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  • FIRST POST
    • PH91
    • By PH91 14th Jul 19, 8:25 AM
    • 2Posts
    • 1Thanks
    PH91
    Outliving your pension
    • #1
    • 14th Jul 19, 8:25 AM
    Outliving your pension 14th Jul 19 at 8:25 AM
    Hi all,

    Just wondering for people who are planning on leaving your DC pension pot invested after retiring, how are you planning to make it last so you don't run out of money?

    On a related note, is your choice to stay invested rather than buying an annuity predominantly driven by a desire to take a higher level of income than an annuity would offer, or the possibility of leaving some of it to children / grandchildren / others?
Page 2
    • westv
    • By westv 15th Jul 19, 2:33 PM
    • 4,851 Posts
    • 2,433 Thanks
    westv
    Is there an industry standard minimum amount to use to buy an annuity??? Say £50k ?
    Originally posted by Sea Shell

    Isn't it something like £10k??
    • westv
    • By westv 15th Jul 19, 2:35 PM
    • 4,851 Posts
    • 2,433 Thanks
    westv
    Yes that looks to be right, which just floors me. People seem sanguine about 1.5% fees when at that level they are almost 50% of the spendable income you end up with. That will decrease as spending increases with inflation, but still it's an enormous amount of money to waste. And I think it is a waste for most people.
    Originally posted by bostonerimus

    But rate before costs is "only" something like 0.5% more.
    • JoeEngland
    • By JoeEngland 15th Jul 19, 2:50 PM
    • 330 Posts
    • 710 Thanks
    JoeEngland
    Hi all,

    Just wondering for people who are planning on leaving your DC pension pot invested after retiring, how are you planning to make it last so you don't run out of money?

    On a related note, is your choice to stay invested rather than buying an annuity predominantly driven by a desire to take a higher level of income than an annuity would offer, or the possibility of leaving some of it to children / grandchildren / others?
    Originally posted by PH91
    I could not afford to retire now if I relied on an annuity so that's a non-starter as a way forward. We have a combination of DC pensions, small DB pensions and eventually SP. Our financial plan is based on cautious assumptions and modest income, and there's some contingency in it. Since working PT is also an option, our plan shows that we shouldn't run out of money. We could even have more money than expected in the long term if we're lucky with DC pension returns.
    • bostonerimus
    • By bostonerimus 15th Jul 19, 5:44 PM
    • 3,097 Posts
    • 2,443 Thanks
    bostonerimus
    But rate before costs is "only" something like 0.5% more.
    Originally posted by westv
    Costs/fees were not included in the original US 4% rule withdrawal models. If you have 1.5% in fees on top of that they have to come out of the 4% so you would end up with 2.5%....I'm assuming Jamesd's baseline SWR number is something like 4.7% but that one of the variable withdrawal strategies is being used. Even so, giving up 1.5% of a 4% to 5% withdrawal is ridiculous IMO.
    Misanthrope in search of similar for mutual loathing
    • westv
    • By westv 15th Jul 19, 6:24 PM
    • 4,851 Posts
    • 2,433 Thanks
    westv
    Costs/fees were not included in the original US 4% rule withdrawal models. If you have 1.5% in fees on top of that they have to come out of the 4% so you would end up with 2.5%....I'm assuming Jamesd's baseline SWR number is something like 4.7% but that one of the variable withdrawal strategies is being used. Even so, giving up 1.5% of a 4% to 5% withdrawal is ridiculous IMO.
    Originally posted by bostonerimus
    No that isn't correct. You don't take off the whole 1.5%.
    • bostonerimus
    • By bostonerimus 15th Jul 19, 10:14 PM
    • 3,097 Posts
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    bostonerimus
    No that isn't correct. You don't take off the whole 1.5%.
    Originally posted by westv
    As the withdrawal increases with inflation the fees become a smaller percentage of that withdrawal. Still, in the first year if you withdraw 4% and your financial fees over and above fund fees are 1.5% you have to pay them out of your 4% and are left with just 2.5% to spend. The playing down of fees as an issue comes from the financial industry and people like Kitces who look at the potential long term effects and come up with 1% fee reducing the SWR by around 0.4% over time. Kitces looks at this from a financial planner perspective and is looking to give advisors ammunition to justify their fees, so I take it with a massive grain of salt.
    Last edited by bostonerimus; 15-07-2019 at 10:16 PM.
    Misanthrope in search of similar for mutual loathing
    • Mordko
    • By Mordko 16th Jul 19, 1:36 AM
    • 345 Posts
    • 142 Thanks
    Mordko
    Yes that looks to be right, which just floors me. People seem sanguine about 1.5% fees when at that level they are almost 50% of the spendable income you end up with. That will decrease as spending increases with inflation, but still it's an enormous amount of money to waste. And I think it is a waste for most people.
    Originally posted by bostonerimus
    Very true, but the “100% success rate” claim is just wrong.
    • bostonerimus
    • By bostonerimus 16th Jul 19, 2:16 AM
    • 3,097 Posts
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    bostonerimus
    Very true, but the “100% success rate” claim is just wrong.
    Originally posted by Mordko
    Well you can set the success level wherever you want, but 95% is more usual number to use.
    Misanthrope in search of similar for mutual loathing
    • Thrugelmir
    • By Thrugelmir 16th Jul 19, 5:18 PM
    • 64,015 Posts
    • 56,612 Thanks
    Thrugelmir
    Well you can set the success level wherever you want, but 95% is more usual number to use.
    Originally posted by bostonerimus
    Rather like deciding not insuring your property against total loss through fire. Everyday it happens to someone somewhere. When you are personally one of the few affected it's too late to have regrets.
    “The stock market is a device for transferring money from the impatient to the patient.” – Warren Buffett
    • westv
    • By westv 16th Jul 19, 5:48 PM
    • 4,851 Posts
    • 2,433 Thanks
    westv
    Rather like deciding not insuring your property against total loss through fire. Everyday it happens to someone somewhere. When you are personally one of the few affected it's too late to have regrets.
    Originally posted by Thrugelmir
    Hardly the same. You'll have, say, 30 years to adjust withdrawal rates if things are running a bit tight. How many house fires last that long?
    • bostonerimus
    • By bostonerimus 16th Jul 19, 6:23 PM
    • 3,097 Posts
    • 2,443 Thanks
    bostonerimus
    Rather like deciding not insuring your property against total loss through fire. Everyday it happens to someone somewhere. When you are personally one of the few affected it's too late to have regrets.
    Originally posted by Thrugelmir
    The long tail on the probability distribution means that setting a success rate at 100% can require very low withdrawal rates. Like many things its a balancing act. If you want to set a withdrawal rate at 100% success you will presumably also be using a lifespan that takes you well into the range of the "Queen's telegram"....or maybe she sends an SMS text message today.......and then you might as well just buy an annuity.
    Misanthrope in search of similar for mutual loathing
    • Mordko
    • By Mordko 17th Jul 19, 2:11 AM
    • 345 Posts
    • 142 Thanks
    Mordko
    I just don’t believe that 100% success rate for any SWR is real. For starters one has to assume that the future will be like the relatively recent past. And that assumption might be wrong.
    Last edited by Mordko; 17-07-2019 at 2:14 AM.
  • jamesd
    Is there an industry standard minimum amount to use to buy an annuity??? Say £50k ?
    Originally posted by Sea Shell
    No formal minimum but income per Pound spent drops for smaller purchases, say under 10k, a lot under 5k. A 2005 study reported drops starting below 20k and a graph showed continued ever-smaller improvement up to 30k. The drops became more severe below-5-8k. At the other end above perhaps 70-100k there can be a reduction based on the belief that the buyer knows they have a longer life expectancy than usual.

