Relying on growth only to grow pension pot?

ComicGeek

https://forums.moneysavingexpert.com/discussion/comment/82084782#Comment_82084782

That was what I was thinking - with 0% real growth I would still be hitting my target figures. And would only need to draw 3-4% for 10 years until we can claim state pensions, at which point we would only need to draw less than 2%.

Can also vary the drawdown if market performance dictates as we have always been used to variable income, and still have 15 years to build up other savings outside of the pension. Probably will still have the opportunity to do some part time work through the company if I need to post 60, but might not be easy without committing to this from day 1 - not something I can easily pick up again say 4 years later, with the required insurances/accreditations/training etc.

ComicGeek

https://forums.moneysavingexpert.com/discussion/comment/82084738#Comment_82084738

That's fair enough, but I don't feel it's useful to plan using pessimistic figures in all areas at the same time - assuming zero real growth for 15 years and a 3% withdrawal rate would be a particularly pessimistic approach. I would rather revisit the model and assumptions regularly and make adjustments, rather than working more hours than I need to now and unnecessarily affect my health.

I can revisit the figures every year just before the end of the company's tax year, and make additional pension contributions if absolutely necessary. Or take additional dividends and put money into savings. As a director I do have much greater flexibility than a typical employee.

I can't do anything about a bad period or large market correction, but that's the same if I'm making contributions or not - my annual contributions would only be about 1% of current value, so that doesn't seem enough to make the required effort at work to achieve.

DRS1

I get the feeling that the real issue here is more work related than pension related.

I am reminded of a story I heard about someone who was an expert in a specialist field. When he didn't want as much work as was coming in he simply increased his rates until the workflow suited him. Obviously there is a fine line between the increased rate and enough work or too little work but maybe you could consider if increasing your rates so you only have to do 35 hours instead of 45 might be possible.

Maybe it is not - the person in question was in a fortunate position to control his workflow the way he could.

dunstonh

That's fair enough, but I don't feel it's useful to plan using pessimistic figures in all areas at the same time - assuming zero real growth for 15 years and a 3% withdrawal rate would be a particularly pessimistic approach.

Planning should be pessimistic. It doesn't mean it has to be worst case. Broadly speaking, whilst I love getting a 100% success rate based on historical data, I generally accept less than that and start getting a bit more worried when it gets below 80%. At that point, I ramp up the risk warnings and discussions about what needs to be done in those scenarios.

It's worth noting that your reference to 4% was the safe withdrawal rate for the United States. So in your own head, you are already using a different country's safe withdrawal rate. It seems more logical to use the U.K.'s safe withdrawal rate if you plan to remain living in the UK.

I would rather revisit the model and assumptions regularly and make adjustments, rather than working more hours than I need to now and unnecessarily affect my health.

Keeping the modelling live is perfectly sensible. However, having an action plan for what happens next if the pessimistic or worst-case scenario occurs is also sensible. You hope you don't have to activate it, but if you do, then it's one less thing to worry about.

I can't do anything about a bad period or large market correction, but that's the same if I'm making contributions or not - my annual contributions would only be about 1% of current value, so that doesn't seem enough to make the required effort at work to achieve.

You can't predict the unpredictable, and you cannot influence events. However, you can have plans in place which you activate at certain points in case they happen. Prepare for the worst. Hope for the best.

MK62

An index linked gilt ladder, with payouts starting in 2041 (ie at 60yo), paying £40000pa (index linked) for 8 years would currently cost c£212k and an IL gilt ladder paying £14904pa for the following 27 years (ie starting in 2049), can be bought today for around £189k (to add to 2x £12548 NSPs)……so that's £40k pa index linked for 35 years from 60yo (assuming 2x full NSPs commencing in 2049).

That would pretty much take care of your planned base income needs until 95yo….leaving you c.£600k today, to invest in whatever you want……no matter what the outcome of that becomes, your £40k pa (index linked) would be pretty much guaranteed to 95yo (save for UK govt debt default and/or cuts to state pension, but then we are all up the creek if that happens).

Obviously further contributions would improve the situation further, but given the information supplied, there currently appears to be little need for any.

OldScientist

I note that index-linked gilt, T41 (0.125% coupon, matures 2041) currently has a real yield of 2.2%, which means you could virtually guarantee (in the absence of UK debt default) real growth of about 2% with at least part of your portfolio.

As others have said, for level spending a higher portfolio withdrawal will be required before state pension (i.e., in the first 7 years if retiring at 60) and a reduced one after that. I note that a new, relatively simple, calculator (https://levelspend.github.io and see discussion at https://www.bogleheads.org/forum/viewtopic.php?p=8811223#p8811223 ) might help your thoughts (it is US based, but since there is no historic data involved, the underlying model is equally applicable to the UK - I have only used it for modelling spending once retired, although a quick play with something approximating to your situation suggests that for a retirement at 60yo, even with 0% growth you could spend £44k per year).

There are other ways to secure at least some income now (e.g., a deferred, 40-year ILG ladder giving an inflation protected £10k per year from 2041 onwards would cost about £210k) that will provide some protection from market fluctuations and give some confidence.

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/82085600#Comment_82085600

you’d need to consider survivor funding should one pass away you’d lose one state pension, but thats a finite target and a shrinking one after starting drawing state pension so you could allocate a fund to cover that in present value and if you don’t need it, could include it in the estate consideration or gift it as it frees up.

Bostonerimus1

https://forums.moneysavingexpert.com/discussion/comment/82085608#Comment_82085608

I'm a strong advocate of securing a baseline retirement income and lifetime annuity or at least a fixed term annuity to bridge the gap between retirement and SP starting should be in the modelling mix. The OP is still relatively young so they might also consider a job with a DB pension. Of course that option is becoming increasingly rare and it won't be viable for many people.

Bostonerimus1

I always used 95% success rate for my retirement drawdown modelling, but I also set up non DC-pension income streams and went into retirement debt free (ie no mortgage or car payment) to minimize the income I needed my DC pensions to generate.

ComicGeek

Thanks for all the comments. I know nothing about gilts and gilt ladders, so will definitely do some reading around this. Sounds like an option worth exploring.