Withdrawal Rate

[billG]

Hi,

I am 57 with a drawdown balanced portfolio 50-50. Presently in good health.
For planning purposes assume I will need income for the next 33 years.

What drawdown rate (i.e. % of pension pot) do people think is sustainable.
I am aware of the 4% rule but given I am younger than most retirees and current market condition may make 4% to aggressive.
Thoughts?

Thanks in advance.
BG

[Urbandreamer]

I personally think that 4% is a bit rich. I'm doing most of my calculations and thinking using 3.6% as my rate.

Have a play with this calculator.
http://www.firecalc.com/

It's in $'s but should give you a rough feel for things. Don't forget to include the state pension in your calculations or it will look terminally depressing.

[tramrider]

Perhaps take 80% of your dividend income in the first year, to allow a safety margin to reinvest and grow your dividends. As the safety amount grows, you can take a little more.

Tramrider

[tjh290633]

Your trouble is that word "balanced".

What you need is dividend income, ideally growing faster than inflation, and if that gives you a current yield of 4% or more, then you are home and dry.

TJH

[Dod1010]

You can safely take the dividends from the SIPP and if that does not at least equal 4% then do a bit of rejigging. If you do not touch the capital I suspect that over say a 5 year period it will at least keep pace with inflation.

4% should not be too rich, even at your tender age .

Dod

[greygymsock]

the 4% rule is now thought to be a bit optimistic, but note how it's defined: it means you start by spending 4% of the initial value of your capital per year, and increase your expenditure by inflation each year, regardless of what has happened to the current value of your capital or what income it has produced. the aim is to have a low probability of completely running out of capital after 30 years (or however long).

but nobody is likely to be so rigid about their expenditure. in practice, you would cut back expenditure if your capital was being dangerously depleted. also, if your capital continued to grow after sticking to your spending plan, you would at some point consider it safe to spend more than planned.

there are some more sophisticated theories about variable withdrawal rates. e.g. - not real figures, but to give the general idea - perhaps you could start by spending 6% of initial capital, but with a minimum expenditure level of 3%; then if investment returns were poor in the early years, you might need to cut back spending; but if they go well, you could increase it. see links here - http://forums.moneysavingexpert.com/sho ... ?t=5466114 - i haven't looked at this properly; i just think the general idea sounds plausible.

a sensible minimum expenditure level depends on what other, more secure, income you have. e.g. if state pension, defined-benefit pensions, etc, cover most of your essential expenditure, then your minimum expenditure from the drawdown pension can be lower. and a lower minimum expenditure level can allow you to *increase* the level of your initial expenditure level (at least, according to these theories that i haven't looked at properly ).

if your overall aim is to spend it all within your lifetime, then you probably *will* want to buy an annuity eventually, but not until you're much older, i.e. well into your 70s. you don't have to decide on your overall aims entirely now, of course. e.g. you can keep the annuity option in mind in case your capital becomes a bit depleted and you want a sure way to maintain expenditure at an acceptable level. but if the investment gods smile on you, you might decide not to spend the lot, and to leave some over for your heirs.

simply spending the dividends is not reliable. dividends can fall in nominal terms, and more in real terms. all-in-equities is only a valid approach for people who are definitely *not* spending it all within their lifetime. i saw 1 suggestion that it was reasonable for people who are only spending 1% of the capital per year. if you might be spending all, or most, of your capital, then IMHO a balanced portfolio does make sense.

[Dod1010]

With respect to greygymsock, do not get bogged down by theories. 4% or so works fine and FredBloggs is I have no doubt nearer the mark. (That means of course that he agrees with me!)

I can well understand that at the beginning of the process it may all seem a bit daunting but I would not worry as things will settle down.

Just sit back, relax and enjoy but at the same time, your portfolio will, like a garden, need some TLC from time to time. If you want complete freedom from that then an annuity is I think the only answer.

