Withdrawal Rate

[tjh290633]

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.

If you have a reliable crystal ball, then tell us what will happen in the future. That the future is not necessarily a guide to the past, or even vice versa , does not mean that past experience is invalid.

Where is Mystic Meg when you need her?

TJH

[Lootman]

I've never yet regretted a bit of deferred gratification. .

At what age does that cease to apply?

If you were on your deathbed, with a million in the bank, and having deferred all the fun and experiences you might have had, would you still maintain that approach was justified?

[James]

I've never yet regretted a bit of deferred gratification. .

At what age does that cease to apply?

If you were on your deathbed, with a million in the bank, and having deferred all the fun and experiences you might have had, would you still maintain that approach was justified?

Hell, yes. "Dealer, one million on red and spin the wheel. Feeling lucky, grandkids?"

[davidm]

First post on the board so be gentle. I am somewhat confused about withdrawal rates as a way of thinking about whether my retirement pot is large enough. From the literature I've read the US SWR is 4% and the UK SWR is 3-3.25%. However, other countries have even lower SWRs (Japan is < 1%).

Questions:
1. I'm early 40s so could be looking at a retirement of potentially 60+ years. Some say the SWR is valid forever, others for 30y. Who is correct?
2. Does the analysis typically exclude fees, taxes etc?
3. The inflation adjustment (CPI/RPI) adjusts for cost of living increases. But what about the fact that the standard of living generally improves? I don't want to lock myself into a standard of living for 2017 when it's 2067 etc (conversely imagine being locked into 1957 living standard now). Do people adjust their SWR lower to take account of this issue? Also is CPI a valid metric if service price inflation (say care home costs) might be a big ticket item?
4. If globalization continues, wouldn't we expect some sort of convergence of SWRs i.e if people can get much better real returns in US over Japan, aren't capital flows eventually going to erode that? Does that argue for using an average global SWR?

I've tried using the Flexible Retirement planner (can't post link) to get a feel for what pot I might want (I've also used cfiresim). Using the following parameters: retirement age 45, longevity 100, inflation 3%, inflation vol 3%, tax rate 30%, asset returns 6%, asset return vol 10% then I find that even an withdrawal rate of 2% means my success rate is only 79%. That's a real rate assumption of 3%. With a 4% real rate it goes up to 92%. To allow for a 3% withdrawal rate I need real rates to be around 6% to get above 90% success.

It isn't the average end result which is the issue (often the average portfolio ends up worth more than at the start). It's the sequence risk that's the problem. A bad string of early returns and there is no way back. In that sense it's not the real rate that's driving the success rate but the asset return vol assumption. If I lower asset return vol then higher success rates can be achieved with lower real rates. However at 10% return vol doesn't seem high for a equity heavy portfolio.

Frankly I'm rather confused/depressed. My analysis seems to imply that even an SWR of 2% might be risky. Help I'm never going to retire!

[tjh290633]

If I were you, I would just concentrate on building a flow of dividend income, which you can reinvest. It is far too early to think about withdrawal rates. Provided that you have sufficient dividend income when you retire, they are academic.

TJH

[toofast2live]

No, not if your income can fluctuate (down) in certain years. If you cannot afford to set aside a reserve then best to go for an I&G IT like CTY. They may not shoot the lights out but do deliver a rising income ( or have done for forty years or more).

Note that these ITs do not always increase income in line with RPI, hence the talk of RPI linked SWR separate from dividend discussion.

[greygymsock]

First post on the board so be gentle. I am somewhat confused about withdrawal rates as a way of thinking about whether my retirement pot is large enough. From the literature I've read the US SWR is 4% and the UK SWR is 3-3.25%. However, other countries have even lower SWRs (Japan is < 1%).

Questions:
1. I'm early 40s so could be looking at a retirement of potentially 60+ years. Some say the SWR is valid forever, others for 30y. Who is correct?

you have to check the small print of each planner you're using. the results may not be very different for 30y and 60y, because a lot of the successes at 30y have a higher 30y-figure than starting figure, and so have a good chance of surviving the next 30y, too. but of course there will be some failures in those next 30y.

