Time Horizon/Retirement Duration For Planning Purposes

[AWOL]

Hi,

Apologies for my usual verbose ramblings, they are neurodevelopmental in source! When modelling SWR/retirement finances what is the most sensible way to model retirement duration? For example is 30 years a good call if, based on nation and life expectancy data one has a 50% chance of living say 24 years or would the 24 years be sensible. I am in my mid 50s. My modelling includes (with tools that permit) supplemental cash flows so extending too far actually improves things due to pension income.

Here is probably unnecessary detail for the original question. I am modelling :

1. combined view (this is the simpler bit) which produces a sustainable drawdown amount flat across all assets
2. tax free with depletion (as I don't wish to outlive my tax free cash)
3. taxable income without depletion which must do all the preservation to leave money for dependents.

I will give some example withdrawal rates for the sake of discussion:

1. 3% targeting 50% residual value as a floor level but hoping for closer to 90+%
2. 4% tax free to depletion
3. 2% taxable targeting getting an overall residual value in line with 1.

Clearly 2 and 3 combined are an attempt at a granular 1.

My thoughts on the retirement duration (which is ultimately unknowable) are:
1. Once in the late 70s I am probably able to bear a higher tax burden/lower net income as I will probably have more decrepitude limiting me (I already have some manageable with medication!)
2. An overall horizon of 30 years is probably okay for combined view. It's a little on the optimistic side but the chance of significantly exceeding life expectancy is significant even if improbable. The residual value/bequest target gives a significant margin for error as does choosing an historic 0% failure rate.
3. 20-25 years is probably fine for running down tax free cash hedged by the fact that there will probably be residual cash although monitoring across time may result in gifting or extra consumption that negates any upside.

How do you chaps/ladies select time horizons for modelling? What principles guide you?

Thank you,
AWOL

[monabri]

How do you chaps/ladies select time horizons for modelling? What principles guide you?

Thank you,
AWOL

90 years old. No one in my family has reached that age...ever! (Not even close )

However, the mother in law reached 91 (her sister is now 93 and other family members have been long lived , so there's a fair chance Mrs M will live that long so I have to plan for this).

[Newroad]

Hi AWOL.

I'm not sure if I understand the question, but just in case, here goes my theory

I understand the optimal equity allocation for maximising returns to be 78%
I understand the optimal equity allocation for minimising risk to be 48%
I assume the maximum time for risk exposure to be at birth, i.e. age 0
I assume a death age of 100 - not that I expect to get there (a bit like Monabri above) - but that leaves some headroom to be wrong

So, wrapping the above together, I use the age of each family member to work out their target current equity holding, which reduces by 0.3% per year.

You don't have to agree with the first two numbers, though they do have a source, as long as you understand the process. If you reckon 100% equities is best at birth, that 60% equities is the most risk averse you'll ever want to be and you'll only live to 80, the maths is equally simply - start at 100% equities and reduce by 0.5% per year.

Regards, Newroad

[scrumpyjack]

A few observations: When you get into your late eighties, you really don't want the worry of having depleted your 'pot' and wondering if it will last. IMO it is worth being prudent earlier on rather than running that risk.

Inflation can and probably will stuff up all your plans.

As you and your wife get older, care costs can make a mockery of your financial planning. I am spending well over £1,000 per week on help with care for my wife who has Alzheimer's.

[Dod101]

A few observations: When you get into your late eighties, you really don't want the worry of having depleted your 'pot' and wondering if it will last. IMO it is worth being prudent earlier on rather than running that risk.

Inflation can and probably will stuff up all your plans.

As you and your wife get older, care costs can make a mockery of your financial planning. I am spending well over £1,000 per week on help with care for my wife who has Alzheimer's.

Being a generation older than the OP, I agree with that. In my area, a decent care home is going to cost at least £60,000 per year and that can certainly make a hole in any planning. Frankly, I do not plan for what may be left for the next generation but as long as I do not have ten years in a care home, they should be OK.

Whatever modelling and planning you do it will not be in the least accurate so I would not worry too much about it.

Dod

[kempiejon]

A few observations: When you get into your late eighties, you really don't want the worry of having depleted your 'pot' and wondering if it will last. IMO it is worth being prudent earlier on rather than running that risk.

Inflation can and probably will stuff up all your plans.

As you and your wife get older, care costs can make a mockery of your financial planning. I am spending well over £1,000 per week on help with care for my wife who has Alzheimer's.

