Retirement fund
Discussion
Armitage.Shanks said:
Mr Pointy said:
The problem is that you have no idea what your health will be like when you are 80 - it could well be the most expensive period of your life. It's not at difficult to be spending £1500 a week (at today's prices) if you need to go into a care home because you can no longer look after yourself, or you're suffering from Alzheimers or dementia. There are some really unpleasant cheap care homes around.
If you end up with Dementia I don't think it matters what home you're in. I'd agree that 80 for me is the absolute limit I'd be looking at in terms of spending. Most of us will all die with excess money (certainly those on index linked FS schemes) that we should have spent in earlier years, it's just difficult to plan it.NickCQ said:
Armitage.Shanks said:
Mr Pointy said:
The problem is that you have no idea what your health will be like when you are 80 - it could well be the most expensive period of your life. It's not at difficult to be spending £1500 a week (at today's prices) if you need to go into a care home because you can no longer look after yourself, or you're suffering from Alzheimers or dementia. There are some really unpleasant cheap care homes around.
If you end up with Dementia I don't think it matters what home you're in. I'd agree that 80 for me is the absolute limit I'd be looking at in terms of spending. Most of us will all die with excess money (certainly those on index linked FS schemes) that we should have spent in earlier years, it's just difficult to plan it.It might not be you that has the problem - it could be your wife/husband/partner. You're 80 & they have advanced demetia & are now aggressive & violent so you can't cope with them at home. You need to get them into a care home, but you'd like a nice one rather than one smelling of cabbage & piss. That's going to cost money.
I'm not saying that it should be the sole focus of your retirement planning but personally I'd say that assuming that your 80s are going to be a low cost period of your life is unlikley to be true. It could easliy turn out to be one of the most expensive times you've ever had.
xeny said:
My mum who I acknowledge is an outlier 
, is significantly over 80 and is currently hassling me for possible holiday destinations for either late this year or next - she still regrets the two long haul trips that ended up cancelled over the past 15 months.
You just don't know - late FIL was doing three or four cruises a year into his early 90's - and keeping three women on the go! He went on a gliding holiday, sleeping in a dorm and man-handling (although not very usefully) the gliders, when he was 88., is significantly over 80 and is currently hassling me for possible holiday destinations for either late this year or next - she still regrets the two long haul trips that ended up cancelled over the past 15 months.Mind you, he didn't retire (for the second time) until he was 85. He first retired from a senior postion, but oddly not that well paid in its day, in a large multi-national at 60.
On the flip side my dad died at 41. (cancer)
My grandfather on my dads side passed in his late 50s (heart). But my grandmother is still alive and approaching 100.
On my mums side they live longer on average, both grandparents late 80s and early 90s respectively, most seem to make 90 and seem to die of just old age related diseases.
So a mixed bag for me.
My grandfather on my dads side passed in his late 50s (heart). But my grandmother is still alive and approaching 100.
On my mums side they live longer on average, both grandparents late 80s and early 90s respectively, most seem to make 90 and seem to die of just old age related diseases.
So a mixed bag for me.
The blanket 4% drawdown thing doesn’t feel right for current UK market conditions. It was drawn up nearly 30 years ago by someone in the US based on an analysis going back to the great 30’s depression and assuming self-selected investments, 50% equities and 50% bonds
If I look at the past 10 years performance of 6 providers that make up my pension savings, each spread over a range of moderate-risk funds, the average annual overall growth has been nearer 6% after charges
Why wouldn’t I consolidate under the best consistent performing provider and and look at a 5% to 6% drawdown? With 25% lump sum and other savings there should be sufficient reserves to ride out a stock market blip assuming it doesn’t last more than say 10 years
If I look at the past 10 years performance of 6 providers that make up my pension savings, each spread over a range of moderate-risk funds, the average annual overall growth has been nearer 6% after charges
Why wouldn’t I consolidate under the best consistent performing provider and and look at a 5% to 6% drawdown? With 25% lump sum and other savings there should be sufficient reserves to ride out a stock market blip assuming it doesn’t last more than say 10 years
anonymous said:
[redacted]
This is of interest to me. I have just started with a new employer and like previous posters have transferred my previous employer pensions into my SIPP every time i left a company, because? well i assumed you could just do that. IF Scottish Widows allows this by default then woohoo as my new employer uses Scottish Windows. Massively unimpressed with the SW website and portal and the 4 letters they sent me after i had changed from crappy "Pension Fund Type 2" to another crappy fund. It looks like it was a 6 year olds first attempt at html...in 2003. mikef said:
If I look at the past 10 years performance of 6 providers that make up my pension savings, each spread over a range of moderate-risk funds, the average annual overall growth has been nearer 6% after charges
Why wouldn’t I consolidate under the best consistent performing provider and and look at a 5% to 6% drawdown? With 25% lump sum and other savings there should be sufficient reserves to ride out a stock market blip assuming it doesn’t last more than say 10 years
The past 10+ years has been a pretty much uninterrupted bull market, partly driven by asset price rises due to drops in interest rates. Interest rates seem unlikely to go much lower, so this continuing isn't guaranteed.Why wouldn’t I consolidate under the best consistent performing provider and and look at a 5% to 6% drawdown? With 25% lump sum and other savings there should be sufficient reserves to ride out a stock market blip assuming it doesn’t last more than say 10 years
5-6% drawdown on nearly 6% doesn't leave much scope for capital growth so the return keeps up with inflation.
