If your aim is to make your money last longer in retirement and you have money in pensions, ISAs and general investment accounts, what do you think is the best order of withdrawal from these?
Depends on your investment goal, but generally speaking if the aim is to avoid IHT for your beneficiaries, use the Pension last....but that said, it also makes sense to use some of the pension to maximise your annual allowances. So use the GIA first, making sure you use your capital gains allwances, use pension to take tax free income allowance then ISA for the rest, the the aim of leaving as much in the pension as possible.
@@garethcallan8335 I've been adding to a GIA for the last 18 months when I had a light bulb moment and realized there's a £12.5 CGT allowance. Get 100k into this and it's like an ISA. What I don't get is the tax you pay. If it gains more than that allowance but you don't take anything out do you declare this? Is it only on actual disposal?
It depends. Life is more complex than the examples provided. Many people have combinations of DC and DB pensions + savings + may downsize. So dynamic spending also needs to be dynamic. Withdrawal percentages may change as life changes and income streams fluctuate. At the start of retirement could be 10% of DC pot reducing over time as other DB pensions, State Pension and incomes kick in. Downsizing may then increase cash available and thus % required from DC pot could be reduced. It would be useful to see a video of a more complex scenario of this nature.
Wow! So glad I stumbled across this whilst looking into my imminent retirement. Having approached several "Advisors" it's quite clear to me they don't really understand me or my needs (despite their searching Questionnaires) and whilst they can promise the world (with zero comeback) they ALL make damned sure THEY get paid (a pretty tidy sum) come what may, and entirely at my expense. An hour or two with this guy and I'd feel SO much happier.
Great question, and as I approach retirement of great interest. I don’t know the answer but gut reaction is General Investment first to allow the others to continue growing (whilst still retaining a sensible amount of cash) followed by a mix of ISA and pensions based on income tax liabilities.
Nice video Chris. As I was watching however, I couldn't help thinking how rubbish the current situation is, with ~10% inflation and negative market returns. Plugging these numbers into a simple spreadsheet my £500k pension pot will be toast in no time, even using the dynamic withdrawal approach! Just hope we get back to sensible inflation rate soon.
It’s tough out there at the moment Steve, but always remember we’re just somewhere in a cycle… I’ve advised through some pretty nasty periods, with the depths of the Global Financial Crisis being particularly bad. Every crisis is different, but they always end.
Great video Chris. When I first heard the term “4% rule”, I automatically assumed that it would be the annual withdrawal rate of the total value of the pot each year. This strategy makes perfect sense to me.
Thank you! Yes some people do apply the 4% rule on the percentage of value basis, but more commonly as pound plus inflation. Dynamic spending aims to take the best of both.
Chris, I've tried to document the annual drawdown calculation in a way that my simple mind can understand. Is this correct? STEP 1. CALCULATE THE GUARDRAILS: Ceiling value = previous year's Drawdown amount adjusted for inflation over the past year, plus 5% Floor value = previous year's Drawdown amount adjusted for inflation over the past year, minus 2.5% STEP 2. CALCULATE THIS YEAR'S DRAWDOWN AMOUNT: This year's Drawdown amount = current portfolio value multiplied by the chosen annual Drawdown percentage (e.g. 4%) STEP 3. ADJUST THIS YEAR'S DRAWDOWN AMOUNT IF NECESSARY: Is the Drawdown amount calculated in Step 2 within the Guardrails calculated in Step 1? Yes - this year's Drawdown amount is the amount calculated in Step 2 No - set this year's Drawdown amount to the Ceiling value or to the Floor value, as appropriate
I think you've got steps 1 & 2 wrong. The target is derived solely from your initial target at the start of the scheme, plus cumulative inflation. The guardrails are then set in relation to this figure.
Hi there. Richard is right - the first step is simply to determine the amount of withdrawal you require. The guide rails are based upon the inflation adjusted income target, not the previous year’s drawdown amount. So for example, if the first year’s income was £25k and there was 2% inflation, the adjusted income target in year 2 would be £25.5k. The ceiling would be +5% above the inflation adjusted income target and the floor would be -2.5% below it. Hope that helps.
I do what I call an 80% claw back. Set a base savings, say $1.5M, in an income-focused fund. Every month, withdraw 80% of any gains as long as it does not lower your principal below the base (and no withdrawal when there is any loss). Re-invest half of whatever is excess over expenditures at the end of every month in a more aggressive portfolio. This does require that you not rely solely on your savings, but it offers long term stability and growing savings during strong markets and parsimony during bad. This really works well for me.
All of these rules and rules of thumb make for a nice academic discussion. But as a 15-year retire I can tell you that, especially after you have been retired for a while, you will find your sea legs and figure out how to live your financial life. These theories pretty much all go away. Just read the comments, everybody has their own ideas anyway. I enjoyed the discussion. Thank you for your work.
Yes having worked with some retirees for nigh on 20 years I can definitely say that all rules are guidelines only, but a structure of some sort is useful. Particularly when first starting out. Over time, most people become more comfortable with their retirement lifestyles and the need to be too rigid goes away like you say.
@@chrisbourne-retirementplanner It would be good to have some examples of how peoples spending changes the longer they are retired while in good health. Do the majority have an initial 2-3 years of spending, holidays a few luxuries etc. then rain it in and by the time they are 80 they spend a lot less / travel Less but basically still enjoy themselves
Working out an example I note the key to get this working in feasible way is a) getting your income needed accurate and b) calculating that % of your portfolio value. The % in b) will be used in future years calculations. I guess if needs change over time one really has to start over again using the new base figures.
Good thinking about use of Personal Allowance for pension. That can work well. Generally speaking, research suggests that taxable accounts like GIAs should be targeted first.
Great vid Chris I just sub you. That really makes a lot of sense. I’m coming up to 55 next year and want to go part time. My pension fund is now all invested in the market since last year. And have seen it drop by -10% it has recovered to -5% that way of managing helps. Hoping the markets improve 🤞 Cheers Graham
As someone who is hoping to have about £1.25m+ at 58 minimum (depending on markets over next 5 years I think I could get it to £1.5m), in pension and cash, I’m already looking at how I’ll deal with it. I select my own pension funds and made £120k growth over last year. However, how to draw it out is proving much more difficult to ascertain. Based on this analysis, it seems this methodology is a no brainer. What I’m going to be struggling with is where do I leave my money invested.
It is definitely a decision that requires thought, and the answer is different for different people. How to invest in retirement may be worth another specific video soon.
I have read about this vanguard dynamic withdrawal strategy and always struggled to understand how the inflation figure is incorporated into the calculation as I’m not sure vanguard explain it very well. Assuming your way of ordering the calculation is correct (why wouldn’t it be), I now understand and will use this method going forward. Thanks Chris
Great video maths looks good, only point I would make, the advice we are given at retirement seminars at work, look at 3 stages of retirement, 1 go go years 2 slow go years 3 no go years Each stage of retirement requires difference levels of money, the early go go years requires a lot more than the no go years, living 30 years after retirement is possible but living a long time healthy when you can travel and enjoy you money is a lot harder, I would say spend approx 50% in first 10 years go go stage 1 by the time you hit no go years your outgoings are very little.
