Remove ads

Introducing the LemonFools Personal Finance Calculators

New Zealand Society of Actuaries doc on pension decumulation

Including Financial Independence and Retiring Early (FIRE)
bots33
Posts: 5
Joined: November 6th, 2016, 12:51 pm
Been thanked: 3 times

New Zealand Society of Actuaries doc on pension decumulation

#171470

Postby bots33 » October 4th, 2018, 6:59 pm

Hi all came across this approach to decumulation of pension savings from New Zealand - gives some different options and was intrigued by the last option around averaging down to life expectancy. I like the options around whether you want to leave an inheritance or not.

link https://actuaries.org.nz/wp-content/uploads/2015/10/NZSA-Decumulation-Rules-of-Thumb-Introduction.pdf

Alaric
Lemon Quarter
Posts: 2195
Joined: November 5th, 2016, 9:05 am
Has thanked: 4 times
Been thanked: 427 times

Re: New Zealand Society of Actuaries doc on pension decumulation

#171510

Postby Alaric » October 4th, 2018, 9:53 pm

bots33 wrote: I like the options around whether you want to leave an inheritance or not.


It's puzzling that there's no apparent mention of what you might be earning on these retirement savings. For example if you withdraw 4% increasing that drawdown every year by 2% of the drawdown amount, you never run out of assets provided you earn at least 6%

Hariseldon58
2 Lemon pips
Posts: 188
Joined: November 4th, 2016, 9:42 pm
Has thanked: 8 times
Been thanked: 79 times

Re: New Zealand Society of Actuaries doc on pension decumulation

#172886

Postby Hariseldon58 » October 10th, 2018, 9:15 pm

@Alaric

Regarding taking 4% annually and then increasing the drawdown amount by 2% each year , I tend to doubt you would need as much as a 6% growth rate to maintain the system.

I.E. start with £100 drawdown £4 , earning 6%

Year 2 start with £96 plus 6% =£101.76 drawdown £4 plus 2%=£4.08 leaving a balance of £97.64
That’s more than the prior year, your ok.

Or I am misunderstanding what you are describing?

Alaric
Lemon Quarter
Posts: 2195
Joined: November 5th, 2016, 9:05 am
Has thanked: 4 times
Been thanked: 427 times

Re: New Zealand Society of Actuaries doc on pension decumulation

#172894

Postby Alaric » October 10th, 2018, 9:42 pm

Hariseldon58 wrote:@Alaric

Regarding taking 4% annually and then increasing the drawdown amount by 2% each year , I tend to doubt you would need as much as a 6% growth rate to maintain the system.


Assume you get 4% as end year income on the start year fund and 2% as growth, so that at the end of year 1 your assets have grown to 106, or which 4 is cash and 102 asset value. Withdraw the 4 to spend, leaving assets of 102. You are 2% up on the first year, so in the second year your fund grows to 108.12 of which 4.08 is cash, 2% more than the previous year. There are variations on the theme where you don't maintain the real value of the assets which would require a lower growth rate but instead maintain the initial fund only in money terms. But if you try to take an increasing income out of a fixed fund, it's eventually going to run out.

It's one of those short cut benchmarks that you add the dividend yield to the inflation rate to get the rate of return needed to maintain a steady state.

Hariseldon58
2 Lemon pips
Posts: 188
Joined: November 4th, 2016, 9:42 pm
Has thanked: 8 times
Been thanked: 79 times

Re: New Zealand Society of Actuaries doc on pension decumulation

#172907

Postby Hariseldon58 » October 10th, 2018, 10:34 pm

@Alaric

I understand where you are coming from, this works only if you want to maintain in real terms the value of your fund, rather than concern yourself with just the income rising. ( If the 2% is your inflation estimate)

I would also imagine if you were in a drawdown situation you probably want to have your income at the beginning of the exercise, or monthly rather than at the end of the year.

The shortcut of adding the growth rate to the yield to revalue an asset is normally used to refer to a compounding asset rather than in a deaccumulation mode.

Alaric
Lemon Quarter
Posts: 2195
Joined: November 5th, 2016, 9:05 am
Has thanked: 4 times
Been thanked: 427 times

Re: New Zealand Society of Actuaries doc on pension decumulation

#172910

Postby Alaric » October 10th, 2018, 10:47 pm

Hariseldon58 wrote:I understand where you are coming from, this works only if you want to maintain in real terms the value of your fund, rather than concern yourself with just the income rising. ( If the 2% is your inflation estimate)


If you don't retain the real value of the fund, you are spending capital, giving the risk of it running out. Assume zero inflation, if you take a 4% income on a fund with a 3% return, it runs out eventually. Same if there's 2% inflation, you take 4% increasing at 2% with a 5% return and it would run out.

On the annual in arrears thing, it makes the numeric illustration easier. Think of it as modelling a decision to retire in a year's time.

Hariseldon58
2 Lemon pips
Posts: 188
Joined: November 4th, 2016, 9:42 pm
Has thanked: 8 times
Been thanked: 79 times

Re: New Zealand Society of Actuaries doc on pension decumulation

#172917

Postby Hariseldon58 » October 10th, 2018, 11:19 pm

@Alaric

With the 5% growth and 4% income rising at 2% you are going to almost make 48 years....that would be enough for me :D

The biggest problem underlying taking a retirement income is that we don't know the pattern of investment returns , the level of investment returns (unless we take a very low risk approach), the level of inflation and of course how long we need the money for.

Speaking personally for an annual income level of X, I have seen my portfolio up by 4X since April and down 2X in the last 3 weeks, it makes any form of modelling rather difficult !

As an aside I wondered what level of return was the basis of the New Zealand study ?

pbarne
Posts: 29
Joined: November 4th, 2016, 7:03 pm
Been thanked: 1 time

Re: New Zealand Society of Actuaries doc on pension decumulation

#173761

Postby pbarne » October 14th, 2018, 10:13 pm

Just a comment on the OP's interest in averaging down to life expectancy...

This intuitively seems a sound method and looks sensible in the early years
of implementation - however as you get much closer to your life expectancy the
model will suggest you take very large withdrawals as a % of your pot which
would likely be unpalatable given that there would be a 50% chance of living
longer than the average.

One method I've played with as I've thought about a withdrawal strategy of
this type is to use current life expectancy plus a decade. Others have used
the average of the longest one might expect to live (say 115) and current life
expectancy.

These have the effect of keeping in check the withdrawals as one gets
closer to the life expectancy limit.


Return to “Retirement Investing (inc FIRE)”

Who is online

Users browsing this forum: No registered users and 1 guest