cavey76 said:
This is of interest to me. I have just started with a new employer and like previous posters have transferred my previous employer pensions into my SIPP every time i left a company, because? well i assumed you could just do that. IF Scottish Widows allows this by default then woohoo as my new employer uses Scottish Windows. Massively unimpressed with the SW website and portal and the 4 letters they sent me after i had changed from crappy "Pension Fund Type 2" to another crappy fund. It looks like it was a 6 year olds first attempt at html...in 2003.
Just make sure you ask your SIPP provider for a partial transfer from SW and not a full transfer, and leave some money in SW else they'll close the account (and that's a PITA because you'll have to ask your employer for a new one!)I've had SW for a few years, and once a year I transfer a lump to my SIPP. It's super easy to do (or at least my SIPP provider makes it seem that way!)
I actually find SW website OK, I don't need to know much more than the current value and performance to be honest. They have two portals when you click pension, your logins should work on both. I actually prefer to use their awful old one
Their default funds are shocking though. I have a v old one 'environmental' one with them from an old employer, and that's outperformed their default one year on year. No idea why their default is so shoddy
B9 said:
Their default funds are shocking though. I have a v old one 'environmental' one with them from an old employer, and that's outperformed their default one year on year. No idea why their default is so shoddy
My impression is default funds are very diversified and designed to be low volatility. That inherently produces a pretty boring investment return, which if you don't want to be sued for losing someone's pension life savings may have a certain appeal.I thought this was an interesting read for anyone doubting the regular 4-5% drawdown method. https://www.vanguardinvestor.co.uk/articles/latest...
One of the most difficult questions you face if you’ve just retired is whether your pension will last for as long as you are likely to need it. It’s all the more demanding if your assets are invested in the stock market and you’ve been through a dip such as we saw in early 2020, when a mixed portfolio of bonds and shares could have lost a fifth or more of its value in just over a month (and an all-share one would have lost at least a third)1.
Against such an unnerving background, anyone relying on their portfolio to live on will have wondered how they could prevent their money running out prematurely.
One common strategy used by those in retirement is to set an annual level of income from the portfolio, and then increase it annually in line with inflation. This provides a high level of certainty about what income is likely to be from year to year, at least in the short term.
Withdrawal methods
You might set an initial withdrawal of, say, £40,000 in the first year and then raise it each year by the inflation rate, say 2%, to give £40,800 in the second year and just over £41,600 in the third year. This makes budgeting easy, although there is also a substantial risk that you could run out of money fairly quickly if you suffer a run of bad markets and your portfolio loses value as your withdrawals continue to rise.
To avoid that, an alternative would be to only spend a set percentage of the portfolio every year. A typical rule of thumb is that around 4% or 5% of a portfolio is a sustainable annual amount to withdraw. Adopting this approach, the arithmetic means you would never run your pot down to nil, but you would have much less certainty about your income, with wide fluctuations from year to year.
For instance, it might have seemed in early 2020 that 5% of an £800,000 global portfolio of shares and bonds would provide an income of £40,000. By mid-March last year, though, it was more likely to look like £32,000 after markets tumbled in response to the Covid-19 pandemic.
A more flexible approach
We’ve done quite a bit of research testing different spending strategies for retirees2 and found a third way that treads a pragmatic path between these two extremes and captures some of the benefits of both. We call it “dynamic spending”.
According to this more-flexible method, you set your annual income as a cash sum, say £40,000, but then adjust it year by year depending on how well your portfolio performs, subject to a floor or ceiling.
