How to stress-test a complex retirement plan
Discussion
Mrs Oxgreen and I have been musing recently about the possibility of taking the first step down the glidepath to retirement. We are only 48 and 49 years old, but I think I may have worked out a plan that could work. Naturally we can't give up work yet, but I know that Mrs Oxgreen would like to step back from full-time teaching. The question is how to stress-test our plan to make sure it's robust and resilient.
There are plenty of retirement planning web sites that allow you to test a simple drawdown scenario, a good example of which is this one. But they only allow for a single rate of drawdown and a single rate of investment growth. The reality of retirement in the modern world is that you're likely to take several steps of gradually increasing retirement, so these sites are not adequate for what I have in mind. They also don't typically allow you to model other income streams coming online, such as DB pensions, State Pension, etc - all of which would allow you to reduce the drawdown rate on your savings and DC pensions later in your plan.
I have therefore made a spreadsheet that models a multi-stage retirement plan, and allows me to enter different rates of growth at each stage to model the ebbs and flows of global stock markets. It also models different income streams coming online later, such as my DC pensions, DB pensions, State Pensions, etc. If I put in growth of 6% for all stages (which I regard as a slightly conservative but relatively optimistic growth rate) and inflation of 3% then it's easy to give ourselves a nice income at each stage and end nowhere near zero at age 100. We could give a big sum to charity on our death (we have no kids to give it to). This is the "moderately optimistic" set of assumptions.
I can tweak the growth assumptions to model what would happen were we to experience a loss over the first 10-year stage (the most critical years), followed by a sluggish recovery to mediocre growth for the rest of our lives. And this is where I'd be grateful for some suggested answers to the following question:
What pessimistic growth/inflation assumptions should I use to stress-test my retirement plan?
If you look at S&P total returns (including dividends) over 10-year periods, there have only been two such periods in modern times (ending in 2008 & 2009) with annualised negative growth of about -1.4% and -1% respectively. It's not too difficult to see why 2008-9 are bad 10-year periods: they start near the top of the dot-com bubble in 98-99 and end at the bottom of a stock market crash! Before that, you have to go back to 1938-39 to find a negative 10-year period (both less than 1% annualised loss)
So do you think I'm reasonable in using -1.5% annual "growth" for the first 10 years, followed by 5 years at +4% per year, then +5% per year for the rest of our lives? I'm aiming for bad performance, followed by mediocre performance.
And what about inflation? Until very recently I had always used 3% as a pessimistic figure. My instinct is that the current surge in inflation is temporary, and that it will settle back to more "normal" rates after a year or so, as it always has done in recent decades. What do you think?
I'd particularly like to hear how other people have convinced themselves that their retirement plans are viable (or otherwise).
The trouble is, it's very easy to invent doomsday scenarios that will never happen, and against which your retirement plan is dead in the water. But what's needed are sensibly pessimistic assumptions to test what might actually happen.
There are plenty of retirement planning web sites that allow you to test a simple drawdown scenario, a good example of which is this one. But they only allow for a single rate of drawdown and a single rate of investment growth. The reality of retirement in the modern world is that you're likely to take several steps of gradually increasing retirement, so these sites are not adequate for what I have in mind. They also don't typically allow you to model other income streams coming online, such as DB pensions, State Pension, etc - all of which would allow you to reduce the drawdown rate on your savings and DC pensions later in your plan.
I have therefore made a spreadsheet that models a multi-stage retirement plan, and allows me to enter different rates of growth at each stage to model the ebbs and flows of global stock markets. It also models different income streams coming online later, such as my DC pensions, DB pensions, State Pensions, etc. If I put in growth of 6% for all stages (which I regard as a slightly conservative but relatively optimistic growth rate) and inflation of 3% then it's easy to give ourselves a nice income at each stage and end nowhere near zero at age 100. We could give a big sum to charity on our death (we have no kids to give it to). This is the "moderately optimistic" set of assumptions.
