retirement. It seems an absurdly simple view so I wondered if we're missing something.

You're missing sequence of returns risk. With consistent performance a US investor could draw 6%+ not 4%. But safe withdrawal rates deal with cases like early and sustained drop and prolonged high inflation to get to levels that work during the worst sequences in 125-160+ years of history.

The Guyton-Klinger rules start out less pessimistic because they cut your income if things go badly or increase it if they go well. They can also compensate for a couple of percentage points of over-optimism by cutting income if you don't end up with better than average performance. Since the capital preservation rule is limited to no more than a 10% cut once a year that limits the speed of cutting and can't handle say 10% drawing and an immediate crash. 10% cut isn't mandatory and if you do go aggressive you might want to use 20% or extra yourself.

Just dividing by the number of years isn't too bad but it's either too optimistic for a couple of decades or too pessimistic for four because it's not accounting for long early underperformance or growth that eventually has historically arrived.

It's not horrible as long as you're willing to adapt. Nice to be aware of the SWRs, though.

State pension deferring and perhaps annuity buying around age 73-74 can reduce risk, including longevity risk, outliving your plan.

QrizB

Qyburn said:

Itsme01x said:

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.  

I'm thinking similar, starting from 65 and planning for 35 years retirement. It seems an absurdly simple view so I wondered if we're missing something..

By assuming zero real growth you either work longer than you need to, or have a more frugal retirement than necessary.

Needing a pot worth 35x your retirement income is an effective withdrawal rate of 2.85%. You end up with a pot 40% bigger than if you used the 4% guide.

Put another way, if you want 20k pa in retirement, your approach would mean a pot at 65 worth £700k. Using a 4% SWR you'd only need a pot of £500k. If you had £500k at 65 and used 1/35th you'd only be drawing £14.3k pa.

cfw1994

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"

HNY to you and yours.  

Sorry to read of the background: I hope you manage to have a good relationship with your daughter, must be super hard for her losing her mum 😔

Only skimmed this - interesting thread!

I think you have a very solid plan, and enough flexibility to deal with whatever life throws at you.
You mentioned liking cruises….they can be expensive beasts, and that might be a way to reduce expenses if there is a year or two of poor markets.  Is there a good way to have cheap cruises?!

I stepped away from work almost 3 years ago, and haven’t regretted a minute, despite markets being ‘challenging’.  Things are picking up now, but I stopped my DC drawdown 6 months into it when funds were dropping, and we lived off ‘savings’ - I would recommend 2-3 years in cash reserves for such times. 

Good luck, & do report back from time to time!

Mutton_Geoff

michaels said:

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?

I agree. A large amount of publications are based on the US industry and don't take into account any DB or SP income many pensioners would have.

I've been a customer of SJP and an IFA previously and they both built investment plans that showed huge bias towards safe investing near retirement (60/40) when this method omitted to take into account my DB and State pensions.

In my case those together provide 50% of my income so my SIPP stays much more aggressively invested and I choose to plan a variable drawdown on it based on performance.

It's already grown more in the last 4 weeks than I intend to drawdown in 2024/2025 (this tax year drawdown already set aside). I took 5% in my first year and that enabled a load of bucket list holidays.

The 60/40 mix and 4% rule is not really a thing for many UK pensioners but my limited experience of financial advice is they couldn't think outside the box and wanted to sell me standardised products based on predictable returns and preservation of capital although I don't intend to leave a legacy myself.

GazzaBloom

cfw1994 said:

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"

HNY to you and yours.  

Sorry to read of the background: I hope you manage to have a good relationship with your daughter, must be super hard for her losing her mum 😔

Only skimmed this - interesting thread!

I think you have a very solid plan, and enough flexibility to deal with whatever life throws at you.
You mentioned liking cruises….they can be expensive beasts, and that might be a way to reduce expenses if there is a year or two of poor markets.  Is there a good way to have cheap cruises?!

I stepped away from work almost 3 years ago, and haven’t regretted a minute, despite markets being ‘challenging’.  Things are picking up now, but I stopped my DC drawdown 6 months into it when funds were dropping, and we lived off ‘savings’ - I would recommend 2-3 years in cash reserves for such times. 

Good luck, & do report back from time to time!

