Key Post Retirement planning - My experience

Gordon Gekko

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It sounds like you want to become financial independence (annual non wage income > annual expenditure)

But imagine for a moment if all your capital was invested in companies that don't pay dividends. Then you never make your goal. As you have no income.

Or vice versa, if you chase dividend paying investments you get there sooner.

I think you should model a percentage withdrawal from your capital. Which may or may not be greater than the income it produced in any year. And May or may not be greater than the capital appreciation.

Relying on income, is more than likely more prudent, bbutgiven all other things you mentioned it almost sounds like you are being too conservative.

That's not necessarily bad, but if your aim is early retirement id guess you are leaving 5-10 years on the table
I never fall into the trap of chasing income/dividends only...total return is what’s relevant
 

SPC100

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I never fall into the trap of chasing income/dividends only...total return is what’s relevant
Right, but then shouldn't you be happy to eat some of the capital? It's paradoxical to optimize total return but only eat income.

To reframe, when predicting your future income, What percentage of your DC pension (if you have one) or percentage of your equity do you assume will be created as income each year? Are you planning 5p/3.c. growth and 5/3p.c. drawdown
 

SBarrett

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Interesting thread.

A lot of people trying to make a guess on how long they will live for. Be over optimistic with this. I use 100. My granny lived to be 100 and all of her 10 kids are still alive and healthy so I come from strong genes :)

Nursing home fees will always screw up your numbers. Don't expect to live for any longer than 5 years in a home. But you may never need to live in a home or need home care. Are you not going to do things in your 60's so you have money for a home when you are 90? In Ireland, we have the safety net of the Fair Deal. Yes, your kids may get less inheritance but if I am in my late 90's, my "kids" will be in their 60's. If they haven't provided for themselves at that stage, it's too late anyway.

This is a work in progress. Your interests and financial needs will change over the years. Plans to save money may turn into plans to spend money. You may change career too. Or you may simply lose interest in things that you had planned to do in retirement. It's not just about having X amount of euro at age 60, it's what you want to do with it...and the journey along the way.


Steven
www.bluewaterfp.ie
 

Gordon Gekko

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Right, but then shouldn't you be happy to eat some of the capital? It's paradoxical to optimize total return but only eat income.

To reframe, when predicting your future income, What percentage of your DC pension (if you have one) or percentage of your equity do you assume will be created as income each year? Are you planning 5p/3.c. growth and 5/3p.c. drawdown
I’m assuming the mandatory 4% income drawdown from my Approved Retirement Fund, increasing to 5% at age 71.

I’m assuming 5% on average from a 100% equity approach.
 

SPC100

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Well then you likely will be eating into your capital! Especially in lean/bad market years.

From what I understand 4 and 5 percent drawdowns from equity capital is not extremely safe and cause capital to go 0. (Caveat most studies cover US investors).
 

Gordon Gekko

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Well then you likely will be eating into your capital! Especially in lean/bad market years.

From what I understand 4 and 5 percent drawdowns from equity capital is not extremely safe and cause capital to go 0. (Caveat most studies cover US investors).
That isn’t correct.

Take a real-world example of someone starting with €1.65m in their Approved Retirement Fund (i.e. the effective maximum) who’s invested in global equities; I struggle to see how they’ll run out of money or their fund can/will go to zero.

The particular equity fund that I like and the provider that I like would manage such an ARF for 0.5% pa (no VAT) with minimal ancillary costs.

A person is mandated to take 4% per year from ages 61 to 70 and then 5% thereafter. It’s 6% if the value of the ARF reaches €2m at any age.

I’m all for looking at ‘sequencing of returns’ etc, but even with a poor start, I’d be keen to see how/why people think someone could run out of money. Even over a particularly dodgy observation period, e.g. circa 2000 to now with the dot.com crash, global financial crisis, and Covid-19), markets have done around 4% a year.
 

Sarenco

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@SPC100

A portfolio can never go to zero if drawn down at a fixed percentage every year. It might shrink in value but it can never go to zero.

The studies that you are referencing relate to a fixed amount withdrawn every year - calculated as a percentage of the opening balance, adjusted for inflation each year.
 

SPC100

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Yes. Good point. Maths agrees.

But I thought in our case Gordan is effectively modeling a fixed amount. I.e. the number to pay his expenses.

The future modeled growth may or may not materialise. But the expenses will grow at inflation. So it sounds like it's effectively fixed percent of the starting year.

A fixed percentage of the fund value every year may not be enough to cover expenses.

Btw, Iirc all the studies don't just rely on fixed starting amount. Some try to ensure better long term outcome by drawing less in lean times.
 