2. Does the analysis typically exclude fees, taxes etc?

i'd expect to input that when using a planner.

3. The inflation adjustment (CPI/RPI) adjusts for cost of living increases. But what about the fact that the standard of living generally improves? I don't want to lock myself into a standard of living for 2017 when it's 2067 etc (conversely imagine being locked into 1957 living standard now). Do people adjust their SWR lower to take account of this issue? Also is CPI a valid metric if service price inflation (say care home costs) might be a big ticket item?

tricky 1. though it may be a smaller factor than measuring inflation correctly, given that CPI and RPI differ by about 1% a year. perhaps many older people don't bother with some of the new/improved products/services that come out, but that is less valid if you're FIRE-ing in your 40s. i would certainly want more margin for error, with such early retirement.

are care home fees going to be covered by your spending plans in the same way? spending patterns would change dramatically on entering a care home. and you might plan to pay for it by selling your home (and perhaps buying an immediate-needs care annuity).

4. If globalization continues, wouldn't we expect some sort of convergence of SWRs i.e if people can get much better real returns in US over Japan, aren't capital flows eventually going to erode that? Does that argue for using an average global SWR?

i agree. i don't really understand why people say there are different SWRs for different countries. that seems to be based on the assumption that the top/middle/bottom-performing stock markets of the last 100 years will continue to be top/middle/bottom-performing respectively. i would say: different markets can perform very differently, but we don't know which will do better in the future, so diversify your equity investments globally, and then you will get something like the average SWR.

it's not very clear what that average SWR is. we only have 100 or so years data for most stock markets, which only gives about 4 non-overlapping 30-year periods (or 2 non-overlapping 60-year periods!). that is very little to go on.

I've tried using the Flexible Retirement planner (can't post link) to get a feel for what pot I might want (I've also used cfiresim). Using the following parameters: retirement age 45, longevity 100, inflation 3%, inflation vol 3%, tax rate 30%, asset returns 6%, asset return vol 10% then I find that even an withdrawal rate of 2% means my success rate is only 79%. That's a real rate assumption of 3%. With a 4% real rate it goes up to 92%. To allow for a 3% withdrawal rate I need real rates to be around 6% to get above 90% success.

that 30% tax rate is very high. after paying 30% tax on 6% returns, you have 4.2% net. after 3% inflation, that is 1.2% net real return. which would explain the discouraging results.

it's unlikely you'd pay 30% tax on investment returns in the UK. investment returns are taxed much more lightly than earnings.

leaving aside taking income from pensions for now (since you can't do that yet), hopefully you are putting as much a possible into S&S ISAs, on which there is no tax.

for unwrapped investments, when you are not earning anything, if you can organize your investment gains to comprise £17,000 in interest, £5,000 in dividends, and £11,1000 in realized capital gains, than there is no tax to pay - that's on your first £33,100 in returns. and if you can organize the next £20,000 or so to be more dividends, you only pay 7.5% tax on that, which leaves you paying £1,500 tax on returns north of £50,000, which is about 3%. and if you can take all returns over that first £50,000 or so as capital gains, then you pay 20% tax on them.

so i'd suggest reducing your tax figure to something more realistic

It isn't the average end result which is the issue (often the average portfolio ends up worth more than at the start). It's the sequence risk that's the problem. A bad string of early returns and there is no way back. In that sense it's not the real rate that's driving the success rate but the asset return vol assumption. If I lower asset return vol then higher success rates can be achieved with lower real rates. However at 10% return vol doesn't seem high for a equity heavy portfolio.

10% volatility sounds in the right ballpark for 2/3 equities, 1/3 bonds. all equities might be 15% or so. (these figures are just a vague idea.)

3% real return (before tax) might be fair for a mixed-asset portfolio.