I can tweak the growth assumptions to model what would happen were we to experience a loss over the first 10-year stage (the most critical years), followed by a sluggish recovery to mediocre growth for the rest of our lives. And this is where I'd be grateful for some suggested answers to the following question:
What pessimistic growth/inflation assumptions should I use to stress-test my retirement plan?
If you look at S&P total returns (including dividends) over 10-year periods, there have only been two such periods in modern times (ending in 2008 & 2009) with annualised negative growth of about -1.4% and -1% respectively. It's not too difficult to see why 2008-9 are bad 10-year periods: they start near the top of the dot-com bubble in 98-99 and end at the bottom of a stock market crash! Before that, you have to go back to 1938-39 to find a negative 10-year period (both less than 1% annualised loss)
So do you think I'm reasonable in using -1.5% annual "growth" for the first 10 years, followed by 5 years at +4% per year, then +5% per year for the rest of our lives? I'm aiming for bad performance, followed by mediocre performance.
And what about inflation? Until very recently I had always used 3% as a pessimistic figure. My instinct is that the current surge in inflation is temporary, and that it will settle back to more "normal" rates after a year or so, as it always has done in recent decades. What do you think?
I'd particularly like to hear how other people have convinced themselves that their retirement plans are viable (or otherwise).
The trouble is, it's very easy to invent doomsday scenarios that will never happen, and against which your retirement plan is dead in the water. But what's needed are sensibly pessimistic assumptions to test what might actually happen.
Lots of tools here for modelling
https://engaging-data.com/will-money-last-retire-e...
and here
https://www.firecalc.com/
You should be able to model based on last 100 years history of stock market returns, I think thats as good as you are going to get.
https://engaging-data.com/will-money-last-retire-e...
and here
https://www.firecalc.com/
You should be able to model based on last 100 years history of stock market returns, I think thats as good as you are going to get.
At those ages you have at least a 35 year horizon to average life expectancy.
Think back 35 years to 1987 - did you know there would be huge stock market growth through the 1990s, the internet and iPhones would be invented, a global financial crisis would disrupt the financial world in 2008 followed by a global pandemic in 2020? I make this point simply to highlight the impossibility of planning anything that far ahead. The world changes beyond recognition in 35 years.
Over your time frame if you try to hold "safe" investments you'll get eaten alive by inflation. You have no realistic choice other than to pursue stock market investment so that hopefully you will "float" on whatever is happening in the world. Safety is an illusion.
Think back 35 years to 1987 - did you know there would be huge stock market growth through the 1990s, the internet and iPhones would be invented, a global financial crisis would disrupt the financial world in 2008 followed by a global pandemic in 2020? I make this point simply to highlight the impossibility of planning anything that far ahead. The world changes beyond recognition in 35 years.
Over your time frame if you try to hold "safe" investments you'll get eaten alive by inflation. You have no realistic choice other than to pursue stock market investment so that hopefully you will "float" on whatever is happening in the world. Safety is an illusion.
Dr Mike Oxgreen said:
So do you think I'm reasonable in using -1.5% annual "growth" for the first 10 years
That's incredibly pessimistic.
The whole future is unpredictable so there's no point trying to predict different futures for different decades. I think you need to pick an assumption and then just apply it.
In my opinion at age 50 you'll be pushing things if you try to start spending anything more than 2.5 to 3% of your total "stuff", and unless your home is worth a fortune I'd leave it completely out of the numbers at this stage.
As you have identified, if in the early years you are hit by poor investment returns at the same as you're spending too much money your whole plan is likely to collapse before you get within a country mile of state pension age.
I have been doing similar planning, aiming to retire at around 60. (actually not far off!)
I have come to the conclusion any plan needs to be flexible. ie my "wanted" income is about 30% higher than my "just about acceptable" income which in turn is about 50% higher than my "Oh my god, I cannot feed myself" income.
So, taking that into account I can plan on expected (ie compared to historic) returns and inflation. If things go a little pear shaped (especially in the short term) then I know I have to cut my expenditure to protect my pot. If things go really pear shaped then I have a choice of dropping back to breadline income levels or, if I don't like that, change my lifestyle. eg downsize the house etc. Or even go back to work.
