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    • 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 3
    • westv
    • By westv 11th Aug 16, 5:59 AM
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    westv
    Regarding state pension deferral, is there still much point in doing this if you are married? If retiring after April 16 your spouse no longer inherits any increase so if you were unlucky enough to die before drawing they could end up with a smaller pension pot, if you have used drawdown to fund the deferral, and no benefit.
    • jamesd
    • By jamesd 14th Aug 16, 8:35 PM
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    jamesd
    Yes, whether married or not. If married there's the option of using some of the higher income to buy term life insurance. That's pretty cheap for moderate term lengths for those in normal good health.
    • jamesd
    • By jamesd 15th Aug 16, 3:47 AM
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    jamesd
    I just added a source for PE10 for the US S&P500 with past charts to the Guyton sequence of returns risk taming post. At the moment it's 27.2 with a predicted annualised return of -0.7 for the next 8 years. Highest monthly PE10 was 44 in 2000, lowest was 4.8, average 16.7.

    FWIW back in an interview on 3 September 2015 Shiller said in an interview that he'd acted on this to reduce his own equity investments though he also observed that he thought that for young people leveraged investing would be a good long term plan, that interview was a couple of weeks after modest market drops.
    • jamesd
    • By jamesd 22nd Aug 16, 10:43 PM
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    jamesd
    I added this to the drawdown rules post:

    "If using US data and UK investments, subtract 0.3 from the safe withdrawal rate percentage, roughly the expected difference between US and UK SWRs."

    The link also has a mention that the author and Kitces are working on a UK safe withdrawal rate analysis, results expected in early 2017.

    Also the discussion on how to use the G&K rules in Drawdown rules help may be of interest, I'll add some sort of worksheet or other guide to how to follow the rules over here at some point.
    • jamesd
    • By jamesd 25th Aug 16, 1:50 AM
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    jamesd
    Just added this:


    Class 3A state pension top-up

    Available for those who reached state pension age before 6 April 2016 it pays less than state pension deferral until age 81 so only do it if you're planning to defer until at least 81 and still want more guaranteed for life income, else defer instead. It still beats an inflation-linked annuity at any age if in normal good health so do it instead of buying one of those, it's just that deferral beats it. Here's a table showing the percentage of capital that class 3A pays at each age to make it easier to compare with deferral or an annuity.

    ----

    For convenience here's the table I linked to:

    Age Increase Calculation, also multiply by 100 to get %
    63 5.56% (52 / 934)
    64 5.70% (52 / 913)
    65 5.84% (52 / 890)
    66 5.97% (52 / 871)
    67 6.14% (52 / 847)
    68 6.29% (52 / 827)
    69 6.49% (52 / 801)
    70 6.68% (52 / 779)
    75 7.72% (52 / 674)
    80 9.56% (52 / 544)
    81 10.12% (52 / 514)
    82 10.74% (52 / 484)
    85 13.20% (52 / 394)
    • wneil
    • By wneil 31st Aug 16, 1:26 PM
    • 17 Posts
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    wneil
    I found this thread on a search. A first post to thank jamesd for compiling this information.
    • Robert60
    • By Robert60 9th Sep 16, 10:38 AM
    • 11 Posts
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    Robert60
    Thank you jamesd for an excellent thread.
    I have posted before about BCE and LTA. I am now getting nearer to working out my pension 'strategy' and would appreciate any comments.
    1. Hopefully retire July 2017 age 60.
    2. Take £9k/year DB pension (retirement age 60) from previous employer.
    3. Defer state pension of £9k/year until 70-ish to give some longevity protection.
    4. Put expected £800k DC pot (current employer, still contributing, plus a previous employer) into drawdown, but not take 25% cash as a single tax free lump sum.
    5. So, I should just avoid any LTA charge as the value will be £9k*20+£800k=£980k.
    6. Withdraw enough each year (including 25% tax free per withdrawal) to 'maximise' withdrawing at the 20% tax band whilst not going into the 40% band.
    7. My simple calculation, assuming the DC pot matches inflation, tax bands/rates do not change significantly and I live to 90, gives me about £38k/year from July 2017 after tax from the DB/DC pensions and then the DB/DC/state pensions. I know that I am fortunate to have so much, and I guess it might even be more if the DC investments perform well.
    8. If this 'strategy' is sensible, then my next task is to look at what the asset allocation should be for the DC fund.
    Comments and suggestions about the strategy are very welcome as I am still learning, mainly by lurking on this forum and reading around the subject.
    Regards, Robert.
    • coyrls
    • By coyrls 9th Sep 16, 11:05 AM
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    coyrls
    Thank you jamesd for an excellent thread.
    I have posted before about BCE and LTA. I am now getting nearer to working out my pension 'strategy' and would appreciate any comments.
    1. Hopefully retire July 2017 age 60.
    2. Take £9k/year DB pension (retirement age 60) from previous employer.
    3. Defer state pension of £9k/year until 70-ish to give some longevity protection.
    4. Put expected £800k DC pot (current employer, still contributing, plus a previous employer) into drawdown, but not take 25% cash as a single tax free lump sum.
    5. So, I should just avoid any LTA charge as the value will be £9k*20+£800k=£980k.
    6. Withdraw enough each year (including 25% tax free per withdrawal) to 'maximise' withdrawing at the 20% tax band whilst not going into the 40% band.
    7. My simple calculation, assuming the DC pot matches inflation, tax bands/rates do not change significantly and I live to 90, gives me about £38k/year from July 2017 after tax from the DB/DC pensions and then the DB/DC/state pensions. I know that I am fortunate to have so much, and I guess it might even be more if the DC investments perform well.
    8. If this 'strategy' is sensible, then my next task is to look at what the asset allocation should be for the DC fund.
    Comments and suggestions about the strategy are very welcome as I am still learning, mainly by lurking on this forum and reading around the subject.
    Regards, Robert.
    Originally posted by Robert60
    Points 4 and 6 are incompatible. If you crystallise your entire pension you must take the 25% tax free lump sum or lose it. Point 6 could be achieved with UFPLS or phased drawdown but each drawdown or UFPLS would be a crystallisation event that would be tested against the LTA. If you want to get your entire pension tested against the LTA as early as possible and want to take advantage of your tax free lump sum, you will need to take the full 25% at once.