Suppose that you set a ceiling of +5% and a floor of -2.5%. If in the first year the value of your portfolio rises by 20%, the ceiling would mean that your income would rise by only 5% in real (inflation adjusted) terms to £42,800. If, however, the value of your portfolio fell by 20%, the floor would mean that your income would drop by only 2.5% in real terms to £39,800. In this way, the ceiling helps to build a buffer in rising markets, while the floor helps to maintain a reasonable level of spending after a sharp decline in the portfolio.
Benefits of dynamic spending
The benefits of this flexible approach to income compared with simply raising your income in line with inflation builds up over time. To give you an idea, we compared both these methods against various benchmarks of success, such as how much you can sustainably spend, how long the portfolio could last and how much might be left for bequests. In all cases, the dynamic spending approach scored more highly.
We looked at how much you should be able to draw down from an £800,000 portfolio over 30 years with an 85% chance of not running out of money by the end of the period3. We found that dynamic spending would allow an average income of £46,400 – substantially more than the £37,600 allowed by the inflation-plus strategy.
We also compared the degree to which different starting income levels would last the course. Again, we based our tests on an £800,000 starting portfolio over 30 years. We found that a retiree using dynamic spending would have a more than 97.6% chance of not running out with a starting income of £40,000, whereas for someone who increased their income annually in line with inflation, the probability dropped to around 76%.
With a more lavish starting income of £50,000, the success rate fell markedly with the first approach. But it was still much better than 50:50 at 73%, whereas it slumped to less than one in three for the second approach (29%).
Will your portfolio last at least 30 years?
Source: Vanguard. Notes. Assuming: starting portfolio of £800,000 and starting withdrawal of £30,000 to £50,000. Time horizon: 30 years after March 2020. Asset allocation: domestic equity: 10%, international equity: 40%, domestic fixed income: 17.5%, international fixed income: 32.5%
And there was good news for the next generation too. We found that the beneficiaries of our £40,000 initial spender could reasonably expect to be left more than £550,000 with dynamic spending, even if they died after 30 years of retirement. By contrast, the inflation-plus retiree’s bequest would be less than £350,0004.
Nobody can predict the future and none of what we have said should be taken as a recommendation about what you can spend in retirement. Nonetheless, we think it shows that there is a sensible path that prudent retirees can follow to reduce the chances that they will outlive their savings.
Staying flexible about how you manage your spending should give you much needed peace of mind as you face uncertain and sometimes volatile markets.
One of the most difficult questions you face if you’ve just retired is whether your pension will last for as long as you are likely to need it. It’s all the more demanding if your assets are invested in the stock market and you’ve been through a dip such as we saw in early 2020, when a mixed portfolio of bonds and shares could have lost a fifth or more of its value in just over a month (and an all-share one would have lost at least a third)1.
Against such an unnerving background, anyone relying on their portfolio to live on will have wondered how they could prevent their money running out prematurely.
One common strategy used by those in retirement is to set an annual level of income from the portfolio, and then increase it annually in line with inflation. This provides a high level of certainty about what income is likely to be from year to year, at least in the short term.
Withdrawal methods
You might set an initial withdrawal of, say, £40,000 in the first year and then raise it each year by the inflation rate, say 2%, to give £40,800 in the second year and just over £41,600 in the third year. This makes budgeting easy, although there is also a substantial risk that you could run out of money fairly quickly if you suffer a run of bad markets and your portfolio loses value as your withdrawals continue to rise.
To avoid that, an alternative would be to only spend a set percentage of the portfolio every year. A typical rule of thumb is that around 4% or 5% of a portfolio is a sustainable annual amount to withdraw. Adopting this approach, the arithmetic means you would never run your pot down to nil, but you would have much less certainty about your income, with wide fluctuations from year to year.
For instance, it might have seemed in early 2020 that 5% of an £800,000 global portfolio of shares and bonds would provide an income of £40,000. By mid-March last year, though, it was more likely to look like £32,000 after markets tumbled in response to the Covid-19 pandemic.
A more flexible approach
We’ve done quite a bit of research testing different spending strategies for retirees2 and found a third way that treads a pragmatic path between these two extremes and captures some of the benefits of both. We call it “dynamic spending”.
According to this more-flexible method, you set your annual income as a cash sum, say £40,000, but then adjust it year by year depending on how well your portfolio performs, subject to a floor or ceiling.
Suppose that you set a ceiling of +5% and a floor of -2.5%. If in the first year the value of your portfolio rises by 20%, the ceiling would mean that your income would rise by only 5% in real (inflation adjusted) terms to £42,800. If, however, the value of your portfolio fell by 20%, the floor would mean that your income would drop by only 2.5% in real terms to £39,800. In this way, the ceiling helps to build a buffer in rising markets, while the floor helps to maintain a reasonable level of spending after a sharp decline in the portfolio.
