Hargreaves Lansdown on £100,000 pension pot

[andyalan10]

Hi all

Has anyone else seen the source report from Hargreaves Lansdown on how long a £100,000 pension pot would last at 7/6/5% withdrawal rates.

It takes a start date of 2000 and says if you withdrew £7000pa you would now be out of money. It occurs to me that without knowing where they put the residual pot, and when in 2000 they started it's not really very useful. But I can only find a Guardian article from today. Can't even find it on www.hl.com.

My guess is they took 1/1/2000 and put the money in a mix of funds including bonds and equities.

Andy

[tjh290633]

Since 1 Jan 2000 saw the market at a high point, not to be passed for 17 years, it's not surprising. If the money had gone into trackers, a lot would have been invested in dot.com shares, soon to vanish without trace. If, instead, the money had gone into shares paying dividends, then the outcome would have been significantly different.

There will always be a withdrawal rate at which you will run out of money at some point in the future. The trick is to have sufficient dividend income that your capital withdrawal rate is low or even negative.

TJH

[toofast2live]

There are two ways of never running out of capital in the withdrawal phase. Do either or both of:

1. Only spending the natural income, i.e. Your dividends.

2. Only withdrawing a fixed % of your portfolio's end year value, each year.

From memory the hl study was 100% equity, I think.

[bungeejumper]

Agreed, 2000 was an awkward starting point for HL to have chosen because of the ensuing dotcom wipeout. The FTSE-100 has gained 9% in nominal terms since 2000, or maybe 50% if you bundle in a modest 2% dividend yield - but inflation at 59% (since 1999) would have all but wiped out the gain. By comparison, starting the comparison at the market bottom in 2008 would have given you a total return of at least 90% against an inflationary drag of only 22% (since 2008). (http://www.bankofengland.co.uk/educatio ... fault.aspx)

Actually I'd be a bit surprised if somebody as clued-up as Hargreaves' Tom McPhail would have chosen 2000 as a comparator unless he was deliberately trying to make a different point - about market fluctuations and the need for a long horizon, for example. That said, the market bottom of 2008 isn't a great comparator either because the growth since then has been exaggeratedly strong. You just can't win....

Then again, any mention of a fixed £7,000 p.a. (or whatever) is likely to lead you up the garden path anyway because it doesn't allow for the skewing effects of inflation. When figuring out how my own pension pot would pan out during drawdown, I opted to assume a real annual return rate of 2.5% for my portfolio, which ought to be achievable over the long term. And TBH, the calcs didn't look too bad.

I am lucky in that I have some fairly chunky non-pension assets to fall back on if my projections don't work out. But, as a recent entrant into the big wide world of drawdown, I have found the experience gently sobering.

O/T, but I stumbled upon this video while looking into the grievous topic of investing my stash. The inimitable Justin Urqhuart Stewart (him with the red braces) on the stupidity of being the wealthiest corpse in the graveyard. http://www.thisismoney.co.uk/video/mone ... a-fallback

BJ

[Ashfordian]

Don't we need a bit of reality behind this with ages?

They are saying you run out of money in 18 years.

If you were 50 when you started this drawdown you would be 68 now and it probably shows you started the drawdown too early and should have addedinto the pot for a few more years, or taken less each year.

However if you were 62, then you would be 80 now and is that a bad age to aim for to have drawn down your pension pot?

This takes in the view that you are spending your pot and not planning to pass it on.

[ursaminortaur]

Agreed, 2000 was an awkward starting point for HL to have chosen because of the ensuing dotcom wipeout. The FTSE-100 has gained 9% in nominal terms since 2000, or maybe 50% if you bundle in a modest 2% dividend yield - but inflation at 59% (since 1999) would have all but wiped out the gain. By comparison, starting the comparison at the market bottom in 2008 would have given you a total return of at least 90% against an inflationary drag of only 22% (since 2008). (http://www.bankofengland.co.uk/educatio ... fault.aspx)

Actually I'd be a bit surprised if somebody as clued-up as Hargreaves' Tom McPhail would have chosen 2000 as a comparator unless he was deliberately trying to make a different point - about market fluctuations and the need for a long horizon, for example. That said, the market bottom of 2008 isn't a great comparator either because the growth since then has been exaggeratedly strong. You just can't win....

