Working out your withdrawal rate in retirement

[dingdong]

Hi....

Looking at FIRE calcs, setting a SWR obviously assumes you'd spend the same amount (plus inflation) each year of retirement.

In my case I guess I'm keen to maximise spending up front (on basis that the older you get the less most people want to do, and I want to maximise life experiences whilst younger). I'm also not massively interested in leaving inheritances (on basis I'd rather give the money away whilst I'm around to see people enjoy it!)

So I guess I was thinking of a model something along these sort of lines for the withdrawal rate (although numbers currently picked from thin air)

50's: 4%
60's: 3.5%
70's: 3%
80's: Add an annuity with balance to cover unexpected long life.

I haven't yet found a calculator that has that that sort of graduated approach but was wondering how others are managing to ensure they don't end up with too much money that they could have spent earlier in their retirement?

[Dod101]

Hi....

Looking at FIRE calcs, setting a SWR obviously assumes you'd spend the same amount (plus inflation) each year of retirement.

In my case I guess I'm keen to maximise spending up front (on basis that the older you get the less most people want to do, and I want to maximise life experiences whilst younger). I'm also not massively interested in leaving inheritances (on basis I'd rather give the money away whilst I'm around to see people enjoy it!)

So I guess I was thinking of a model something along these sort of lines for the withdrawal rate (although numbers currently picked from thin air)

50's: 4%
60's: 3.5%
70's: 3%
80's: Add an annuity with balance to cover unexpected long life.

I haven't yet found a calculator that has that that sort of graduated approach but was wondering how others are managing to ensure they don't end up with too much money that they could have spent earlier in their retirement?

Depending on how you are investing I should think you could expect to see an increase in your invested funds each decade, so that sort of withdrawal rate might well maintain the actual amount withdrawn, depending of course on what happens about inflation. But being in the older category, my experience is that your assumption about spending less as you get older just does not happen. I spend just about as much on travelling for instance as I ever did, maintenance costs for my house are no less and rather than do the messy jobs around the place myself I now tend to pay somebody to do them for me. It is nice to be able to take others out for a meal and pay for it myself, and so on. Given the way house prices have gone, I think for anyone wo owns a house it will be difficult not to have 'too much money' on death but the trouble is we will not know until it is too late.

Dod

[tjh290633]

So I guess I was thinking of a model something along these sort of lines for the withdrawal rate (although numbers currently picked from thin air)

50's: 4%
60's: 3.5%
70's: 3%
80's: Add an annuity with balance to cover unexpected long life.

If you think that you will spend less in retirement as time goes by, you will be sadly disillusioned.

Aim for a high and growing income, ideally somewhat in advance of inflation. Currently between 5% and 6% is quite easily achieved,and that should allow you to reinvest some of the income, which will tend to increase the amount of dividends.

Shun anything which does not offer the prospect of a growing income. even if there are prospects of capital growth.

TJH

[genou]

Hi....


I haven't yet found a calculator that has that that sort of graduated approach but was wondering how others are managing to ensure they don't end up with too much money that they could have spent earlier in their retirement?

This will get you closer to what you are after. I have no connection with them other than using the calculator for my own purposes.

https://tidewaywealth.co.uk/drawdown-calculator/

[JohnB]

https://finalytiq.co.uk/busting-myth-u- ... -spending/ has spending charts fron a study. Most people do spend less as the OP suggests, but its not universal

[Urbandreamer]

https://finalytiq.co.uk/busting-myth-u-shaped-retirement-spending/ has spending charts fron a study. Most people do spend less as the OP suggests, but its not universal

I just thought that it might be worth plugging his book "Beyond the 4% rule".
In my opinion, it's well worth reading.

https://www.amazon.co.uk/Beyond-4-Rule- ... 181&sr=8-1

[JohnW]

What you’re seeking is ‘don’t run out of money’ and ‘don’t leave too much’. Pre-determined rates as in your example just can’t cut it if you have a portfolio whose value jumps around a lot. Were it in duration matched bonds it could work, otherwise you need a variable withdrawal rate approach. Here’s a well thought out one: https://www.bogleheads.org/wiki/Variabl ... withdrawal

[Dod101]

What you’re seeking is ‘don’t run out of money’ and ‘don’t leave too much’. Pre-determined rates as in your example just can’t cut it if you have a portfolio whose value jumps around a lot. Were it in duration matched bonds it could work, otherwise you need a variable withdrawal rate approach. Here’s a well thought out one: https://www.bogleheads.org/wiki/Variabl ... withdrawal

I would not dream of doing that, far too complicated. I have been retired for nearly 30 years I am surprised to discover and have never bothered with withdrawal rates, although if I did, it would be around 4.5% in recent years anyway. That is roughly what my portfolio yields and I live off (with some surplus) the so called ‘natural yield’. Much easier and less hassle just to do that.The surplus I occasionally reinvest but more often give it to charity.