Benefits of dynamic spending
The benefits of this flexible approach to income compared with simply raising your income in line with inflation builds up over time. To give you an idea, we compared both these methods against various benchmarks of success, such as how much you can sustainably spend, how long the portfolio could last and how much might be left for bequests. In all cases, the dynamic spending approach scored more highly.
We looked at how much you should be able to draw down from an £800,000 portfolio over 30 years with an 85% chance of not running out of money by the end of the period3. We found that dynamic spending would allow an average income of £46,400 – substantially more than the £37,600 allowed by the inflation-plus strategy.
We also compared the degree to which different starting income levels would last the course. Again, we based our tests on an £800,000 starting portfolio over 30 years. We found that a retiree using dynamic spending would have a more than 97.6% chance of not running out with a starting income of £40,000, whereas for someone who increased their income annually in line with inflation, the probability dropped to around 76%.
With a more lavish starting income of £50,000, the success rate fell markedly with the first approach. But it was still much better than 50:50 at 73%, whereas it slumped to less than one in three for the second approach (29%).
Will your portfolio last at least 30 years?
Source: Vanguard. Notes. Assuming: starting portfolio of £800,000 and starting withdrawal of £30,000 to £50,000. Time horizon: 30 years after March 2020. Asset allocation: domestic equity: 10%, international equity: 40%, domestic fixed income: 17.5%, international fixed income: 32.5%
And there was good news for the next generation too. We found that the beneficiaries of our £40,000 initial spender could reasonably expect to be left more than £550,000 with dynamic spending, even if they died after 30 years of retirement. By contrast, the inflation-plus retiree’s bequest would be less than £350,0004.
Nobody can predict the future and none of what we have said should be taken as a recommendation about what you can spend in retirement. Nonetheless, we think it shows that there is a sensible path that prudent retirees can follow to reduce the chances that they will outlive their savings.
Staying flexible about how you manage your spending should give you much needed peace of mind as you face uncertain and sometimes volatile markets.
Phooey said:
I thought this was an interesting read for anyone doubting the regular 4-5% drawdown method. https://www.vanguardinvestor.co.uk/articles/latest...
One of the most difficult questions you face if you’ve just retired is whether your pension will last for as long as you are likely to need it. It’s all the more demanding if your assets are invested in the stock market and you’ve been through a dip such as we saw in early 2020, when a mixed portfolio of bonds and shares could have lost a fifth or more of its value in just over a month (and an all-share one would have lost at least a third)1.
Against such an unnerving background, anyone relying on their portfolio to live on will have wondered how they could prevent their money running out prematurely.
One common strategy used by those in retirement is to set an annual level of income from the portfolio, and then increase it annually in line with inflation. This provides a high level of certainty about what income is likely to be from year to year, at least in the short term.
Withdrawal methods
You might set an initial withdrawal of, say, £40,000 in the first year and then raise it each year by the inflation rate, say 2%, to give £40,800 in the second year and just over £41,600 in the third year. This makes budgeting easy, although there is also a substantial risk that you could run out of money fairly quickly if you suffer a run of bad markets and your portfolio loses value as your withdrawals continue to rise.
To avoid that, an alternative would be to only spend a set percentage of the portfolio every year. A typical rule of thumb is that around 4% or 5% of a portfolio is a sustainable annual amount to withdraw. Adopting this approach, the arithmetic means you would never run your pot down to nil, but you would have much less certainty about your income, with wide fluctuations from year to year.
For instance, it might have seemed in early 2020 that 5% of an £800,000 global portfolio of shares and bonds would provide an income of £40,000. By mid-March last year, though, it was more likely to look like £32,000 after markets tumbled in response to the Covid-19 pandemic.
A more flexible approach
We’ve done quite a bit of research testing different spending strategies for retirees2 and found a third way that treads a pragmatic path between these two extremes and captures some of the benefits of both. We call it “dynamic spending”.
According to this more-flexible method, you set your annual income as a cash sum, say £40,000, but then adjust it year by year depending on how well your portfolio performs, subject to a floor or ceiling.
Suppose that you set a ceiling of +5% and a floor of -2.5%. If in the first year the value of your portfolio rises by 20%, the ceiling would mean that your income would rise by only 5% in real (inflation adjusted) terms to £42,800. If, however, the value of your portfolio fell by 20%, the floor would mean that your income would drop by only 2.5% in real terms to £39,800. In this way, the ceiling helps to build a buffer in rising markets, while the floor helps to maintain a reasonable level of spending after a sharp decline in the portfolio.
