Retirement. What is your SWR?

[Brewster Green]

As per the title really.

After too much research, I have decided on 4%. I know what you are thinking that is out of date!!

I have come to that figure by taking my pot, and allowing for a 15% drop in my wealth preservation funds and 40% drop in equity funds. Then taken the total remaining and 4% of that is a figure I am happy to live well with. At todays current value that equates to just over 3%.

For context I am approaching 60.

I would be interested in other peoples calculations and conclusions.

Thanks

[anonymous-user]

I’ll be 60 next year.

I’ve worked on a max 3% but currently drawing about 2.5 to 2.7%. We tend to tighten the belts a little when the US market has st the bed.

I’d have no problem spending 4% if needed because I do have a small db pension to come at 65 and then the full state pension at 67.

[Derek Chevalier]

Brewster Green said:

As per the title really.

After too much research, I have decided on 4%. I know what you are thinking that is out of date!!
Thanks

I'm not sure that it ever was "in date".

Realistically there are far too many variables for a given person's SWR to have any relevance to someone else.

[gotoPzero]

I work on 4% in all my calculations. Its not perfect but its a good rough guide that fits my requirements. I am yet to retire so I cant tell you how "safe" it will be !!!

[Gary C]

What's an SWR ?

But when it comes to retirement, I intend to take the maximum lump sum and the reduced Pension from the Scheme

There are a lot of people taking theirs out of the scheme and my last transfer value was £2.3M but I'm not sure I'm brave enough to leave a final salary scheme with RPI yearly increases for a more exposed SIPP

But I'm sure a lot of others are very comfortable with it.

Ah well, three years to go.

[UrbanAchiever]

I thought mine was 4% but having read a book called die with zero, I will likely draw more. I plan for my pot to reduce significantly during my retirement. I'll give my kids cash along the way instead of inheriting when I die.

[PistonHead007]

Safe Withdrawal Rate.

Before you opt for max lump sum on a DB check the commutation factor to ensure you're not getting stiffed. Also, if it's more than 20 then you'll have a higher lifetime allowance valuation and therefore more LTA tax at that sort of level (assuming you haven't got enough protection not to be in excess).

[Gary C]

PistonHead007 said:

Safe Withdrawal Rate.

Before you opt for max lump sum on a DB check the commutation factor to ensure you're not getting stiffed. Also, if it's more than 20 then you'll have a higher lifetime allowance valuation and therefore more LTA tax at that sort of level (assuming you haven't got enough protection not to be in excess).

Cheers

I think the factor is 18.

[Derek Chevalier]

UrbanAchiever said:

I thought mine was 4% but having read a book called die with zero, I will likely draw more. I plan for my pot to reduce significantly during my retirement. I'll give my kids cash along the way instead of inheriting when I die.

The SWR logic typically assumes the pot is exhausted - I'm not clear if you are suggesting otherwise?

[Carbon Sasquatch]

I'm not sure there is 'safe' number.... Potentially, 4% is as good as any other as an initial withdrawal rate & then figure out how you will respond to things after that.

It will depend on how long you need the money to last for and how your investments perform.

I intend to start higher than 4%, but am consciously front loading my spending and plan to reduce the inflation adjusted rate downwards over time. I also have some DB + state pension which helps mitigate the longevity risk, allowing a little more adventurous withdrawal than would otherwise be the case.

[bmwmike]

Out of interest and maybe I should start a new thread but how are people getting these £2m defined benefit schemes? I work in the private sector on a very good salary and benefits but nowhere near that. Is it a public sector / civil service thing? I would be happy to drop salary to build up a DB pot, personally, but maybe current pension offerings don't offer DB?

[Carbon Sasquatch]

You can't find many (if any) private sector DB schemes these days.

The multiples offered can be around 40x - so it would seem something like a 50k DB pension would offer a 2M transfer value.

However, over 1M and you're into LTA territory - nice problem to have

[Derek Chevalier]

Carbon Sasquatch said:

I'm not sure there is 'safe' number

It's certainly possible to generate a chance of success using historical data as a guide.

