Flexible Retirement Planner Tool - Do my inputs look OK?

GenX0212

cobson said:

Thinking about modelling UK tax, the best that I can think of is to not use any of the program's tax settings, and instead just manually calculate the tax due for each time period according to income streams, then in Additional Inputs add an Other Expenses entry for each of these periods with the tax amount calculated.

I did it by reducing the DB and State Pension income by the expected tax. The problem as one of the other posters said earlier is how to factor in changes to the personal allowance as it increments periodically rather than follows inflation.  

2nd_time_buyer

I have been using this modeler, which I have been very impressed with so far:

https://james-shack.co.uk/retirement-planner-download

Has anyone tried this and also the Flexible Retirement Planner tool? I am just wondering if there any advantages/disadvantages of each. Off hand it looks like the James Shack is set up for the UK situation e.g. taxes, which might be an advantage.

GenX0212

2nd_time_buyer said:

I have been using this modeler, which I have been very impressed with so far:

https://james-shack.co.uk/retirement-planner-download

Has anyone tried this and also the Flexible Retirement Planner tool? I am just wondering if there any advantages/disadvantages of each. Off hand it looks like the James Shack is set up for the UK situation e.g. taxes, which might be an advantage.

I have had a play with it using the same inputs. He's using more pessimistic return rates than the Flexible Retirement Tool but perhaps they are more realistic?

The good news for me is that it validates my minimum scenario of not running out of DC POT until at least age 75.

2nd_time_buyer

GenX0212 said:

2nd_time_buyer said:

I have been using this modeler, which I have been very impressed with so far:

https://james-shack.co.uk/retirement-planner-download

Has anyone tried this and also the Flexible Retirement Planner tool? I am just wondering if there any advantages/disadvantages of each. Off hand it looks like the James Shack is set up for the UK situation e.g. taxes, which might be an advantage.

I have had a play with it using the same inputs. He's using more pessimistic return rates than the Flexible Retirement Tool but perhaps they are more realistic?

The good news for me is that it validates my minimum scenario of not running out of DC POT until at least age 75.

Thanks very much, that is encouraging for both you and the modeler. I found projections based on the historic scenarios quite interesting too. 

I understand that most people are generally expecting lowing average returns going forward. In part due to most countries having now done a lot of their developing and population growth levelling off. So historic (or lucky) projections may be very, very lucky.

GenX0212

I cross checked https://james-shack.co.uk/retirement-planner-download vs the https://www.fidelity.co.uk/retirement/calculators/pension-drawdown-tool/ for a £50k a year withdrawal from a £600k pot with no other income.
Remarkable consistency between the two, James-Shack gives you a lot more input options though.

OldScientist

GenX0212 said:

I'm doing some modelling using the Flexible Retirement Planner Tool The Flexible Retirement Planner | A financial planning tool powered by Monte Carlo Simulation

I have a starting pot of £620k and want to take early retirement from 56 with a drawdown £36k (after tax) each year until age 67 and then £16k a year from 67 onwards. The aim is not to run out of drawdown income before age 75. In addition to the £36k drawdown we also have DB pots and which when combined with State Pensions will provide a more or less guaranteed Moderate retirement from 67 onwards even if no drawdown pot left.

I'm only just learning how the tool works. I have set the Inflation Rate at 4% and used the inbuilt 'Moderate Risk' approach. Investment Tax Rate is set at 15% to account for 25% of the actual drawdown being tax-free income.
Do the inputs I have used look reasonable, are there any advanced tweaks I should use?

First projection drawing down £36k a year leaves a median projected pot of £318k at age 67 (with an upper 10% projection of £547k and a bottom 10% projection of £152k) :



Then using the £318k as the starting pot for age 67 and a drawdown rate of £16k per year:


and the lower projection using £152k as the starting pot for age 67 and a drawdown rate of £16k per year:


The worse-case scenario seems to support the pot lasting until the desired age 75 by when life will have slowed down somewhat.

Thoughts welcome, especially with regards to the input settings. Thanks.

FWIW, using my own code (historical asset returns and inflation from macrohistory.net and a few other sources) taking inflation adjusted 36k per year (i.e. 5.8% of the initial portfolio) for 11 years and £16k (i.e., 2.6% of the initial portfolio) for the next 8 years, I get a failure rate with 60% stocks of about 5% to 10% depending on what gilts were held (this ignores fees and taxes). The following graphs are for holding 'All Stocks' gilt fund.

The first graph shows the 1st (worst case), 10th, 50th (median), 75th, and 99th (best case) percentiles of the real withdrawal rate for historical UK retirements



The second graph shows the percentiles of the portfolio value as a function of time


The first failure was 13 years after retirement (although in that case, the withdrawal for the previous year was a bit short). Including the effect of taxes will make these outcomes a bit worse.

A few thoughts:
1) Are your DB pensions fully RPI protected? I note that you have used 4% inflation which will leave DB pensions capped at 5% with their full value, while the real value of one capped at 2.5% would be gradually eroded. If they are capped, it might be worth putting a non-zero value for the standard deviation of inflation.
2) Distasteful as it might be, it will be useful to run the modelling for the scenario where one of you dies before state pension/DB pensions kick in.
3) You haven't asked, so apologies for this point. As an alternative to drawdown you could consider a inflation-linked gilt ladder to provide certainty over the period until state pension. According to https://lategenxer.streamlit.app/Gilt_Ladder you could build a ladder to provide £36k per year for 11 years at a cost of about £400k. This may seem expensive, but in the worst 10% of historical cases, the portfolio fell below about 30% of the initial value within about 7 or 8 years.

