Working out your withdrawal rate in retirement

[vand]

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 That 'pot' is withdrawn at 8% (or 10% including divis) so might last the 10 years, or longer or shorter, but that is easily monitored on an excel sheet.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

... and I'm going to upset you by telling you that natural yield is absolutely no defence against poor conditions where equities struggle in general. Dividends get cut, shareholders get diluted, and dividends payouts are by no means guaranteed to keep up with persistently high inflation

[Spet0789]

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?

To give you a good idea, just work out how much capital you need at a 3% SWR and then just add 15% (the extra spend of 10x1% and 10x0.5%). That will be more than good enough as an estimate given all the other uncertainties.

[SoBo65]

My approach is slightly different, I have assumed a withdrawal rate of around 4.8% from aged 60 -75% increasing by assumed CPI of 3.5%, then from 75 onwards, in real terms, 50% of the starting annual amount withdrawn. This assumes that big discretionary items cease, long haul travel, two cars, benefits of downsizing in terms of expenses, but not capital upside, plus state pensions from 67 on the income side.

[1nvest]

4% SWR is the common guideline, accumulating 25 times anticipated yearly spending. i.e. historic measures that suggest drawing down 4% of the initial portfolio value, where that £££ amount is uplifted by inflation each year, tended to cover 30 years, saw a 65 year old retiree through to age 95 life expectancy, in the worst case ending with £0 remaining, but more often left a considerable residual value.

I'm inclined to lower that to 3.33%, 30 years return of your inflation adjusted money via yearly instalments. But that entails having to save up more before retiring, 33x yearly spending rather than 25x

For better prospects, diversify. Don't just rely on dividends or a single factor, have income sourced from multiple assets. Owning a home avoids having to find/pay rent to others and doesn't matter if rents soar or collapse. Pension income especially if inflation linked is comparable to a bond/annuity. Some income from dividends, some from interest, some via profit taking (SWR). Each of those might wax and wane but collectively be smoother/better than relying upon just a single source such as dividends alone. Dividends have in the past massively collapsed, declined to being below 25% of prior levels and stayed down for decades, its unwise to assume such a bad historic case might not be repeated.

Such a diversified choice along with a conservative rate such as 3.33% historically had a very high success rate and was more inclined to end 30 years with inflation adjusted start date wealth or more still being available at the end of 30 years.

Primarily SWR is just a start date guide. Thereafter no one really draws the mathematical model of that progression, they just draw/spend what's actually needed. There are no real guarantees, just guidelines. If for instance a partner goes down with dementia requiring nursing, then prior planned budgets/spending get totally blown out of the water when you have to additionally fund upwards of £1250/week in care home/nursing costs.

For safety the best is to simply have way more-than-enough, but for many that isn't a realistic option. It's a failing in our system. Before the state used to guarantee fixed rates of real return that could reliably be planned to. Big money however has taken that away, leaving people with much more uncertainty/variability such that individuals have to aspire to save/accumulate more for any degree of security.

AI should rightfully be for the benefit of all, but once again is more inclined to be a benefit to a few, liability for many. Better would be for a common credit system, a modest income for all, where health issues were also collectively insured, and where the state provided a safe means to put savings aside for a assured and reasonable real rate of return, say 2% real come what may. However our MP's don't work for the people, only for the big-money that bribes them to introduce policies that benefit the big-money, circumstances under which yields uncertainty for many.

Much will become evident quite quickly following retirement. If within the first few years your portfolio value has taken a big-hit, then you'll have to reconsider things. For others however and after the first few years the portfolio will often be doing OK/well, such that a former 3.33% might reflect perhaps just 2.5% of the ongoing portfolio value, in which case you've pretty much hit a home-run. A good time to retiree is after largish declines. A riskier time to retiree is at new-highs, that may subsequently turn out to have been a peak.

[GrahamPlatt]

I see that TJH has liked/rec'd your post, …

Interesting. How can you see that as TJH’s rec? I can’t. Recs seem to be unattributed as far as I can see.
So go on, how’d you do it?