Hi Dave. Yes that’s a good way of splitting retirement income phases. This method can be applied to Dynamic Spending by using a higher base income level in the most active years, resulting in higher guide rails, and a lower base income level later on. The one thing the above misses is the fact that expenses often accelerate in late retirement as well due to care costs. This spending pattern is often referred to as the ‘retirement smile’ (starts high, lowers, ends high).
Great video Chris. How does this strategy compare to the Guyton guard rails plan. Is either better or do they both offer similar levels of protection for your drawdown pot long-term
I’m fortunate to be getting my final salary pension from 42 only downside is no uplift till I’m 55 . Only a matter of years till I do then it’s increased with all the intervening CPI increase which this year is a whopper. My mortgage is minuscule and I’m paying £900 into the workplace pension so I’m well set up for when or if I do retire .
It sounds like it Alan! Good to hear it. You may find that unfortunately, the indexation is capped off on the escalation of benefits, but it will certainly increase by the maximum it can.
@@chrisbourne-retirementplanner I’m thinking I’m safe in getting the full increase due it being an Armed forces pension . But should find out this month when they release the information . Fingers crossed of course.
Great video! Just a quick question though... on year one, if your base target is £25500, do you remember that figure forever and keep adding the inflation figure to this each year indefinitely? Even if for instance, your pot decreased in value for a few years in a row.
Hi thanks for your videos and and all your hard work. Can you recommend a book or information in general, about NHS pensions? How can I obtain basic information, and definitions about how to manage and understand a pension? Thank you.
Thank you! Regarding the NHS pension, I’d recommend watching Edmund Bailey’s RUclips videos about the NHS scheme. He’s a financial planner too and I believe his wife is in the scheme, so he understands it more than most. I’m not sure about books regarding pensions, but there are certainly online resources to help with basic understanding of pensions, such as Moneyhelper (just type in moneyhelper pensions to a search engine). I have numerous other videos discussing aspects of pensions too, particularly pension income options. My How To Get More Than 25pc Tax Free Video has probably been the most popular.
Just re-watching this, and it occurs to me, I don’t know how the mechanics of actually taking retirement income work…. Is it recommended to just do one big withdrawal a year? If so, where would you put it - an instance access savings account? Would seem a shame to miss out on any growth from what would start out as a considerable sum each year. Is this subject worthy of a video in its own right?
Hi Richard. The answer is - it is up to you as an individual, but also sometimes determined by the mechanics of the scheme. Most people tend to withdraw on a monthly basis, allowing the underlying holdings to remain invested. It may be something to cover in a video at some stage.
@@chrisbourne-retirementplanner thanks. I can see that monthly withdrawals provide best scope for growth, but I guess the downside is having the decision to withdraw from equities or cash (depending on equity performance) 12 times a year instead of once?
Interesting vid, though some of us don't have an actual pension "pot" as such. I have a DB pension, plus ISA savings, plus investments, & (in 2.5 yrs time) a state pension. So I'm not sure how relevant the vid is - though I appreciate that I am in the minority!
Yes your DB scheme will certainly provide the ballast and will mean that you aren’t affected by the issues that people without guaranteed pensions are, at least not to the same extent.
I've just watched this video and I'm not stupid but I've no more idea as to what dynamic spending is now than I did before I watched it. Why do the explanations have to be so complicated and why do the amounts used in the examples vary so slightly? Most people would say say that taking £33k pa, £36k pa or £39k is pretty much immaterial in the great scheme of things. And why, whatever you decide to take, take it as a lump sum at the beginning or end of each year? Why not just sell what you need to raise each month? After all, making affordable monthly contributions is how we are advised to build our portfolios. Why not do the same when taking money out? And can I make a request for age related models? Assuming that the only useful or helpful model is one based on a 55 year old pensioner likely to live for 30 years isn't optimum given the age profile of pensioners in the UK. I'd like them based on 55, 65 and 75 year olds. (Apologies is this is a little ranty.)
I agree with dynamic spending but disagree that after planning for 30 years you still allow anything than zero and the government will tax it and take most of it. In £1m pot I would take as a min the max allowed to pay 20% tax and anything else above will come from ISA
Hi Ivan. I think the best answer to this is to use your own personal rate of inflation. Headline inflation is a useful guide, but we all have a different ‘basket of goods’ depending on lifestyle and life stage. You can probably work out your own inflation by measuring your personal change in expenses, but headline inflation figures still provide a useful rule of thumb if you don’t want to go to those lengths.
Great video and content as always. Thinking of building a spreadsheet model of this approach with my pot and some historic data. Any references I can leverage ?
Not that I can think of to plug into a spreadsheet unfortunately Nick. Financial modelling software systems like Voyant and Timeline allow this kind of backtesting but they purchase the data.
Generally I'd say GIA first as it's taxable for income tax, CGT and IHT then an ISA which is not liable to income tax or CGT, but does form part of your estate and lastly a pension which is only liable to income tax when withdrawn and is outside of your estate. I forgot to add that if you also have a part time job or a DB pension which uses up your annual tax allowance, the I would say all the more reason to take from the pension last.
Thanks for this video. It was very informative. I still have one question, which I'm not sure this video was meant to address: how much do I need in order to be able to retire? Your example uses 5%, but is that a recommendation? Also, do you think this also works for early retirees (i.e. retirement over 30 years)?
Hi there. Yes you're right - the video doesn't answer that question specifically because there isn't a universal answer. Neither is there a specific percentage. There will never be any recommendations in the videos - just information. By nature, a dynamic spending strategy should help to make capital last longer so yes, it could still work better for longer retirement periods than the alternative drawdown options. Nothing is guaranteed though unless you actually purchase a guaranteed income at some point, like an annuity.
Thanks. A really interesting model. A question I have is once you know next years figure to withdraw do you sell equities to cover that full year as opposed to leaving it invested and just sell down each month? I can see pros and cons both sides… Any views. Thank you. 🙌
I would say Liquid assets first i.e. isa's bonds etc, then Gia investments, Etf's etc, then Pensions lastly. All depends on the pot you have and the lifestyle you wish to be accustomed too.
It’s usually best from a capital longevity perspective to target taxable GIAs first based on research that’s been carried out, but there can be variances in individual situations. Correct on pensions last 👍🏼
Well done Chris another good video. Life is pretty dynamic so it makes sense to have a dynamic strategy to match. I am wondering if you are lucky enough to have a sizeable cash buffer in cash isa’s premium bonds etc and you use this for income in negative / poor performing years. How much impact this would have on sequence of return risk. It feels like a good strategy for mitigating the risks if not for maximising returns. Just wondering if you have looked at this or have any thoughts on this approach.