GenX0212

OldScientist said:

A few thoughts:
1) Are your DB pensions fully RPI protected? I note that you have used 4% inflation which will leave DB pensions capped at 5% with their full value, while the real value of one capped at 2.5% would be gradually eroded. If they are capped, it might be worth putting a non-zero value for the standard deviation of inflation.
CPI capped at 5%

2) Distasteful as it might be, it will be useful to run the modelling for the scenario where one of you dies before state pension/DB pensions kick in.
DB pension will kick in next year at reduced rates; £12k a year + residual DC pot for my wife if I die before SP, £16k a year for me if the other way around. No mortgage, no debts.

3) You haven't asked, so apologies for this point. As an alternative to drawdown you could consider a inflation-linked gilt ladder to provide certainty over the period until state pension. According to https://lategenxer.streamlit.app/Gilt_Ladder you could build a ladder to provide £36k per year for 11 years at a cost of about £400k. This may seem expensive, but in the worst 10% of historical cases, the portfolio fell below about 30% of the initial value within about 7 or 8 years.
Not really sure that appeals, it does provide certainty but I'm not averse to taking some risks with the pot. Worse comes to the worse there is always the option to go back to work in some capacity but that would need to be a pretty big hit and if it happened then rather than deplete the pot the drawdown amount would get reduced to compensate.

To add a little further context the plan will see us retire at 56 with an income very close to what our current take home pay is and a very good chance of reaching 75 at that level without any reduction, past 67 we will have a minimum combined £40k guaranteed which I think is a pretty decent place to be in all honesty. We will have the option to tighten belts if the markets do take a downturn and if things do go well then possibly an option to take even more.

Seen a few friends and family never able to fully realise retirement dreams for one reason or another, including Father-in-law who couldn't wait to retire but passed just before reaching his retirement age. 

Can't legislate for everything and there are some nerves but on balance it feels right.

OldScientist

Just to note the effect of UK historic inflation on a DB pension with a 5% CPI cap is illustrated in the following figure (for a starting amount of £10k)



The worst cases are, of course, those starting in the 1960s and 1970s - about 60% of purchasing power lost over a 30 year period.

Your long term position is quite similar to ours, although we are funding the gap to SP with a DB pension taken early and relatively small amounts to top that up from our portfolio using a form of ABW (see https://www.bogleheads.org/wiki/Amortization_based_withdrawal ).

If you are happy with some flexibility in withdrawals, then the probability of the portfolio running out before you are 75 is much reduced (I've been retired 4 years and I really wouldn't want to go back to work - even if anyone would employ me!). For example, in the following graph the total income (a 'target' £36k from portfolio for first 11 years, and then £15k from portfolio and £21k from SP afterwards). In this case, the portfolio withdrawals are made up of £27k inflation adjusted topped up with a 1.45% percentage of portfolio withdrawal to give the flexibility (effectively, 75% of the portfolio withdrawals are inflation adjusted and 25% are percentage of portfolio - a variant of Carlson's endowment formula).



Even in the worst historical cases, the portfolio lasted 20 years or so, but at the expense of a less income even in median cases.

michaels

Try the index linked gilts tool with 22 years of £16k costing 330k and 12 years of £20k costing 240k so you get certainty for your need plus 50k left in the pot on top...

OldScientist

My apologies to @GenX0212 since a ladder may not suit their needs, but I thought I'd just add the results of some historical backtesting since it may be of interest to others. In each case, I've assumed £36k from the portfolio/ladder before SP and £16k from portfolio/ladder after SP (asset returns from macrohistory.net).

The results with no ladder.



These are the same as an earlier post (but in slightly different form). There was a small probability (just under 10%) that the portfolio would be exhausted before 20 years had elapsed.

Next the case where the ladder was constructed to cover the first 12 years (I've assumed a cost of £400k to provide an income of £36k as per my earlier post)


Several things to note:
1) Even in the worst cases, the portfolio was not exhausted during the 20 year period
2) The amount left in the portfolio was higher in the worst 25% of cases (the 25th percentile value was about £200k with or without the ladder) and worse in the best 75% of cases (e.g. at the 75th percentile, £750k without the ladder and £475k with). In other words, the ladder protects the downside, but reduces the upside.

With the longer ladder suggested by @michaels (i.e., £36k for the first 12 years and another 10 years of £16k costing £570k) the outcomes looked as follows

Several things to note:
1) The portfolio was never exhausted (not surprising since no withdrawals were taken during the 20 year period shown in the graph), but worth noting that the real value was still below that of the initial value in the worst cases.
2) The portfolio value in the worst 10% of cases was better than those with the shorter ladder. However, the upside cases are much worse than either without a ladder or with the short ladder, e.g., at the 25th percentile the portfolio had £100k compared to £200k in the other two scenarios.

The overall conclusion is that the IL gilt ladder did an excellent job of protecting the income stream in the worst historical markets, but at the expense of worse outcomes in better markets. Which solution appeals (and as I've implemented it as an either/or, whereas partially funding the income with a ladder is also an option in order to capture a bit of the strengths of each approach) is a personal decision since one isn't better than the other, merely different.

Of course, the usual caveats that these are historical results and future results could be worse than historical results, etc.