Withdrawal rate

Justso65

I often see a safe pension withdrawal rate of around 4-5%.  This would seem very low to me. Assuming we expect better than 4-5% on pension investments is the suggested withdrawal rate based on maintaining the pension pot?  

I have what I consider a healthy pension pot and ISA savings and will be 60 this year.  My plan accepts pot erosion because at 67 I have a modest DB pension along with my state pension, another modest DB spouse pension and a state pension 3 years later. So whilst I don’t want to completely drain my DC pot in the 7 years to 67 I still feel a 10% withdrawal rate would be sustainable.  This would give me a greater take home pension than I currently have in salary mainly because my salary is significantly reduced due to my current rate of pension contributions. Assuming the remaining pot has any kind of growth over those 7 years I would have at least 30% of my pot left to use to top up my other guaranteed pension incomes.

At 60 I feel I should benefit from diligently saving for retirement over many years and enjoy it whils I am still fit enough to do so. 

Any comments on this strategy are welcome.

JS

QrizB

If you're confident in your model, test it.

https://www.cfiresim.com/

(Other stress testing tools are available.)

Justso65

Thank you.

That’s a very interesting tool.  Some initial runs have come up with, at worst, 2 fails in 148 runs. Not bad odds.  I’ll look at the tool inputs in more detail over the next week and see how it plays out.

JS.

tacpot12

The 4% safe withdrawal rate strategy came from the US, where investment returns are generally better than are available in the UK (even when investing in US funds from the UK!). It assumed no other income; so no State Pension and no Defined Benefit Pensions. It was based on modelling historical returns from the US Stock Market and US Bonds, and the effect of retiring at different times (so it allowed for every potential sequence of returns; or at least all those sequences that had occured in previous years)  The 4% rate also expects withdrawals to be increased by the rate of inflation.

The result is, I feel, a safe withdrawal rate that is conservative for most UK retirees, who will typically have an full State Pension entitlement and often some Defined Benefit Pension provision, and may also have savings in an ISA.

I consider that my own Safe Withdrawal Rate is about 6% (I have a full state pension, two small DB pensions and a rental property), but I have only been withdrawing at the rate of 4.2% as a result of me wanting to prioritise leaving my pension pot to my partner and children. The new proposals on Inheritance Tax are likely to see me withdrawing at a greater rate. I think 6% would be sustainable for me. 

If you want to try modelling a safe withdrawal rate for yourself, you could look at cFIREsim.  

dunstonh

I often see a safe pension withdrawal rate of around 4-5%.

Never seen 5% mentioned.    You often see 4% mentioned in reference to the US research data for US based citizens living in dollar domicle.      For the UK, its more typically 3.5% (or 3% in your 50s).

This would seem very low to me. Assuming we expect better than 4-5% on pension investments is the suggested withdrawal rate based on maintaining the pension pot?  

You are forgetting some things
a) investment returns are not consistent.  They zig zag
b) there have been long term periods of less than 5% p.a.
c) you are forgetting inflation.  (for the last 70 years UK inflation has averaged around 4.9%)

If you take a 20 year period investing in 60% equities and 40% bonds (with the bonds being a spread of all types and equities being market cap) then before charges on a an annualised nominal basis you have:



However, in real terms, it is:



So, that 20 year period of Sept 60 to August 80 made nothing in real terms 

So whilst I don’t want to completely drain my DC pot in the 7 years to 67 I still feel a 10% withdrawal rate would be sustainable.

In a good period it could be.  In a poor period it wont be.

If we take the first 10 years of this millennium, you would have just about made 7 years it if you ignored inflation.



The last 10 years have been very good for equities.  Indeed, better than the long term average.  So, you have to be careful you are not falling for recency in your views.  By contrast, bonds are coming off a torrid time with some types having their worst period in over 100 years.   



What is your period going to be closer to? 

If you have limited windows to fund, then your personal SWR may vary.  i.e. someone funding the gap but not needing the investments after that could well have a very high SWR. 

Hoenir

Justso65 said:

 Assuming we expect better than 4-5% on pension investments

You can assume anything you like. However it's likely to be well above the documented long term historic rates of return. The data is out there. Never been easy to access. Investments will zig zag in value during cycles. End of the day the total return cannot better that which is actually achieved by the companies invested in or the debt instruments held. 

Bostonerimus1

The withdrawal rates you see for drawdown (eg 3% or 4%) take into account inflation and the variability of investment return and assume a 30 year retirement, not a 7 year bridge until your DB/SP pensions begin. If we assume 4% annual inflation then your withdrawal amount will have doubled after 18 years and if your pot has fallen you might need double digit percentage withdrawals. The forecasting calculations take historic inflation and investment returns and calculate a probability that you will have money left when you die for a range of withdrawal rates. It so happens that for something like a 60/40 portfolio and a 30 year retirement a 3% or 4% withdrawal rate will have around a 95% probability of success ie you don't run out of money. You can play with the numbers if you have other sources of income like DB pensions, but don't discount inflation and the near certainty that you'll have years where your return is minus 20%.

cfw1994

dunstonh said:

I often see a safe pension withdrawal rate of around 4-5%.

Never seen 5% mentioned.    You often see 4% mentioned in reference to the US research data for US based citizens living in dollar domicle.      For the UK, it’s more typically 3.5% (or 3% in your 50s).

Maybe the 4% rule is actually the 4.7% rule…..which the creator of the rule adjusted it to, I believe?
Mentioned 2’30” in at this (now old) video.

Mind you, reading this makes me more confused…

Justso65

All good advice as usual and thank you all for taking the time to reply.

Qyburn

cfw1994 said:

Maybe the 4% rule is actually the 4.7% rule

I think it's misleading calling it a "rule".  It's more of a suggestion, and according to most it's not a particularly good suggestion for the UK.

OldScientist

Justso65 said:

I often see a safe pension withdrawal rate of around 4-5%.  This would seem very low to me. Assuming we expect better than 4-5% on pension investments is the suggested withdrawal rate based on maintaining the pension pot?  

I have what I consider a healthy pension pot and ISA savings and will be 60 this year.  My plan accepts pot erosion because at 67 I have a modest DB pension along with my state pension, another modest DB spouse pension and a state pension 3 years later. So whilst I don’t want to completely drain my DC pot in the 7 years to 67 I still feel a 10% withdrawal rate would be sustainable.  This would give me a greater take home pension than I currently have in salary mainly because my salary is significantly reduced due to my current rate of pension contributions. Assuming the remaining pot has any kind of growth over those 7 years I would have at least 30% of my pot left to use to top up my other guaranteed pension incomes.

At 60 I feel I should benefit from diligently saving for retirement over many years and enjoy it whils I am still fit enough to do so. 

Any comments on this strategy are welcome.

JS

For an alternative perspective, I note that a collapsing ladder of index-linked gilts to cover the period of 7 years before DB and SP kick-in would currently have a payout rate of 14% (see https://lategenxer.streamlit.app/Gilt_Ladder ). In other words, to provide your estimated 10% withdrawal rate would cost about 70% of your pot (leaving about 30% of your pot to grow as you have already suggested) and would, in the absence of UK debt default, provide inflation protected income throughout those 7 years.