If you don't make it to your late 80s you've not had time to enjoy the hard earned, saved investeds. IMO it is better to enjoy it while you can.
Be sensible and make some contingency but if I had to budget for £1k per week on care and add in my day to day living expenses I'd be working into my 70s and scared about spending anything on myself now while I'm at work.

I think at 50 it's impossible to know what you'll need after your 60th, 70th 80th birthdays. All forecasting 20+ years out seems pointless. Make a plan for the next decade and keep it under review. To be hones I expect the planet will have burnt, flooded or we'll have been overrun with refugees or antibiotic resistant diseases if those with targeted drones and genetically engineered weapons haven't got us first. Perhaps the aliens will land or free energy will revolutionise things.
I make a plan to live to 100 but do not expect to. I expect to spend more between 55 and 70 than I will after my late 60s.

[Dod101]

A few observations: When you get into your late eighties, you really don't want the worry of having depleted your 'pot' and wondering if it will last. IMO it is worth being prudent earlier on rather than running that risk.

Inflation can and probably will stuff up all your plans.

As you and your wife get older, care costs can make a mockery of your financial planning. I am spending well over £1,000 per week on help with care for my wife who has Alzheimer's.

If you don't make it to your late 80s you've not had time to enjoy the hard earned, saved investeds. IMO it is better to enjoy it while you can.
Be sensible and make some contingency but if I had to budget for £1k per week on care and add in my day to day living expenses I'd be working into my 70s and scared about spending anything on myself now while I'm at work.

I think at 50 it's impossible to know what you'll need after your 60th, 70th 80th birthdays. All forecasting 20+ years out seems pointless. Make a plan for the next decade and keep it under review. To be hones I expect the planet will have burnt, flooded or we'll have been overrun with refugees or antibiotic resistant diseases if those with targeted drones and genetically engineered weapons haven't got us first. Perhaps the aliens will land or free energy will revolutionise things.
I make a plan to live to 100 but do not expect to. I expect to spend more between 55 and 70 than I will after my late 60s.

That sounds a very sensible summary of how you should look at things, except that these days, many people are perfectly capable of long haul overseas travel up to (and sometimes beyond) their 70s so it is perfectly possible that you will spend as much up to around 80 than you will in earlier years. After that maybe a bit less.

Dod

[Urbandreamer]

That sounds a very sensible summary of how you should look at things, except that these days, many people are perfectly capable of long haul overseas travel up to (and sometimes beyond) their 70s so it is perfectly possible that you will spend as much up to around 80 than you will in earlier years. After that maybe a bit less.

Dod

Indeed so. While I am unlikely to indulge in long haul overseas travel, my new freedom means that you may see me among the wrinklies of a morning at the local indoor ski slope. I am certainly spending more in retirement than I did when working.

As for how long? Well "average" life expectancy for a man your age is 84, but 1/4 live beyond 93.
https://www.ons.gov.uk/peoplepopulation ... 2019-06-07

Financially I'm planning on surviving at least to 100.

I did have a great aunt who died a few days short of 105 as a means to avoid the Mayor. She was fed up with him turning up on her birthday uninvited!

Ps, we had a bit of a laugh when she took out a five year warranty on a fridge at age 95. Shows what we knew.

[flyer61]

Interesting discussion.

We recently paid for a professional look at our cash flows in retirement.

The base line used was both the Mrs and I make a 100!

Taxation in retirement was an issue identified when you are trying to extract a significant monthly pull. So making sure you have your personal allowances BOTH sorted with income along with as much tax free as you can get helps. Probably a bit to spare is not a bad place to be.

As to IHT, Vegas here we come!

[tjh290633]

As someone who has got to 90, with no obvious end point in sight, I would suggest that you consider infinity. In other words, build up a more than adequate income flow from various sources, including state and occupational pensions.

From time to time exceptional expenditure will crop up, the roof in my case, and you may find a considerable increase in outgoings if you or your other half goes into care. That's when having the capital intact will be useful, as it's not cheap.