I almost never touch the capital.

Dod

[1nvest]

What you’re seeking is ‘don’t run out of money’ and ‘don’t leave too much’. Pre-determined rates as in your example just can’t cut it if you have a portfolio whose value jumps around a lot. Were it in duration matched bonds it could work, otherwise you need a variable withdrawal rate approach. Here’s a well thought out one: https://www.bogleheads.org/wiki/Variabl ... withdrawal

I would not dream of doing that, far too complicated. I have been retired for nearly 30 years I am surprised to discover and have never bothered with withdrawal rates, although if I did, it would be around 4.5% in recent years anyway. That is roughly what my portfolio yields and I live off (with some surplus) the so called ‘natural yield’. Much easier and less hassle just to do that.The surplus I occasionally reinvest but more often give it to charity.

I almost never touch the capital.

Dod

That's a considerable amount of capital to have passed on. Whilst its not you that is touching the capital others are.

Dividends aren't 'free', they come out of stocks bottom line. If a stock is priced to twice its book value, a £1M book-value firm having a £2M market cap, the if it pays out a 4% dividend that reduces its book-value by £40K to leave a £960K book-value, £1.92M market cap (share price), then contrast that with another £1M book-value firm that also had a 2 x book value market cap of £2M, but where it pays no dividend and instead £40K value of shares are sold to other investors, who pay 2x book-value price for those shares.

Ask Buffett about which is better - to have dividends paid out by the firm, or whether selling shares to other investors at multiples of book-value share prices ... and IIRC he detailed the benefits of the latter over the former in one of his shareholder-letters.

Maybe small in yearly terms, but over 30 years can compound to a more meaningful amount, £50K on a £1M present day portfolio value for instance.

[Dod101]

I would not dream of doing that, far too complicated. I have been retired for nearly 30 years I am surprised to discover and have never bothered with withdrawal rates, although if I did, it would be around 4.5% in recent years anyway. That is roughly what my portfolio yields and I live off (with some surplus) the so called ‘natural yield’. Much easier and less hassle just to do that.The surplus I occasionally reinvest but more often give it to charity.

I almost never touch the capital.

Dod

That's a considerable amount of capital to have passed on. Whilst its not you that is touching the capital others are.

Dividends aren't 'free', they come out of stocks bottom line. If a stock is priced to twice its book value, a £1M book-value firm having a £2M market cap, the if it pays out a 4% dividend that reduces its book-value by £40K to leave a £960K book-value, £1.92M market cap (share price), then contrast that with another £1M book-value firm that also had a 2 x book value market cap of £2M, but where it pays no dividend and instead £40K value of shares are sold to other investors, who pay 2x book-value price for those shares.

Ask Buffett about which is better - to have dividends paid out by the firm, or whether selling shares to other investors at multiples of book-value share prices ... and IIRC he detailed the benefits of the latter over the former in one of his shareholder-letters.

Maybe small in yearly terms, but over 30 years can compound to a more meaningful amount, £50K on a £1M present day portfolio value for instance.

I appreciate all that you say but it is so much easier just to take the dividends which land in my bank account regularly. And we have all the usual arguments about selling at the wrong time and so on. It suits me as I am organised and I am not going to change now. Anyway I cannot see the point in receiving a dividend 'frictionlessly' and reinvesting it and then selling some shares at a cost to raise the income I have just reinvested.

Dod

[1nvest]

That's a considerable amount of capital to have passed on. Whilst its not you that is touching the capital others are.

Dividends aren't 'free', they come out of stocks bottom line. If a stock is priced to twice its book value, a £1M book-value firm having a £2M market cap, the if it pays out a 4% dividend that reduces its book-value by £40K to leave a £960K book-value, £1.92M market cap (share price), then contrast that with another £1M book-value firm that also had a 2 x book value market cap of £2M, but where it pays no dividend and instead £40K value of shares are sold to other investors, who pay 2x book-value price for those shares.