Benefits of dynamic spending
The benefits of this flexible approach to income compared with simply raising your income in line with inflation builds up over time. To give you an idea, we compared both these methods against various benchmarks of success, such as how much you can sustainably spend, how long the portfolio could last and how much might be left for bequests. In all cases, the dynamic spending approach scored more highly.
We looked at how much you should be able to draw down from an £800,000 portfolio over 30 years with an 85% chance of not running out of money by the end of the period3. We found that dynamic spending would allow an average income of £46,400 – substantially more than the £37,600 allowed by the inflation-plus strategy.
We also compared the degree to which different starting income levels would last the course. Again, we based our tests on an £800,000 starting portfolio over 30 years. We found that a retiree using dynamic spending would have a more than 97.6% chance of not running out with a starting income of £40,000, whereas for someone who increased their income annually in line with inflation, the probability dropped to around 76%.
With a more lavish starting income of £50,000, the success rate fell markedly with the first approach. But it was still much better than 50:50 at 73%, whereas it slumped to less than one in three for the second approach (29%).
Will your portfolio last at least 30 years?
Source: Vanguard. Notes. Assuming: starting portfolio of £800,000 and starting withdrawal of £30,000 to £50,000. Time horizon: 30 years after March 2020. Asset allocation: domestic equity: 10%, international equity: 40%, domestic fixed income: 17.5%, international fixed income: 32.5%
And there was good news for the next generation too. We found that the beneficiaries of our £40,000 initial spender could reasonably expect to be left more than £550,000 with dynamic spending, even if they died after 30 years of retirement. By contrast, the inflation-plus retiree’s bequest would be less than £350,0004.
Nobody can predict the future and none of what we have said should be taken as a recommendation about what you can spend in retirement. Nonetheless, we think it shows that there is a sensible path that prudent retirees can follow to reduce the chances that they will outlive their savings.
Staying flexible about how you manage your spending should give you much needed peace of mind as you face uncertain and sometimes volatile markets.
Makes me glad I accumulated 35 years in a defined benefits/final salary plan before I retired. Maybe it's considered to be "unsophisticated" by present day standards, but nice and comfy!One of the most difficult questions you face if you’ve just retired is whether your pension will last for as long as you are likely to need it. It’s all the more demanding if your assets are invested in the stock market and you’ve been through a dip such as we saw in early 2020, when a mixed portfolio of bonds and shares could have lost a fifth or more of its value in just over a month (and an all-share one would have lost at least a third)1.
Against such an unnerving background, anyone relying on their portfolio to live on will have wondered how they could prevent their money running out prematurely.
One common strategy used by those in retirement is to set an annual level of income from the portfolio, and then increase it annually in line with inflation. This provides a high level of certainty about what income is likely to be from year to year, at least in the short term.
Withdrawal methods
You might set an initial withdrawal of, say, £40,000 in the first year and then raise it each year by the inflation rate, say 2%, to give £40,800 in the second year and just over £41,600 in the third year. This makes budgeting easy, although there is also a substantial risk that you could run out of money fairly quickly if you suffer a run of bad markets and your portfolio loses value as your withdrawals continue to rise.
To avoid that, an alternative would be to only spend a set percentage of the portfolio every year. A typical rule of thumb is that around 4% or 5% of a portfolio is a sustainable annual amount to withdraw. Adopting this approach, the arithmetic means you would never run your pot down to nil, but you would have much less certainty about your income, with wide fluctuations from year to year.
For instance, it might have seemed in early 2020 that 5% of an £800,000 global portfolio of shares and bonds would provide an income of £40,000. By mid-March last year, though, it was more likely to look like £32,000 after markets tumbled in response to the Covid-19 pandemic.
A more flexible approach
We’ve done quite a bit of research testing different spending strategies for retirees2 and found a third way that treads a pragmatic path between these two extremes and captures some of the benefits of both. We call it “dynamic spending”.
According to this more-flexible method, you set your annual income as a cash sum, say £40,000, but then adjust it year by year depending on how well your portfolio performs, subject to a floor or ceiling.
Suppose that you set a ceiling of +5% and a floor of -2.5%. If in the first year the value of your portfolio rises by 20%, the ceiling would mean that your income would rise by only 5% in real (inflation adjusted) terms to £42,800. If, however, the value of your portfolio fell by 20%, the floor would mean that your income would drop by only 2.5% in real terms to £39,800. In this way, the ceiling helps to build a buffer in rising markets, while the floor helps to maintain a reasonable level of spending after a sharp decline in the portfolio.