    In a male-female couple with no life expectancy modifiers it's better for the female to buy because of their roughly three year longer life expectancy that insurers are prohibited from taking into account. I've no data on effects on life expectancy except for traditional obvious gender at birth.

    When writing about long term regular buying I'm likely to write 20k every other year rather than 10k a year to get to a size that is neither small nor large.

    30k is entirely reasonable and 60k might be ideal, though too much for most regular buyers.

    The paper also noted 75 as the optimum age to annuitise fully. Life expectancy increases will have raised this, health and lifestyle matter a lot and competition with state pension deferral is also a factor.
  • jamesd
    I just don’t believe that 100% success rate for any SWR is real. For starters one has to assume that the future will be like the relatively recent past. And that assumption might be wrong.
    Originally posted by Mordko
    It's unreal in part due to imprecise simplified wording. A more strictly correct expression would be "100% of historic starting points for the rate, investments, planning period and drawdown rules specified succeeded". Which does recognise that it's possible for something worse to happen.

    In general a lot of discussions between regulars here are between people who know the constraints. More care is often merited for newcomers and delivering that is part of the value of the Drawdown: safe withdrawal rates topic.
  • jamesd
    Yes that looks to be right, which just floors me. People seem sanguine about 1.5% fees when at that level they are almost 50% of the spendable income you end up with. That will decrease as spending increases with inflation, but still it's an enormous amount of money to waste. And I think it is a waste for most people.
    Originally posted by bostonerimus
    You got that somewhat wrong. I wrote "costs" while you wrote "fees".

    The original SWR research didn't include costs in the calculation. Not trading, regulatory, fund, fund platform or adviser. By using 1.5% I aim to fairly comfortably allow for all of those costs.

    It's not a whole waste because it's unavoidable to have some costs. Even someone who buys shares with share certificates and locks them in a safe has costs.

    The effect of costs on SWR is about a third of costs because SWR is expressed as a percentage of initial pot size while the near failure cases deplete capital well below that so the average value on which the 1.5% is paid is much less than starting value.

    But: the 1.5% is likely to matter more in times of average performance. Then you don't get depletion unless you increase spending. So 1.5% still matters but not for the logic you seem to have been expressing.