Then again, any mention of a fixed £7,000 p.a. (or whatever) is likely to lead you up the garden path anyway because it doesn't allow for the skewing effects of inflation. When figuring out how my own pension pot would pan out during drawdown, I opted to assume a real annual return rate of 2.5% for my portfolio, which ought to be achievable over the long term. And TBH, the calcs didn't look too bad.

I am lucky in that I have some fairly chunky non-pension assets to fall back on if my projections don't work out. But, as a recent entrant into the big wide world of drawdown, I have found the experience gently sobering.

O/T, but I stumbled upon this video while looking into the grievous topic of investing my stash. The inimitable Justin Urqhuart Stewart (him with the red braces) on the stupidity of being the wealthiest corpse in the graveyard. http://www.thisismoney.co.uk/video/mone ... a-fallback

BJ

The standard advise for a sustainable withdrawal rate has been 4% for a 50-50 equity/bond mix to last for 30 years (where the amount withdrawn starts at 4% of your pot but then goes up each year with inflation). However this was based upon the American stock market studies conducted a few decades back. Subsequent studies suggest this should be lower say 3% for the UK. Also as Justin Urqhuart Stewart says in the video you referenced some of the old advice eg increasing your exposure to fixed-income as you age doesn't seem like good advice anymore.

There are a number of good online modelling tools available.

https://www.firecalc.com/

http://www.cfiresim.com/

http://www.flexibleretirementplanner.com/wp/

which either look at what would have happened historically to your investments at lots of starting dates or use monte carlo simulations to see what might happen. The tools can be quite sophisticated in allowing you to choose different types of spending plans, incorporating future income streams such as starting to receive future pensions or lump sums or having to make extra payments or lump sums at points in the future, modelling the effects of tax on taxable parts of your portfolio etc Though some of these features may need tweaking since the tools tend to be US based.

As Justin Urqhuart Stewart says you don't want to be the wealthiest corpse in the graveyard but, since you don't know how long you will live, you also don't want to outlive your funds. Striking the balance is difficult but tools like the above at least provide some guidance.

[bungeejumper]

As Justin Urqhuart Stewart says you don't want to be the wealthiest corpse in the graveyard but, since you don't know how long you will live, you also don't want to outlive your funds. Striking the balance is difficult but tools like the above at least provide some guidance.

Indeed. But as somebody once said, you come into this world with nothing. If you die with debts, you've made a profit on the deal.

BJ

[tjh290633]

Don't we need a bit of reality behind this with ages?

They are saying you run out of money in 18 years.

If you were 50 when you started this drawdown you would be 68 now and it probably shows you started the drawdown too early and should have addedinto the pot for a few more years, or taken less each year.

However if you were 62, then you would be 80 now and is that a bad age to aim for to have drawn down your pension pot?

This takes in the view that you are spending your pot and not planning to pass it on.

Speaking as someone in his 85th year, I can assure you that running out at 80, or any other age, would be a very bad outcome. One of the advantages of having a substantial income is that one can face the prospect of a prolonged time in care with equanimity. The more income that you have, the less you will need to draw on capital, if at all. What is more, you can pick and choose your care home to suit yourself and your family.

TJH

[Ashfordian]

Don't we need a bit of reality behind this with ages?

They are saying you run out of money in 18 years.

If you were 50 when you started this drawdown you would be 68 now and it probably shows you started the drawdown too early and should have added into the pot for a few more years, or taken less each year.

However if you were 62, then you would be 80 now and is that a bad age to aim for to have drawn down your pension pot?

This takes in the view that you are spending your pot and not planning to pass it on.