Ask Buffett about which is better - to have dividends paid out by the firm, or whether selling shares to other investors at multiples of book-value share prices ... and IIRC he detailed the benefits of the latter over the former in one of his shareholder-letters.

Maybe small in yearly terms, but over 30 years can compound to a more meaningful amount, £50K on a £1M present day portfolio value for instance.

I appreciate all that you say but it is so much easier just to take the dividends which land in my bank account regularly. And we have all the usual arguments about selling at the wrong time and so on. It suits me as I am organised and I am not going to change now. Anyway I cannot see the point in receiving a dividend 'frictionlessly' and reinvesting it and then selling some shares at a cost to raise the income I have just reinvested.

Dod

Accumulation funds along with a monthly 'free' trade and SWR withdrawals provides a regular/reliable inflation adjusted income for me, come what may. Funds make it easier to tax harvest as well. As yearly CGT allowances are declining a increasing need to do so. Unless you're fully ISA'd/SIPP'd of course, but then that has concentration risk factors, such as being fully visible to the state and its rules policies.

A frictionless dividend can yield savings. holding for instance a distributing US stock/index that pays in US$ incurs a 1.5% FX cost within a ISA, and another 1.5% to reinvest. Whereas a fund rolls/accumulates the dividends at far lower cost. VUAG for instance that trades in £ so no FX for purchase/sale either. If instead dividend paying/distributing stocks were held in a ISA then by the time you factor in multiple FX and US dividend withholding taxes ...etc. then you'd mostly be investing for the benefit of others.

But as ever, whatever works best for oneself is the best choice. I see that TJH has liked/rec'd your post, as he operates along similar lines to yourself. If it works for you and you're set up that way then fine, generally there is no sole right/wrong way.

[Dod101]

I appreciate all that you say but it is so much easier just to take the dividends which land in my bank account regularly. And we have all the usual arguments about selling at the wrong time and so on. It suits me as I am organised and I am not going to change now. Anyway I cannot see the point in receiving a dividend 'frictionlessly' and reinvesting it and then selling some shares at a cost to raise the income I have just reinvested.

Dod

Accumulation funds along with a monthly 'free' trade and SWR withdrawals provides a regular/reliable inflation adjusted income for me, come what may. Funds make it easier to tax harvest as well. As yearly CGT allowances are declining a increasing need to do so. Unless you're fully ISA'd/SIPP'd of course, but then that has concentration risk factors, such as being fully visible to the state and its rules policies.

A frictionless dividend can yield savings. holding for instance a distributing US stock/index that pays in US$ incurs a 1.5% FX cost within a ISA, and another 1.5% to reinvest. Whereas a fund rolls/accumulates the dividends at far lower cost. VUAG for instance that trades in £ so no FX for purchase/sale either. If instead dividend paying/distributing stocks were held in a ISA then by the time you factor in multiple FX and US dividend withholding taxes ...etc. then you'd mostly be investing for the benefit of others.

But as ever, whatever works best for oneself is the best choice. I see that TJH has liked/rec'd your post, as he operates along similar lines to yourself. If it works for you and you're set up that way then fine, generally there is no sole right/wrong way.

I do not hold many funds for various reasons and all but a couple of my holdings are in an ISA or a SIPP. I pay virtually no tax. It all works very well for me I must say.

Dod

[vand]

Many calculators such as (my go-to) cfiresim will allow you to factor in social security coming into the equation at a certain point in time.. which is effectively a step change in your required drawdown rate.

It makes a difference, but maybe not as large as some people think, depending how much income it will be replacing. You are still quite vulnerable to sequence risk at the start of the drawdown period.


The ERN SWR series covers factoring in social security and everything else you can imagine..

[DrFfybes]

I've been watching this thread, even started to reply a few times, and I'm going to upset some people by saying that there is no such thing a a SWR.

It doesn't exist, if you just want a safe, secure income that isn't going to run out before you die, buy an annuity. For some people having a small secure annuity for basic income will work from a 'low stress' point of view.

We have DB schemes to cover basic needs, so want a top up between now and SP age, and a lesser top up once SP arrives. I don't use percentages, I use pounds, as that is what I spend.

Our plan is (or was until MrsF kept on working and we got an inheritance) 'pots'.

Pot 1 in our case is our DB pension, but for you it could be a HYP that generates a basic level of income from natural yield.
Pot 2 is the discretionary spend....

