How do you set retirement target?

Bostonerimus1

kempiejon said:

Alexland said:

LHW99 said:

In the UK, people reckon it should be a lower % - 3.5% or 3% depending on the age you retire.

I think it very much depends on the contents of your portfolio and the reasonableness of asset class valuations.

Quite so, I live in the UK but invest in assets, debt and equities globally, I've got equities from Mexico, the USA, Australia, Europe and Asia in my holding. My investment has been inching up at 8% year on year averaged over several decades. Looks like 4% would have been sustainable for my portfolio who knows abut the future. Past couple of years I'm making more >10% but I've been lucky with the timing of some asset balancing.

4% might be doubted or USA centric but we have to start somewhere.

The 4% rule is from the 1990s and uses US equity and bond data. With the opening up of investment markets it's rare for a US investor to not be invested globally and the same goes for the UK so as asset allocations can be similar for a US and a UK retiree there shouldn't be any difference in sustainable withdrawals between the two. Maybe there is some taxation nuance...If you are bond heavy ie more than 40% then it's probably good to have a conservative withdrawal. 

I'm not dependent on drawdown for much of my retirement income so I can take more risk than most retirees and I have a high equity allocation. In the decade since I retired my annual average return has been over 10% and I've done that by using index funds and sitting on my hands.

BikingBud

af1963 said:

Tracking all your spending in detail can be a lot of work, but can reveal potentially useful things like "I am spending HOW much on beer .. ?? "

An alternative that involves less work is just to track all the money you receive ( or had at the start), take off anything you save or invest or have left at the end, and that's your total spending. Can usually be done from old bank statements if you want to look at past amounts spent.

Drilling into groups of expenditure and then deciding if further granularity is required might be worthwhile.

If you spend 35% on "groceries" does that include beer/wine etc and can you get, do you want to get, a better perspective.

I find that once you have dealt with big stuff; mortgage or housing costs, household bills, vehicle costs, then the rest tends to be discretionary and can be adjusted to allow more eating out, more holidays etc and you might decide what that requires to sustain those life style choices and that you need to work longer or can go now.

OldScientist

ex-pat_scot said:

LHW99 said:

Bostonerimus1 said:

FatherAbraham said:

olb81 said:

I am 44 and only have about 30k in pensions and 200k in property.
Where should I go from here?
I have no savings on top of this.
Do I need an aim for a total pot?
Is the 4 per cent rule still a target eg 250k gives you 10k a year?
Thanks for any help

Halio Olb81.

How to start?

You should begin by setting a best-guess date for when you would prefer to stop working and to start living off the income that your assets can generate. Having this rough time-frame will let you make a rough plan.

Now to have a time-frame for accumulating wealth to use to generate income to live on when you no longer earn by working. No-one can make a plan until he or she has a target to achieve. 

The next important part is to decide how much expenditure you will want in retirement.  A rough rule of thumb is: about the same as you spend before retirement. While done employment expenses may vanish, you are likely to want to fill some of your free time with non-free activities.

Now you can look at index-linked pension-annuity prices to work or hire much capital you'll need to have available.  Remember that, because of income tax, you'll probably need more income from your capital than your expenditure needs.

The full UK pension is currently a thousand pounds a month, and your state pension age is, what, 68? 69? Thus, if you retire before that age, you'll need to have the future equivalent of £12,000 per year to use, to fill this funding gap.

Please stay away from the "4% rule", it's mythical nonsense, with many supporting wishful-thinkers.

Best regards,

FA

What are your reasons for this statement? Do you mean that 3.5% annual drawdown is right? or that index linked percentage drawdown is inherently flawed?

4% was worked out using US data and assuming a 30 year retirement. I think it allows for not running out of money something like 95% of the time

In the UK, people reckon it should be a lower % - 3.5% or 3% depending on the age you retire.

Having aid that, it's not a bad thing to aim at, as long as you realise it may well be optimistic.