Frankly I'm rather confused/depressed. My analysis seems to imply that even an SWR of 2% might be risky. Help I'm never going to retire!

mainly, change your tax rate assumption.

but also note that the SWR calculations are based on an inflexible spending plan: always increase it with inflation. if you can be flexible - i.e. if investments start out badly, either cut spending, or earn some more money after all, or take in a lodger - then you can be less cautious with the initial withdrawal rate.

[DeBriefed]

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.

The sequence of returns thing is important (though survivable: I always take comfort from Retired Syd on this point - if you're not aware of her blog it is well worth a look and she talks about retiring just before a market crash here for example, with a few links to interesting earlier posts): http://retiredsyd.typepad.com/retiremen ... arket.html

My best guess is that for "super-early" retirement the biggest risk is not stock-market returns disappointing but "other stuff" - and the last year should have taught us just how quickly "other stuff" that once seemed impossible (or at least highly implausible) can become reality. I hope to retire (or largely retire) in the next 5 years, in my mid 40s, and the biggest concern I have is that in potentially 50ish years of retired life I could easily live through 10+ years of a government that decides a wealth tax (or huge unearned income tax) is a good idea, or some kind of social unrest that makes being a "young" retired person with money in the bank an unpopular/unsustainable position. That does push me towards a lower SWR (at least as one scenario in my spreadsheet, so I can check it would be liveable, if not comfortable). It also makes me keen to make sure I retain at least some skills and contacts that would allow me to get back into work (not necessarily well paid, but avoiding the soul-destroying) later if I need to.

[mickeypops]

I'm about 16 months away from "FIRE" (well, we've reached the FI "number" but it will only be a couple of years "RE.")

We are lucky enough to have DB pensions that will pay all the bills comfortably. For our other investments I'm planning on withdrawing the natural yield from a selection of Domestic and International equity-focused ITs, plus a smattering of fixed interest, property and infrastructure ITs. I'm getting an average yield just over 4.5% I don't plan for us to touch the capital.

I'm hoping for a pretty reliable income stream that keeps up with inflation, and so am avoiding any Withdrawal Rate decisions, hopefully.

[saechunu]

My best guess is that for "super-early" retirement the biggest risk is not stock-market returns disappointing but "other stuff" - and the last year should have taught us just how quickly "other stuff" that once seemed impossible (or at least highly implausible) can become reality. I hope to retire (or largely retire) in the next 5 years, in my mid 40s, and the biggest concern I have is that in potentially 50ish years of retired life I could easily live through 10+ years of a government that decides a wealth tax (or huge unearned income tax) is a good idea, or some kind of social unrest that makes being a "young" retired person with money in the bank an unpopular/unsustainable position. That does push me towards a lower SWR (at least as one scenario in my spreadsheet, so I can check it would be liveable, if not comfortable). It also makes me keen to make sure I retain at least some skills and contacts that would allow me to get back into work (not necessarily well paid, but avoiding the soul-destroying) later if I need to.

I would agree with that.

1. Use tools like cfiresim to model a range of realistic scenarios, particularly the impact of very adverse conditions during initial drawdown which can prove very damaging. Consider variable spending strategies which can alleviate this adversity such as described in jamesd's MSE posts that greygymsock linked to.

2. Recognise that while reality is likely to be much better than the historically worst case outcomes of the early 70s, they could be even worse. This sort of planning is not about obtaining certainties but finding risk levels that are acceptable.

3. Indeed, the outcome could be so much worse (capital confiscations, some form of social collapse, as some other countries have experienced) that for most people no amount of realistically achievable level of capital would help. As you indicate, one answer to extreme long tail risk scenarios is to consider wider issues than just the money that can be accumulated, such as your own human capital, so that you have fitness, skills, personal networks, etc to call upon if needed. These attributes will probably lead to a richer life regardless of what politics or markets serve up, and so unlike doomers stashing beans in their bunkers, make good sense anyhow!