Dod

[kempiejon]

Here's a web calculator that lets us try some numbers. It shows me I might be on track.
https://financialmentor.com/calculator/ ... calculator

[argoal]

A very reasonable alternative to the 4% rule withdrawal rate is the Bogleheads variable withdrawal rate.

The basic idea is that you work out how much longer you need your pot to last and withdraw an increasing percentage as the number of years you have left reduce.

You can use a pretty conservative assumption to start with, estimating that you will live to 95 say, and then adjust it each year.

All you have to do each year is to enter the value of your funds as at the start of the year, adjust your longevity assumption and your equity/bond mix, and it spits out a percentage of the fund that you can safely withdraw.

The downside is that the income is more variable than the 4% rule, it fluctuates with market returns, but this is compensated by being more sensitive to changes in size of your fund. So if market returns are good then you get to spend more each year.

With the 4% rule you might end up with anything between 0% and 200% of your starting capital depending on the performance of the markets with income just plodding along. With the boglehead formula the fund reduces towards zero at the target ending age regardless of market performance.

https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

This type of methodology is pretty close to what I am planning to use - with a compensation to adjust for the state pension when that kicks in.

[tjh290633]

The downside is that the income is more variable than the 4% rule, it fluctuates with market returns, but this is compensated by being more sensitive to changes in size of your fund. So if market returns are good then you get to spend more each year.

With the 4% rule you might end up with anything between 0% and 200% of your starting capital depending on the performance of the markets with income just plodding along. With the boglehead formula the fund reduces towards zero at the target ending age regardless of market performance.

The upside is that, although dividends may fluctuate, they usually grow at more than the rate of inflation. Here is the record of my "income units" of my HYP, since I started in 1987 when the value of a unit was set at 100p:

Ordinary    Ordinary    RPI       Change      Change
Year to      Divs/unit   Divs/unit   Rebased   Divs/Unit   RPI   
05-Apr-88         2.87      100.00    100.00                     
05-Apr-89         2.75       95.71    112.28      -4.29%   12.28%
05-Apr-90         4.33      150.98    122.89      57.74%    9.45%
05-Apr-91         5.75      200.34    130.75      32.69%    6.39%
05-Apr-92         7.97      277.71    136.35      38.62%    4.28%
05-Apr-93         7.33      255.30    138.11      -8.07%    1.30%
05-Apr-94         6.65      231.50    141.65      -9.32%    2.56%
05-Apr-95         7.93      276.14    146.37      19.28%    3.33%
05-Apr-96         7.81      272.15    149.90      -1.44%    2.42%
05-Apr-97         8.90      310.02    153.54      13.92%    2.42%
05-Apr-98         9.35      325.60    159.72       5.02%    4.03%
05-Apr-99         8.91      310.18    162.28      -4.73%    1.60%
05-Apr-00        11.96      416.65    167.09      34.32%    2.97%
05-Apr-01        12.42      432.57    170.04       3.82%    1.76%
05-Apr-02        13.82      481.20    172.59      11.24%    1.50%
05-Apr-03        12.95      451.20    178.00      -6.24%    3.13%
05-Apr-04        12.48      434.56    182.42      -3.69%    2.48%
05-Apr-05        12.96      451.25    188.21       3.84%    3.18%
05-Apr-06        14.09      490.63    193.03       8.73%    2.56%
05-Apr-07        15.07      524.76    201.77       6.96%    4.53%
05-Apr-08        26.09      908.86    210.22      73.20%    4.19%
05-Apr-09        22.76      792.84    207.76     -12.77%   -1.17%
05-Apr-10        11.91      414.74    218.86     -47.69%    5.34%
05-Apr-11        16.71      582.13    230.26      40.36%    5.21%
05-Apr-12        18.79      654.57    238.21      12.44%    3.46%
05-Apr-13        20.89      727.68    245.09      11.17%    2.89%
05-Apr-14        21.48      748.29    250.29       2.83%    2.12%
05-Apr-15        22.40      780.31    253.44       4.28%    1.26%
05-Apr-16        22.77      793.06    256.78       1.63%    1.32%

Here I compare the dividend per unit and the RPI on the same basis. I also show the change in the tax year, which indeed shows the variability in the dividend income. There are occasional falls, and the very big fall in 2009-10, after a big rise in 2007-8, caused by several take-over bids and reinvestment into higher yield companies which then cut their dividends in the 2008 recession. Not as nasty as it might have been, if you compare the dividends with 2006-7. That level was regained in a year and it has continued to rise since.