"it may well be optimistic" following the "allows for not running out of money something like 95% of the time".
Frankly 4% is ridiculously pessimistic.

IF you can flex your spending in retirement, primarily to swerve any early sequence of returns experience, then you will struggle to spend it all.

The only scenarios where 4% fail are generally those where you retire immediately into a sustained depression /recession. Obviously you don't know this at the time you pull the trigger, but if you can flex your spending (or go back to some sort of part time earnings) to avoid the first 2-3 years running the pot down too far, then you're good to go.

Second point. Yes historically US returns are 4.5% long terms, whereas UK have historically been 0.5% lower.
So what?
Invest in a global tracker, and you will benefit from global returns rather than the pedestrian UK ones.

Yes, it's not perfect. 
No it doesn't give you 100% certainty.
Yes it will be wrong for your personal lived experience.
Yes it's possibly too late once you have pulled the trigger- you probably can't or won't want to return to your old job or any job, if you belatedly find you need / want more money in retirement.

But

Perfection is the enemy of the good.
Heuristics (shortcuts) like the 4% rule allow a general approach, that's a really good starting point.

You can be cavalier if you have a large pot, and are able to absorb the weft and weave of the stock market through your early retired years. Less so if the pot is small, with little wriggle room to adapt to market conditions.

IF you are so worried, that a 95% or greater chance of certainty is still not sufficient, then frankly you need to be thinking about annuitising rather than drawdown, as your attitude to risk is so pessimistic as to make Chicken Little blush...

Much to agree with in your post.

In terms of SWR, adding in some international diversity in equities definitely improved historical SWRs. For example, the worst case 30 year retirement for 80% UK equities, 10% UK cash and 10% UK long bonds was about 3.2%, while diversifying the equities such that the portfolio was 40% UK equities, 40% US equities and the fixed income as before increased the SWR to 3.7% (i.e., by about 50bp). Of course, SWRs of the rolling 30-year periods varied from the worst case to a best case of 12%. In other words, in terms of retirement planning any value from 3.0% to 4.0% is probably good enough as a first approximation.

Flexible portfolio withdrawals are useful for extending the life of a portfolio - although the obvious question is then 'how flexible?'. For example, historically a 50/50 mix a 5% constant inflation adjusted withdrawal with a 5% percentage of portfolio withdrawal allowed portfolio survival for 33 years for a UK retiree (international portfolio as before) although, in real terms, withdrawals fell as low as 2.7% in some cases (with no flexibility, in the worst case, the portfolio was exhausted in 16 years).

Guaranteed income (whether SP, DB pension, annuity, and/or IL gilt ladder) forms a useful income floor for retirement spending that variable portfolio withdrawals can then boost. If that floor covers essential ('core') spending then so much the better.

ex-pat_scot

OldScientist said:

ex-pat_scot said:

LHW99 said:

Bostonerimus1 said:

FatherAbraham said:

olb81 said:

I am 44 and only have about 30k in pensions and 200k in property.
Where should I go from here?
I have no savings on top of this.
Do I need an aim for a total pot?
Is the 4 per cent rule still a target eg 250k gives you 10k a year?
Thanks for any help

Halio Olb81.

How to start?

You should begin by setting a best-guess date for when you would prefer to stop working and to start living off the income that your assets can generate. Having this rough time-frame will let you make a rough plan.

Now to have a time-frame for accumulating wealth to use to generate income to live on when you no longer earn by working. No-one can make a plan until he or she has a target to achieve. 

The next important part is to decide how much expenditure you will want in retirement.  A rough rule of thumb is: about the same as you spend before retirement. While done employment expenses may vanish, you are likely to want to fill some of your free time with non-free activities.

Now you can look at index-linked pension-annuity prices to work or hire much capital you'll need to have available.  Remember that, because of income tax, you'll probably need more income from your capital than your expenditure needs.

The full UK pension is currently a thousand pounds a month, and your state pension age is, what, 68? 69? Thus, if you retire before that age, you'll need to have the future equivalent of £12,000 per year to use, to fill this funding gap.

