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  • FIRST POST
    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 (adds about 0.5% of pot size to withdrawal rate (see below, I need to review the research that led to this being better)
    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 charges, or some more appropriate amount.
    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: 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.
    Last edited by jamesd; 19-01-2018 at 8:00 PM.
Page 7
    • stoozie1
    • By stoozie1 16th May 18, 7:47 AM
    • 611 Posts
    • 570 Thanks
    stoozie1
    Do you mean you will be doing it in 18/19 for 17/18, or can you apply it to 2 tax years ago?
    Save 12 k in 2018 challenge member #79
    Target 2018: 24k Jan 2018- 560 April 2670
  • jamesd
    Do you mean you will be doing it in 18/19 for 17/18, or can you apply it to 2 tax years ago?
    Originally posted by stoozie1
    Thanks, corrected to : "For 2017/18 tax year I didn't buy VCTs. Instead I plan to buy EIS' in 2018/19 and apply that to the 2017/18 year"

    You can go back to the previous tax year under EIS rules but two years isn't allowed.
    • Reluctantpensioner
    • By Reluctantpensioner 1st Sep 18, 9:21 PM
    • 62 Posts
    • 25 Thanks
    Reluctantpensioner
    PE10/CAPE in UK?
    Firstly, thanks everyone, especially jamesd, for this fascinating and articulate thread.

    It encouraged me to read - a lot. I recently read many of the posts on Kitces site.
    Several of his articles discuss linking SWR with a general market forecast.
    His arguments makes a lot of sense.

    Specifically, using the measure PE10 as a forecast of future market performance, he proposes derating SWR if PE10 is high (the market is overvalued) and increasing if low.
    He has this table (sorry, can't make the formatting stick):
    Market PE10 Recommendation
    Overvalued >20 SWR=4.5%
    neutral 12-20 SWR+0.5% = 5%
    Undervalued <12 SWR+1% = 5.5%

    A later article also proposes reducing equity:bond ratio when the market is overvalued and vice versa:
    PE10 Recommendation
    >18 Equity - 20%
    <15 Equity +20%

    MAJOR EDIT>> my post lost a whole section. All the questions were left out.
    I note that US PE10 is 31.8 - well into overvalued. But I live in the UK...
    For the UK I find FTSE100 15.22 and FTSE250 24.03. Two pretty different measures, apparently saying different things.
    I normally prefer wider measures rather than concentrated ones. Is the UK overvalued or not?
    Or is PE10 a relative measure, and I can't compare them like this? Gut feel says it's an absolute measure.
    So that begs the question: what would trigger levels like Kitces be for the UK?
    And of course there is the general question: what do you guys think of this approach?
    Last edited by Reluctantpensioner; 02-09-2018 at 4:22 PM.
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