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The impact of inflation - yikes!
Comments
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Yes, your approach seems appropriate if your over-riding retirement objective is to die rich and are prepared both to constrain your income in the mean time and to take the risk of SORR impoverishing your old age in order to achieve it.
My objective in retirement has been to maximise sustainable income until we die leaving only sufficient for expensive one-offs and to pay for care for both myself and Mrs L should we need it. We have no wish to leave a large inheritance.
Different objectives, different strategies.
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Hmmm………the possible cost of lower volatility could well be lower absolute returns, but it's by no means a given……
Also, a portfolio in drawdown can behave quite differently to one in accumulation……..that's why the historical SWR for an all equity portfolio is around 3.4% in the UK…..well below the current 30yr guaranteed return from gilts…..around 4.5%. Of course, nobody knows the future, and an all equity drawdown portfolio might well average more than that over the next 30 yrs…..but that could still result in a lower income if there is a bad SOR early on.
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"Hmmm………the possible cost of lower volatility could well be lower absolute returns, but it's by no means a given……"
It may be helpful to distinguish between expected (probabilistically average) returns, and returns achieved in practice. A strategy with higher expected returns won't necessarily produce higher returns in all circumstances.
Some of us are willing to accept lower expected returns for the sake of lowering the risk of very bad outcomes.
"well below the current 30yr guaranteed return from gilts…..around 4.5%."
Am I right in thinking that you're referring to a 30 year ladder of index-linked gilts?
If we're comparing drawdown with alternatives, then another one is an index-linked annuity, which could give you a rate above 4.5%, depending on age and other factors. (I recently bought an index-linked annuity with a rate of 5.9%.) An index-linked annuity is probably the ultimate low-risk-low-expected-return option.
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Yes, for the gilts, I was referring to a 30yr collapsing ladder of inflation linked gilts........
As for annuities, I agree they are a viable option now, but if comparing drawdown options, as you say, then you'd need to reveal the terms under which your 5.9% payout was obtained.…..that rate is unlikely to be available for everyone.
On the issue of expected returns vs actual returns, all you can do at the outset is consider "expected" as "actual" are unknown at that point....... I would also caution against using just "average" returns numbers in drawdown plan modelling......they can hide some very nasty returns sequences.
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Fully agree with your last sentence - it also explains why people come at these conversations with different views!
However, I'd disagree with your first sentence if you are comparing natural yield with total return strategies for the reason that the real amount that natural yield will leave on the table will vary between retirements (effectively it is the price return of whatever the underlying investments are) whereas the amount left on the table with the total return approach will depend on the withdrawal strategy adopted as well as the retirement start date. For example, using constant inflation adjusted withdrawals (the so-called 'safe' withdrawal approach of Bengen) will leave somewhere between 0 and a lot (historically, IIRC, as much as 12 times the original portfolio in real terms). However, adopting an amortization-based approach (e.g., boglehead's VPW) in principle allows complete exhaustion of the portfolio at the end of retirement to be targeted (although, in practice, I doubt anyone would be brave enough to spend 100% of their portfolio in their 'last' year - in case it wasn't their last!).
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Rightly or wrongly, we just keep an eye on our spends as a % of our total pot.
It's easy to get bogged down in all the 'what ifs' otherwise.
Likely we've not increased our spending power since July 19, despite the numbers looking very healthy.
(That reminds me...need to amend my signature at month end😉)
How's it going, AKA, Nutwatch? - 12 month spends to date = 3.24% of current retirement "pot" (as at end December 2025)5 -
I agree with this, but would like to add that dividends can change with external events (which may or may not also cause market turbulence). To take two income-focussed investment trusts as examples, for EDIN the dividend was cut from 28.65p/share in 2021 to 25.2p/share in 2022 while for TMPL dividends were cut from 10.69p/share in 2019, to 9.73 (in 2020) and then to 7.5 in 2021. Of course, these are nominal values, so the real value of the income would have had a larger drop. Of course, post-COVID, other ITs managed to maintain their dividends or only make small cuts - I guess it would have depended on their underlying investments, gearing, and dividend coverage as well as management style.
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Just to provide a bit of data for the income vs growth debate. The following table shows the nominal annualised total return from end of 1972 to end of 2025 of the FTSE all-share index together with a selection of the surviving UK-focussed income ITs (as I mentioned in an earlier post, only about 10% of the Its that existsed in the 1970s remain in existence now). In a tiny nod to the original topic, I note that annualised inflation was about 4.5% over this period (and fairly close to the average inflation since the UK came off the gold standard in the early 1930s).
Annualised return (%)
FTSE
12.2
LWDB
12.6
LWI
12.4
JCH
11.2
EDIN
9.9
While this says nothing about income, income volatility or return volatility, what is does illustrate is that over this long period some income-focussed ITs did better than the index and some did worse and the variation between them makes it difficult to determine whether income or mixed income-growth (i.e., the index) did better.
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Just running our numbers through AI, we're breaking even with RPI, from where we were in July 19, but ahead if comparing with CPI.
As we don't have any housing costs (mortgage free), I'm assuming RPI is a bit irrelevant?
How's it going, AKA, Nutwatch? - 12 month spends to date = 3.24% of current retirement "pot" (as at end December 2025)0 -
I think this is what I’d do regardless of drawdown approach. basically guardrails. if your’e doing 4% and increasing with inflation you should be ok almost always. but checking in annually and making sure your withdrawal isnt’ edging above eg 5-5.5% will give you confidence. Likewise if thats dropping down below 3% you might be able to spend a bit more
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