Retirement strategy, for comments

Bostonerimus1

aroominyork said:

Bostonerimus1 said:

There are plenty of algorithms for retirement drawdown that try to produce stable income from inherently unstable investment markets. Why not consider the old fashioned approach of SP, annuity and natural yield ie dividends and interest. That makes things simple.

I could suggest annuity to OH but at the same time I'd have to ask if you have a spare sofa. When she arrived here from Australia, pre-Osborne reforms, she could not understand or accept the govt mandating that your money dies with you. 

Well maybe a little education about the pros and cons of annuities and drawdown would be good. I have very knowledgeable friends who are CFAs (Chartered Financial Analysts) and would never buy an annuity because they have been brainwashed that SWR methods from a portfolio are "better". They might be well educated and be able to depreciate assets etc. but I feel they are not wise when it comes to many people's retirement needs. Of course they have a point because annuities can easily be mis-sold and often have high fees, but they should not be dismissed out of hand. I asked one of these friends what payout rate they would need to buy an annuity and they said they would simply never buy one on principle. But at todays rates they are an interesting option to at least replace the bonds part of a retirement portfolio.

aroominyork

OK, let's talk annuities. This site gives an annuity of £5,852 with 3% escalation for a 65 year old (no guarantee, no joint life). My spreadsheet below is for running the equivalent yourself. It assumes an interest rate of 4%, so withdrawing an escalating £5,852 you have a reducing balance which would run out in year 20, ie at age 85, with UK life expectancy averaging 78.6 male/82.6 female. I have not looked at forward interest rates so this is to check concept/maths.

masonic

So already a bit of a problem if you live beyond the age of 85. But if you used a gilt ladder perhaps you'd achieve a little more than 4% and eke out a few more months. Whereas if you used an ILG ladder, you may be able to get some additional tax efficiencies and potentially more inflation protection should you need it (but a lower return if inflation is low). The question is would that approach provide enough to justify the extra hassle. Using a rolling set of consumer savings products would add uncertainty regarding future cashflows and require some ongoing management.

If you expect your spending to drop in your later years, as is common, then perhaps you'd draw less and this money would last longer.

AlanP_2

I'm an ex Project Manager and I've seen plenty of project outlines / briefs that start life like this, a bit wooly with everything that can be thought of written down, some of which doesn't need to be in the strategy document.

To my simple mind this is your objective / aim / goal:

 Pass on to our kids our property’s value and c.30% of other assets; 30% seems a target which would also prevent our assets running too low if we refuse to die.

The other items under Aims are in the wrong "section" to my mind as they are items that you want to spend money on along the way and not where you want to end up. 

I think if you accept that premise then things become clearer and more straightforward - you want to / (can) spend 70% of your asset values excluding the main residence.

At a 3.2 / 3.5% withdrawal rate and allowing for future SP, PHI, holidays, tax allowances etc. etc, do you have enough to live the life you want and to achieve your objective assuming you / OH live until age xx? 

{My model assumes we both live to 100 which is extremely unlikely but reassured us that we had "enough" (OK, more than enough in reality) and that we could book the holidays etc. we wanted to with minimal concern about money.}

Assuming the numbers stack up then you can decide where to invest / save your 70%.

For the 30% allocated to inheritance I'd go 100% Global Equity and not even bother to look at the balance for a good few years. Over time it will increase in value and could end up as being a 25% or a 50% or a 75% inheritance one day. Whatever percentage it is you wont care and I doubt if your beneficiaries will either.

If you did that what would the Equity / Bond / Cash split look like for YOUR DRAWDOWN part of the overall pot?

(i.e. treat your 70% as 100% of your pot and focus on that). 

Bostonerimus1

aroominyork said:

OK, let's talk annuities. This site gives an annuity of £5,852 with 3% escalation for a 65 year old (no guarantee, no joint life). My spreadsheet below is for running the equivalent yourself. It assumes an interest rate of 4%, so withdrawing an escalating £5,852 you have a reducing balance which would run out in year 20, ie at age 85, with UK life expectancy averaging 78.6 male/82.6 female. I have not looked at forward interest rates so this is to check concept/maths.

The thing is "assumes" always does a lot of of work in any SWR and annuity comparison. Everything has got to start with your income needs and there are then a vast array of ways to generate that income. Given your stated investment level of being in the low 7 figure range I think you might be in the "it doesn't really matter what you do" situation where large market losses won't significantly change your lifestyle and you could buy a comfortable annuity and still leave significant assets invested. I think a dividend strategy plus an annuity might work well for you where you get a good level of income for life guaranteed and you should be thinking about estate planning and IHT issues and maybe gifting to reduce the exposure.

enthusiasticsaver

I have asked for this to be moved to Pensions

aroominyork

Thanks Boston, we’ll do estate planning, though you’re perhaps a little over-optimistic about any scenario working out fine. On dividends, our global equity index fund (where, partly thanks to you, we are mostly invested – I hope others have been equally influenced by your incessant badgering 😊) shows a historic yield of 1.64% so surely we would need to sell units alongside the yield to have enough income and not be repeatedly rebalancing between asset classes?

masonic, very useful re. annuities and gilt laddering. I’ve split the timeframe into five year blocks, taken the YTM for gilts maturing in the middle year of each block and shown the return on £100,000 invested, frontloaded given the lower yields for shorter duration. I then powered the gilt yield to the middle year of each five years to show the returns. (I have quietly ignored that gilt coupons cannot be reinvested at the same YTM for the rest of the gilt's life.) I’ve assumed half the gain will come from coupons and half from capital gain, so have applied a 10% tax rate on the gain. But is the tax correct? The annuity comes from a SIPP (£133.33k liquidated, £33.3k TFLS and £100k to annuity) and is taxed on annual income, while the gilt is from an unwrapped account to minimise tax. Am I comparing apples and pears? 

The outcomes show higher net income for the DIY option (slightly offset by the coupon reinvestment issue mentioned above). DIY also leaves your heirs with cash in the bank if you die before age 90, if starting out at 65, but leaves you with nothing to spend on the day after your 90th birthday. I expect any actuaries reading this will throw their hands up in horror, but does it seem close enough?

sausage_time

aroominyork said:

QrizB said:

Might be a better fit on the Pensions forum, although I think most of the regulars visit here too.

https://forums.moneysavingexpert.com/categories/pensions-annuities-retirement-planning

Yup, happy for it to move/be moved. (How does that happen...?)

I have moved it over @aroominyork.

QrizB

aroominyork said:

OK, let's talk annuities. This site gives an annuity of £5,852 with 3% escalation for a 65 year old (no guarantee, no joint life). My spreadsheet below is for running the equivalent yourself. It assumes an interest rate of 4%, so withdrawing an escalating £5,852 you have a reducing balance which would run out in year 20, ie at age 85, with UK life expectancy averaging 78.6 male/82.6 female.

Note that you've quoted average life expectancies at birth there. By the time you get to 65, you've already managed to avoid dying younger than that.

Average life expectancy for a 65yo is more like 85 male / 88 female.

Also, Hargreaves Lansdown quote rates for generic RPI-linked annuities if you want to take some of the guessing out of the calculation (or compare with IL gilts):

https://www.hl.co.uk/retirement/annuities/best-buy-rates

Triumph13

I'm another one voting for annuities.  If we say 5% for an RPI joint life annuity, then using half your assets for an annuity, plus 3% drawdown on the other half gives you your desired 4% income, and is heavy odds on to leave more than 50% to your heirs vs your 30% target - especially if you accept some volatility in income and take a fixed percentage 3% from a largely equity portfolio.  It is also going to be way easier to manage as you get older.