Benefits of dynamic spending
The benefits of this flexible approach to income compared with simply raising your income in line with inflation builds up over time. To give you an idea, we compared both these methods against various benchmarks of success, such as how much you can sustainably spend, how long the portfolio could last and how much might be left for bequests. In all cases, the dynamic spending approach scored more highly.
We looked at how much you should be able to draw down from an £800,000 portfolio over 30 years with an 85% chance of not running out of money by the end of the period3. We found that dynamic spending would allow an average income of £46,400 – substantially more than the £37,600 allowed by the inflation-plus strategy.
We also compared the degree to which different starting income levels would last the course. Again, we based our tests on an £800,000 starting portfolio over 30 years. We found that a retiree using dynamic spending would have a more than 97.6% chance of not running out with a starting income of £40,000, whereas for someone who increased their income annually in line with inflation, the probability dropped to around 76%.
With a more lavish starting income of £50,000, the success rate fell markedly with the first approach. But it was still much better than 50:50 at 73%, whereas it slumped to less than one in three for the second approach (29%).
Will your portfolio last at least 30 years?
Source: Vanguard. Notes. Assuming: starting portfolio of £800,000 and starting withdrawal of £30,000 to £50,000. Time horizon: 30 years after March 2020. Asset allocation: domestic equity: 10%, international equity: 40%, domestic fixed income: 17.5%, international fixed income: 32.5%
And there was good news for the next generation too. We found that the beneficiaries of our £40,000 initial spender could reasonably expect to be left more than £550,000 with dynamic spending, even if they died after 30 years of retirement. By contrast, the inflation-plus retiree’s bequest would be less than £350,0004.
Nobody can predict the future and none of what we have said should be taken as a recommendation about what you can spend in retirement. Nonetheless, we think it shows that there is a sensible path that prudent retirees can follow to reduce the chances that they will outlive their savings.
Staying flexible about how you manage your spending should give you much needed peace of mind as you face uncertain and sometimes volatile markets.
R.
mikef said:
What I took from that article is that unless you have 800K at retirement after lump sum, you might as well give up. Which I don’t believe...
I think 800k might have been an example. Divide by 2 or 4 if you wish. But What I think was the most interesting point was how you can draw it down to maximise return and minimise (IFA) fees.mikef said:
What I took from that article is that unless you have 800K at retirement after lump sum, you might as well give up. Which I don’t believe...
It’s not an unfeasible sum is it?Start young consistently add and see it grow.
Of course not everyone can achieve it, but it’s not a ridiculous sums to base calculations on.
Phooey said:
And there was good news for the next generation too. We found that the beneficiaries of our £40,000 initial spender could reasonably expect to be left more than £550,000 with dynamic spending, even if they died after 30 years of retirement. By contrast, the inflation-plus retiree’s bequest would be less than £350,000.
It just seems mad to me that you could be left with several hundred £K that's effectively wasted, yet non-final salary pensioners daren't be more aggressive.Late FIL, with a reasonable, but not huge, final salary pension, used to run a chunky overdraft with all the holidays etc he was having - we were a bit shocked when we found out, but his attitude was "no worries, it'll catch itself up".
Phooey said:
I thought this was an interesting read for anyone doubting the regular 4-5% drawdown method. https://www.vanguardinvestor.co.uk/articles/latest...
One of the most difficult questions you face if you’ve just retired is whether your pension will last for as long as you are likely to need it. It’s all the more demanding if your assets are invested in the stock market and you’ve been through a dip such as we saw in early 2020, when a mixed portfolio of bonds and shares could have lost a fifth or more of its value in just over a month (and an all-share one would have lost at least a third)1.
Against such an unnerving background, anyone relying on their portfolio to live on will have wondered how they could prevent their money running out prematurely.
One common strategy used by those in retirement is to set an annual level of income from the portfolio, and then increase it annually in line with inflation. This provides a high level of certainty about what income is likely to be from year to year, at least in the short term.
Withdrawal methods
You might set an initial withdrawal of, say, £40,000 in the first year and then raise it each year by the inflation rate, say 2%, to give £40,800 in the second year and just over £41,600 in the third year. This makes budgeting easy, although there is also a substantial risk that you could run out of money fairly quickly if you suffer a run of bad markets and your portfolio loses value as your withdrawals continue to rise.
To avoid that, an alternative would be to only spend a set percentage of the portfolio every year. A typical rule of thumb is that around 4% or 5% of a portfolio is a sustainable annual amount to withdraw. Adopting this approach, the arithmetic means you would never run your pot down to nil, but you would have much less certainty about your income, with wide fluctuations from year to year.