TJH

[xxd09]

A bit down the road now at 78( wife same age) so what we have done having retired at 57 and 59 respectively
Knew what we were spending from record keeping(Quicken 2004-still using it) while we were working
We spent the same in retirement-travel was the new big item
Income came from a Teachers Pension(hers) and an investment portfolio-SIPPs and ISAs( his and hers)
All sources of income have risen slowly and steadily over time-our retirement expenditure has stayed much the same -albeit it started at a high level ie the same as when we were working
Carehome fees only possible problem on the horizon but kids all financially OK at the moment so no inheritance monies required
So far so good!
xxd09

[Steveam]

I don’t think it’s possible to insure against longevity.

I know there are various get arounds but could I go to a bookie and say here’s £100k bet that I’ll make 90 (say).

Best wishes, Steve

[AJC5001]

I don’t think it’s possible to insure against longevity.

Of course it is - that is what an annuity does. They pay out as long as you stay alive.

You might not like the premium you have to pay, though, even though returns have improved with increasing interest rates.

Adrian

[Urbandreamer]

I don’t think it’s possible to insure against longevity.

Of course it is - that is what an annuity does. They pay out as long as you stay alive.

You might not like the premium you have to pay, though, even though returns have improved with increasing interest rates.

Adrian

There are a lot of books on the subject.
From "Beyond the 4% rule" which I can recommend to "The 100 year life", which I do not recommend.

The first deals with how to manage money to finance things. The second argues that it's not possible and that you should accept that you will have to work until you start pushing up daisies.

[Wuffle]

Working longer as an insurance against longevity clearly works.
Billions of poor people the world over prove it.

For the early retirers, an inconvenient truth is that either you were worth what you were briefly paid and so withdrawing your efforts leaves the economy with less talent, or you ripped off the economy and have high tailed it off into the sunset. Both sub optimal for the economy, which you subsequently rely on to finance the duration of the non activity.

W.

[scrumpyjack]

I don’t think it’s possible to insure against longevity.

I know there are various get arounds but could I go to a bookie and say here’s £100k bet that I’ll make 90 (say).

Best wishes, Steve

Yes you could. My brother, a solicitor, had a client who was 90 and fit as a fiddle. Her daughter in law was a convinced she would make it to 100, so she bet £100 at odds of 125 to 1 on that eventuality.

My brother went to his client's 100th birthday party. One of the other guests was the man from William Hill with a cheque for £12,500

You wouldn't get those odds these days!

[Steveam]

I don’t think it’s possible to insure against longevity.

Of course it is - that is what an annuity does. They pay out as long as you stay alive.

You might not like the premium you have to pay, though, even though returns have improved with increasing interest rates.

Adrian

Thanks for your reply. I think a deferred annuity might serve the purpose.

You say “They pay out as long as you stay alive” that’s not what I was getting at - I was suggesting something which pays out if you live to, say, 90.

Best wishes, Steve

[JohnB]

I'd plan to have enough for 100, and plenty for 90, less if poor genes and lifestyle, at a 90% investment risk level. You can always pull in your horns if you live longer or investments underperform. Planning to have plenty until 100 no matter what the markets do means you will need an eye-watering sum now and almost certainly have another eye-watering sum in your final estate.

One More Year to reduce risk that little bit is the enemy of enjoyable retirement, as you can't eliminate all risk. And why people think others are obliged to work longer 'for the sake of the country' puzzles me.

[James]

Working longer as an insurance against longevity clearly works.
Billions of poor people the world over prove it.

For the early retirers, an inconvenient truth is that either you were worth what you were briefly paid and so withdrawing your efforts leaves the economy with less talent, or you ripped off the economy and have high tailed it off into the sunset. Both sub optimal for the economy, which you subsequently rely on to finance the duration of the non activity.

W.

Good thing that the whole basis of capitalism is enlightened self-interest, in which optimising for the individual is superior to the common good.
I'm content for the economy to carry on without me as either of these options suggest I maximised the return to the sole shareholder in the enterprise that sold my skills, labour and time to the highest bidder.

[scrumpyjack]

Working longer as an insurance against longevity clearly works.
Billions of poor people the world over prove it.

For the early retirers, an inconvenient truth is that either you were worth what you were briefly paid and so withdrawing your efforts leaves the economy with less talent, or you ripped off the economy and have high tailed it off into the sunset. Both sub optimal for the economy, which you subsequently rely on to finance the duration of the non activity.

W.

I have primarily invested the fruits of my toils into overseas investments, so in fact my retirement will not be on the shoulders of UK workers but a substantial benefit for our economy from overseas economic activity.

My planning is based on living til 150. OK that is taking it a bit far but why not