Like I say, I have been doing a fair bit of modelling but am rapidly coming to the conclusion it is leading to analysis paralysis. I am now coming back to a few basic rules:
1) Assuming the 4% rule (ie for 30k income, have a 750k pot). I think that might turn out to be pessimistic but it is a level that I feel comfortable with.
2) Don't reduce the risk of my investments just because I am close to retiring (or already retired). That just guarantees underperformance.
3) Have a 2-3 year buffer in a liquid, low risk, pot. eg cash. If the investments do badly then this is what is used to lessen the blow on the pensions etc.
4) Be prepared to act quickly (change expenditure, lifestyle etc) if things are not going to plan. Remind myself that money and possessions don't actually make me any happier (much as I pretend otherwise).
5) As Panamax says, leave the house out of it. That can be used as a last resort.
I have come to the conclusion any plan needs to be flexible. ie my "wanted" income is about 30% higher than my "just about acceptable" income which in turn is about 50% higher than my "Oh my god, I cannot feed myself" income.
So, taking that into account I can plan on expected (ie compared to historic) returns and inflation. If things go a little pear shaped (especially in the short term) then I know I have to cut my expenditure to protect my pot. If things go really pear shaped then I have a choice of dropping back to breadline income levels or, if I don't like that, change my lifestyle. eg downsize the house etc. Or even go back to work.
Like I say, I have been doing a fair bit of modelling but am rapidly coming to the conclusion it is leading to analysis paralysis. I am now coming back to a few basic rules:
1) Assuming the 4% rule (ie for 30k income, have a 750k pot). I think that might turn out to be pessimistic but it is a level that I feel comfortable with.
2) Don't reduce the risk of my investments just because I am close to retiring (or already retired). That just guarantees underperformance.
3) Have a 2-3 year buffer in a liquid, low risk, pot. eg cash. If the investments do badly then this is what is used to lessen the blow on the pensions etc.
4) Be prepared to act quickly (change expenditure, lifestyle etc) if things are not going to plan. Remind myself that money and possessions don't actually make me any happier (much as I pretend otherwise).
5) As Panamax says, leave the house out of it. That can be used as a last resort.
Panamax said:
Dr Mike Oxgreen said:
So do you think I'm reasonable in using -1.5% annual "growth" for the first 10 years
That's incredibly pessimistic.
The whole future is unpredictable so there's no point trying to predict different futures for different decades. I think you need to pick an assumption and then just apply it.
In my opinion at age 50 you'll be pushing things if you try to start spending anything more than 2.5 to 3% of your total "stuff", and unless your home is worth a fortune I'd leave it completely out of the numbers at this stage.
As you have identified, if in the early years you are hit by poor investment returns at the same as you're spending too much money your whole plan is likely to collapse before you get within a country mile of state pension age.
My sheet has me expecting a ~2.1% rise each year, with stocks averaging 4% rise, cash (or equiv) getting 1%. Also has various columns for various pensions which kick in at various points, each with their own % rise.
Sanitised example version:
Msg me if you'd like a copy to play with.
I also personally believe that once I reach 70 and again at perhaps 80, the amount needed will likely go *down*.
Clearly care costs could trip in at some point, but that is what the house is for (IMHO). If I wanted to budget for 10 years in a 5* care home, I doubt I would ever retire!
It is, of course, all broad brush numbers.
That 2.1% general rise....might want to be higher for the next few years if inflation carries on as broadly expected.....but inflation is really a personal thing - some areas will go up more than others - you cannot influence your council tax, but some areas of your spend, you may be able to reduce (TV/phone/holiday budgets).
I've paused the pension drawdown just because it dropped a lot since November (to try to guard against sequencing risk), that might last a year (or more).
What I really expect is to revisit it regularly as time goes on, and for the past numbers to become 'actuals' rather than guestimates.
& around 2031 I will be starting my paper-round to bring some cash in
Thanks for all the thoughts so far, folks! Here are some of my thoughts in response. 
