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  • FIRST POST
    • jamesd
    • By jamesd 20th May 16, 9:39 AM
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    jamesd
    Drawdown: safe withdrawal rates
    • #1
    • 20th May 16, 9:39 AM
    Drawdown: safe withdrawal rates 20th May 16 at 9:39 AM
    This is a collection of posts that I think are useful for those planning drawdown, suggesting a base plan and references to help you to adjust as you wish.

    To get started you should:

    1. Use Guyton and Klinger's decision rules
    2. Use Guyton's sequence of return risk taming (adds about 1% of pot size to withdrawal rate)
    3. Keep one year of planned investment income in cash, counting that as part of your bond percentage
    4. Use state pension deferral to protect against the long life risk (see the income effect on cFiresim and the like)
    5. Continue to make pension contributions until you reach age 75.
    6. Reduce income by 0.5% of pot size to allow for costs of 1.5%, or some more appropriate amount given a reduction of about 30% of costs.
    7. Reduce income by 0-1% of pot size depending on how far you are from having all US investments.
    8. Use cFiresim and change its investment returns to do the cost/investment returns adjustments instead of using fixed reductions in income. Since UK safe withdrawal rate is about 0.3% below US, you might use cfiresim with fees increased by 1% 0.5% and skip 6 and 7, this has the advantage of just affecting the investments, not state or defined benefit pensions. 1% higher fees roughly produce a 0.3% reduction in SWR.

    Those are assuming that you have a reasonably large pot of money available and are using it to fund a high percentage of your living costs. State pension deferral assumes reasonably normal health and life expectancy around state pension age.

    Retirement is long, don't worry about it taking a while to work though things as you get started.

    Investment highlight: December 2018 August April 2017: You should have lower than usual equity investments at the moment because cyclically adjusted price/earnings ratios (PE10) are above average in some major markets, particularly the US. You might also favour lower PE10 markets with higher than their usual equity weights. I like P2P lending rather than corporate or government bonds for this. See Guyton's sequence of return risk reduction and Bengen's interesting timing thought in the last paragraph of his 2016 small cap paper. But remember that while this has good predictive value for ten year investment returns it has none for one year so it can't tell you specifically when to change, just when conditions are less favourable for equities.
    Last edited by jamesd; 04-05-2019 at 3:02 PM.
Page 2
    • jamesd
    • By jamesd 10th Jun 16, 2:25 AM
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    jamesd
    I've just added an "at a minimum, do these things" part to the first post to point people to the first things that they should be learning about.
    • AnotherJoe
    • By AnotherJoe 10th Jun 16, 8:29 AM
    • 16,233 Posts
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    AnotherJoe
    Shouldn't point 5 come with a health risk warning (Continue with pension contributions until you reach age 75.) because it may fall foul
    of recycling rules?
    • Malthusian
    • By Malthusian 10th Jun 16, 2:31 PM
    • 6,956 Posts
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    Malthusian
    It's really quite difficult to break the tax free cash recycling rules.

    Not realising that you can now only contribute £3,600pa if you've stopped work is more likely to catch people out if they take point 5 at face value and don't do any research into it.
    • jamesd
    • By jamesd 10th Jun 16, 3:55 PM
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    jamesd
    Shouldn't point 5 come with a health risk warning (Continue with pension contributions until you reach age 75.) because it may fall foul of recycling rules?
    Originally posted by AnotherJoe
    That's supposed to be a quick start, not a full lesson, the other posts later on can expand on things. LTA is more of an issue. Remembering here that HMRC has never invoked the recycling rule and its purpose was to prevent organised schemes. Still, I've just used one of the future use posts to add a bit about recycling. Not its main focus but it causes so much confusion and worry that it's worth addressing.

    I've still got a lot of writing and linking to do but hopefully the work in progress forms will be useful and help to improve the overall quality of planning.
    Last edited by jamesd; 10-06-2016 at 3:59 PM.
    • AnotherJoe
    • By AnotherJoe 10th Jun 16, 4:41 PM
    • 16,233 Posts
    • 19,466 Thanks
    AnotherJoe
    I think part of the disconnect might be the comparison of yourself as an individual to a massive diverse population of data. The most obvious difference to me is that people who are saving effectively for retirement are likely to be controlling spending more than people who aren't; they are also likely to have the resources to increase spending in retirement when those who didn't save as much need to cut it back.
    Originally posted by N1AK
    Fair points and true but I still contend that the opportunities to spend are far greater after retirement than before, cutting back on a few lattes at work and even the commute costs is going to pale compared to taking cruises, staying away in hotels, eating out every day when away from home on holiday and so on. That's limited before retirement not mainly through affordability but time.
    • bigadaj
    • By bigadaj 10th Jun 16, 5:13 PM
    • 10,850 Posts
    • 7,187 Thanks
    bigadaj
    Fair points and true but I still contend that the opportunities to spend are far greater after retirement than before, cutting back on a few lattes at work and even the commute costs is going to pale compared to taking cruises, staying away in hotels, eating out every day when away from home on holiday and so on. That's limited before retirement not mainly through affordability but time.
    Originally posted by AnotherJoe
    Yes, but not everyone wants to travel extensively.