Hi Phil. Yes it’s always wise to have a reasonable cash buffer - 3 to 5 years’ worth of income is ideal and gives further protection in highly volatile markets. If there is a prolonged period of market falls, it can be helpful to cease withdrawals from pensions and utilise cash reserves.
@@chrisbourne-retirementplanner Would you class putting 1/2 the cash you are proposing into a stocks n shares ISA to potentially get a better return than just being in a cash savings account
Great video Chris - you managed to clearly explain to people with no finance background complex topics which are so relevant. I have a couple of questions related to your video, when you referred to Dynamic Withdrawal Strategy (DWS), it seems to me that you focused on annual income. (i) Is there any benefit in running the DWS in a monthly basis to factor in monthly fluctuations in stock markets values (is it a DWS on a monthly basis more likely to give better results than when applied annually) and (ii) i've noticed that there is some seasonality on the valuations on the stock markets in US/UK (i.e. higher values towards end of May and November/December), is this correct? If so, wouldn't it make sense to withdraw the income when the markets are more likely to be the highest on the yea (i.e. end of May and end of November)?
Hi there. You can run the calc as frequently as you like but it would be quite a lot of work doing it monthly. The results of doing it annually provide a sufficient improvement. I wouldn’t focus too much on seasonality because those things can’t be relied up.
We seem to be moving from a low inflation low, interest rate environment to a high interest rate high inflation environment. what is the outlook for the 60:40 share/bonds portfolio in such an environment. Won't the bonds part be killed by the higher interest rates and loose their lack of stock correlation.
It’s not possible to say for sure, but bonds have remained good diversifiers through many different market cycles. New issues will also provide higher coupons than they have for some time so there will be yield to reinvest again, which hasn’t been the case for a long time.
Great video Chris. Just a thought - Unless I missed it I think it would be helpful to drop in how the guide rail figures are calculated, arrived at for those who may not know where to look or how to work it out.Looks like -2.5 and plus 5 percent. Thanks
Hi Craig. Thanks for your message. I did run through in the vid that the guide rails are indeed -2.5% floor and 5% ceiling. These are based upon research by Vanguard as to what levels provide the optimum result.
Interesting question Dave. I’m not sure how you’d apply these rules to investing though? Do you mean altering your contributions based on how markets have performed last year?
@@chrisbourne-retirementplanner Hi Chris I'm not sure, but the logic would be the same, I think a year is too big, but say monthly if the market is down +%, and up -% from your nominal.....kind of the opposite of withdrawal, i guess you would have to run some simulations. While Ive got you, do you think uk gilts will recover ? My pension pot is feeling the pain of what seems an unfortunate lifestyling plan...thanks Chris...great videos, helpful and very well presented
Hi Dave. The outlook for UK gilts is certainly better than it was just over a year ago. Whenever an asset class suffers a rout, longer term prospects tend to improve. Gilt values were overinflated before, and the losses suffered were inevitable, but the shocking thing is that they happened in a single year rather than over a prolonged period as anticipated. Valuations are now better than they were and looking further out, interest rates are predicted to level out and reduce, which will be helpful to fixed income assets like gilts.
@@chrisbourne-retirementplanner thanks a lot Chris the gilt situation severely impacted my pension, i hope they setlle down. I dont fully how it works as its an accumulation fund and the coupon payment goes back in the fund but they dont buy more gilts.
No doubt this is a trick question for us N00bs ... but I'd use the Pension to fill what ever of my tax free allowance + 25% so £3923 (for example if I'm drawing a state pension (12570-(185.15*52))/0.75 ) as when that allowance is gone, I wouldn't be able to use it in later years. Any residual cash goes to the buffer, but if I need more then I'd run down the GIC - up to the CGT allowance, and then from my ISA.
Hi Roger. Certainly a strategy that can work well! It is generally considered best to withdraw GIAs first, but individual circumstances must always be considered.
@@chrisbourne-retirementplanner These always seem like trick questions! I think I just emotionally I'd feel like personal allowance is gone if I don't use it. I get that there are IHT benefits etc. to a pension but I can't get annoyed about taxes when I'm dead 😀
Hi Chris. I have just come across your site and immediately impressed! Subscribed! The Dynamic Spending technique is really interesting but unless I have missed something, can you explain how you arrived at the Max of £26775 and Min of 24,862 for the £500K pot example?
Hi Gerard. Those figures are based on the original starting income level of £25k, plus an estimated 2% inflation (£25,500). The upper figure is 5% above this and the lower figure is 2.5% below. These are the guide rails.
Hi Chris, what wrong with picking a figure and sticking to it, ignoring inflation and the market, and if if it grows take more up to 4k then leave it for a further 5 years. And increase or leave as necessary On the proviso that your state and other pensions are increasing by 3% 🤷
Why up to 4k? Has any analysis been completed completed to test the viability of that strategy? I’m just trying to understand the advantages of it compared to other approaches?
Very interesting. Are IFAs going towards Vanguard Dynamic Spending or similar nowadays? I expect I will go down the DIY approach. Presumably the Vanguard approach may reduce the need of having a large cash buffer? Being a cautious individual I am aiming for 3 years of cash buffer and 5 years of wealth preservers (PNL, RICA, CGT). I need to sleep at night.
There is certainly more interest in Dynamic Spending approaches these days. It does aim to reduce reliance on large amounts of cash. Holding cash isn’t too much of a problem if you can get a reasonable return on it though.
@@chrisbourne-retirementplanner Some cash is definitely needed when the black swan events happen - when the stuff really hits the fan out of nowhere. I think of it as paying for an insurance policy. Even as recently as Covid lots of people were caught out possibly including me: not allowed to work with the markets down 30% - a bleak combination. Then go back to the banking crisis of 2008. I am also just old enough to remember the 1987 crash. But financial crises will always happen which is why I now have a written plan to cover worse case scenarios.
Hi Graham. Most people take the annual income amount on a monthly basis as that’s the way they’ve usually been paid while working. It’s probably a better option as it spreads the selling price of shares/units in the fund. If you took a large withdrawal annually it might be at a time when markets are down and prices are low, meaning you have to sell more units to get the same amount of money. It’s the opposite of pound cost averaging… some call it pound cost ravaging!
Would love you to do a video on high dividend paying funds, just don't see how they can be beaten in a draw down scenario because your never really drawing down if your taking just the dividends and the pot continues to grow to some extent if its selected correctly. Just look at Vanguards UK equity income fund and its rates for example (around 6%), would love to know your thoughts.
From experience, that never tends to work as well as one might hope. Dividends are prone to reduce when we enter severe market downturns, meaning capital then needs to be drawn upon. Usually, the capital withdrawals coincide with the decline in values, meaning there are then less shares in the pot, and therefore less income, when values recover.
Is there such a concept as reverse dynamic spending, where you spend 2.5 more when nest egg is up 10 and 0 more when nest egg is down 10. in otherwords, spending less, in terms amount increased, when the market is up by 10 to capitalise on growth and spending at par when the market is down by 10 to use previous growth as a buffer.