This is interesting. I plan to start drawdown in April 2025 and will have accumulated 3 years worth of living expenses as cash to sit alongside equity index funds in a "barbell" portfolio of 85% stocks/15%cash. My thoughts have been to drawdown proportionally and rebalance at the end of each year.

When you decided to stop your DC drawdown what was your trigger point to start using the cash to cover your expenditure? and what will be your trigger to revert back?

MK62

QrizB said:

Qyburn said:

Itsme01x said:

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.  

I'm thinking similar, starting from 65 and planning for 35 years retirement. It seems an absurdly simple view so I wondered if we're missing something..

By assuming zero real growth you either work longer than you need to, or have a more frugal retirement than necessary.

Needing a pot worth 35x your retirement income is an effective withdrawal rate of 2.85%. You end up with a pot 40% bigger than if you used the 4% guide.

Put another way, if you want 20k pa in retirement, your approach would mean a pot at 65 worth £700k. Using a 4% SWR you'd only need a pot of £500k. If you had £500k at 65 and used 1/35th you'd only be drawing £14.3k pa.

It doesn't assume zero growth..... part of any growth is taken each year as part of the withdrawal.
So if you start by withdrawing at 1/35 of a £500k pot, (for a 35 year retirement) you'd take £14285 in year 1......if the remaining pot grew by 10%, (ie from £485715 to £534286) you'd then take 1/34 of that in year 2, £15714......ie, the same 10% increase. The reverse is true for a 10% fall. The plan does ignore inflation though (or rather has no direct correlation to it)....it simply divides the remaining pot by the number of years left in the plan. That said, none of the variable withdrawal strategies have a direct correlation to inflation either.
As for the starting rate......the original 4% rule was for a retirement of 30 years, and for a UK retiree is more in the region of 3.3-3.5%.......stretch that to 35 and the rule no longer applies, at least not at the same level......for a UK retiree, over 35 years, 2.85% is in the ballpark for a starting withdrawal. However, this is planning for the historical worst case......it's unlikely we'll see that, statistically speaking, but it's not impossible, and nor is worse than the historic worst case. Once you retire, you are tied to the next 30 or 35 year period (or whatever timeframe you plan for).......what happens in other periods no longer matters all that much.
The drawbacks of the "divide by years" strategy are that the plan has a finite life......you choose 35 years and it will last 35 years, regardless of whether you last more or less than that......and the variation in income you might encounter along the way
In the end though, no matter which drawdown plan you use, there will be unknowns.....the only way to remove those completely is with an index linked lifetime annuity, but that's not without it's cons either.

OldScientist

MK62 said:

QrizB said:

Qyburn said:

Itsme01x said:

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.  

I'm thinking similar, starting from 65 and planning for 35 years retirement. It seems an absurdly simple view so I wondered if we're missing something..

By assuming zero real growth you either work longer than you need to, or have a more frugal retirement than necessary.

Needing a pot worth 35x your retirement income is an effective withdrawal rate of 2.85%. You end up with a pot 40% bigger than if you used the 4% guide.

Put another way, if you want 20k pa in retirement, your approach would mean a pot at 65 worth £700k. Using a 4% SWR you'd only need a pot of £500k. If you had £500k at 65 and used 1/35th you'd only be drawing £14.3k pa.

It doesn't assume zero growth..... part of any growth is taken each year as part of the withdrawal.
So if you start by withdrawing at 1/35 of a £500k pot, (for a 35 year retirement) you'd take £14285 in year 1......if the remaining pot grew by 10%, (ie from £485715 to £534286) you'd then take 1/34 of that in year 2, £15714......ie, the same 10% increase. The reverse is true for a 10% fall. The plan does ignore inflation though (or rather has no direct correlation to it)....it simply divides the remaining pot by the number of years left in the plan. That said, none of the variable withdrawal strategies have a direct correlation to inflation either.
As for the starting rate......the original 4% rule was for a retirement of 30 years, and for a UK retiree is more in the region of 3.3-3.5%.......stretch that to 35 and the rule no longer applies, at least not at the same level......for a UK retiree, over 35 years, 2.85% is in the ballpark for a starting withdrawal. However, this is planning for the historical worst case......it's unlikely we'll see that, statistically speaking, but it's not impossible, and nor is worse than the historic worst case. Once you retire, you are tied to the next 30 or 35 year period (or whatever timeframe you plan for).......what happens in other periods no longer matters all that much.
The drawbacks of the "divide by years" strategy are that the plan has a finite life......you choose 35 years and it will last 35 years, regardless of whether you last more or less than that......and the variation in income you might encounter along the way
In the end though, no matter which drawdown plan you use, there will be unknowns.....the only to remove those completely is with an index linked lifetime annuity, but that's not without it's cons either.