    I'm assuming Jamesd's baseline SWR number is something like 4.7% but that one of the variable withdrawal strategies is being used
    Originally posted by bostonerimus
    My UK 4% rule baseline with no costs is 3.7%. That's because research shows UK 4% rule based on historic performance to be about US minus 0.3%. For G-K it's 5.5% on a 40 rather than 30 year plan from UK-specific G-K work.

    If you have 1.5% in fees on top of that they have to come out of the 4% so you would end up with 2.5%....
    Originally posted by bostonerimus
    No...
    ... and your financial fees over and above fund fees are 1.5% you have to pay them out of your 4% and are left with just 2.5% to spend.
    Originally posted by bostonerimus
    and no.

    The difference in meaning between costs and fees matters and adviser fees are part of the costs.

    If you're paying 0.5% for funds (including all of their costs), trading account and dealing and also 1% for advice the total costs are 1.5% and the cost-free 4% SWR is reduced to 3.5%.

    The fee discussion isn't so much about its greatly reduced effect in the bad times edge case that sets the SWR but in the average case where you're going to pay something closer to 1% until death because your capital isn't getting depleted...

    and here Kitces and others point out that you don't calculate 4% just once but should do it again to increase income if times have been good ... which helps to keep those fees under control.
    Last edited by jamesd; 17-07-2019 at 4:06 AM.
    • Sea Shell
    • By Sea Shell 17th Jul 19, 5:32 AM
    • 2,280 Posts
    • 3,964 Thanks
    Sea Shell
    No formal minimum but income per Pound spent drops for smaller purchases, say under 10k, a lot under 5k. A 2005 study reported drops starting below 20k and a graph showed continued ever-smaller improvement up to 30k. The drops became more severe below-5-8k. At the other end above perhaps 70-100k there can be a reduction based on the belief that the buyer knows they have a longer life expectancy than usual.

    In a male-female couple with no life expectancy modifiers it's better for the female to buy because of their roughly three year longer life expectancy that insurers are prohibited from taking into account. I've no data on effects on life expectancy except for traditional obvious gender at birth.

    When writing about long term regular buying I'm likely to write 20k every other year rather than 10k a year to get to a size that is neither small nor large.

    30k is entirely reasonable and 60k might be ideal, though too much for most regular buyers.

    The paper also noted 75 as the optimum age to annuitise fully. Life expectancy increases will have raised this, health and lifestyle matter a lot and competition with state pension deferral is also a factor.
    Originally posted by jamesd
    Thanks for that info, very interesting. I didn't realise that annuities could be bought with such relatively small amounts.

    Sounds like drip-buying annuities might be a THING to look into, further down the line (if still available in nearly 30 years time!!!!)
    " That pound I saved yesterday, is a pound I don't have to earn tomorrow " JOB DONE!!
    This should now read "It's time to start digging up those Squirrelled Nuts"!!!
    • Anonymous101
    • By Anonymous101 17th Jul 19, 7:55 AM
    • 1,388 Posts
    • 1,106 Thanks
    Anonymous101
    There's a very good article on the "early retirement now" blog at the moment regarding using Monte Carlo simulations for retirement planning.


    https://earlyretirementnow.com/2019/07/10/monte-carlo-plan-for-retirement-guest-post-gasem/


    Personally I intend to use a drawdown strategy on my investments (ISA and DC pot) which will hopefully see my original capital provide sufficient income until much later in life. My plan is to live off the investment returns and keep the capital for any end of life care should that situation arise. If not I'll have to formulate a legacy plan should I ever have children.
    Last edited by Anonymous101; 17-07-2019 at 8:00 AM.
    • Linton
    • By Linton 17th Jul 19, 10:11 AM
    • 11,143 Posts
    • 11,527 Thanks
    Linton
    James - why decrease UK SWR relative to the US values now that hopefully most investors in drawdown will have a broad global portfolio?
    • enthusiasticsaver
    • By enthusiasticsaver 17th Jul 19, 10:53 AM
    • 8,963 Posts
    • 20,835 Thanks
    enthusiasticsaver
    DB pensions provide our essential expenditure topped up by state pension when we get there. DC pensions and ISAs/SIPPS are invested for drawdown for non essential large holidays, extra home improvements, care costs etc etc. What is left will go to our children/grandchildren along with house.
    Early retired in December 2017

    I'm a Board Guide on the Debt-Free Wannabe, Mortgages and Endowments, Banking and Budgeting boards. I volunteer to help get your forum questions answered and keep the forum running smoothly. Any views are mine and not the official line of moneysavingexpert.com. Pease remember, board guides don't read every post. If you spot an illegal or inappropriate post then please report it to forumteam@moneysavingexpert.com
    • Linton
    • By Linton 17th Jul 19, 11:00 AM
    • 11,143 Posts
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    Linton
    I am somewhat dubious about the whole SWR concept. Its fine for a first pass plan but to expect that people will actually follow it blindly year after year seems unrealistic.


    If you are going to use it, it seems sensible to me to re-evaluate it every few years. If it is operated with a 95% success rate over say 30 years most people, most of the time, will be well in profit after 10 years. If they then recalculate the SWR over 20 years they will get a larger figure.
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