Hi Norman, it is certainly possible to alter the guide rails that you set, and I would imagine that any rules based approach to responsively altering income is better than none. I believe Vanguard arrived at the figures proposed through testing various permutations.
I am very interested in this dynamic drawdown. I am actually interested if a company can offer this and 'do all the maths for me'? Or this has to be myself manually on a spreadsheet working out all the maths ..
Hi Dave. You can always engage the services of an adviser to help, but it is possible to set your own rules based approach to withdrawals. Much depends on your level of confidence and the time you want to spend on it. Advice costs money, but would save time.
Hi Chris is it realistic to think you might spend less as you get older and how could this be factored in. Also why do many pension lifestyle plans move towards UK gilts when this approach just doesnt appear to do what it says on the tin, would you consider some adjustment of these approaches ? Thanks Chris ...great information.
Hi Dave. I tend to observe people spending less from their mid 70’s, but as Dean says this sometimes ticks up again in late retirement. I actually discussed figuring that in in my last video. Lifestyling pension funds are a big big bear of mine - I’ve actually discussed it in a few previous videos. One was done over a year ago now called ‘Don’t De-Risk’. My thoughts are outlined in there.
@@chrisbourne-retirementplanner thanks for reply Chris I will search for that video, assuming you wanted to de risk , gilts seem an odd choice at the moment.
Hi Chris. It would be interesting to see a video, including the pros and cons for a retirement income) of using high dividend yield ETFs such as vanguard’s VHYL and/or dividend aristocrat ETFs (maybe 3 - 5%), averaging on 4% but using guiderails on the withdrawals, only withdrawing dividend pay-outs (not capital), and reinvesting any dividends not taken in the good times back into the ETF portfolio. Also maybe on the flip side, if some capital was taken out, without guiderails, instead of reinvestment to take account of other pensions income paying out after a period of time in early retirement when the ETF running out might not be a problem as it would be covered by other pensions kicking in (not least the state pension, DB pensions, amongst others). This might be in an ISA, a SIPP or in a GIA with the upcoming tax changes.
@@chrisbourne-retirementplanner Hi Chris. Further to the content suggestion above, regarding using high dividend yield ETFs and dividend aristocrat ETFs as a long-term income strategy in retirement, please also consider the pros and cons of covered call ETFs to provide dividend income in retirement. N.B. QYLD and QYLP are now available on the London Stock Exchange.
Thought provoking and your modelling isn’t to far from mine … or maybe that should be the other way around? 😂 The piece I am missing is capital consumption. Of course, less capital, less growth etc., but whatever value you start with, there seems a fundamental question: Are you aiming to finish at around the same level of capital to pass on, or is that pot something you might expect to ‘mostly’ consume by death … not that you know that date? This session seems very much in the vein of maintaining capital and so maintaining growth (income) from the fund, meaning you start with 500/800/1000K/whatever, and look to preserve that pot at the end. Surely an option is to consume at least some of that capital before 85/90/95? Indeed you spending may be slowing up by then? Indeed what is the position of pension capital and final care? My Dad’s assets were eaten by care costs in his last few years. Lovely that he had good care, but I was on the point of applying for council support for his care fees just before his death. On these models, if you preserve your 500/800/1000K pot, what happens to that when you need care? Have you saved spending your earnings just for it to be consumed on end of life care and not passed on?
All good points Iain and probably too complex to go into long term care and pension relationship in a reply on here, but that is the main purpose of some capital preservation I’d say. I tend to believe in a ‘managed depletion’ of capital, unless there is so much capital that it can’t viably be spent.
And of course there is the partial crystallisation and taking of successive 25% tax free amounts to factor in @@chrisbourne-retirementplanner. I sure ain't simple 🙂
In reality nobody adheres strictly to a set budget, whether retired or not. There are a huge number of variations of variable withdrawal strategies as you can imagin - the trouble is they increasing ignore reality and become more theoretical. What if life forces you to spend more in a year when markets fall? These things happen all the time - they're called life. If you truely want to not have to worry about managing your pot and being able to be able to keep up with inflation then annuities will do that for you!
Great. Pay me daily 50 quid and I'll make sure you get some eggs and bacon for breakfast. Sounds like a good offer our you will do little work to save serious money
I agree with much of what you’ve said - certainly the fact that expenses can still be highly variable, but an annuity won’t provide all of the answers for a few reasons... One is that most only provide fixed increases, rather than inflation linked. When you do choose fixed increases, it substantially reduces your initial income. As well as that, annuities provide none of the flexibility to alter your withdrawals that other withdrawal methods do, which is directly at odds with what you’ve said above regarding potentially needing more in a future year due to life events.
@@chrisbourne-retirementplanner Yes, no arguments there. Annuities will not offer 4% inflation-linked. That might change as the interest rate environment evolves though. All you are doing when you buy an annuity is swapping your pot for a gauranteed income - the money is still managed by the annuity provider and run as a perpetual portfolio who then on take the tail-end risk of a bad outcome, with the understanding that most of the time this won't be the case, but then they also get to pocket what's left on the table from the vast majority of policies. In any case, it can be worth the trade-off if all you care about is not having to worry about the variability of your future income stream. It would be good if you could talk about annuities a little more in a future video - I feel they're quite under-appreciated by the FIRE community.
If your aim is to make your money last longer in retirement and you have money in pensions, ISAs and general investment accounts, what do you think is the best order of withdrawal from these?
Depends on your investment goal, but generally speaking if the aim is to avoid IHT for your beneficiaries, use the Pension last....but that said, it also makes sense to use some of the pension to maximise your annual allowances. So use the GIA first, making sure you use your capital gains allwances, use pension to take tax free income allowance then ISA for the rest, the the aim of leaving as much in the pension as possible.
@@garethcallan8335 I've been adding to a GIA for the last 18 months when I had a light bulb moment and realized there's a £12.5 CGT allowance. Get 100k into this and it's like an ISA. What I don't get is the tax you pay. If it gains more than that allowance but you don't take anything out do you declare this? Is it only on actual disposal?
ISA first as tax free, then replace ISA withdrawal with GIA upto CGT, then once all GIA in ISA and ISA used up, use pension
It depends. Life is more complex than the examples provided. Many people have combinations of DC and DB pensions + savings + may downsize. So dynamic spending also needs to be dynamic. Withdrawal percentages may change as life changes and income streams fluctuate. At the start of retirement could be 10% of DC pot reducing over time as other DB pensions, State Pension and incomes kick in. Downsizing may then increase cash available and thus % required from DC pot could be reduced. It would be useful to see a video of a more complex scenario of this nature.
You forgot a cash buffer, that I am using at the moment, then GIA up to CGT limit, then ISA, then SIPP last
Wow! So glad I stumbled across this whilst looking into my imminent retirement. Having approached several "Advisors" it's quite clear to me they don't really understand me or my needs (despite their searching Questionnaires) and whilst they can promise the world (with zero comeback) they ALL make damned sure THEY get paid (a pretty tidy sum) come what may, and entirely at my expense. An hour or two with this guy and I'd feel SO much happier.
