Withdrawal rate

cfw1994

OldScientist said:

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.

How much of a scientist do I need to become to make sense of that link?

None of the % numbers that appear look like 14%:
 

#confused!

SVaz

What would it look like if you were to lose your Wife’s State pension and presumablyhalf her DB ( and vice versa for her)?  
People don’t seem to plan for the possibility of losing a partner.
A 10% withdrawal rate in the first 7 years would leave my Wife very short if I were to die after our life insurance ends at 70. 

SVaz

OldScientist said

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.

Perhaps I was doing it wrong but I played around with that yesterday and it didn’t seem to save me any money over having the required amount in cash and MMFs.
I need £46000 ( £10k x 4 and £6k ) to cover 4 years 9 months from April 2028 - December 2032 ( my SP age)  - the cost to me for a gilt ladder said £45600 so what am I missing?    

I used £10k a year x 5 in the calculation btw. 

OldScientist

cfw1994 said:

OldScientist said:

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.

How much of a scientist do I need to become to make sense of that link?

None of the % numbers that appear look like 14%:
 

#confused!

Left hand panel, scroll down to where it says 'withdrawal rate' (for an inflation protected income, switch on 'index linked')

SVaz

I am assuming that there is nothing left at the end of a collapsing gilt ladder?

When I modelled a cash/mmf pot of £46k with interest of 3% and withdrawals of £830 monthly,  there is £2000 left at the end.

 When I used 14% interest as per your post, then it said there would be £22k left so I am quite confuzzled! 

On that gilt calculator, the balance says zero. 

If I buy £46000 in gilts today, the last one maturing in 2032 and take £830 a month flat income for 57 months from April 2028,  is there anything left or not?   Are the coupons before 2028 not included in the future income so they are extra ?  

OldScientist

SVaz said:

OldScientist said

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.

Perhaps I was doing it wrong but I played around with that yesterday and it didn’t seem to save me any money over having the required amount in cash and MMFs.
I need £46000 ( £10k x 4 and £6k ) to cover 4 years 9 months from April 2028 - December 2032 ( my SP age)  - the cost to me for a gilt ladder said £45600 so what am I missing?    

I used £10k a year x 5 in the calculation btw. 

The reason for using a collapsing gilt ladder is to provide certainty in nominal or inflation linked income, but for short-term nominal income (up to about 5 years) it is just as effective (and probably easier!) to use a combination of fixed-rate savings accounts, savings accounts, and MMFs. I note that in the example you've given, the ladder has provided an additional 3 months of income, so would actually cost about £2k less (say £44k).

For fixed-term inflation protected income (which nominal gilts, savings accounts and MMFs do not provide), a collapsing inflation linked gilt ladder provides a solution.

SVaz

I have an index linked military pension starting this year ( which is going straight into my Sipp for 3 years)  so inflation proofing that short term income isn’t crucial,  I could even do a bit of work in extreme circumstances - I’m self employed and would need to renew my qualification in late 2027 to do so,  it’s around £1k and a very hard exam so I’d rather not.  

MetaPhysical

Some good posts here t a very common question.

Let me illustrate my thinking.  I want a retirement income in the mid £50k area.   I am retiring next year aged nearly 58 (so is my wife who is 57) and I will get £30K pa in DB pensions from the get go.  I have a £600k DC and I am taking a £100k lump sum day 1 and then £25k + inflation per year from it which is 5%, quite high admittedly but fortune favours the brave.  My rationale is that the £100k (which will be instant access ISA at a good rate) is my "buffer" from stock market crashes in which case I'd make no drawdowns until it recovered somewhat. 

My soon-to-be-wife has a very small pension (£100 per month) and we will both get two full state pensions.  So I can draw heavier on the DC until I hit 67.

This must be a common scenario - people who had a DB earlier in career and then a DC from their 40s.

SVaz

Yes, we will be taking 10% a year of our Sipps using UFPLS from age 63-67 then dropping to 2% for 8-10 years,  just taking tax free cash, crystallising £10k a year until it’s fully done.
Whatever’s left will remain untouched in case of care needs etc.  unless one of us dies, especially if I go first, my wife would  be down £20k a year after State pension age.  

Justso65

OldScientist said:

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.

I understand the concept of a gilt ladder but I have never looked into the deatils.  So I went to that webpage and put in some initial figures. 

To come out with the pension I want after tax I take £60k per year on a monthly basis and put 7 years as the number of years (until my DB.State pensions) with index linked selected and the tool seems to have thrown out the following

Overview

Cost

£424,499.52

Net Real Yield

-0.30%

Net Nominal Yield

2.69%

Withdrawal Rate

14.13%

Essentially it is the cost of 7 x £60k but with index linked built in ?

If so that is very appealling to me at it would leave me with £220k of DC pension pot to do something with such as top up my DC/SP at 67.

Excuse my ignorance, but are guilt ladders purchaseable products or are the self built and if so are they easy to build?

JS.