For instance, it might have seemed in early 2020 that 5% of an £800,000 global portfolio of shares and bonds would provide an income of £40,000. By mid-March last year, though, it was more likely to look like £32,000 after markets tumbled in response to the Covid-19 pandemic.
A more flexible approach
We’ve done quite a bit of research testing different spending strategies for retirees2 and found a third way that treads a pragmatic path between these two extremes and captures some of the benefits of both. We call it “dynamic spending”.
According to this more-flexible method, you set your annual income as a cash sum, say £40,000, but then adjust it year by year depending on how well your portfolio performs, subject to a floor or ceiling.
Suppose that you set a ceiling of +5% and a floor of -2.5%. If in the first year the value of your portfolio rises by 20%, the ceiling would mean that your income would rise by only 5% in real (inflation adjusted) terms to £42,800. If, however, the value of your portfolio fell by 20%, the floor would mean that your income would drop by only 2.5% in real terms to £39,800. In this way, the ceiling helps to build a buffer in rising markets, while the floor helps to maintain a reasonable level of spending after a sharp decline in the portfolio.
Benefits of dynamic spending
The benefits of this flexible approach to income compared with simply raising your income in line with inflation builds up over time. To give you an idea, we compared both these methods against various benchmarks of success, such as how much you can sustainably spend, how long the portfolio could last and how much might be left for bequests. In all cases, the dynamic spending approach scored more highly.
We looked at how much you should be able to draw down from an £800,000 portfolio over 30 years with an 85% chance of not running out of money by the end of the period3. We found that dynamic spending would allow an average income of £46,400 – substantially more than the £37,600 allowed by the inflation-plus strategy.
We also compared the degree to which different starting income levels would last the course. Again, we based our tests on an £800,000 starting portfolio over 30 years. We found that a retiree using dynamic spending would have a more than 97.6% chance of not running out with a starting income of £40,000, whereas for someone who increased their income annually in line with inflation, the probability dropped to around 76%.
With a more lavish starting income of £50,000, the success rate fell markedly with the first approach. But it was still much better than 50:50 at 73%, whereas it slumped to less than one in three for the second approach (29%).
Will your portfolio last at least 30 years?
Source: Vanguard. Notes. Assuming: starting portfolio of £800,000 and starting withdrawal of £30,000 to £50,000. Time horizon: 30 years after March 2020. Asset allocation: domestic equity: 10%, international equity: 40%, domestic fixed income: 17.5%, international fixed income: 32.5%
And there was good news for the next generation too. We found that the beneficiaries of our £40,000 initial spender could reasonably expect to be left more than £550,000 with dynamic spending, even if they died after 30 years of retirement. By contrast, the inflation-plus retiree’s bequest would be less than £350,0004.
Nobody can predict the future and none of what we have said should be taken as a recommendation about what you can spend in retirement. Nonetheless, we think it shows that there is a sensible path that prudent retirees can follow to reduce the chances that they will outlive their savings.
Staying flexible about how you manage your spending should give you much needed peace of mind as you face uncertain and sometimes volatile markets.
"I thought this was an interesting read for anyone doubting the regular 4-5% drawdown method. "One of the most difficult questions you face if you’ve just retired is whether your pension will last for as long as you are likely to need it. It’s all the more demanding if your assets are invested in the stock market and you’ve been through a dip such as we saw in early 2020, when a mixed portfolio of bonds and shares could have lost a fifth or more of its value in just over a month (and an all-share one would have lost at least a third)1.
Against such an unnerving background, anyone relying on their portfolio to live on will have wondered how they could prevent their money running out prematurely.
One common strategy used by those in retirement is to set an annual level of income from the portfolio, and then increase it annually in line with inflation. This provides a high level of certainty about what income is likely to be from year to year, at least in the short term.
Withdrawal methods
You might set an initial withdrawal of, say, £40,000 in the first year and then raise it each year by the inflation rate, say 2%, to give £40,800 in the second year and just over £41,600 in the third year. This makes budgeting easy, although there is also a substantial risk that you could run out of money fairly quickly if you suffer a run of bad markets and your portfolio loses value as your withdrawals continue to rise.
To avoid that, an alternative would be to only spend a set percentage of the portfolio every year. A typical rule of thumb is that around 4% or 5% of a portfolio is a sustainable annual amount to withdraw. Adopting this approach, the arithmetic means you would never run your pot down to nil, but you would have much less certainty about your income, with wide fluctuations from year to year.
For instance, it might have seemed in early 2020 that 5% of an £800,000 global portfolio of shares and bonds would provide an income of £40,000. By mid-March last year, though, it was more likely to look like £32,000 after markets tumbled in response to the Covid-19 pandemic.