That’s very kind of you to say Glenn 🙂
Great question, and as I approach retirement of great interest. I don’t know the answer but gut reaction is General Investment first to allow the others to continue growing (whilst still retaining a sensible amount of cash) followed by a mix of ISA and pensions based on income tax liabilities.
That’s right Rob - your instinct is serving you well!
Nice video Chris. As I was watching however, I couldn't help thinking how rubbish the current situation is, with ~10% inflation and negative market returns. Plugging these numbers into a simple spreadsheet my £500k pension pot will be toast in no time, even using the dynamic withdrawal approach! Just hope we get back to sensible inflation rate soon.
It’s tough out there at the moment Steve, but always remember we’re just somewhere in a cycle… I’ve advised through some pretty nasty periods, with the depths of the Global Financial Crisis being particularly bad. Every crisis is different, but they always end.
Just reading this now. Covid lockdowns were to blame, fortunately you’ll be in a much better position now.
Great video Chris. When I first heard the term “4% rule”, I automatically assumed that it would be the annual withdrawal rate of the total value of the pot each year. This strategy makes perfect sense to me.
Thank you! Yes some people do apply the 4% rule on the percentage of value basis, but more commonly as pound plus inflation. Dynamic spending aims to take the best of both.
Chris, I've tried to document the annual drawdown calculation in a way that my simple mind can understand. Is this correct?
STEP 1. CALCULATE THE GUARDRAILS:
Ceiling value = previous year's Drawdown amount adjusted for inflation over the past year, plus 5%
Floor value = previous year's Drawdown amount adjusted for inflation over the past year, minus 2.5%
STEP 2. CALCULATE THIS YEAR'S DRAWDOWN AMOUNT:
This year's Drawdown amount = current portfolio value multiplied by the chosen annual Drawdown percentage (e.g. 4%)
STEP 3. ADJUST THIS YEAR'S DRAWDOWN AMOUNT IF NECESSARY:
Is the Drawdown amount calculated in Step 2 within the Guardrails calculated in Step 1?
Yes - this year's Drawdown amount is the amount calculated in Step 2
No - set this year's Drawdown amount to the Ceiling value or to the Floor value, as appropriate
I think you've got steps 1 & 2 wrong. The target is derived solely from your initial target at the start of the scheme, plus cumulative inflation. The guardrails are then set in relation to this figure.
@@rgefryer Thanks Richard. I'll have another attempt, and probably delete this one.
Hi there. Richard is right - the first step is simply to determine the amount of withdrawal you require. The guide rails are based upon the inflation adjusted income target, not the previous year’s drawdown amount. So for example, if the first year’s income was £25k and there was 2% inflation, the adjusted income target in year 2 would be £25.5k. The ceiling would be +5% above the inflation adjusted income target and the floor would be -2.5% below it. Hope that helps.
I do what I call an 80% claw back. Set a base savings, say $1.5M, in an income-focused fund. Every month, withdraw 80% of any gains as long as it does not lower your principal below the base (and no withdrawal when there is any loss). Re-invest half of whatever is excess over expenditures at the end of every month in a more aggressive portfolio. This does require that you not rely solely on your savings, but it offers long term stability and growing savings during strong markets and parsimony during bad. This really works well for me.
All of these rules and rules of thumb make for a nice academic discussion. But as a 15-year retire I can tell you that, especially after you have been retired for a while, you will find your sea legs and figure out how to live your financial life. These theories pretty much all go away. Just read the comments, everybody has their own ideas anyway.
I enjoyed the discussion. Thank you for your work.
Yes having worked with some retirees for nigh on 20 years I can definitely say that all rules are guidelines only, but a structure of some sort is useful. Particularly when first starting out. Over time, most people become more comfortable with their retirement lifestyles and the need to be too rigid goes away like you say.
@@chrisbourne-retirementplanner
It would be good to have some examples of how peoples spending changes the longer they are retired while in good health. Do the majority have an initial 2-3 years of spending, holidays a few luxuries etc. then rain it in and by the time they are 80 they spend a lot less / travel Less but basically still enjoy themselves
@@guyr7351Yes that would be a good interesting video to watch 👍👍
Working out an example I note the key to get this working in feasible way is a) getting your income needed accurate and b) calculating that % of your portfolio value. The % in b) will be used in future years calculations.
I guess if needs change over time one really has to start over again using the new base figures.
Combination of Pension and ISA to maximise your personal tax free allowances,Would move the general investments to isa and pension when allowed.
Good thinking about use of Personal Allowance for pension. That can work well. Generally speaking, research suggests that taxable accounts like GIAs should be targeted first.
These are getting clearer, excellent work Chris.
Thanks Ian appreciate the compliment 👍🏼
Great vid Chris I just sub you.
That really makes a lot of sense.
I’m coming up to 55 next year and want to go part time.
My pension fund is now all invested in the market since last year.
And have seen it drop by -10% it has recovered to -5% that way of managing helps.
Hoping the markets improve 🤞
Cheers Graham
Thanks Graham good to have you on board!
As someone who is hoping to have about £1.25m+ at 58 minimum (depending on markets over next 5 years I think I could get it to £1.5m), in pension and cash, I’m already looking at how I’ll deal with it. I select my own pension funds and made £120k growth over last year. However, how to draw it out is proving much more difficult to ascertain. Based on this analysis, it seems this methodology is a no brainer. What I’m going to be struggling with is where do I leave my money invested.
It is definitely a decision that requires thought, and the answer is different for different people. How to invest in retirement may be worth another specific video soon.
I have read about this vanguard dynamic withdrawal strategy and always struggled to understand how the inflation figure is incorporated into the calculation as I’m not sure vanguard explain it very well.
Assuming your way of ordering the calculation is correct (why wouldn’t it be), I now understand and will use this method going forward. Thanks Chris
No worries John. Glad it’s useful. The calculation order was taken from Vanguard’s own research, so should provide a good framework for you.
I too found the Vanguard explanation difficult to follow.
Great video maths looks good, only point I would make, the advice we are given at retirement seminars at work, look at 3 stages of retirement,
1 go go years
2 slow go years
3 no go years
Each stage of retirement requires difference levels of money, the early go go years requires a lot more than the no go years, living 30 years after retirement is possible but living a long time healthy when you can travel and enjoy you money is a lot harder, I would say spend approx 50% in first 10 years go go stage 1 by the time you hit no go years your outgoings are very little.
Hi Dave. Yes that’s a good way of splitting retirement income phases. This method can be applied to Dynamic Spending by using a higher base income level in the most active years, resulting in higher guide rails, and a lower base income level later on. The one thing the above misses is the fact that expenses often accelerate in late retirement as well due to care costs. This spending pattern is often referred to as the ‘retirement smile’ (starts high, lowers, ends high).
Great video Chris. How does this strategy compare to the Guyton guard rails plan. Is either better or do they both offer similar levels of protection for your drawdown pot long-term
I’m fortunate to be getting my final salary pension from 42 only downside is no uplift till I’m 55 . Only a matter of years till I do then it’s increased with all the intervening CPI increase which this year is a whopper.