That's incredibly pessimistic.Well, yes and no! From 1998-2008 the S&P returned -13% (and that's including dividends) - so that is approximately -1.4% per year. Hence my -1.5% per year for the first 10 years as a worst-case scenario... it has almost happened in recent history.
And I agree that the house stays out of the equations altogether. That might, however, be needed if we both go ga-ga and need residential care for our last few years.
bogie said:
Lots of tools here for modelling
https://engaging-data.com/will-money-last-retire-e...
and here
https://www.firecalc.com/
I'll have a play with that, but I'm always wary when something is clearly so US-focused. Do I convert all my numbers to dollars, or do I just enter the numbers as if they were dollars but are actually in pounds? They also don't really allow for variable drawdown rates. And one of them calls for an "average" tax rate - but some of my drawdown sources (ISAs) are tax-free while others (DC pensions) are taxed as income.https://engaging-data.com/will-money-last-retire-e...
and here
https://www.firecalc.com/
Panamax said:
Dr Mike Oxgreen said:
So do you think I'm reasonable in using -1.5% annual "growth" for the first 10 years
That's incredibly pessimistic.
Panamax said:
In my opinion at age 50 you'll be pushing things if you try to start spending anything more than 2.5 to 3% of your total "stuff", and unless your home is worth a fortune I'd leave it completely out of the numbers at this stage.
Well of course I'm not talking about drawing down those percentages over the whole of my retirement. And that's my point - I need to model a variable drawdown that starts quite small during the first 10 years (when we are both still doing a moderate level of paid work). Then the drawdown gets much bigger, perhaps as much as 6% in the "good growth" scenario, but only for 5 years until our DB pensions can kick in, then the drawdown can reduce again. And then at 68 it can reduce to a very small percentage once the State Pension kicks in. So drawdown funds will only have to do "heavy lifting" during quite a small period of time, perhaps 5 to 8 years at most. A graph of my proposed drawdown percentages would be distinctly bell shaped, with barely anything in the years beyond 68.And I agree that the house stays out of the equations altogether. That might, however, be needed if we both go ga-ga and need residential care for our last few years.
brman said:
I have come to the conclusion any plan needs to be flexible.
Totally agree with you there! In my doomsday scenario of -1.5% per year for the first 10 years, both of us would need to carry on doing some work at least until 65, and we'd have to reduce our drawdown percentages and accept a lower level of income throughout our retirement. It would mean fewer holidays per year, for example.brman said:
rapidly coming to the conclusion it is leading to analysis paralysis
Very true. The actuaries that I periodically met with when I was a trustee of my last company's pension scheme also had a wonderful phrase to sum up when one's excessively cautious thinking can lead to wrong decisions: they called it being "recklessly prudent".mikeiow said:
My sheet has me expecting a ~2.1% rise each year, with stocks averaging 4% rise, cash (or equiv) getting 1%. Also has various columns for various pensions which kick in at various points, each with their own % rise.
Sanitised example version:
Your spreadsheet looks reassuringly similar to mine! Sanitised example version:
mikeiow said:
I also personally believe that once I reach 70 and again at perhaps 80, the amount needed will likely go *down*.
Definitely! My plan has a reduced requirement for income after 75, which is when I reckon we'll start to slow down and the desire for foreign travel (for example) will reduce.Edited by Dr Mike Oxgreen on Thursday 10th February 17:46
By the way, an assumption that I have started with is that DB pensions are best left alone until their normal retirement age.
My logic, as an ex-trustee, is that I know how DB pension trustees think. The actuarial reduction for early retirement will be tilted in favour of the scheme, rather than the retiree. No board of trustees wants early retirements to increase the risk to the scheme.
I therefore instinctively see early retirement from DB schemes as being somewhat poor value for money, and since we can manage without them until age 65-ish, that's what I intend to do.
Does anyone have a contrary view on this?
My logic, as an ex-trustee, is that I know how DB pension trustees think. The actuarial reduction for early retirement will be tilted in favour of the scheme, rather than the retiree. No board of trustees wants early retirements to increase the risk to the scheme.