Speaking as someone in his 85th year, I can assure you that running out at 80, or any other age, would be a very bad outcome. One of the advantages of having a substantial income is that one can face the prospect of a prolonged time in care with equanimity. The more income that you have, the less you will need to draw on capital, if at all. What is more, you can pick and choose your care home to suit yourself and your family.

TJH

I would agree with you if we were talking about a pot nearer £1m in size but in this instance we are talking about £100k and to me, this is about getting the most out of the pot while you are of an age that you can make the most out of it.

[ursaminortaur]

Don't we need a bit of reality behind this with ages?

They are saying you run out of money in 18 years.

If you were 50 when you started this drawdown you would be 68 now and it probably shows you started the drawdown too early and should have added into the pot for a few more years, or taken less each year.

However if you were 62, then you would be 80 now and is that a bad age to aim for to have drawn down your pension pot?

This takes in the view that you are spending your pot and not planning to pass it on.

Speaking as someone in his 85th year, I can assure you that running out at 80, or any other age, would be a very bad outcome. One of the advantages of having a substantial income is that one can face the prospect of a prolonged time in care with equanimity. The more income that you have, the less you will need to draw on capital, if at all. What is more, you can pick and choose your care home to suit yourself and your family.

TJH

I would agree with you if we were talking about a pot nearer £1m in size but in this instance we are talking about £100k and to me, this is about getting the most out of the pot while you are of an age that you can make the most out of it.

I'd assumed that the £100k was simply an illustrative size that HL used in their report. From what I've seen a £100K fund is often used in such illustrations on drawdown or annuity purchases as it is very easy to draw conclusions from it for smaller or larger pots with very simple mathematical manipulations ie multiplication or division.

[Hariseldon58]

With regard to the asset split for a retirement pot, a portfolio invested in multiple markets is going to give more diversification than a single market.

The split between shares and bonds in these examples is often given with an increasing bond component with age. I saw an interesting article that suggested the opposite approach. More bonds early to mitigate the risk of adverse equity results in early years, the problem of the order of returns. An interesting idea.

TJHs suggestion of living off dividends is pretty good starting point for many though

[DrBunsenHoneydew]

...
I saw an interesting article that suggested the opposite approach. More bonds early to mitigate the risk of adverse equity results in early years, the problem of the order of returns. An interesting idea.

The auto-enrolment NEST pension scheme takes that approach of a very cautious portfolio for new entrants even if they are young. NEST has been criticised for taking this "over-cautious" approach.

[scrumpyjack]

As long as you have had enough money to live on comfortably, there is quite a lot to be said for ending up a wealthy corpse with a large unspent pension fund.

One does not want in one's later years to be worrying about funds running out, or even getting to anywhere near running out. That is a recipe for great anxiety in your dotage.

Also it is better to spend your other assets and save the pension fund - it gives you a reassuring cushion and a legacy for your children which is not subject to IHT (at present anyway).

Also politically pensions are 'good' whereas owning shares and receiving dividends makes you a 'filthy capitalist' and a prime target for an ultra left government. So spend the latter first!

[forlesen]

I saw an interesting article that suggested the opposite approach. More bonds early to mitigate the risk of adverse equity results in early years, the problem of the order of returns. An interesting idea.

This is something retirement researcher Wade Pfau has written about quite a bit recently, under the general description "Rising Equity Glide Path", see for example this blog post: https://retirementresearcher.com/use-ri ... etirement/

Which in turn refers to this published article:
https://www.onefpa.org/journal/Pages/Re ... 0Path.aspx

[ursaminortaur]

...
I saw an interesting article that suggested the opposite approach. More bonds early to mitigate the risk of adverse equity results in early years, the problem of the order of returns. An interesting idea.

The auto-enrolment NEST pension scheme takes that approach of a very cautious portfolio for new entrants even if they are young. NEST has been criticised for taking this "over-cautious" approach.