With the very lengthy retirement periods being considered, one of the few thing we can be certain of is lots of change: pensions, ISAs, tax, politics, the economy and markets will all change. Any plans formulated now may have to be adjusted from time to time in response. Of course this is the same for everyone, early retiree or not, but as you suggest an early retiree probably has less 'safety in numbers' protection than other groups from unfavourable changes and so could be more vulnerable to them. Keeping life options open in order to mitigate these risks sounds like a sensible non-financial aspect of planning for people to consider.

[Lootman]

Look at ISA allowance wordings and there are indications that the chancellor could sooner or later apply taxes to dividends, leaving just capital gains tax exempt. Or maybe worse.

What "wordings" is that? I've never seen a reference to any intent to tax dividends within an ISA, if that is what you are saying.

Doesn't mean it can't happen, of course. Only that I'm not aware it has been signalled, nor would it be probably.

[PinkDalek]

IIRC Osborne in 2015 budget said something to the effect "ISA dividends continue to remain tax free". The mere highlighting of that was suggestive that ISA capital gains and dividend income were being looked at as separate and that there was scope for potential future changes. Perhaps when there are enough ISA millionaires to be a big enough cherry to pick.

I can't find your something like quote but the Summer 2015 Budget, introducing the changes to dividend tax, included (my bold):

"Alongside further cuts to corporation tax rates for all businesses, the government will reform and simplify the system of dividend taxation, while maintaining the extensive tax reliefs for investments held in ISAs and pensions."

https://www.gov.uk/government/publicati ... udget-2015

[Daytona]

What drawdown rate (i.e. % of pension pot) do people think is sustainable.

Have a look at the large university endowment funds as they, by necessity, have spent considerable efforts on the issue.

The Oxford Funds Report 2015 -

...there is a specific distribution policy to
distribute 4.25% of the average of the past 20 quarters’
NAV, subject to a cap of 10% increase and a floor of
the past year’s distribution. The formula has the benefit
of providing a more predictable stream of income.

http://ouem.co.uk/wp-content/uploads/20 ... Report.pdf

[hiriskpaul]

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.

By far the most sensible posting I have seen on this thread. I would rec it, but obviously cannot at present.

People should be on guard against overconfident and logically flawed claims of the sort "I have been following this strategy for X years and it has worked very well for me, so will for you in the future." The truth is that there is no strategy that is guaranteed to work in future, despite what many on these boards imply, and the only totally safe withdrawal rate is zero.

To get back to the original posting. Age 57, good health, so 33 years would get you to 90. Well my Father is over 90 and still doing fine apart from his eyesight and hearing and is not receiving any care. So there is longevity risk, but I think 33 years is in the right ballpark for the purposes of estimating a drawdown rate. If you could invest at the rate of inflation with zero volatility, then the drawdown rate would be 3.0% (100%/33). I would hope that a widely diversified 50-50 portfolio would be able to deliver at least inflation after any taxes with reasonably low volatility, provided costs are kept low.

There have certainly been periods when a 50-50 portfolio would not have matched inflation for extended periods, for example mid 60s to mid 70s your portfolio would likely have lost money in real terms even if you withdrew nothing at all and that is before you paid any taxes on returns. Getting the crystal ball out, it seems to me that there is a reasonable risk that we may be about to enter yet another period of high inflation. Governments around the world have been following inflationary policies for several years now and Trump/UK Gov appear to want to up the game. So far the policies have at best averted deflation, but if inflation does take off it may be very hard to control and if so will likely be very bad for asset prices once again. So if it was me, I would start off prudently, go for 3% and review each year. "Life" will overtake the best laid plans anyway, altering your spending needs/desires, the size of your portfolio and much else, so no point in being too rigid. As you get older, you can increase your withdrawal rate. For example in 10 years time you might think in terms of a 25 year future withdrawal period, so could increase to 4.0% (100%/25).

You have not mentioned any pensions, including the state pension. Once you consider these, then that will alter your drawdown rate. Unless you are very prudent and want to ignore pensions, this means you should be able to afford a higher drawdown rate initially, dropping back when you start receiving pension income.

