My Decumulation Strategy - Please Criticise.

Pat38493

NoMore said:

Are you not just starting to overthink all this, you said that at age 56, putting the DB pension into payment will cover 97% of your expenses, you also say you have plenty of scope to cut spending if really needed as your spend plan includes a lot of leisure and luxury stuff.  

So just put the DB pension into payment and don't worry so much about market performance.

It seems to me you are just trying to get a perfect plan, which is impossible, just use a plan that appears to work very well simply and easily.

You could be right - I am just aware that as long as the DB pension remains deferred, it is pretty much guaranteed to grow faster than inflation (inflation plus decrease in early retirement factors) so it seems like a kind of guaranteed growth asset if I can avoid putting it into payment for one or two extra years.

cloud_dog

Hi @Pat38493, I am following this post with interest, as R-Date for us is towards the end of this year (probably go until Christmas now TBH), 58 for me 56 for my partner.

I am very intrigued with your decision making regarding taking the DB early, not from a right of wrong perspective as such but.... We are in a similar position whereby c. 85% / 90% of our number at SP age (DB 2 years earlier from 65) will be covered by guaranteed sources.  I did consider taking the DB early, but at the back of my mind I have a partner who knows virtually zero about drawdown methodologies (and is not interested), and also having recently been through a period with my mother finally succumbing to dementia, I worry about our capabilities (knowledge / mental) to manage drawdown at some point in our lives.

It is for this reason, at the moment (happy to be guided further) that I am planning to only take the DB schemes at their NRA and potentially not to take the PCLS, deferring a S32 policy that will increase in deferment by 7%pa, etc, so as to ensure that as much of our income is provided by guaranteed sources, without the need for faffing around.  I appreciate that later in life one could buy an annuity, have PoA in place, etc, etc, but even so I am wary.

To my point... Has this been a consideration in your musings or have you taken it from a straightforward financial efficiency / financial safety perspective?

Pat38493

cloud_dog said:

Hi @Pat38493, I am following this post with interest, as R-Date for us is towards the end of this year (probably go until Christmas now TBH), 58 for me 56 for my partner.

I am very intrigued with your decision making regarding taking the DB early, not from a right of wrong perspective as such but.... We are in a similar position whereby c. 85% / 90% of our number at SP age (DB 2 years earlier from 65) will be covered by guaranteed sources.  I did consider taking the DB early, but at the back of my mind I have a partner who knows virtually zero about drawdown methodologies (and is not interested), and also having recently been through a period with my mother finally succumbing to dementia, I worry about our capabilities (knowledge / mental) to manage drawdown at some point in our lives.

It is for this reason, at the moment (happy to be guided further) that I am planning to only take the DB schemes at their NRA and potentially not to take the PCLS, deferring a S32 policy that will increase in deferment by 7%pa, etc, so as to ensure that as much of our income is provided by guaranteed sources, without the need for faffing around.  I appreciate that later in life one could buy an annuity, have PoA in place, etc, etc, but even so I am wary.

To my point... Has this been a consideration in your musings or have you taken it from a straightforward financial efficiency / financial safety perspective?

It sounds like we are in similar situations but probably you have less years to go till NRA and maybe a larger pot than me.  For me, it's more important to be able to stop my main employment and be able to dictate my own activities earlier, partly because my wife is not in the best of health and we want to spend time doing nice things as soon as possible.  Quite often if you do stress testing, putting the DB into payment early means you can stop work earlier as the DB income (and potentially the PCLS) acts as a kind of partial mitigation of SORR risk.

If you are already only some months from retirement and your plan already works with putting the pension into payment at NRA, then all the better - I would probably do that too if it wasn't for the fact that I would then have to probably work about 2-3 years more to avoid significant risk of running out of cash before my DB and SP kicks in.

Regarding the point about ability to manage a drawdown pot in later life - this is also a a very good point.  That said, I think it's quite likely that in reality all our spend will be covered from DB/SP anyway from 67 onwards as my current spend plan is based on spending the same amount as our current spend in real terms forever (obviously with some specific adjustments for items that are not inflation linked or will definitively stop at some date).  I will give this some further thought.  If I still have a decent pot left at 70 or 80 I will have the option to get an annuity I guess, but probably I would rather leave some for inheritance at that point though it's not currently a priority.

Also if I am doing well and still have a larger than expected pot later on, I can get an IFA as I will have plenty of money to pay for it.

cloud_dog

Thanks for laying out your thoughts, and given your circumstances I would in all likelihood be doing exactly the same as yourself.

af1963

I am just aware that as long as the DB pension remains deferred, it is pretty much guaranteed to grow faster than inflation (inflation plus decrease in early retirement factors) 

The decrease in early retirement factors has to be balanced against the fact that every year you defer is a year's worth of payments that you won't receive.  ER factors are usually calculated to try to be actuarially neutral between those who defer and those who don't..