As you can see, the dividend per unit is now over three times the level of the RPI on the same basis. What those figures do not show is the portfolio yield, which started at 2.5%, rose to 4.5% in 1991-2, fluctuated between those limits until 2008-9 when it rose to 9%, and is currently about 4.5%. The yield is relatively unimportant, it is the cash flow from dividends which matters, and that rose above 4% of the original unit value in the third year. The first year will always have a low yield because of dividend drag, and in my case I was building a PEP, so some of that persisted into the fourth year, by which time I had got to the initial desired portfolio. I didn't add any further new money until 1997-8, after which there were a further seven years of capital input. That is why I calculate on a unitised basis, to eliminate the effects of adding capital.

So unless you are very unlucky, drawing an index-linked 4% on the initial capital and reinvesting any surplus dividends in the portfolio, should be a safe approach.

TJH

[Dod1010]

People love to complicate things. My eyes glaze over when I read posts like that of 1nv35t. This is completely unnecessary. I have lived off my investments for more than 20 years. (I have not had a day's employment since 31 December 1994). Since then I have lived off my dividends plus the occasional drawdown from my SIPP, plus extracted lots of capital for a house move and then improvements to a new one. I today have much more capital than I started with and an income from dividends that is more than adequate. If conservatively invested it is not difficult to get a portfolio yield of at least 4% (hopefully tax protected in a SIPP and/or Stocks & Shares ISA)

Of course you would be entitled to ask how I have invested. To begin with not very well but I soon came to the conclusion that I needed shares that would be reasonably certain to give me an income if nothing else so I largely adopted the HYP style before I had ever heard of TMF or HYP as per pyad. It is just common sense if like me you are handed a lump sum on retirement, or at least it soon became so. High yield investing usually means a fairly conservative, defensive style of investing and that has stood me in good stead right through the 2008/9 crisis.

KISS is at least as important in investing as in most other situations.

Dod

[tjh290633]

Of course you would be entitled to ask how I have invested. To begin with not very well but I soon came to the conclusion that I needed shares that would be reasonably certain to give me an income if nothing else so I largely adopted the HYP style before I had ever heard of TMF or HYP as per pyad. It is just common sense if like me you are handed a lump sum on retirement, or at least it soon became so. High yield investing usually means a fairly conservative, defensive style of investing and that has stood me in good stead right through the 2008/9 crisis.

KISS is at least as important in investing as in most other situations.

Dod

Very much the same as me. I decided when I started the PEP in 1987 that I would concentrate on shares paying reasonable dividends and found TMF c.1999 after I had retired. It became obvious that I had more or less been following the HYP method.

Back in 1988 short term interest rates (T-Bill yields) were up at 11%. By 1990 they had risen to near 16%. Subsequently they've broadly declined down to more recent 0.5% type levels.

Consider for instance that at times you could buy inflation bonds (index linked gilts) during those years that paid 4% real (above inflation). More recently such bonds are yielding negative real yields.

As measured over that post 1987 era. Even inflation bonds might have provided that. To use that as a basis for forward time projection however is dubious at best. Possibly even tilted to the complete opposite. Consider for instance the 1960's and 70's transition from modest to high interest rates/inflation era, UK stocks gross total returns provided around 1.4% real (after inflation). Factor in higher taxes (and costs), and a basic rate taxpayer would have been lucky to see even a inflation matching total net real return. Drawing whatever 4% of the original start date amount was, uplifting that withdrawal amount by inflation each year and drawing from a investment that didn't even pace inflation would have seen the portfolio value decline at a increasing rate such that it might not even have provided adequate income for 20 years, let alone 30+ years before being totally depleted.