It is arguable that for someone starting drawdown hedging your bets against a fall in equity values during your first few years might be a good idea. Since you are drawing money out of the pension pot it would be much more difficult to recover from such an initial fall.
However it makes no sense at all for new entrants to NEST since they are contributing to the pot and any early fall will easily be recovered from over the long term. Over the long term, despite the increased risks of the pot size falling at times because of increased volatility, equities will outperform bonds and hence should be the preferred investment when investing for a long period.

[hiriskpaul]

Hi all

Has anyone else seen the source report from Hargreaves Lansdown on how long a £100,000 pension pot would last at 7/6/5% withdrawal rates.

It takes a start date of 2000 and says if you withdrew £7000pa you would now be out of money. It occurs to me that without knowing where they put the residual pot, and when in 2000 they started it's not really very useful. But I can only find a Guardian article from today. Can't even find it on http://www.hl.com.

My guess is they took 1/1/2000 and put the money in a mix of funds including bonds and equities.

Andy

Without seeing the original paper it is hard to reach any conclusion, but I checked with the MSCI World Index and gilt returns from the Barclays Equity Gilts study and this does not look right. I agree that taking £7,000 per year from an equity only portfolio tracking the MSCI World index would have run out of money in 2016, but with a gilts only portfolio there would be £70,685 left at the end of 2015 and for a 50:50 mix there would be £45,633 left.

Taking 7% fixed from year 1 though would be a fairly unusual drawdown approach and likely to fail in a lot of historical periods. With the more normal 4% rising with inflation this would have been fine (so far) even with a 100% equity portfolio, despite the poor sequence of returns. The amount left at the end of 2015 would have been £62,145 for 100% equities, £121,618 for 100% gilts and £103,028 for 50:50.

[Urbandreamer]

I'm struggling to see how advocating lower risk/lower return options to monthly saver at the start of a 40+ year investment term makes any sense at all.

The issue is that it's not about "sense" or really about long term investment returns. I too feel that a higher risk approach would do better, but I know many who fall into the economists "coward" catagre*.

These are people who wouldn't take a $100 2-1 bet at 50-50 odds. The pain of loosing $100 outweighs the joy of winning the $200. In this case it would be worse because they would be "forced" or automatically made to take the bet. An early loss could cause such people to realise that they have the choice and opt-out of the pension, which would be bad for the state and the proponenets of autoenrolment.

FWIW, I don't acept the argument that politically pensions are "good" and other forms of investment "bad". Politically pension saving by higher rate tax payers is coming in for a lot of flack and there are sugestions that such people should be effectivly taxed on their pension contributions (30% rebate as opposed to their actual tax rate).

*https://books.google.co.uk/books?id=9EJzAwAAQBAJ&pg=PT188&lpg=PT188&dq=economist+coward+bet&source=bl&ots=2Hx2kfgw1I&sig=A-c-gL1qrCJLGCmmP1596H6ZHEk&hl=en&sa=X&ved=0ahUKEwiIufKE_8TXAhUC0hoKHZceCzkQ6AEIQjAE#v=onepage&q=economist%20coward%20bet&f=false

[hiriskpaul]

Regarding the early stage pension investor, I can (just about) understand a person making a single lump sum contribution every year being wise with a safer, less volatile investment for the fist few years. However, this is not your typical model. Typically, a small investor, quite young would be far better off over a 40+ year savings period by electing for the more volatile, higher risk, higher reward investments. Buying such an investment monthly makes the most of buying more "units" when the price is down and buying fewer "units" when the prices are high. Pound cost averaging is the term, I believe. I'm struggling to see how advocating lower risk/lower return options to monthly saver at the start of a 40+ year investment term makes any sense at all. We all agree (I think) that it is the earliest contributions that over several decades of investment that do the "heavy lifting" in a defined contribution pension plan. I can't advocate the low risk low return approach to a young pension saver. In fact, "putting money where my mouth is" for both my kids in their 20's. They both have had SIPP portfolios based on higher risk investments since they were about ten years old. So far, it seems the strategy is set to pay handsomely. (I hope, but may be I just said the wrong thing).

