Withdrawal Strategies

Iain_For · 18 October 2018 at 3:03PM

I will be taking voluntary severance and retirement from my current job at the end of April next year, so am starting to think about the withdrawal strategy I need to put in place for our ISAs, which will in due course have to provide around 25% of our retirement income, the balance coming from a defined benefit plan and in a few years state pensions. The DB plan is sufficient to meet routine expenses. I'm working to a safe withdrawal rate of around 3% with the hope of some capital growth or at least maintaining the capital either to pass on or meet future care needs. To that end, the VS and lump sum from the DB plan can cover the income we would need to draw from our ISAs for 5 years to mitigate sequence of return risk, I turn 60 next April so am having to plan for these investments to last potentially 25+ years.

Current ISA portfolios of around £250k are invested in VLS 60, which meets our risk tolerance, desire for a globally invested portfolio and, quite frankly, simplicity. Given the timeframe, I see no reason to change those investments and I'm certainly not looking to return to a situation I once had of an overly complex portfolio mix and have no desire to spend my retirement managing an investment portfolio more than absolutely necessary.

Am considering 3 withdrawal strategies:

1. Maintain my total return investment approach (VLS60 accumulation units), selling some units annually to provide the income required, possibly selling a little extra when markets are stronger.

2. Set up a monthly withdrawal for the amount I require and let the platform sell as appropriate.

3. Switch the units to income units (historical yield 1.4%) to generate some of the cash, requiring around 1.6% capital growth to make up the balance of income through selling units.

I am most wary about (2), despite its simplicity appeal, especially in the early years of retirement. (1) and (3) are really the same thing (IMHO) just that taking the natural yield of (3) probably requires less mental effort and might help with market downturns if I accept a variable income at times.

I'm interested in the approaches others take.

BLB53 · 18 October 2018 at 4:42PM

Sounds like a reasonable plan and I like the simplicity of the VLS60 fund which I also hold.

I am also in drawdown and I take just one lump sum drawdown each year from my SIPP and place this in my building society from where I then take the monthly withdrawals to my bank.

Obviously up to you but I would think 3% is on the conservative side. A more conventional rate for drawdown would be 4%.

You may be interested in this drawdown article on the diy investor site

http://diyinvestoruk.blogspot.com/2016/08/a-look-at-sustainable-drawdown.html

bostonerimus · 18 October 2018 at 5:53PM

I like your approach and strategy...stay invested and keep it simple.

I'd give yourself around a year's spending in your bank account just for cash flow purposes. Then get a feel for how the balance goes as the DB pension comes in and you spend.....you should do a detailed budget so you have a good idea of that before you begin. Then just sell every quarter or six months, whichever is more appropriate, to top up the cash account. Depending on the amounts you need you might also look at VLS60 income class and just take the cash dividends automatically.

Thrugelmir · 18 October 2018 at 6:10PM

Iain_For wrote: »

I'm working to a safe withdrawal rate of around 3% with the hope of some capital growth or at least maintaining the capital either to pass on or meet future care needs.

Only history will determine if this is achievable. The original SWR's were based on US Treasuries yielding over 4%.

A quick scan shows the following bond holdings in VG 60 currently yielding:-

VANGUARD UK INVESTMENT GRADE BOND INDEX 2.58%
VANGUARD UK GOVERNMENT BOND INDEX 1.34%
VANGUARD GLOBAL BOND INDEX 1.85%

Equities are going to have perform well to guarantee the shortfall. Likewise there needs to be no adverse currency movement. As this is where much of global equity outperformance (outside of the US Tech boom stocks) has been achieved in recent years.

londoninvestor · 18 October 2018 at 6:24PM

Iain_For wrote: »

I'm working to a safe withdrawal rate of around 3% with the hope of some capital growth or at least maintaining the capital either to pass on or meet future care needs.

Also, if you want to at least maintain the capital, Safe Withdrawal Rate isn't quite the right metric to use. The SWR for an N-year retirement is the percentage of the original capital which you can take each year (indexed upwards by inflation), with minimal probability of your capital being exhausted in N years' time.

Now, there's a good probability your capital will indeed increase - but neither capital increase or capital preservation is at all guaranteed: that's not what SWR measures.

Audaxer · 18 October 2018 at 7:45PM

I would do 1) or 3) but if £250k was my total and I wanted to draw 4% per year, I would maybe only have £220k or £230k invested in VLS60 with the rest as a cash buffer to draw on in loss years, and replenish the cash buffer when the market recovers.

Linton · 18 October 2018 at 8:54PM

My drawdown strategy

1) A sizeable cash and low risk investment buffer

2) A portfolio of income shares and funds with all natural income (about 6%) taken as and when it occurs. Additional income taken from cash buffer as required.

3) A 100% equity growth portfolio

4) Each year as part of rebalancing between cash, growth and income withdraw as much as possible from SIPP whilst keeping within basic rate tax bands. Excess cash put into S&S ISAs. Defer SP to enable SIPP to be cleared ASAP and to enhance inflation protection.

Iain_For · 18 October 2018 at 9:09PM

londoninvestor wrote: »

Also, if you want to at least maintain the capital, Safe Withdrawal Rate isn't quite the right metric to use. The SWR for an N-year retirement is the percentage of the original capital which you can take each year (indexed upwards by inflation), with minimal probability of your capital being exhausted in N years' time.

Now, there's a good probability your capital will indeed increase - but neither capital increase or capital preservation is at all guaranteed: that's not what SWR measures.

That’s a good point, which I think I’d considered, at least in as much as I recognised that in reality I’d need at least 6% total return p.a. to preserve capital in line with inflation and probably more if I wanted income to grow with inflation as well. In reality, to achieve this Inthink I need to accept a variable income from this portion of my retirement income.

coyrls · 18 October 2018 at 9:11PM

Iain_For wrote: »

I'm interested in the approaches others take.

In general terms I take approach 1), i.e. one withdrawal a year.

Iain_For · 18 October 2018 at 9:18PM

Linton wrote: »

My drawdown strategy

1) A sizeable cash and low risk investment buffer

2) A portfolio of income shares and funds with all natural income (about 6%) taken as and when it occurs. Additional income taken from cash buffer as required.

3) A 100% equity growth portfolio

4) Each year as part of rebalancing between cash, growth and income withdraw as much as possible from SIPP whilst keeping within basic rate tax bands. Excess cash put into S&S ISAs. Defer SP to enable SIPP to be cleared ASAP and to enhance inflation protection.

Have read a bit about this style of 3 pot approach, it has real merits and would certainly appeal were I reliant on a SIPP and ISAs. In my case, I guess I’m fortunate with a DB plan so that I can work with (1) and (3). Have considered increasing my equity exposure to generate more growth but after many years investing, I sort of know what I’m comfortable with these days.

BLB53 · 18 October 2018 at 9:25PM

I would maybe only have £220k or £230k invested in VLS60 with the rest as a cash buffer to draw on in loss years, and replenish the cash buffer when the market recovers.

With such a cash buffer I guess you will get little or no return so would be missing out on ~ £2K p.a. growth on the buffer amount to cover the odd year or two when the markets pull back.

Withdrawal Strategies

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