My mortgage is minuscule and I’m paying £900 into the workplace pension so I’m well set up for when or if I do retire .
It sounds like it Alan! Good to hear it. You may find that unfortunately, the indexation is capped off on the escalation of benefits, but it will certainly increase by the maximum it can.
@@chrisbourne-retirementplanner I’m thinking I’m safe in getting the full increase due it being an Armed forces pension . But should find out this month when they release the information . Fingers crossed of course.
5 months from drawing mine at 65, clueless wouldn't start to cover it!
You’re not alone, but hopefully the content is helpful.
GIA -> ISA -> pension I think
Spot on Finn
You're a legend Chris. Thanks for all the advice you're giving, exceptionally helpful
Thanks Lee much appreciated 👍🏼
Great video! Just a quick question though... on year one, if your base target is £25500, do you remember that figure forever and keep adding the inflation figure to this each year indefinitely? Even if for instance, your pot decreased in value for a few years in a row.
Hi James… yes the base figure always remains the inflation adjusted reference point.
Hi thanks for your videos and and all your hard work. Can you recommend a book or information in general, about NHS pensions? How can I obtain basic information, and definitions about how to manage and understand a pension? Thank you.
Thank you! Regarding the NHS pension, I’d recommend watching Edmund Bailey’s RUclips videos about the NHS scheme. He’s a financial planner too and I believe his wife is in the scheme, so he understands it more than most. I’m not sure about books regarding pensions, but there are certainly online resources to help with basic understanding of pensions, such as Moneyhelper (just type in moneyhelper pensions to a search engine). I have numerous other videos discussing aspects of pensions too, particularly pension income options. My How To Get More Than 25pc Tax Free Video has probably been the most popular.
Just re-watching this, and it occurs to me, I don’t know how the mechanics of actually taking retirement income work…. Is it recommended to just do one big withdrawal a year? If so, where would you put it - an instance access savings account? Would seem a shame to miss out on any growth from what would start out as a considerable sum each year. Is this subject worthy of a video in its own right?
Hi Richard. The answer is - it is up to you as an individual, but also sometimes determined by the mechanics of the scheme. Most people tend to withdraw on a monthly basis, allowing the underlying holdings to remain invested. It may be something to cover in a video at some stage.
@@chrisbourne-retirementplanner thanks. I can see that monthly withdrawals provide best scope for growth, but I guess the downside is having the decision to withdraw from equities or cash (depending on equity performance) 12 times a year instead of once?
Interesting vid, though some of us don't have an actual pension "pot" as such. I have a DB pension, plus ISA savings, plus investments, & (in 2.5 yrs time) a state pension. So I'm not sure how relevant the vid is - though I appreciate that I am in the minority!
Yes your DB scheme will certainly provide the ballast and will mean that you aren’t affected by the issues that people without guaranteed pensions are, at least not to the same extent.
You are 😂
I've just watched this video and I'm not stupid but I've no more idea as to what dynamic spending is now than I did before I watched it. Why do the explanations have to be so complicated and why do the amounts used in the examples vary so slightly? Most people would say say that taking £33k pa, £36k pa or £39k is pretty much immaterial in the great scheme of things. And why, whatever you decide to take, take it as a lump sum at the beginning or end of each year? Why not just sell what you need to raise each month? After all, making affordable monthly contributions is how we are advised to build our portfolios. Why not do the same when taking money out? And can I make a request for age related models? Assuming that the only useful or helpful model is one based on a 55 year old pensioner likely to live for 30 years isn't optimum given the age profile of pensioners in the UK. I'd like them based on 55, 65 and 75 year olds. (Apologies is this is a little ranty.)
I agree with dynamic spending but disagree that after planning for 30 years you still allow anything than zero and the government will tax it and take most of it. In £1m pot I would take as a min the max allowed to pay 20% tax and anything else above will come from ISA
Chris, which level of inflation do we use? Some say the published rate is half the real rate.
Hi Ivan. I think the best answer to this is to use your own personal rate of inflation. Headline inflation is a useful guide, but we all have a different ‘basket of goods’ depending on lifestyle and life stage. You can probably work out your own inflation by measuring your personal change in expenses, but headline inflation figures still provide a useful rule of thumb if you don’t want to go to those lengths.
Great video and content as always. Thinking of building a spreadsheet model of this approach with my pot and some historic data. Any references I can leverage ?
Not that I can think of to plug into a spreadsheet unfortunately Nick. Financial modelling software systems like Voyant and Timeline allow this kind of backtesting but they purchase the data.
my ex girlfriend was good at dynamic spending. she spent my money and never touched her own!
😂 That’s a brilliant FIRE strategy
Sounds about right
If u ever see your ex again ,Would u thank her for paying for the hotel and the meals ,I really appreciate that, Thanks again Ken😂🎉
Generally I'd say GIA first as it's taxable for income tax, CGT and IHT then an ISA which is not liable to income tax or CGT, but does form part of your estate and lastly a pension which is only liable to income tax when withdrawn and is outside of your estate. I forgot to add that if you also have a part time job or a DB pension which uses up your annual tax allowance, the I would say all the more reason to take from the pension last.
Absolutely right Gary.
Excellent and insightful alternative withdrawal strategy Chris .. thank you !!
You’re welcome! Really pleased you found it useful.
Thanks for this video. It was very informative. I still have one question, which I'm not sure this video was meant to address: how much do I need in order to be able to retire?
Your example uses 5%, but is that a recommendation?
Also, do you think this also works for early retirees (i.e. retirement over 30 years)?
Hi there. Yes you're right - the video doesn't answer that question specifically because there isn't a universal answer. Neither is there a specific percentage. There will never be any recommendations in the videos - just information. By nature, a dynamic spending strategy should help to make capital last longer so yes, it could still work better for longer retirement periods than the alternative drawdown options. Nothing is guaranteed though unless you actually purchase a guaranteed income at some point, like an annuity.
Thanks. A really interesting model. A question I have is once you know next years figure to withdraw do you sell equities to cover that full year as opposed to leaving it invested and just sell down each month? I can see pros and cons both sides… Any views. Thank you. 🙌
I would say Liquid assets first i.e. isa's bonds etc, then Gia investments, Etf's etc, then Pensions lastly. All depends on the pot you have and the lifestyle you wish to be accustomed too.
It’s usually best from a capital longevity perspective to target taxable GIAs first based on research that’s been carried out, but there can be variances in individual situations. Correct on pensions last 👍🏼
Clear and well informed guidance. Great stuff!
Thanks James! Glad it’s helpful.
Well done Chris another good video. Life is pretty dynamic so it makes sense to have a dynamic strategy to match. I am wondering if you are lucky enough to have a sizeable cash buffer in cash isa’s premium bonds etc and you use this for income in negative / poor performing years. How much impact this would have on sequence of return risk. It feels like a good strategy for mitigating the risks if not for maximising returns. Just wondering if you have looked at this or have any thoughts on this approach.