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Gordon Gekko

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Sarenco is absolutely right. If you take 4% of something every year, it never runs out, albeit the amount may decrease.

But there’s nuance that you’re not factoring in, SPC100; an ARF is only one piece of the retirement pie. There is also a DB, two State Pensions, rental income, and investment income.

In order to ensure that all eventualities are covered, there needs to be decent surpluses at the start.
 

SPC100

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Yes, I agree. Fixed percent of the fund each year will never reach 0.

But fixed percent of the fund each year means you have no guarantee of meeting your expenditure.

E.g.

5k expenditure using your model requires 100k find
But if markets drop 50p.c. now your income is only ~2.5k and you are not meeting expenses.

Whereas swr would imply if you need 5k each year (growing with inflation), you need 5k/3% i.e. 166k or 5k/4% 125k fund, depending on how much longevity risk you want.

Imo you should be modeling income from the fund at something like 3p.c. of fund on the day you start withdrawing, and allow the number to increase with inflation, and stop modeling fund growth. Effectively treat it like an annuity.

Modelling 5p.c drawdown/income each year is overly optimistic (especially if you don't want to touch the capital).

But as you mention you have multiple streams, and you are very prudent/conservative on other parts, so likey this doesn't have very large affect on safety of your overall model.
 

50andOut

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I have a similar spreadsheet and approach, detailing monthly expense and income averages yearly from now (45) until 100.

I also have some vlookups and formulas which allow me to make various input adjustments and watch the full long term impact of savings/pensions - (retirement date, pension drawdown date, redundancy yes/no, State Pens. yes/no, Overpay mortgage, Pension Growth pre drawdown).

After drawdown, I assume the 4%/5% drawdown on the ARF, with a 2% growth on the fund. For simplicity I accept the ever decreasing drawdown amount, since the lump sum + excess income over expenses at the beginning always maintain a large enough cash reserve to offset that reduction.

Assume Gordan with other sources of income is the same, the example he gave earlier of income being greater than an expense, was hypothetical and is presumably similar to me, not reliant on the pension drawdown to maintain the amount over expenses.
 

SBarrett

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Deducting your income as a % works as an automatic adjuster to avoid burnout of your retirement fund. The graph below shows Gordon's MSCI World Index tracker priced at 0.5% pa and withdrawing 5% per annum.

4753

In real life practice, I have not had any worries regarding burnout of ARF's from clients who draw down their income as a %. I have to watch the fixed income ones like a hawk. The problem is, you only know in hindsight if a downturn is temporary or longer in nature.


Steven
www.bluewaterfp.ie
 

Sarenco

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That's an excellent chart Steven.

Mind you, I suspect the 2008/09 market crash would have caused Gordon some sleepless nights!

Do many of your clients maintain an all-equity portfolio within their ARFs?
 

SBarrett

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Do many of your clients maintain an all-equity portfolio within their ARFs?
Not one of them. People's attitudes to risk changes when they lose the safety net of having a regular pay cheque and they have to start spending the money they have saved over decades. For some, they find it difficult to spend as it goes against their nature and we have to show them that it's ok and they won't run out of money.

You also have to take into account, that on the whole, today's retiree is not as knowledgeable with investing as today's 40 year old is. There wasn't the same access to investing as there is now.


Steven
www.bluewaterfp.ie
 

Gordon Gekko

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That is most useful.

That would be extraordinarily painful if it was all you were relying on, but if you’ve other income sources, some of which is guaranteed, it’s easier.
 

SBarrett

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For completeness this is what it would look like if you'd taken 5% of the initial value and fixed it as a withdrawal rate i.e. €82,500 a year

4755
 

SBarrett

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That would be extraordinarily painful if it was all you were relying on, but if you’ve other income sources, some of which is guaranteed, it’s easier.
Not many people get to a position of having €1.65m in the ARF at retirement. Never mind having a fund that big AND having other assets as a fall back. You'd better hope the Shinners don't get in in the next election, because they'll be coming directly for you! :D

Steven
www.bluewaterfp.ie
 

Gordon Gekko

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Hi Steven,

Not trying to make work for you, but what does the first graph look like just taking the mandatory amounts (i.e. 4% for the first 10 years) and then 5% thereafter?

Thanks,

G
 

SBarrett

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Hi Steven,

Not trying to make work for you, but what does the first graph look like just taking the mandatory amounts (i.e. 4% for the first 10 years) and then 5% thereafter?

Thanks,

G
The software doesn't give the option of changing the drawdown amount during the term.
 
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