I therefore instinctively see early retirement from DB schemes as being somewhat poor value for money, and since we can manage without them until age 65-ish, that's what I intend to do.
Does anyone have a contrary view on this?
You can stress test all you like, but ultimately whatever planning you do will be completely out of date by tomorrow.
The biggest risk to you is not really inflation, because generally investment growth would keep pace with that, however the sequence of investment returns is your biggest enemy. Consecutive years of poor or even negative performance in the earlier years of retirement are far more detrimental to the sustainability of your income than poor returns in later years.
In a nutshell, you need to set some clear ground rules for yourself and ultimately be flexible as brman has outlined.
If you want to get into the weeds of it then I'd recommend picking up a copy of "Beyond the 4% rule" by Abraham Okusanya which summarises the main options, looks at scientific studies and uses historical data to suggest a 'best of all worlds' approach.
The biggest risk to you is not really inflation, because generally investment growth would keep pace with that, however the sequence of investment returns is your biggest enemy. Consecutive years of poor or even negative performance in the earlier years of retirement are far more detrimental to the sustainability of your income than poor returns in later years.
In a nutshell, you need to set some clear ground rules for yourself and ultimately be flexible as brman has outlined.
brman said:
Like I say, I have been doing a fair bit of modelling but am rapidly coming to the conclusion it is leading to analysis paralysis. I am now coming back to a few basic rules:
1) Assuming the 4% rule (ie for 30k income, have a 750k pot). I think that might turn out to be pessimistic but it is a level that I feel comfortable with.
2) Don't reduce the risk of my investments just because I am close to retiring (or already retired). That just guarantees underperformance.
3) Have a 2-3 year buffer in a liquid, low risk, pot. eg cash. If the investments do badly then this is what is used to lessen the blow on the pensions etc.
4) Be prepared to act quickly (change expenditure, lifestyle etc) if things are not going to plan. Remind myself that money and possessions don't actually make me any happier (much as I pretend otherwise).
5) As Panamax says, leave the house out of it. That can be used as a last resort.
The one thing I'd caution is using the 4% rule. There are a few recent(ish) studies that prove this is not really as sustainable as it once used to be, again with sequence of returns being the biggest influencing factor.1) Assuming the 4% rule (ie for 30k income, have a 750k pot). I think that might turn out to be pessimistic but it is a level that I feel comfortable with.
2) Don't reduce the risk of my investments just because I am close to retiring (or already retired). That just guarantees underperformance.
3) Have a 2-3 year buffer in a liquid, low risk, pot. eg cash. If the investments do badly then this is what is used to lessen the blow on the pensions etc.
4) Be prepared to act quickly (change expenditure, lifestyle etc) if things are not going to plan. Remind myself that money and possessions don't actually make me any happier (much as I pretend otherwise).
5) As Panamax says, leave the house out of it. That can be used as a last resort.
If you want to get into the weeds of it then I'd recommend picking up a copy of "Beyond the 4% rule" by Abraham Okusanya which summarises the main options, looks at scientific studies and uses historical data to suggest a 'best of all worlds' approach.
Dr Mike Oxgreen said:
I therefore instinctively see early retirement from DB schemes as being somewhat poor value for money, and since we can manage without them until age 65-ish, that's what I intend to do.
Does anyone have a contrary view on this?
It really depends on the early retirement penalties. Some aren't as harsh as others. It's fairly simple to workout the breakeven point for drawing early vs. deferring and then, based on your own thoughts about your life expectancy, gauging whether it's in your interest or not.Does anyone have a contrary view on this?
There's only so much modelling & stressing you can do. Ultimately you have to accept that it's only modelling & the real world will be different.
My initial model just did everything in todays value - very crude - assume that returns = inflation. That worked, but I still wasn't convinced.
However, its still all down to assumptions - and they will be wrong.
I signed up to Meaningful Academy - which I found useful & came with a Voyant Go subscription, which is basically the tool that most IFA's use. So I plugged all the numbers into that and still came out OK.
So once you have a number you're comfortable with, you also need some kind of plan for what you will do to adjust when reality is different to your model.