We are aiming to spend much less than 3% over the next few years, but that is because we anticipate having to help the kids out with housing and we have planned some expensive splurges. Another way of looking at this is we are planning to withdraw much more than 3%!

[Eboli]

What seems to be missing from this series of posts is - and I can't put this any better - is "Live whilst you can!'. Your income expectations are very likely to differ as you get older. As one wag put it, travel to the ends of the Earth in your 60s, then to the world's mundane in your 70s and to Europe in your 80s. It's UK thereafter. I bet a lot of retirees spend most on holidays in the first few years and (as I have) had a thought that I can only do long haul in comfort. Better travel first/business long haul whilst you can travel at all otherwise lose it forever. The real problem with any x% withdrawal rate is that it fails on the two most important aspects of retirement: (i) travelling in comfort whilst you can travel; (2) paying privately for operations that reduce pain later - knees, hips &c. So for many, the income requirements fluctuate in extremes - fast after first retirement then a slowing down then a need for large sums for private health then much lower. So any 'standard rate' has unrealistic expectations.

Of course how you factor this in is relevant to the size of the pot. Why hold shy of knee replacements if £10K to Jaipur first + private hospital is such a great financial trauma that you ignore it in your plans? So 4% to a pot of £100K is a very different scenario, Pace, firecalc to a pot of £1m+ . The individual dynamics are far more important than theory.

Eb.

[hiriskpaul]

Just to illustrate why volatility and sequence of returns are so important in drawdown, I have calculated that a 50/50 UK stock market/gilts portfolio would have had an annualised real total return of 5.79% between the end of 1985 and end of 2015 (source is Barclays equity/gilts study). That would mean that withdrawing £5.79 per £100 investment after each year would have left £100 at the end of 2015 if the volatility had been zero. But because of the fortunate sequence of returns, £5.79 drawdown would actually have left £168.57 at the end of 2015. Reversing the order of the gains though would only have left £17.85 at the end, despite the fact that the total rate of return would have been the same. A few more years withdrawals would result in a wipeout.

Doing the same exercise, but with 100% equities, would have delivered a very similar total return rate of 5.70%, but more extreme differences in real drawdown. With the correct order, the final amount would have been £188.50, but with the gains in the reverse order, the money would have run out in 2012.

Increased volatility in drawdown results in an increased risk of runing out of money.

[Lootman]

What seems to be missing from this series of posts is - and I can't put this any better - is "Live whilst you can!'.

Yes, there's a tendency to see this question as primarily a mathematical problem. Perhaps it is a curse of our educational system that we tend to deconstruct questions in a left-brained way, believing that if only we can get the perfect spreadsheet, simulation or equation, then the correct answer will be spat out. Except of course, as you note, there is no correct answer.

There are so many personal factors that I really don't see this as a maths problem at all. A crude number like the oft-cited 4% rule is about as deep as I get into that. A lot depends on other issues like:

1) How close is your family and community? Do you have children who would care for you? The quality of your relationship with your immediately family is probably worth a few hundred thousand. I don't ever want to lean on them but I know they will be there if I need them. Those who are not so lucky probably need more money, so they can pay strangers.

2) What is your attitude towards risk? Some people will work too long or spend too little, just to remove the last 1% probability of running out of funds. But to me the bigger risk is not doing things that I want to do, while I am still fit and healthy enough to do them. Put another way, the quality of my life matters more than the quantity of it, and I can accept some uncertainty.

3) Do you feel lucky? Buy an annuity and you could die the next day. Be frugal and you might die rich with nobody to leave it to. To my mind, living a long time is a reward in itself. So I bet I won't live a long time, and spend what I want when I feel like it.

4) Do you own a home and factor the value of it into your sums? I think one should. Anyone owning a decent house in London and has paid off their mortgage can probably afford to retire regardless, because if money gets tight you can always sell it and move somewhere cheaper.