    People may do that but many won't. Also many people don't necessarily want cruises and five star hotels even if they can afford it, it's down to preference as well as time and budget.
    • Thrugelmir
    • By Thrugelmir 10th Jun 16, 11:49 PM
    • 65,334 Posts
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    Thrugelmir
    The most obvious difference to me is that people who are saving effectively for retirement are likely to be controlling spending more than people who aren't;.
    Originally posted by N1AK
    Saving is a lost habit. There's going to be a generation far far poorer.
    ““there really is no such thing as ‘the future’, singular. There are only multiple, unforeseeable futures, which will never lose their capacity to take us by surprise.””
    ― Niall Ferguson
    • westv
    • By westv 7th Jul 16, 1:44 PM
    • 4,910 Posts
    • 2,481 Thanks
    westv
    Bump

    as I think this thread has very useful info.
    • ffacoffipawb
    • By ffacoffipawb 8th Jul 16, 5:58 AM
    • 2,965 Posts
    • 2,081 Thanks
    ffacoffipawb
    Bump

    as I think this thread has very useful info.
    Originally posted by westv
    Agreed, should be made a 'sticky'.
    • jamesd
    • By jamesd 20th Jul 16, 6:39 AM
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    jamesd
    Two additions:

    Academic Acceptance for Reverse Mortgages in Retirement Income and notice that in a low interest rate environment it can potentially double the safe withdrawal rate!
    Does Asset Allocation Affect Withdrawal Rates? : yes, more equities increase the upside without affecting the downside much.
    • edinburgher
    • By edinburgher 20th Jul 16, 8:38 AM
    • 11,530 Posts
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    edinburgher
    Saving is a lost habit. There's going to be a generation far far poorer.
    Originally posted by Thrugelmir
    I don't think that it's fair to conflate those two (as the main cause for a poorer generation). Surely the death of DB pensions will be a far greater factor in terms of future generations being less well off? A few decades ago, every FTSE100 company had a DB pension scheme, now there are 2-3.
    Last edited by edinburgher; 20-07-2016 at 8:45 AM.
    • westv
    • By westv 20th Jul 16, 1:17 PM
    • 4,910 Posts
    • 2,481 Thanks
    westv
    Agreed, should be made a 'sticky'.
    Originally posted by ffacoffipawb
    I guess MSE Towers don't agree.
    • jamesd
    • By jamesd 20th Jul 16, 8:05 PM
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    jamesd
    The current way they want things to go is to have just one sticky with links to other threads inside it. I think that the idea in part is so that the sticky threads don't fill all of the initially visible rows, forcing people to scroll to get to the new threads.
    • BobQ
    • By BobQ 20th Jul 16, 10:36 PM
    • 10,698 Posts
    • 14,085 Thanks
    BobQ
    James,

    Thank you for taking the trouble to collate all this.
    • Thrugelmir
    • By Thrugelmir 20th Jul 16, 11:47 PM
    • 65,334 Posts
    • 57,507 Thanks
    Thrugelmir
    I don't think that it's fair to conflate those two (as the main cause for a poorer generation). Surely the death of DB pensions will be a far greater factor in terms of future generations being less well off? A few decades ago, every FTSE100 company had a DB pension scheme, now there are 2-3.
    Originally posted by edinburgher
    People still made sizable employee contributions to the schemes. One scheme I was a member ( mid 90's) had employee contribution levels of 9%. They weren't simply funded by employer contributions. How many people now save 9% of their salary into personal pension plans? The emphasis has changed for people. Party now and worry pension provision later. Bigger and more expensive housing. Better cars. Long distance travel. All down to personal choice.
    ““there really is no such thing as ‘the future’, singular. There are only multiple, unforeseeable futures, which will never lose their capacity to take us by surprise.””
    ― Niall Ferguson
    • bigadaj
    • By bigadaj 20th Jul 16, 11:57 PM
    • 10,850 Posts
    • 7,187 Thanks
    bigadaj
    People still made sizable employee contributions to the schemes. One scheme I was a member ( mid 90's) had employee contribution levels of 9%. They weren't simply funded by employer contributions. How many people now save 9% of their salary into personal pension plans? The emphasis has changed for people. Party now and worry pension provision later. Bigger and more expensive housing. Better cars. Long distance travel. All down to personal choice.
    Originally posted by Thrugelmir
    That level of contribution would have been unusual then, not so much now.

    We can look at the approximate cost of a db scheme being a round 25% of salary which still means the company is contributing far more than most would do to a DC scheme.

    Many peoples approach has not varied that much and certainly not in the also two or three decades. It's the fact that db schemes have been closed everywhere apart from the public sector, and significantly diluted even in the latter.
    • jamesd
    • By jamesd 24th Jul 16, 8:14 PM
    • 23,495 Posts
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    jamesd
    I've added this:

    Non-essential interesting material
    Last edited by jamesd; 24-07-2016 at 8:30 PM.
    • mozza78
    • By mozza78 25th Jul 16, 8:07 AM
    • 93 Posts
    • 150 Thanks
    mozza78
    Can I just say thanks for a very very useful thread!
    • jamesd
    • By jamesd 1st Aug 16, 3:42 AM
    • 23,495 Posts
    • 15,831 Thanks
    jamesd
    I've added a link to another cfiresim worked example:

    Thoughts on my plan please retiring 59, £9500 defined benefit pension, 8k assumed state pension, £275000 investments, desired income £2000 a month, £2250 looks possible.

    I've also added a worked example of how to use the 4% rule to calculate approximate monthly pension contributions needed to get to a given target income at and before state pension age.
    • simonfitba
    • By simonfitba 1st Aug 16, 4:31 PM
    • 174 Posts
    • 72 Thanks
    simonfitba
    Appreciate the effort jamesd. Top work fella. This will help a lot of people.
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