[1nvest]

I see that TJH has liked/rec'd your post, …

Interesting. How can you see that as TJH’s rec? I can’t. Recs seem to be unattributed as far as I can see.
So go on, how’d you do it?

Wondered how long it might take for someone to ask.

Tricks of the trade. A quick hack and I see that you last thanked viewtopic.php?p=593192#p593192
Don't you use a separate system to do your online banking, I do, dedicated for that purpose alone, not used for anything else that otherwise might catch a nasty virus at any time that remains buried/hidden, a separate dedicated hardwired (not wifi) system is better security than your existing setup/use.
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Seriously ....

Code: Select all















A bit of deduction. Thought it might have been Terry thanking Dod so viewed Terry's profile and in the bottom left you can list whom they thanked and it links to the post that was thanked. Most recent being the first in the list.


[Hariseldon58]

You can set an SWR but things happen…..

I retired in late 2007 when I was 49, my plan was a 4% SWR, largely natural yield, an almost entirely equity portfolio, by March 2009 I was down close on 50%….

I changed my investment approach !

It worked out.

[sizzors]

You can set an SWR but things happen…..

I retired in late 2007 when I was 49, my plan was a 4% SWR, largely natural yield, an almost entirely equity portfolio, by March 2009 I was down close on 50%….

I changed my investment approach !

It worked out.

Same here i would love to know how you changed your investment approach.i changed all mine into investment trusts, think City of London has increased dividend payout for 56 or so years and i thought that'll do me.i'm not greedy don't need to be the best investor in the world just need to do ok and have enough income to live off with no more risk than the market.

[xxd09]

Having a plan does not insulate you from life,s happenings
Things occur and the stockmarket as a human construct is as susceptible as any other system
By all means have a plan -in fact it’s essential but keep on your toes at all times because as you no doubt have noticed stockmarket variability is constant
I would liken it to engaging in combat-you have a plan but once battle is joined the unforeseen circumstances occur and you had better be ready for them -or you’re dead!
As a 77 year old 20 years retired survivor-so far my personal SWR is set but subject to occasional change!
xxd09

[JohnW]

don't need to be the best investor in the world just need to do ok and have enough income to live off with no more risk than the market

One takes ‘the market risk’ by owning the market in capitalisation weighting. You get the returns of the market, however large or small.

i changed all mine into investment trusts, think City of London’

Those trusts hold only a subset of the market if they don’t track cap weighted indexes. This means they must be carrying more than market risk since the subset offers the possibility of better or worse returns than the market, ie more extreme returns, which means more risk. N’est pas?

[Hariseldon58]

You can set an SWR but things happen…..

I retired in late 2007 when I was 49, my plan was a 4% SWR, largely natural yield, an almost entirely equity portfolio, by March 2009 I was down close on 50%….

I changed my investment approach !

It worked out.

Same here i would love to know how you changed your investment approach.i changed all mine into investment trusts, think City of London has increased dividend payout for 56 or so years and i thought that'll do me.i'm not greedy don't need to be the best investor in the world just need to do ok and have enough income to live off with no more risk than the market.

My response to the crisis was to drop my HYP, I moved into some ITs that had large discounts. I moved more towards a total return approach and over the next couple of years started towards a more passive global ETF approach.

Periodically I have held a wide selection of Investment Trusts on a tactical basis but my core holdings are Developed World index funds today, no active management at present. Bonds are more attractive now than they have been for years now, and presently hold a variety of TIPs indexes, linkers including some direct holdings in index linked gilts.

I understand the comfort factor of living off natural yield, the logic of a proxy value tilt but why limit your investments to a subset of the market where companies have no better use for capital than return it to shareholders….companies that borrow on the one hand and then pay dividends because shareholders expect it….

City of London for example does provide consistent, increasing dividend payments and has done so for decades. Compare it to the FTSE index on a total return basis over a long period of time and it’s very similar, compare it to a world index and City of London has been very pedestrian.