A good illustration of this pound cost averaging effect can be observed with the example indices I posted about previously. The MSCI World index produced a total return (in pound terms) of 98% from the end of 2000 to the end of 2015, but gilts produced 137%. It looks then that the best investment to make during the period would have been gilts and this was absolutely the case for anyone drawing down. But if instead cash was being added each year instead of being taken away, global equities turned out to be the best investment. Saving £10k per year from the end of 2000 to the end of 2015 (£160k total) would have resulted in a pot of £301k for equities and only £261k for gilts. 50:50 annually rebalanced would have made £289k. Since then the equities pot would have accelerated away due to the 40%+ growth in equites since the end of 2015 compared to only about 11% for gilts.

I think the main issues though is psychology. Can the investor cope with the volatility, or be likely to panic then sell, or become disillusioned and abandon saving? Putting a small amount (10-20%) of gilts into the portfolio can dramatically reduce volatility with only a small drop in long term returns. If by doing that someone can stay stay disciplined and on course, they will likely achieve a better outcome than being 100% in equities and misbehaving.

We should not forget either that by historical standards, the period from 2000 has not actually been that bad for equities as the market has swiftly recovered from falls. The financial crisis provided a very minor blip - The MSCI TR index peaked in October 2007, bottomed out down 32% in Feb 2009 and was back above the 2007 peak in March 2010. For many that would have been bad enough, but a decade or more long period of poor equity returns would be a lot harder to ignore.

[richfool]

Regarding the early stage pension investor, I can (just about) understand a person making a single lump sum contribution every year being wise with a safer, less volatile investment for the fist few years. However, this is not your typical model. Typically, a small investor, quite young would be far better off over a 40+ year savings period by electing for the more volatile, higher risk, higher reward investments. Buying such an investment monthly makes the most of buying more "units" when the price is down and buying fewer "units" when the prices are high. Pound cost averaging is the term, I believe. I'm struggling to see how advocating lower risk/lower return options to monthly saver at the start of a 40+ year investment term makes any sense at all. We all agree (I think) that it is the earliest contributions that over several decades of investment that do the "heavy lifting" in a defined contribution pension plan..

A related point which I was vaguely aware of from my past days working in financial services, (close to but not directly involving pensions), was that if someone made single one-off annual contributions, as opposed to regular monthly contributions, the insurance/pension companies I had contact with, would set each of those annual contributions up as a separate single premium/policy/plan. I don't know if that was normal or widespread practice or indeed whether it continues to be the case. I can imagine however, that upon retirement, a pension contributor could end up with a substantial number of separate policies/plans.

I think that pension contributors (the self-employed), preferred to do that because it wasn't until the end of the year that they would more accurately know their income and resultant tax situation and could then better determine how much they could "pay-in" to their pensions. I would certainly concur with the merit of contributing monthly and the resultant benefits of £ cost averaging.

[DiamondEcho]

The split between shares and bonds in these examples is often given with an increasing bond component with age. I saw an interesting article that suggested the opposite approach. More bonds early to mitigate the risk of adverse equity results in early years, the problem of the order of returns. An interesting idea.

I will in due course move from 100% equities towards an increasing holding in bonds; and I'll be keeping an eye on the various Vanguard Life-Strategy funds, and how the allocate vs age profile to suggest a framework to work to. Theirs [allocations] is a long tried and tested approach.
In fact since V-LS is a diversified and low-fee approach, I might want to progressively migrate funds out of 100% equities and into such funds - we'll see, it would tie with going lower-risk/hands-off.
Don't agree with 'more bonds early/[less later]' - from personal experience. Getting near/into retirement I want less drama and uncertainty and not increasingly more. Also in earlier years IME, I'm better placed to take higher risk, whilst having time remaining to weather short of medium-term set-backs.