Here's few of mine -
Annual inflation increases but only if the portfolio increases enough to cover them
Guardrails - not to let withdrawals drop too low - but also to increase them if growth allows
If proposed next year withdrawal rate >1% above the initial rate then cut it back by 10%
If it is >1% below the initial rate then increase by 10%
So say the initial rate is 4%, guardrails kick in at 3 or 5%
I'm also fortunate enough to have some DB & some DC. The mix of guaranteed income & variable is a big positive for me.
The calculation for when to take the DB is not as simple as it first seems & I am paying for some specific advice on that. There are all sorts of technical considerations and I never thought I'd think that 3k in advice was money well spent, but I'm amazed at what I didn't even know to ask an d how the headline numbers can deceive.
I flirted with cashing in the DB's but ultimately decided to keep them. Those & the state pension cover my 'floor' for my basic needs - which are likely higher than some other peoples idea of nbasic - but also less than others - but they are mine
I can then front load my use of DC which I intend to do from 55 and taper down to DB + State at 80 ish.
If I'm lucky I'll have loads left, if I'm unlucky then I'll be at my basic level earlier than 80.
My initial model just did everything in todays value - very crude - assume that returns = inflation. That worked, but I still wasn't convinced.
However, its still all down to assumptions - and they will be wrong.
I signed up to Meaningful Academy - which I found useful & came with a Voyant Go subscription, which is basically the tool that most IFA's use. So I plugged all the numbers into that and still came out OK.
So once you have a number you're comfortable with, you also need some kind of plan for what you will do to adjust when reality is different to your model.
Here's few of mine -
Annual inflation increases but only if the portfolio increases enough to cover them
Guardrails - not to let withdrawals drop too low - but also to increase them if growth allows
If proposed next year withdrawal rate >1% above the initial rate then cut it back by 10%
If it is >1% below the initial rate then increase by 10%
So say the initial rate is 4%, guardrails kick in at 3 or 5%
I'm also fortunate enough to have some DB & some DC. The mix of guaranteed income & variable is a big positive for me.
The calculation for when to take the DB is not as simple as it first seems & I am paying for some specific advice on that. There are all sorts of technical considerations and I never thought I'd think that 3k in advice was money well spent, but I'm amazed at what I didn't even know to ask an d how the headline numbers can deceive.
I flirted with cashing in the DB's but ultimately decided to keep them. Those & the state pension cover my 'floor' for my basic needs - which are likely higher than some other peoples idea of nbasic - but also less than others - but they are mine
I can then front load my use of DC which I intend to do from 55 and taper down to DB + State at 80 ish.
If I'm lucky I'll have loads left, if I'm unlucky then I'll be at my basic level earlier than 80.
anonymous said:
[redacted]
That is exactly what “stage 1” is, until age 60. We both give up full-time work and take part-time work to earn maybe 15-18k each. Mrs Oxgreen could do that standing on her head - she already has a successful sideline of private tutoring, for which she charges £60 per hour, and could easily ramp that up. She’s turning away requests on a daily basis. And she could do supply work at the school she currently teaches in.samdy said:
The one thing I'd caution is using the 4% rule. There are a few recent(ish) studies that prove this is not really as sustainable as it once used to be, again with sequence of returns being the biggest influencing factor.
If you want to get into the weeds of it then I'd recommend picking up a copy of "Beyond the 4% rule" by Abraham Okusanya which summarises the main options, looks at scientific studies and uses historical data to suggest a 'best of all worlds' approach.
Agreed. I have read quite a few comments on the 4% rule. Some say it is cautious, some say it is too optimistic....If you want to get into the weeds of it then I'd recommend picking up a copy of "Beyond the 4% rule" by Abraham Okusanya which summarises the main options, looks at scientific studies and uses historical data to suggest a 'best of all worlds' approach.
The key thing I have come away with is that it is a starting point only. If I get to my retirement age and I don't have enough for 4% then I know I need to keep working a bit. If after a few years things have crashed then I know I need to re-evaluate. Like I said, flexibility is the key.