    Also donít forget that there will be another test against the LTA at 75 but you will have fifteen years to make sufficient withdrawals to avoid breaching the LTA at 75.
    • Robert60
    • By Robert60 9th Sep 16, 1:44 PM
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    Robert60
    Coryls
    Thank you very much for pointing this out. Another learning point for me on BCE/LTA!
    I guess, then, it will turn out that I will take the full 25% tax free cash at once, so I can get the entire pension tested against LTA asap to avoid any LTA charge.
    I then need to work out how to get the most tax efficient etc. income from the DB/DC/state pensions and the 25% cash. It's going to be interesting looking at the options.
    • jamesd
    • By jamesd 19th Sep 16, 10:36 PM
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    jamesd
    Just added this as a start on life expectancy.

    Life expectancy

    The ONS 2014 Principal projection based How long will my pension need to last? tool gives these values:

    Male, to age 86, 21 years, 1 in 4 chance of 95, 1 in 10 chance of 99
    Female, to age 89, 24 years, 1 in 4 chance of 96, 1 in 10 chance of 100

    Unless you have reason to expect a shorter than usual life expectancy I suggest planning to at least the 1 in 4 age. That would be roughly the traditionally used 30 years from age 65 while 1 in 10 would be 35/36 years.
    • westv
    • By westv 28th Sep 16, 4:36 PM
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    westv
    Does anybody else find that cfiresim throws up wild results when using Android?
    • edinburgher
    • By edinburgher 19th Oct 16, 8:52 AM
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    edinburgher
    2. Use Guyton's sequence of return risk taming (adds about 1% of pot size to withdrawal rate)
    Having read through the materials provided and some more recent documents on similar themes by Pfau etc., I am none the wiser as to how sequence of returns risk taming can be applied practically to a model portfolio.

    It seems easy enough to figure this out for a single asset class, but how can you/can you realistically calculate whether a fund such as one of the Life Strategy products is collectively overvalued against something like P/E 10? Something like calculate P/E 10 for each then weight by size of the market cap for each region?
    • jamesd
    • By jamesd 19th Oct 16, 10:22 AM
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    jamesd
    You'd have to look at how the particular mixed asset fund is invested then use the information for the various investments and markets it's holding. Then work out how to use other holdings to achieve the intended allocation. If you limit how much you hold in such funds you would be able to do the asset matching with the rest.

    In the same way you can use something like a global equity tracker as a core fund and vary the allocations between countries with the rest.

    What you shouldn't do is try to work out an average PE10 for the whole of a mixed asset fund. PE10's vary between different markets and asset classes at the same time and it's those underlying assets that need to have their allocations changed.
    Last edited by jamesd; 19-10-2016 at 11:16 AM.
    • edinburgher
    • By edinburgher 19th Oct 16, 5:14 PM
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    edinburgher
    So it might be worth considering creating my own clone 'fund of funds' from low cost regional funds (with the side benefit of lower total costs) as an aid to reducing exposure to more overvalued regions?
    • jamesd
    • By jamesd 19th Oct 16, 11:44 PM
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    jamesd
    Right. And as you say, you may be able to get that at lower total cost than the somewhat more expensive blended fund.

    I've done something similar in the past myself going for regional and national investments to emulate a global equity investment at lower total cost with a close match to the investment mixture.
    • westv
    • By westv 17th Nov 16, 8:11 PM
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    westv
    With cfiresim is my understanding that the "individual dips" section of the results shows the lowest balance your portfolio could reduce to correct?
    • gallygirl
    • By gallygirl 18th Nov 16, 9:13 AM
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    gallygirl
    With cfiresim is my understanding that the "individual dips" section of the results shows the lowest balance your portfolio could reduce to correct?
    Originally posted by westv
    That's my understanding as well.
    A positive attitude may not solve all your problems, but it will annoy enough people to make it worth the effort
    Mortgage Balance = £0
    "Do what others won't early in life so you can do what others can't later in life"
    • michaels
    • By michaels 18th Dec 16, 9:15 PM
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    michaels
    Thanks JamesD, extremely useful.

    2 questions.
    How does cfiresim handle the uprating of state pension, it is currently say 8k but should I put in the likely cash value when it comes payable 5-10 years after my retirement date?
    If deferring state pension makes sense should we include the deferral and uprating (how much?) in the model?
    Cool heads and compromise
    • jamesd
    • By jamesd 19th Dec 16, 6:14 AM
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    jamesd
    for income streams you can choose to have the money inflation linked or not. Just make state pension inflation linked and it'll take care of most of the normal increases, though not the triple lock.

    When deferring the state pension set the starting year to the year you start to take the pension after deferring. Set the amount to the level it will be at after deferring, including the increase due to deferral.
    • westv
    • By westv 19th Dec 16, 7:08 AM
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    westv
    I actually find deferring the state pension reduces our initial withdrawal rate but that must be due to when the various DB pensions come on stream.
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