Hi Phil. Yes it’s always wise to have a reasonable cash buffer - 3 to 5 years’ worth of income is ideal and gives further protection in highly volatile markets. If there is a prolonged period of market falls, it can be helpful to cease withdrawals from pensions and utilise cash reserves.
@@chrisbourne-retirementplanner
Would you class putting 1/2 the cash you are proposing into a stocks n shares ISA to potentially get a better return than just being in a cash savings account
@Guy R Not a cash buffer then and you could lose money. High interest cash ISA may be a better bet.
Great video Chris - you managed to clearly explain to people with no finance background complex topics which are so relevant. I have a couple of questions related to your video, when you referred to Dynamic Withdrawal Strategy (DWS), it seems to me that you focused on annual income. (i) Is there any benefit in running the DWS in a monthly basis to factor in monthly fluctuations in stock markets values (is it a DWS on a monthly basis more likely to give better results than when applied annually) and (ii) i've noticed that there is some seasonality on the valuations on the stock markets in US/UK (i.e. higher values towards end of May and November/December), is this correct? If so, wouldn't it make sense to withdraw the income when the markets are more likely to be the highest on the yea (i.e. end of May and end of November)?
Hi there. You can run the calc as frequently as you like but it would be quite a lot of work doing it monthly. The results of doing it annually provide a sufficient improvement. I wouldn’t focus too much on seasonality because those things can’t be relied up.
Depends which has performed the best; but assuming everything performs equally I’d probably start with general investment accounts.
That’s right Jon 👍🏼
We seem to be moving from a low inflation low, interest rate environment to a high interest rate high inflation environment. what is the outlook for the 60:40 share/bonds portfolio in such an environment. Won't the bonds part be killed by the higher interest rates and loose their lack of stock correlation.
It’s not possible to say for sure, but bonds have remained good diversifiers through many different market cycles. New issues will also provide higher coupons than they have for some time so there will be yield to reinvest again, which hasn’t been the case for a long time.
Great video Chris. Just a thought - Unless I missed it I think it would be helpful to drop in how the guide rail figures are calculated, arrived at for those who may not know where to look or how to work it out.Looks like -2.5 and plus 5 percent. Thanks
Hi Craig. Thanks for your message. I did run through in the vid that the guide rails are indeed -2.5% floor and 5% ceiling. These are based upon research by Vanguard as to what levels provide the optimum result.
Would this then apply to investing, should you invest dynamically ??
Interesting question Dave. I’m not sure how you’d apply these rules to investing though? Do you mean altering your contributions based on how markets have performed last year?
@@chrisbourne-retirementplanner Hi Chris I'm not sure, but the logic would be the same, I think a year is too big, but say monthly if the market is down +%, and up -% from your nominal.....kind of the opposite of withdrawal, i guess you would have to run some simulations. While Ive got you, do you think uk gilts will recover ? My pension pot is feeling the pain of what seems an unfortunate lifestyling plan...thanks Chris...great videos, helpful and very well presented
Hi Dave. The outlook for UK gilts is certainly better than it was just over a year ago. Whenever an asset class suffers a rout, longer term prospects tend to improve. Gilt values were overinflated before, and the losses suffered were inevitable, but the shocking thing is that they happened in a single year rather than over a prolonged period as anticipated. Valuations are now better than they were and looking further out, interest rates are predicted to level out and reduce, which will be helpful to fixed income assets like gilts.
@@chrisbourne-retirementplanner thanks a lot Chris the gilt situation severely impacted my pension, i hope they setlle down. I dont fully how it works as its an accumulation fund and the coupon payment goes back in the fund but they dont buy more gilts.
No doubt this is a trick question for us N00bs ... but I'd use the Pension to fill what ever of my tax free allowance + 25% so £3923 (for example if I'm drawing a state pension (12570-(185.15*52))/0.75 ) as when that allowance is gone, I wouldn't be able to use it in later years. Any residual cash goes to the buffer, but if I need more then I'd run down the GIC - up to the CGT allowance, and then from my ISA.
Hi Roger. Certainly a strategy that can work well! It is generally considered best to withdraw GIAs first, but individual circumstances must always be considered.
@@chrisbourne-retirementplanner These always seem like trick questions! I think I just emotionally I'd feel like personal allowance is gone if I don't use it. I get that there are IHT benefits etc. to a pension but I can't get annoyed about taxes when I'm dead 😀
Hi Chris. I have just come across your site and immediately impressed! Subscribed! The Dynamic Spending technique is really interesting but unless I have missed something, can you explain how you arrived at the Max of £26775 and Min of 24,862 for the £500K pot example?
Hi Gerard. Those figures are based on the original starting income level of £25k, plus an estimated 2% inflation (£25,500). The upper figure is 5% above this and the lower figure is 2.5% below. These are the guide rails.
Hi Chris, what wrong with picking a figure and sticking to it, ignoring inflation and the market, and if if it grows take more up to 4k then leave it for a further 5 years. And increase or leave as necessary
On the proviso that your state and other pensions are increasing by 3% 🤷
Why up to 4k? Has any analysis been completed completed to test the viability of that strategy? I’m just trying to understand the advantages of it compared to other approaches?
Very interesting. Are IFAs going towards Vanguard Dynamic Spending or similar nowadays?
I expect I will go down the DIY approach. Presumably the Vanguard approach may reduce the need of having a large cash buffer?
Being a cautious individual I am aiming for 3 years of cash buffer and 5 years of wealth preservers (PNL, RICA, CGT). I need to sleep at night.
There is certainly more interest in Dynamic Spending approaches these days. It does aim to reduce reliance on large amounts of cash. Holding cash isn’t too much of a problem if you can get a reasonable return on it though.
@@chrisbourne-retirementplanner
Some cash is definitely needed when the black swan events happen - when the stuff really hits the fan out of nowhere. I think of it as paying for an insurance policy. Even as recently as Covid lots of people were caught out possibly including me: not allowed to work with the markets down 30% - a bleak combination. Then go back to the banking crisis of 2008. I am also just old enough to remember the 1987 crash. But financial crises will always happen which is why I now have a written plan to cover worse case scenarios.
Hi Chris
Is there any benefit from drawing down a monthly income or take it annually ?
Thanks Graham
Hi Graham. Most people take the annual income amount on a monthly basis as that’s the way they’ve usually been paid while working. It’s probably a better option as it spreads the selling price of shares/units in the fund. If you took a large withdrawal annually it might be at a time when markets are down and prices are low, meaning you have to sell more units to get the same amount of money. It’s the opposite of pound cost averaging… some call it pound cost ravaging!
@@chrisbourne-retirementplanner
Thanks very much Chris 👍
Cheers Graham
Hi Chris do you offer a financial planner service?
Hi there. Yes my contact details are on the About section of my channel page 👍🏼
@@chrisbourne-retirementplanner And how much in your opinion should the advice cost??
Is there an overall ballpark figure? Low£££? High£££?