I have also come to the conclusion that most commentators that say that 4% is not sustainable are assuming a requirement for fixed income for all of retirement (inflation linked) and no buffer to protect the pot. A lot also appear to assume that, come retirement, all the funds will be moving towards a "low risk" investment strategy (ie a poorly performing one! ). Not taking into account that, come 67, the state pension kicks in and not taking into account that, as I get older, I am less likely to be active and so likely to be spending less on hobbies etc.
Also, to be clear, when I say the 4% rule, I am assuming the 4% is for my investment pot. I still have my "buffer" pot on top to help me over a lean year or 3. eg 30k income: That is a £750k investment pot (mostly pension) plus a £90k buffer (cash, low risk isas etc). So actually that is more like a "3.5% rule" overall.
I am curious what people think about this though. No hard and fast decision have been made yet
NowWatchThisDrive said:
There's such an abundance of hubristic literature out there among "FIRE" types that it's easy to get into a state of analysis paralysis and waste time engaging in the kind of overfitted modelling that really just amounts to academic masturbation. Personally I consider the generally accepted "safe" withdrawal rate of 4% to be insufficiently conservative, and target ~2%. Ultimately I think annuity rates offer a more reliable indication (though not perfectly accurate, as providers seek to make a profit themselves) of the real safe withdrawal rate at a given point in time, than the cherry-picked modelling of a community most of whom have only ever known a bull market and never had to do the kind of introspection that comes with a proper drawdown.
I agree in relation to the "FIRE types" if you treat the 4% as something fixed, as it was originally proposed. However I think vanguard have done a summary of the issues that makes sense to me:
https://personal.vanguard.com/pdf/ISGFIRE.pdf
If I understand their conclusion right then yes, a rigid 4% rule is asking for trouble. But a 4% with flexibility (diversified investments, dynamic spending etc) is viable. I do understand though that this is very dependant on length of retirement. I am thinking of retiring at around 60. If it was 50 my sums would be very different. To be fair that probably puts me in a different situation to others here.
Personally I am glad I have a few years to see how things pan out after this pandemic etc but I am hopeful that will still hold good
Good question. We did a most likely case based on historical returns and a worst case that assumed;
1.) Living for 35 years.
2.) Expenditure increases by 2% per annum.
3.) investments return 0%
It’s ridiculously conservative but the missus wanted to guarantee that we would not run out of money and this was as stressful a case as we could realistically imagine.
A more realistic worst case might be that expenditure increases with CPI and investments have a positive return but below inflation so negative in real terms.
1.) Living for 35 years.
2.) Expenditure increases by 2% per annum.
3.) investments return 0%
It’s ridiculously conservative but the missus wanted to guarantee that we would not run out of money and this was as stressful a case as we could realistically imagine.
A more realistic worst case might be that expenditure increases with CPI and investments have a positive return but below inflation so negative in real terms.
A big consideration is maximising your tax free withdrawals.
You can crystallise amounts every year taking out the 25% tax free plus the £12570 allowance without withdrawing the whole crystallised amount from your SIPP.
Eg 500k pot, year 1 crystallise 50k, withdraw £12570 tax free allowance + 12.5k (25% tax free) leaving 24930 in your SIPP. Next year repeat crystallising 50k from your uncrystalised pot, 24930 gets added to your crystallised pot and so on for 10:years until your state pension kicks in when you start withdrawing from the crystallised amount which will all be taxable but you’ll be getting your state pension.
You can crystallise amounts every year taking out the 25% tax free plus the £12570 allowance without withdrawing the whole crystallised amount from your SIPP.
Eg 500k pot, year 1 crystallise 50k, withdraw £12570 tax free allowance + 12.5k (25% tax free) leaving 24930 in your SIPP. Next year repeat crystallising 50k from your uncrystalised pot, 24930 gets added to your crystallised pot and so on for 10:years until your state pension kicks in when you start withdrawing from the crystallised amount which will all be taxable but you’ll be getting your state pension.
Carbon Sasquatch said:
...