I could go on, but the point I'm really making is that people focus too much of formulae when the real determining factors are human and highly personal.

[hiriskpaul]

Just to illustrate why volatility and sequence of returns are so important in drawdown, I have calculated that a 50/50 UK stock market/gilts portfolio would have had an annualised real total return of 5.79% between the end of 1985 and end of 2015 (source is Barclays equity/gilts study). That would mean that withdrawing £5.79 per £100 investment after each year would have left £100 at the end of 2015 if the volatility had been zero. But because of the fortunate sequence of returns, £5.79 drawdown would actually have left £168.57 at the end of 2015. Reversing the order of the gains though would only have left £17.85 at the end, despite the fact that the total rate of return would have been the same. A few more years withdrawals would result in a wipeout.

Doing the same exercise, but with 100% equities, would have delivered a very similar total return rate of 5.70%, but more extreme differences in real drawdown. With the correct order, the final amount would have been £188.50, but with the gains in the reverse order, the money would have run out in 2012.

Increased volatility in drawdown results in an increased risk of running out of money.

One method to reduce sequence of returns risk is to start with lower amounts of stock. For instance for a 2% SWR, drop 40% into bonds and draw those down over 20 years, leaving the remainder 60% in stock to accumulate for the 20 years before needing to be drawn upon.

A more recent problem however is negative real yields from the likes of index linked gilts. That aside, if you start with 40% in bonds, 60% in stocks, draw those bonds down 2%/year for 20 years to exhaustion, assuming stocks grow at 3% real then you'll have averaged of the order 70/30 stock/bonds after 10 years, 80/20 after 20 years, 90/10 after 40 years. Broadly comparing in reward to had you held one of those stock/bond weightings more consistently over the same period, but having reduced early years sequence of returns risk (when the sequence of returns risk is generally the most risky).

Pretty comfortable to have perhaps £25K/year 'income' requirement, £500K initially in inflation pacing bonds to cover that for 20 years, alongside perhaps £750K in stock accumulation/growth. Has the added benefit that increasing stock further into retirement, leaves a more appropriate portfolio for younger heirs.

Another method that can be applied to reduce sequence of return risk is to withdraw a fixed percentage of portfolio value each year. 40 years initial target/horizon, draw 1/40th of the portfolio value. 1/39 the next year, 1/38 the next ...etc. That does however mean that income is more variable and you might have to reign in spending in some years, potentially by a significant amount (30% or more perhaps).

A major factor however is politics. Instead of securing the population, providing decent health care, pensions, the means for investors to save relatively safely for their retirement etc. more typically all of those are being raided/depleted/removed (pension pots raided, open borders, withdrawal of index linked savings certificates and index linked pension schemes etc.). MP's are doing a lousy job, totally missing their purpose/objectives.

If you cut down to a 2% withdrawal rate then any manner of strategies would work. I suspect for most people, 2% is not going to deliver the lifestyle they are hoping for and if rigidly followed will likely end up with too big a legacy. Unless the state confiscates it!

Going from a 5.79% rate of withdrawal over the 30 years to end 2015 (what a 50/50 equity/gilt fund returned) down to a 4% rate of withdrawal would have improved safety enormously. At the end of 2015 that would have left £284 (in 1985 pounds) for every £100 invested. Even with the sequence of returns reversed, the final amount would have been £180. 100% equities would have resulted in a slightly higher maximum of £293, but a worse (but still very acceptable) minimum of £145.

The problem with partial annuitisation/indexation is that the price paid for certainty means giving up on likely higher than inflation growth in the part used to annuitise. For example 40% in annuities or index linked, which paces inflation with no volatility and 60% in equities with dividends reinvested and a 4% drawdown rate would mean buying a new annuity every 10 years. If that had been done over the 1985-2015 period, the end portfolio value would have been £184. Reverse the sequence of returns however and the final amount would only have been £36. So in reverse order, a much worse result than either 50/50 equity/gilts or 100% equity.