Yes, inflation rates have been up and down. 4.125% 2030 I-L bonds were briefly available, as I recall. Looking at http://www.dmo.gov.uk/reportView.aspx?r ... ily_Prices I see that every I-L Gilt has a negative redemption yield.

What's wrong with a 1.4% yield after inflation? I think that this is not a real reflection of what happens. Are you deducting inflation from the yield? Oh no, I see that weasel word "total" returns has crept in. We are talking about income and not "total returns".

TJH

[toofast2live]

What I don't understand about 4% SWR is this:

I have a pot of £500,000 and retire in 2009. I start taking an income of £20,000 per year index linked.

Now here I am in 2017 and my pot, having deducted all my withdrawals, is more like £900,000 thanks to the bull market.

Can I just "rebase", my retirement and declare a new withdrawal rate of 4% of £900,000, or £36,000 pa? Almost 50% higher than my £20k index linked to today. This is especially the case as I now have 8 fewer years to live.

[tjh290633]

What I don't understand about 4% SWR is this:

I have a pot of £500,000 and retire in 2009. I start taking an income of £20,000 per year index linked.

Now here I am in 2017 and my pot, having deducted all my withdrawals, is more like £900,000 thanks to the bull market.

Can I just "rebase", my retirement and declare a new withdrawal rate of 4% of £900,000, or £36,000 pa? Almost 50% higher than my £20k index linked to today. This is especially the case as I now have 8 fewer years to live.

Presumably your pot is producing a good amount of income inside your pot, probably all of which is being withdrawn in your I-L 4%, plus a little bit of capital. What is the indexation from 2009 to 2017? The RPI in April 2009 was 211.5 and the latest for December 2016 is 267.1, which is an increase of 26.3%. Now, the question is how much income is being generated now? Your pot has risen by 80%. The probability is that you are now drawing less than the income being generated inside the portfolio, in which case there is probably no reason why you should not increase your withdrawal rate to, say, 80% of the income. The balance will be reinvested inside the pot and the income will continue to rise ahead of inflation. You will have a safety cushion in the event that there is a fall in income.

TJH

[Lootman]

Can I just "rebase", my retirement and declare a new withdrawal rate of 4% of £900,000, or £36,000 pa? Almost 50% higher than my £20k index linked to today. This is especially the case as I now have 8 fewer years to live.

The probability is that you are now drawing less than the income being generated inside the portfolio, in which case there is probably no reason why you should not increase your withdrawal rate to, say, 80% of the income. The balance will be reinvested inside the pot and the income will continue to rise ahead of inflation. You will have a safety cushion in the event that there is a fall in income.

Yes, that's the crucial point I think. If his pot is 80% higher but his income needs are only 20% higher, then he can simply reinvest the surplus and remain on track.

The problem would only arise if he reacted to the 80% increase by spending 80% more. The point being that the 4% rule assumes many years above that rate of return, but also years when the return is less than that, or negative.

His point about having 8 less years to live is also important. The 4% rule is designed to be timeless. Since it is a "safe" rate of withdrawal, it should work for 400 years as well as for 40 or 4. But in practice the safe rate of withdrawal depends on the number of years you are planning for. As you age, it can be increased. If you retire very young, a lower rate might be more prudent.

If I get old enough, I may just throw caution to the wind, given that the government may take 40% of my net worth in death duties upon my expiry. It will feel like everything is on a 40% sale. Don't forget to have some fun; you've earned it.

[AJC5001]

If I get old enough, I may just throw caution to the wind, given that the government may take 40% of my net worth in death duties upon my expiry.

Only if you ignore the Inheritance Tax allowances.

IIRC, you used to tell us how you would be organising all your estate so that it went to your beneficiaries by joint holdings so that you avoided any need for probate etc. I thought you also would arrange to avoid IHT.