As @mk62 says, the 1/N withdrawal method is a percentage of portfolio approach (and hence, in real terms, withdrawals will vary from year to year) that implies an expected 0% real growth and is, as such, a special case of the so-called pmt, or actuarial, approaches (pmt is named after the payment function in excel and other spreadsheets). Other growth rates can be used - VPW is a well known example (see https://www.bogleheads.org/wiki/Variable_percentage_withdrawal ).

The following graphs show the 0th (worst case), 10th, 25th, 50th (median), and 75% percentiles of real withdrawal (expressed, in real terms, as a percentage of the initial portfolio value, %IPV) as a function of time after retirement for two different PMT growth rates (*see below for more details), 0% in the upper panel and 3% in the lower panel. A 35 year planning period has been assumed together with 30% UK stocks, 30% US stocks, and 40% UK bonds (all held in the UK). Taxes and fees have been ignored. The dashed horizontal  line on the graph is the historical safemax of 3.1% for constant inflation adjusted withdrawals for this planning period and portfolio.



There are a number of points to note:
1) For a PMT growth rate of 0%, the median withdrawals started low and increased (remember this is in real terms) throughout retirement. For a PMT growth rate of 3%, the median withdrawals started higher and still increased, but to a lesser extent.
2) Regards of the chosen PMT growth rate, in 75% of historical retirements (i.e. looking at the 25th percentile), the withdrawal rates exceeded the constant inflation adjusted level for most of the retirement planning period.
3) However, the withdrawal rates for the lowest percentiles (0th and 10th) fell below that of the constant inflation adjusted income level (note: the 0th percentile at different years since retirement does not necessarily correspond to the same retirement case).
4) While I've not shown the portfolio values, they will all fall to zero after the 35th withdrawal (this doesn't have to be the case, since the percentage withdrawal can, if desired, be capped).
5) The rapid drop in the worst case was caused by the short lived stock market crash in the early 1970s (it is a bit worse using solely UK stocks or a higher allocation to stocks).

The answer to the question "Which of these is the better solution?" is, I think, "it depends". For example,
1) For a retiree with inflation capped sources of DB income (e.g., a 2.5% cap is the current statutory minimum) or who has bought a level annuity might think the first case is more suitable since increasing real income (even in the worst cases) from the portfolio may compensate for decreasing real income from DB pension or annuity.
2) For a retiree who has sufficient inflation protected guaranteed income (e.g., state pension, DB pensions, and RPI annuity) the lower of the two may be more attractive since the initial withdrawals are higher. FWIW, since we do have sufficient inflation protected income from non-portfolio sources to cover most of our spending, we are using, a slightly different version, of the second example.

* As promised, here are some more details on the method.  In each case, the withdrawal percentage can be pre-calculated using the appropriate 'expected' pmt rate and the pmt formula. For example, with a 3% growth rate and a 35 year planning period, the inputs to the pmt function are as follows
pmt(3%,35,-100,0,1)=4.52%.

Assuming a portfolio worth £100k, the initial withdrawal would be £4520. At the beginning of the second year, the formula is
pmt(3%,34,-100,0,1)=4.59%. If the portfolio value is now worth £90k (after the previous withdrawal and a poor year) then the withdrawal would be £4131 (if you're really accounting to the nearest pound!)

The percentage can be calculated beforehand and tabulated. As per discussion upthread about simplicity, while the amount to withdraw is not automated, it is fairly easy to calculate with pen, paper and calculator or in a spreadsheet. Actual implementation (rather than backtesting) does not require any other information (e.g., inflation) other than the pre-calculated percentage and the amount in the portfolio making it a reasonable approach for the less interested partner.