Daddy Ireland
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Ok thanks for explainingI don't think so.
To beat inflation, you're taking on investment risk. Which means your pot will go up and down. Doesn't matter much during an accumulating period, but could impact a lot during drawdown phases. If you're invested pot drops by 20% but you take out the same amount, you don't have the capital there to recover. If you're taking investment risk, you need to be able to adjust your drawdown significantly during market downturn.
@Sarenco linked to an explanation about sequence of returns earlier that should explain it.
You dont have inflation built in.When I used 6% and 4%, the pot ran out after 26 years rather than 19 or 28
Further food for thought.Assumptions about growth rates and drawdown rates are just that.....assumptions. If you are targeting a net growth rate of 4% that equates to c5% pa allowing for charges. Therefore you need to adopt an investment risk profile likely to generate such growth. This means adopting a high(ish) Equity content. This high(ish) risk profile is likely to result in greater volatility of returns. And the incidence of returns (sequence) is important.
Assuming you are proposing to invest the retirement fund into an ARF (as opposed to buying a guaranteed Annuity), then you need to consider what long term risk profile you will adopt. The higher the risk profile, the more likely will be the volatility of return. Will you be comfortable with such volatility? It’s great when you have a good year and the return is say 8%. But what happens when the return is minus 8%? Will you be happy to stick with the strategy? Or will you “cut and run” and move to a lower risk profile (say Cash) and be willing to adjust your drawdown rate?
Equity returns have been very very positive over the past 10 years, but remember what happened in 2007/2008 when fund values fell by c40%. Many people could not take the losses and moved to Cash in early 2009, just before markets began to pick up.
The figures quoted by earlier contributors assume no volatility of return, ie 4% net every year. But the investment world does not operate like that. Markets go up and down. Can you live with the volatility inherent in adopting a high(ish) investment profile? As Warren Buffet said “ you only know what swimmers are wearing trunks when the tide goes out”.
My bet is that most people are not prepared to take that level risk, and those people need to consider an average growth rate of closer to 1% pa, then 4% pa.
That's certainly true.The imputed drawdown is to ensure that large pension pots in tax sheltered ARFs are taxed before they get passed on with tax advantages to the next generation.
Actually, I think the variable % drawdown rate from an ARF could progressively increase, not decrease, over the course of a retirement. After all, somebody in their 90s could probably withdraw up to 10% pa of their portfolio balance without being overly concerned about running out of money!You could argue that the imputed distribution rates should be the other way round, 5% up to age 70 and 4% thereafter seeing as you reduce your expenditure as you get older.
Actually, I think the variable % drawdown rate from an ARF could progressively increase, not decrease, over the course of a retirement. After all, somebody in their 90s could probably withdraw up to 10% pa of their portfolio balance without being overly concerned about running out of money!
A few other thoughts:-
- A tax-free lump sum taken at retirement could be used, in addition to drawdowns, to fund an increased level of spending during the early years of retirement;
- The sequence of returns risk (which I think is often underestimated) starts to diminish significantly after the first few years of retirement;
- I've read a number of (admittedly US) studies that suggest that spending patterns in retirement are typically "U" shaped (rather than "L" shaped). In other words, spending does indeed progressively decrease after the first few years of retirement but then starts to gradually rise again once a person reaches their mid-70s (as medical costs increase and/or assisted living costs come into play).
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