Say, I want £10kpa for 12 years until SP. I ringfence £100k in a Vanguard or similar account and autosell units each month to generate my desired income. I can choose (say) their Lifestrategy 100% equities fund (and/or VHYL), take the circa £200 annual divi and sell £650 of my initial holding every month to get my target. That 'pot' is withdrawn at 8% (or 10% including divis) so might last the 10 years, or longer or shorter, but that is easily monitored on an excel sheet. Add in a 'cash reserve' of 12 month's spend and it means if stocks drop I can reduce the withdrawal and if they rise then fine. The point being that pot is all I have to look at for that decade, the rest is your base income provision pot, and another discretionary pot that remains untouched and invested for growth.

Paul

[JohnW]

I’ll bite, before you upset too many people.
I’m 70 years young, I need £10/year (indexed) for the next 50 years. I buy linkers with zero yield, worth £500. My SWR is 2%. Does that work for SWR?

[DrFfybes]

I’ll bite, before you upset too many people.
I’m 70 years young, I need £10/year (indexed) for the next 50 years. I buy linkers with zero yield, worth £500. My SWR is 2%. Does that work for SWR?

No.

It's not really an 'investment' SWR, is it?, that's more akin to my 'pot' that you just wind down to zero over a fixed period of time, but without the risk/excitement/benefits of equities investments. And if you used that £500 to buy an annuity at age 70 you'd get a lot more than a tenner a year out of it, even a 55 year old can buy an RPI linked annuity paying 3% with no end date, at age 70 that rises to over 5%.

The idea of working out a Sustainable Withdrawal Rate is that you can take a higher income but don't run out of money, or are very unlikely to in your anticipated lifetime, in your scenario someone aged 50 using your method is guaranteed to run out of money aged 100, so it isn't sustainable.

Paul

[JohnW]

Not an ‘investment SWR’? Are you changing the definitions now? The Trinity study, where are this started, tested a mix of stocks and bonds, including all stocks and all bonds. I don’t think we can say bonds aren’t an investment.
At 105 years old, I’m over the risk and excitement of equities.
An annuity might give a better payout, but is an insurance company as safe a bet as a government honouring its bonds? I’m thinking Equitable Life. More with the annuity, but as much ‘S’?
If I’d wanted my example to start at 50 years I would have upped the principal or reduced the SWR.
Where you’ve got me is any SWR, were they to exist, is trying to maximise the ‘R’; but the ‘S’ is always under threat then.

[DrFfybes]

Not an ‘investment SWR’? Are you changing the definitions now? The Trinity study, where are this started, tested a mix of stocks and bonds, including all stocks and all bonds. I don’t think we can say bonds aren’t an investment.

Ok, it is an investment, I'll grant you that.
But your plan is not Sustainable - it always has an end date, unless you withdraw at zero percent it is guaranteed to run out of money.

Paul

[Wuffle]

The thing that remains unsaid about SWR is that you will end up with an increasing amount of money (on average).
This suits most people because the need to be 'in control' is all consuming, though again unsaid.
I expect it to be furiously denied here.
Some other stuff goes unsaid as well. Dying being the main one.

From the outside ( no kids, or money) it looks like a blinding plan to bung your kids any amount of money to sort out their tax situation. Mainly around bunging them enough to sidestep HRT with pension contributions (because tax actually leaves the family unit, pensions don't) with little regard to your personal pot size. I mean so long as you don't actually run out, what difference does it make (apart from the 'control' thing obviously). SWR then bequeathing (potentially taxed) while HRT is leaving the family unit looks flawed compared to strategic distribution and a reducing pot.

W.

[hiriskpaul]

Not an ‘investment SWR’? Are you changing the definitions now? The Trinity study, where are this started, tested a mix of stocks and bonds, including all stocks and all bonds. I don’t think we can say bonds aren’t an investment.

Ok, it is an investment, I'll grant you that.
But your plan is not Sustainable - it always has an end date, unless you withdraw at zero percent it is guaranteed to run out of money.

Paul

You are mischaracterising SWRs here. No-one ever said that SWRs should be sustainable forever, that would be a perpetual withdrawal rate. SWRs always have a time period associated with them. JohnW's ladder of linkers is a perfect example. Sustainable for a period of 50 years. in the original Trident study which came up with the 4% rule, the sustainable period was 30 years. I agree there is no such thing as sustainable in the sense that there will always be a risk of running out of money (even linkers could default) and that risk is typically stated in backtests. So you might have a 40 year SWR of 3.5% with 50/50 equity/bond mix having a failure rate of 2%, or whatever.