Adrian

[TheRIT]

People love to complicate things. My eyes glaze over when I read posts like that of 1nv35t. This is completely unnecessary. I have lived off my investments for more than 20 years. (I have not had a day's employment since 31 December 1994). ...

IMHO If you're going to live off investments alone then you need to be thinking about the worst sequence of returns not the since 1994 sequence. Of course history is no indicator of the future but it's all we have. Wade Pfau has done some work in this area. Using a UK historic data set with 50% UK equities : 50% UK Bonds and for a 30 year retirement he found the maximum withdrawal rate to not deplete your wealth was 3.05% (before investment expenses) in the first year. In subsequent years you increase by inflation. Mix it up with 50% Global Equities : 50% Global Bonds and it increases to 3.26%.

I'm going to FIRE a bit later this year at age 45. I've settled on a withdrawal rate of 2.5% + 0.25% investment expenses.

[Lootman]

IIRC, you used to tell us how you would be organising all your estate so that it went to your beneficiaries by joint holdings so that you avoided any need for probate etc. I thought you also would arrange to avoid IHT.

It's a work in progress. But of course you will know that those two aims are orthogonal. The avoidance of probate does not, ipso facto, cause one to avoid owing IHT, in theory at least. It does, however, place one's family in control of the process since they would already have the assets and would not need to jump through the usual hoops of probate.

Avoiding probate can be achieved, as you know, by a combination of gifts and putting all assets in joint names. In some cases you can designate a direct beneficiary which will also ensure that asset bypasses probate. Gifts also potentially avoid IHT if you live long enough after they are made, but avoid probate immediately.

But this is a little off-topic here. I mentioned IHT only to indicate that, at a certain age, one might relax one's prudence about being frugal and conservative towards a withdrawal rate if, at that time, IHT was still a threat.

[77ss]

Hi,

I am 57 with a drawdown balanced portfolio 50-50. Presently in good health.
For planning purposes assume I will need income for the next 33 years.

What drawdown rate (i.e. % of pension pot) do people think is sustainable.
I am aware of the 4% rule but given I am younger than most retirees and current market condition may make 4% to aggressive.
Thoughts?

Thanks in advance.
BG

'there is nothing good for a man under the sun except to eat and to drink and to be merry'

Don't spend too much time agonising over the right drawdown rate. You are in good health now - enjoy life to the hilt while you can. If, after a few years, you find your pot dwindling too rapidly you can pull your horns in then.

I would back up Dod's experience. Not as long, but I took early retirement, younger than you, some 15 years ago and now have rather more capital than I started with - despite 2 market crashes - and fully indulging my predilection for foreign travel. Of course, you may have more expensive tastes .

[saechunu]

As has already been pointed out the "this worked well for me" historic anecdotes are often of limited use to others because the specific sequence of returns experienced by those people are unlikely to be the same as those that are going to be experienced by those retiring today - simply because no such sequence ever repeats.

The highly (some might say overtly) prudent schemes being discussed (eg. in greygymsock's post) are designed to allow people to weather extremely adverse sequence of returns (massive declines in stocks + very high inflation) occurring very early into a retirement period, where such adverse conditions inflict the maximum damage on a portfolio in drawdown.

I shouldn't imagine anyone who's worked their guts out to retire in their 40s wants to find themselves forced back into work in their late 50s or early 60s because their imprudent drawdown plan unluckily coincided with terrible market and economic conditions.

If I was retiring very early I would certainly be taking a prudent initial approach. After all, if lady luck shone during those early years, spending could always be upped as that early need for extreme vigilance diminished. I've never yet regretted a bit of deferred gratification. That sounds to me like making your own luck, as opposed to the alternative of simply hoping that those early drawdown years didn't unluckily coincide with terrible conditions that result in you, now fully deskilled by your workplace absence, forced into stacking shelves or suchlike because your plan was not sufficiently robust.