Triumph13

I personally would look at it a slightly different way.  Assume you defer the DB enough that you are fully covered from age 67, and then work backwards from there.  Your cash and investments then fall naturally into four separate pots:
1. Your planned big ticket items
2. Replacing for your DB income until you put it into payment
3. Replacing your SPs until they come into payment
4. A drawdown pot for extra income and/or inheritance

I would then use a liability matching approach to select an appropriate investment mix for each pot.  Note that this is independent of whether those pots are in or out of pensions - that is just driven by tax and cashflow considerations.

Pot 2 is all to be spent in the next four or five years so cash (or very near cash) would seem the only appropriate investment.  Most or all of Pot 1 likewise.

Pot 3 has a longer period, so I might hold it as x years of cash and y of equities, with a plan to move the equities to cash as the period progresses.

Pot 4 is a forever pot so can be equity rich and drawn or left to accumulate as you wish.

What I actually did myself was to factor in the drawdown income from pot 4 to allow me to reduce the size of pots 2 and 3 above.  Not great as it means a lower income now, compared to at 67, but avoids the mental anguish of earmarking quite so much capital for spending   

michaels

I am pretty safety first so plan to use my mix of DC, DB and state pension to generate 100% of required 'floor' income protected from market fluctuations and inflation.  To do this I will build an 'index linked bonds' bridge from retirement date to the date I receive the state pension and when I pencil in to take my DB.  I am 'lucky' in that the TFLS commutation factor on my DB is so poor as to not make sense even if it were to avoid higher rate tax so no need to worry about that decision.

After that the rest of the money is for extras so am thinking it could be pretty much 100% invested (the floor provision means that SORR is no longer a real problem) and that I basically calculate a rolling SWR at the start of each year and base my draw down on that - sure it potentially means a rollercoaster of income but the good years can be splurge years and the tight years can be tighten belt years.  I am pretty good at living below my means so hopefully won't become addicted to the higher standard of living of the good years....

Pat38493

Triumph13 said:

I personally would look at it a slightly different way.  Assume you defer the DB enough that you are fully covered from age 67, and then work backwards from there.  Your cash and investments then fall naturally into four separate pots:
1. Your planned big ticket items
2. Replacing for your DB income until you put it into payment
3. Replacing your SPs until they come into payment
4. A drawdown pot for extra income and/or inheritance

I would then use a liability matching approach to select an appropriate investment mix for each pot.  Note that this is independent of whether those pots are in or out of pensions - that is just driven by tax and cashflow considerations.

Pot 2 is all to be spent in the next four or five years so cash (or very near cash) would seem the only appropriate investment.  Most or all of Pot 1 likewise.

Pot 3 has a longer period, so I might hold it as x years of cash and y of equities, with a plan to move the equities to cash as the period progresses.

Pot 4 is a forever pot so can be equity rich and drawn or left to accumulate as you wish.

What I actually did myself was to factor in the drawdown income from pot 4 to allow me to reduce the size of pots 2 and 3 above.  Not great as it means a lower income now, compared to at 67, but avoids the mental anguish of earmarking quite so much capital for spending   

Thanks - that is not too far off what I am actually proposing except with the option to put the DB in payment earlier if needed.  The breakeven for when the DB fully covers "adjusted" current spend is about age 59/60.  Interestingly though, even at 56, it covers more than 97%, so each additional year doesn't make much difference in % terms.  Major capital expenditures for the next few years are in the plan, and there is also an annual budget for capital which can be set aside and/or postponed if needed.

My investments are structured pretty much in the way you describe although not following the exact same methodology, or at least they will be before I stop work.  What I have found with pension planning is that you can use a dozen different methods but you will probably come to roughly the same answer give or take.

michaels said:

I am pretty safety first so plan to use my mix of DC, DB and state pension to generate 100% of required 'floor' income protected from market fluctuations and inflation.  To do this I will build an 'index linked bonds' bridge from retirement date to the date I receive the state pension and when I pencil in to take my DB.  I am 'lucky' in that the TFLS commutation factor on my DB is so poor as to not make sense even if it were to avoid higher rate tax so no need to worry about that decision.

After that the rest of the money is for extras so am thinking it could be pretty much 100% invested (the floor provision means that SORR is no longer a real problem) and that I basically calculate a rolling SWR at the start of each year and base my draw down on that - sure it potentially means a rollercoaster of income but the good years can be splurge years and the tight years can be tighten belt years.  I am pretty good at living below my means so hopefully won't become addicted to the higher standard of living of the good years....

Thanks - I looked at doing a gilts ladder to cover some or all of the needs, but my thinking at the moment is that I prefer to have flexibility year by year rather than locking things in too much, especially given the proportion of guaranteed income that we already have (at least from 67).