Over the last 30 years any combination of equities and gilts, coupled with a 4% drawdown rate would have worked brilliantly, due to a high 5.7%+ real rate of return, a very favourable sequence of returns and inflation moving from high to low. The problem we have now is that we don't know what the next 30 years is going to be like. Good returns from equities and another favourable sequence of returns are I suppose possible again (anyone's guess really), but I cannot see inflation going much lower with Government attitudes the way they are, so we will not have the tailwind that has delivered such strong returns from bonds.

After giving this some thought we decided just to stay invested and treat each year as it comes. Start with around a 2% rate of withdrawal, excluding exceptionals, and react to what Life throws our way. With any luck we will find we are being overly prudent and can adjust higher or more likely, introduce more "exceptionals".

[davidm]

Thanks to everybody who responded to my first post, I very much appreciate the comments.

I would just concentrate on building a flow of dividend income, which you can reinvest. It is far too early to think about withdrawal rates. Provided that you have sufficient dividend income when you retire, they are academic.

I agree it would be preferable to live off passive income from dividends and not touch the capital. At this point we spend around £60k/annum (two adults+2children) plus another £20k on school fees. This will rise to around £40k for school fees/uni fees for the next 15 years or so. Thereafter, I would hope £60k/annum (in today's terms) would provide for an ok retirement. So near-term I need to generate £80-100k of post tax investment income (which is a lot when the S&P yield is 2% and FTSE 3.75%). Hence I'm seeing the need to draw on capital to some extent but clearly that exacerbates my sequence of return risk.

are care home fees going to be covered by your spending plans in the same way? spending patterns would change dramatically on entering a care home. and you might plan to pay for it by selling your home (and perhaps buying an immediate-needs care annuity).

My concern re:care home fees is actually focused on having to pay for my parents. I'm an only child so their care falls to me. They have no assets except a small house and care home fees would eat it's value within 2 years. My biggest concern financially is caught by a pincer movement on one side by school fees/uni fees for my 2 children and on the other by care home costs for both my parents.

it's unlikely you'd pay 30% tax on investment returns in the UK. investment returns are taxed much more lightly than earnings. leaving aside taking income from pensions for now (since you can't do that yet), hopefully you are putting as much a possible into S&S ISAs, on which there is no tax.

I also agree that my tax assumption at 30% is too high. I do worry that, at some point, NIC is added to BR income tax (i.e BR tax ends up at 30%+) but it's also poor tax planning. Until I had children in 2010, I focused solely on earning money rather than thinking about investing it. I didn't bother with ISAs, SIPPs etc, I just stacked it up in deposit accounts and paid off my mortgage. End result is that our ISAs are only £250k, my wife's SIPP £250k (she doesn't work anymore) and my SIPP £850k (I took fixed protection 2012 to protect a £1.5mm LTA). This leaves an uncomfortably large £2.3m in taxable accounts. Nonetheless, 30% tax is probably still too high.

My feeling from what some others posters have said is that the key for real comfort in retirement is a DB pension. I always knew I should have become a civil servant!

[JMN2]

Interesting thread, especially since I will be in a SIPP drawdown in a couple of years time, and might be in an ISA drawdown even before that. So I have been using that 4% in a spreadsheet and have played with all kinds of subscription and withdrawal permutations just to get familiar with the numbers and scenarios. My spreadsheet has columns for ISA and SIPP values, cash in, cash out, row for each year to show how balance changes over time given rate of return (say 4%).

On the whole the feeling I have is relief. I have no interest in a new car every 3 years, expensive holidays, buying stuff, buyng expensive services. I have no children. No wife. No debt. My hobbies are running, walking, reading, cask ale, local history. I like to take inexpensive city breaks for a bit of beer and food. Bulk of my outgoings will be council tax, utility bills, keeping my car running, some food and beer. I don't have to think about leaving someone an inheritance. What is very important to me is my financial independence, total independence - so my health has to go before the money runs out.