A more flexible approach
We’ve done quite a bit of research testing different spending strategies for retirees2 and found a third way that treads a pragmatic path between these two extremes and captures some of the benefits of both. We call it “dynamic spending”.
According to this more-flexible method, you set your annual income as a cash sum, say £40,000, but then adjust it year by year depending on how well your portfolio performs, subject to a floor or ceiling.
Suppose that you set a ceiling of +5% and a floor of -2.5%. If in the first year the value of your portfolio rises by 20%, the ceiling would mean that your income would rise by only 5% in real (inflation adjusted) terms to £42,800. If, however, the value of your portfolio fell by 20%, the floor would mean that your income would drop by only 2.5% in real terms to £39,800. In this way, the ceiling helps to build a buffer in rising markets, while the floor helps to maintain a reasonable level of spending after a sharp decline in the portfolio.
Benefits of dynamic spending
The benefits of this flexible approach to income compared with simply raising your income in line with inflation builds up over time. To give you an idea, we compared both these methods against various benchmarks of success, such as how much you can sustainably spend, how long the portfolio could last and how much might be left for bequests. In all cases, the dynamic spending approach scored more highly.
We looked at how much you should be able to draw down from an £800,000 portfolio over 30 years with an 85% chance of not running out of money by the end of the period3. We found that dynamic spending would allow an average income of £46,400 – substantially more than the £37,600 allowed by the inflation-plus strategy.
We also compared the degree to which different starting income levels would last the course. Again, we based our tests on an £800,000 starting portfolio over 30 years. We found that a retiree using dynamic spending would have a more than 97.6% chance of not running out with a starting income of £40,000, whereas for someone who increased their income annually in line with inflation, the probability dropped to around 76%.
With a more lavish starting income of £50,000, the success rate fell markedly with the first approach. But it was still much better than 50:50 at 73%, whereas it slumped to less than one in three for the second approach (29%).
Will your portfolio last at least 30 years?
Source: Vanguard. Notes. Assuming: starting portfolio of £800,000 and starting withdrawal of £30,000 to £50,000. Time horizon: 30 years after March 2020. Asset allocation: domestic equity: 10%, international equity: 40%, domestic fixed income: 17.5%, international fixed income: 32.5%
And there was good news for the next generation too. We found that the beneficiaries of our £40,000 initial spender could reasonably expect to be left more than £550,000 with dynamic spending, even if they died after 30 years of retirement. By contrast, the inflation-plus retiree’s bequest would be less than £350,0004.
Nobody can predict the future and none of what we have said should be taken as a recommendation about what you can spend in retirement. Nonetheless, we think it shows that there is a sensible path that prudent retirees can follow to reduce the chances that they will outlive their savings.
Staying flexible about how you manage your spending should give you much needed peace of mind as you face uncertain and sometimes volatile markets.
But it's a different model to the "regular" drawdown method which assumes inflationary increases each year - this argument centres on a dynamic spending approach. If you are to adopt this it's key that you understand there are potential downsides.
Also bear in mind that it's not using historical data (FWIW)
"To model the performance of the portfolio over 30 years, we used the Vanguard Capital Markets Model, a proprietary forecasting tool that provides investors with a range of possible future expected returns for a wide range of asset classes."
mikef said:
What I took from that article is that unless you have 800K at retirement after lump sum, you might as well give up. Which I don’t believe...
There's no compulsion to take the lump sum AFAIK though and if you're running at a relatively high withdrawal rate, then your income is likely to be high enough you can economise over a couple of years for a capital purchase.I'd expect (haven't played with the numbers explicitly) that rather than taking the 25% to have a cash reserve, you might be better off/lower risk leaving roughly half of it invested (so at a 4% SWR you'd have a ~ 3 year cash buffer) as it would let you run a slightly lower withdrawal % rate for the same actual amount.
Would you want to take any tax free lump sum per se if you're considering it reserve cash? Leave it wrapped, and use the 25% tax free allowance each year to reduce the income tax bill, simply choose if you sell investments or withdraw cash.
xeny said:
Would you want to take any tax free lump sum per se
In the real world? To pay off that interest-only mortgage, to help kids get on the housing ladder, to buy a car now that the company car has gone back, to treat the missus to that round the world cruise (Covid notwithstanding)....The Leaper said:
Makes me glad I accumulated 35 years in a defined benefits/final salary plan before I retired. Maybe it's considered to be "unsophisticated" by present day standards, but nice and comfy!
R.
"lucky" is the word. i stared work some 25 years ago and DB schemes were not available even then in the work i do R.
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