I signed up to Meaningful Academy - which I found useful & came with a Voyant Go subscription, which is basically the tool that most IFA's use. So I plugged all the numbers into that and still came out OK.
Out of interest, did you find Voyant Go easy to learn, and in practical terms, did it generate any useful insights beyond that which you had already found via any spreadsheet analysis you had already done? I signed up to Meaningful Academy - which I found useful & came with a Voyant Go subscription, which is basically the tool that most IFA's use. So I plugged all the numbers into that and still came out OK.
Mazinbrum said:
A big consideration is maximising your tax free withdrawals.
You can crystallise amounts every year taking out the 25% tax free plus the £12570 allowance without withdrawing the whole crystallised amount from your SIPP.
Eg 500k pot, year 1 crystallise 50k, withdraw £12570 tax free allowance + 12.5k (25% tax free) leaving 24930 in your SIPP. Next year repeat crystallising 50k from your uncrystalised pot, 24930 gets added to your crystallised pot and so on for 10:years until your state pension kicks in when you start withdrawing from the crystallised amount which will all be taxable but you’ll be getting your state pension.
Okay, this is an area that I need to understand better! You can crystallise amounts every year taking out the 25% tax free plus the £12570 allowance without withdrawing the whole crystallised amount from your SIPP.
Eg 500k pot, year 1 crystallise 50k, withdraw £12570 tax free allowance + 12.5k (25% tax free) leaving 24930 in your SIPP. Next year repeat crystallising 50k from your uncrystalised pot, 24930 gets added to your crystallised pot and so on for 10:years until your state pension kicks in when you start withdrawing from the crystallised amount which will all be taxable but you’ll be getting your state pension.
I’m not sure I understand the concept of crystallisation. Is crystallisation simply a way of tracking which funds you’ve already had your tax-free lump sum (“TFLS”) for, and the uncrystallised funds are the amount for which you haven’t yet claimed a TFLS?
And if I understand correctly, I think what you’re saying is this:
If you have a £500,000 pot, you could crystallise it all on day one and receive £125,000 TFLS.
OR
You could spread the crystallisation over a longer period, and because the whole remaining pot continues to grow during that period, you will actually end up crystallising more than £500,000 and therefore receive more than £125,000 TFLS in total over the years.
Is that correct?
Dr Mike Oxgreen said:
Mazinbrum said:
A big consideration is maximising your tax free withdrawals.
You can crystallise amounts every year taking out the 25% tax free plus the £12570 allowance without withdrawing the whole crystallised amount from your SIPP.
Eg 500k pot, year 1 crystallise 50k, withdraw £12570 tax free allowance + 12.5k (25% tax free) leaving 24930 in your SIPP. Next year repeat crystallising 50k from your uncrystalised pot, 24930 gets added to your crystallised pot and so on for 10:years until your state pension kicks in when you start withdrawing from the crystallised amount which will all be taxable but you’ll be getting your state pension.
Okay, this is an area that I need to understand better! You can crystallise amounts every year taking out the 25% tax free plus the £12570 allowance without withdrawing the whole crystallised amount from your SIPP.
Eg 500k pot, year 1 crystallise 50k, withdraw £12570 tax free allowance + 12.5k (25% tax free) leaving 24930 in your SIPP. Next year repeat crystallising 50k from your uncrystalised pot, 24930 gets added to your crystallised pot and so on for 10:years until your state pension kicks in when you start withdrawing from the crystallised amount which will all be taxable but you’ll be getting your state pension.
I’m not sure I understand the concept of crystallisation. Is crystallisation simply a way of tracking which funds you’ve already had your tax-free lump sum (“TFLS”) for, and the uncrystallised funds are the amount for which you haven’t yet claimed a TFLS?
And if I understand correctly, I think what you’re saying is this:
If you have a £500,000 pot, you could crystallise it all on day one and receive £125,000 TFLS.
OR
You could spread the crystallisation over a longer period, and because the whole remaining pot continues to grow during that period, you will actually end up crystallising more than £500,000 and therefore receive more than £125,000 TFLS in total over the years.
Is that correct?
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