This will be impacted by

Longevity (you can make a prudent assumption at the outset)
Asset allocation (which you can determine at the outset)
Fees (which you will have an idea of)
Spending (admittedly an unknown, but there's a lot of research out there to get an idea of what various incomes will buy you, how spending tends to change over time and other large items, such as care fees)

The only tough one to nail down is investor behaviour.

[Gary C]

bmwmike said:

Out of interest and maybe I should start a new thread but how are people getting these £2m defined benefit schemes? I work in the private sector on a very good salary and benefits but nowhere near that. Is it a public sector / civil service thing? I would be happy to drop salary to build up a DB pot, personally, but maybe current pension offerings don't offer DB?

Former nationalised industry (CEGB) -

The most powerful union in the country (not that anyone knew because we didn't go on strike, because it was so powerful it didn't need too) so pay and benefits were exceptional. Also, people were only statistically expected to live to 68 on average so the valuations were sound originally. All fell apart when people started living to 80+

[mikeiow]

Brewster Green said:

As per the title really.

After too much research, I have decided on 4%. I know what you are thinking that is out of date!!

I have come to that figure by taking my pot, and allowing for a 15% drop in my wealth preservation funds and 40% drop in equity funds. Then taken the total remaining and 4% of that is a figure I am happy to live well with. At todays current value that equates to just over 3%.

For context I am approaching 60.

I would be interested in other peoples calculations and conclusions.

Thanks

When you say your “pot”….don’t forget to include some allowance for that pot being boosted by the State Pension for many of the later years..
I also expect to spend less once older. Google “go-go slow-go no-go retirement”.
It’s complicated!

[Welshbeef]

Is now the time to switch out of equity and into cash if at retirement or close to as the 4% rule of thumb might be dramatically changed

[Derek Chevalier]

Welshbeef said:

Is now the time to switch out of equity and into cash if at retirement or close to as the 4% rule of thumb might be dramatically changed

Given the futility of market timing, the sustainability of a cash portfolio in retirement, and the irrelevance of the 4% "rule of thumb" for the average investor, I'm not clear what you'd be looking to achieve. See my point about investor behaviour a few posts back.

Taking of investor behaviour, I think it's a variable that should certainly be considered when thinking about sustainability, potentially a bigger drag on returns than fees. Take two investors, both with a £1m pot and taking out £30k per year, both have retired at the start of 2022.

Investor 1: Has read and understood the investing and retirement planning research, and buys a low cost, globally diversified portfolio, and is down 7% YTD.
Investor 2: Tells his wife he has read and understood the retirement planning research, but decides to ignore it, and instead invests in the hot funds of 2021. He is down 25% YTD.

Do you really think Investor 1 and 2 and going to have similar chances of success? An 18% differential is a lot to claw back. What would you estimate investor 2's behaviour "fee" to be? 2%pa?

Look back at 2018 to see how much investor misbehaviour cost.

https://www.fa-mag.com/news/u-s--investors-lost-tw...

[UrbanAchiever]

Derek Chevalier said:

The SWR logic typically assumes the pot is exhausted - I'm not clear if you are suggesting otherwise?

I thought that the 4% safe withdrawal rate could lead to the pot remaining the same?

6% annual return on the pot
4% withdrawal, with 2% inflation (not now, I appreciate)
Leaving the pot at the same level, as you are effectively only withdrawing the investment gains.

Or have I got this totally wrong?

[Derek Chevalier]

UrbanAchiever said:

I thought that the 4% safe withdrawal rate could lead to the pot remaining the same?

If the market and inflation are kind to you in retirement you could potentially take far more than 4%pa of the starting pot (or have a lot left at the end of the road). - there have been a wide range of outcomes historically (a factor of approx 3 in the example), but the standard assumption is that the pot is exhausted.

UrbanAchiever said:

6% annual return on the pot
4% withdrawal, with 2% inflation (not now, I appreciate)
Leaving the pot at the same level, as you are effectively only withdrawing the investment gains.

Markets and inflation don't always go up in straight lines. The red line in the screenshot above was just prior to the 70s, where we had double digit inflation and falling markets. It's this double whammy that tends to put a portfolio under stress. This can be (broadly) modelled using straight line assumptions, so you'd have to be happy that 4% real (returns minus inflation) was realistic over the long term.