By disregarding the portfolio yield I have a grown an equity portion that provides a yield of around 1.7%, that could provide a comfortable living standard. In addition there is a fixed income portfolio ( largely inflation protected ) that could provide sufficient funds to live off for 15 years, if we hit a very protracted bear market, that’s a comfortable position to be in. ( there is a direct holding in an industrial building as well)

Oddly the present yield as a % of the whole portfolio is 3%, that would exceed our spending. The portfolio yield is not a consideration in the portfolio design whatsoever, so it’s just a statistic.

The aim has been growth, the source of funds for spending is not important, money is fungible.

It’s comfortable to have a plan to spend X% per year, the reality of an equity portfolio is annual volatility that is a multiple of your yearly income, portfolio values go up and down a lot most years….

My initial plan in 2007 for a 4% withdrawal each year was naive, by 2009 I had a choice of changing my investment style of yield for a growth approach and now I can live with an equity pot and a bond pot. The alternative was looking for a job !!! (I have no company pension income until the state pension kicks in)

My style would not work for those who don’t want to touch the capital and spend only the dividends because it’s ‘safe’

My concern for those investors is that the approach has worked in the same way that a Turkey lives it life, well looked after, fed every day, the historic record is perfect, until one day I late December …

[TahiPanasDua]

My style would not work for those who don’t want to touch the capital and spend only the dividends because it’s ‘safe’

"safety" is may not be the only consideration. Everyone's circumstances are, of course, different

I, and others, may have few options other than to live off natural yield. I am 78 and have to consider my wife who has little knowledge of or interest in investment. If I fall under the proverbial bus before she does, I have have to ensure that she can cope with the admin. Dividend payments popping regularly into the savings account are a simple solution.

I have taught her how to do the annual tax return.

We have no old age pension and only a miniscule civil service pension of £5,500 a rear.

TP2

[xxd09]

Would an annuity be useful here for your wife?
xxd09

[TahiPanasDua]

Thanks xxdo9,

definitely an annuity would be even simpler.

However, there are 2 thoughts stopping me from doing that.

First, as you know, the entire nest egg in the annuity disappears on her demise and presumably in only a few years time given our current decrepitude. That seems like a pile of money being donated overnight to an insurance company. (my outrageous inherent meanness comes to the fore here)

Secondly, I have 2 sons whose lives would be greatly enhanced by the inheritance. Even allowing for IHT, there should still be enough to buy them each a much-needed house and a bit over. Why can't I give them some cash now to minimise IHT? I would but there are current familial problems which suggest that might be not such a good idea at present. As I said in the original post, everyone's circumstances are different.

TP2

[xxd09]

Might be a compromise to annuitise enough of your pot for you to feel that your wife has enough secure income to survive your demise (she is after all your primary concern) and the rest of your monies can be kept separate and used as required
xxd09

[scrumpyjack]

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.

Paul

I agree there is no such thing as a safe withdrawal rate, but an annuity is not safe either unless it is index linked. In 2022 inflation reached over 11%. It doesn't take many years for a nominal income to have its purchasing power obliterated, as we who remember the 1970s know.

Dividends from strong companies, IMO, have a good chance in the long run of at least matching inflation.

There is no risk free option other than an index linked annuity, but I prefer to take the risk of investing in strong companies. (Generally that is not the HYP candidates that are popular here)

[Charlottesquare]

Has anyone considered what withdrawal rate from say a SIPP is worthwhile if factoring in possible charges on same if death post age 75, my view has always been to wait till I stop working (regain my basic rate band) then loot the pension from age 66 to age 75, use what we need as we go (we have other pensions) and recycle excess cash into ISAs each year, I expect I can manage our estate re IHT but know if do not do this the kids will eventually face hefty charges re the SIPP.

Accordingly I think looking at optimum rates and looming future charges one probably has to look at where the funds currently are and what the terminal taxes will likely be when determining how much to withdraw each year, certainly one size does not fit all.