Would love you to do a video on high dividend paying funds, just don't see how they can be beaten in a draw down scenario because your never really drawing down if your taking just the dividends and the pot continues to grow to some extent if its selected correctly. Just look at Vanguards UK equity income fund and its rates for example (around 6%), would love to know your thoughts.
From experience, that never tends to work as well as one might hope. Dividends are prone to reduce when we enter severe market downturns, meaning capital then needs to be drawn upon. Usually, the capital withdrawals coincide with the decline in values, meaning there are then less shares in the pot, and therefore less income, when values recover.
Was your example based on 4% then +5 or -2.5 ?
Is there such a concept as reverse dynamic spending, where you spend 2.5 more when nest egg is up 10 and 0 more when nest egg is down 10. in otherwords, spending less, in terms amount increased, when the market is up by 10 to capitalise on growth and spending at par when the market is down by 10 to use previous growth as a buffer.
Hi Norman, it is certainly possible to alter the guide rails that you set, and I would imagine that any rules based approach to responsively altering income is better than none. I believe Vanguard arrived at the figures proposed through testing various permutations.
General investment account first, then ISA, finally SIPP
Spot on Kevin.
I am very interested in this dynamic drawdown. I am actually interested if a company can offer this and 'do all the maths for me'? Or this has to be myself manually on a spreadsheet working out all the maths ..
Hi Dave. You can always engage the services of an adviser to help, but it is possible to set your own rules based approach to withdrawals. Much depends on your level of confidence and the time you want to spend on it. Advice costs money, but would save time.
Hi Chris is it realistic to think you might spend less as you get older and how could this be factored in. Also why do many pension lifestyle plans move towards UK gilts when this approach just doesnt appear to do what it says on the tin, would you consider some adjustment of these approaches ? Thanks Chris ...great information.
I think it is realistic to think you will spend less in your 80’s than 60-80 but you may need to factor in care fees at £1000 a week!
@@deanculshaw712 Agh no one can save enough for that :)
Hi Dave. I tend to observe people spending less from their mid 70’s, but as Dean says this sometimes ticks up again in late retirement. I actually discussed figuring that in in my last video. Lifestyling pension funds are a big big bear of mine - I’ve actually discussed it in a few previous videos. One was done over a year ago now called ‘Don’t De-Risk’. My thoughts are outlined in there.
@@chrisbourne-retirementplanner thanks for reply Chris I will search for that video, assuming you wanted to de risk , gilts seem an odd choice at the moment.
Hi Chris. It would be interesting to see a video, including the pros and cons for a retirement income) of using high dividend yield ETFs such as vanguard’s VHYL and/or dividend aristocrat ETFs (maybe 3 - 5%), averaging on 4% but using guiderails on the withdrawals, only withdrawing dividend pay-outs (not capital), and reinvesting any dividends not taken in the good times back into the ETF portfolio.
Also maybe on the flip side, if some capital was taken out, without guiderails, instead of reinvestment to take account of other pensions income paying out after a period of time in early retirement when the ETF running out might not be a problem as it would be covered by other pensions kicking in (not least the state pension, DB pensions, amongst others). This might be in an ISA, a SIPP or in a GIA with the upcoming tax changes.
Thanks for the content suggestion. It is certainly something that I will think about for future content as I agree it could be interesting.
@@chrisbourne-retirementplanner Hi Chris. Further to the content suggestion above, regarding using high dividend yield ETFs and dividend aristocrat ETFs as a long-term income strategy in retirement, please also consider the pros and cons of covered call ETFs to provide dividend income in retirement. N.B. QYLD and QYLP are now available on the London Stock Exchange.
With high inflation today of over 10% I wonder how the strategy fares in the simulation? I have a feeling that it won’t end well!
Hi Simon. It wouldn’t if we had 10% inflation every year, but that is extremely unlikely long term.
Very helpful, thanks.
You’re welcome thanks for watching.
Thought provoking and your modelling isn’t to far from mine … or maybe that should be the other way around? 😂
The piece I am missing is capital consumption. Of course, less capital, less growth etc., but whatever value you start with, there seems a fundamental question: Are you aiming to finish at around the same level of capital to pass on, or is that pot something you might expect to ‘mostly’ consume by death … not that you know that date? This session seems very much in the vein of maintaining capital and so maintaining growth (income) from the fund, meaning you start with 500/800/1000K/whatever, and look to preserve that pot at the end. Surely an option is to consume at least some of that capital before 85/90/95? Indeed you spending may be slowing up by then?
Indeed what is the position of pension capital and final care? My Dad’s assets were eaten by care costs in his last few years. Lovely that he had good care, but I was on the point of applying for council support for his care fees just before his death. On these models, if you preserve your 500/800/1000K pot, what happens to that when you need care? Have you saved spending your earnings just for it to be consumed on end of life care and not passed on?
All good points Iain and probably too complex to go into long term care and pension relationship in a reply on here, but that is the main purpose of some capital preservation I’d say. I tend to believe in a ‘managed depletion’ of capital, unless there is so much capital that it can’t viably be spent.
And of course there is the partial crystallisation and taking of successive 25% tax free amounts to factor in @@chrisbourne-retirementplanner. I sure ain't simple 🙂
In reality nobody adheres strictly to a set budget, whether retired or not.
There are a huge number of variations of variable withdrawal strategies as you can imagin - the trouble is they increasing ignore reality and become more theoretical. What if life forces you to spend more in a year when markets fall? These things happen all the time - they're called life.
If you truely want to not have to worry about managing your pot and being able to be able to keep up with inflation then annuities will do that for you!
Great. Pay me daily 50 quid and I'll make sure you get some eggs and bacon for breakfast. Sounds like a good offer our you will do little work to save serious money
I agree with much of what you’ve said - certainly the fact that expenses can still be highly variable, but an annuity won’t provide all of the answers for a few reasons... One is that most only provide fixed increases, rather than inflation linked. When you do choose fixed increases, it substantially reduces your initial income. As well as that, annuities provide none of the flexibility to alter your withdrawals that other withdrawal methods do, which is directly at odds with what you’ve said above regarding potentially needing more in a future year due to life events.
@@chrisbourne-retirementplanner Yes, no arguments there. Annuities will not offer 4% inflation-linked. That might change as the interest rate environment evolves though. All you are doing when you buy an annuity is swapping your pot for a gauranteed income - the money is still managed by the annuity provider and run as a perpetual portfolio who then on take the tail-end risk of a bad outcome, with the understanding that most of the time this won't be the case, but then they also get to pocket what's left on the table from the vast majority of policies. In any case, it can be worth the trade-off if all you care about is not having to worry about the variability of your future income stream.
It would be good if you could talk about annuities a little more in a future video - I feel they're quite under-appreciated by the FIRE community.
I agree - they are, and I have a feeling they will very much be coming back onto people’s radars again in the years ahead.
Consider the cost of living has doubled over the last 6 months and the pound is weaker.....
ISA - SIPP - AUX - CRYPTO