Please stay away from the "4% rule", it's mythical nonsense, with many supporting wishful-thinkers.

Best regards,

FA

What are your reasons for this statement? Do you mean that 3.5% annual drawdown is right? or that index linked percentage drawdown is inherently flawed?

4% was worked out using US data and assuming a 30 year retirement. I think it allows for not running out of money something like 95% of the time

In the UK, people reckon it should be a lower % - 3.5% or 3% depending on the age you retire.

Having aid that, it's not a bad thing to aim at, as long as you realise it may well be optimistic.

"it may well be optimistic" following the "allows for not running out of money something like 95% of the time".
Frankly 4% is ridiculously pessimistic.

IF you can flex your spending in retirement, primarily to swerve any early sequence of returns experience, then you will struggle to spend it all.

The only scenarios where 4% fail are generally those where you retire immediately into a sustained depression /recession. Obviously you don't know this at the time you pull the trigger, but if you can flex your spending (or go back to some sort of part time earnings) to avoid the first 2-3 years running the pot down too far, then you're good to go.

Second point. Yes historically US returns are 4.5% long terms, whereas UK have historically been 0.5% lower.
So what?
Invest in a global tracker, and you will benefit from global returns rather than the pedestrian UK ones.

Yes, it's not perfect. 
No it doesn't give you 100% certainty.
Yes it will be wrong for your personal lived experience.
Yes it's possibly too late once you have pulled the trigger- you probably can't or won't want to return to your old job or any job, if you belatedly find you need / want more money in retirement.

But

Perfection is the enemy of the good.
Heuristics (shortcuts) like the 4% rule allow a general approach, that's a really good starting point.

You can be cavalier if you have a large pot, and are able to absorb the weft and weave of the stock market through your early retired years. Less so if the pot is small, with little wriggle room to adapt to market conditions.

IF you are so worried, that a 95% or greater chance of certainty is still not sufficient, then frankly you need to be thinking about annuitising rather than drawdown, as your attitude to risk is so pessimistic as to make Chicken Little blush...

Much to agree with in your post.

{snippety snip)

Guaranteed income (whether SP, DB pension, annuity, and/or IL gilt ladder) forms a useful income floor for retirement spending that variable portfolio withdrawals can then boost. If that floor covers essential ('core') spending then so much the better.

I like Ermine's thinking of the State Pension as an income floor.
2 x modern SPs is £25,000 for a couple.
Covers the basics (for most people, I would think) but not enough for carers / help, holidays.
The DC element can then flex to its heart's content.

I take the broad view that a SP NPV is about £275,000. Two of them £550,000.
With a notional £1m DC (100% equities) pot, I view the SP element as bond-like in behaviour, and the overall couple's retirement portfolio of c£1,6m as a roughly 60:40 balanced portfolio equivalent.

I do struggle a little to calculate what the base running costs would be in retirement, as it's not really a steady-state. Too many variables in the medium term, with young adults requiring time, focus and (at the moment) a liberal application of cash. Significant costs in caring for elderly parent.

Although I haven't done it for quite a while, there are plenty of online tools and calculators that can weave in the future income streams of state pensions, alongside other DB and DC, and show the effect of different withdrawal rates. Some do fixed and dynamic withdrawal modelling. It's all very clever. And guaranteed to be wrong. But at least, it gives a ball park to start with.

If in later life the calculation gets too much of a burden (as it is becoming, for my parents), then you can pay someone to manage it, or annuitise some or all, in stages, as your capacity, capability and circumstances dictate.
Eg if I get to 85, then decide I really can't be @rsed with managing the DC pot any more, then there are pretty cracking annuity deals on offer.

Veloflyer

I do like the idea of some sort of guaranteed income  - annuity/gilt ladder - to cover the basics and a pot of equity funds for that Mark 2 Jag I have always dreamt of. A 50/50 total pot split perhaps to hedge all bets. The other thing I would have is a cash pot for a buffer should the markets crash.