# Pension pot. How long last ?



## Daddy Ireland (13 Jan 2020)

Say a pension pot of €150k and withdraw 6% per annum and the dwindling pot increases by 4% say on average.   How long will the pot last ?   Is there an equation ?


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## Sarenco (13 Jan 2020)

It really depends on the sequence of returns.

Here's a short paper from BlackRock that explains the concept -


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## mtk (13 Jan 2020)

roughly using your numbers for assumptions when 150,000*((1.04*.94)^(expiry term))<0
just solve for expiry term in the equation 
( ignoring sequence of returns which makes it more complicated )


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## Daddy Ireland (13 Jan 2020)

mtk thanks. Not quite sure how to solve that.


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## orka (13 Jan 2020)

If you are taking 6% of the pot each year it will last indefinitely but your withdrawal will reduce over time (i.e. even if your fund is down to 1,000, your 6% is only €60 so the fund lives on...).  If you mean take 6% of the 150,000 (which is 9,000) at the end of each year and the fund grows at 4%, the fund will last about 28 years.  This assumes your 9,000 stays flat.

There isn't really an easy equation to use - using Excel is probably the easiest way to work it out.


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## Daddy Ireland (13 Jan 2020)

Thanks Orka.  Taking 9k flat per year so approx 28 years. Thats great to have an idea.


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## NoRegretsCoyote (14 Jan 2020)

Daddy Ireland said:


> Thanks Orka.  Taking 9k flat per year so approx 28 years. Thats great to have an idea.


Do you expect 9k to have the same purchasing power in 28 years as today? I don't.

I would make allowance for inflation in planning your drawdowns.


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## Paul O Mahoney (14 Jan 2020)

NoRegretsCoyote said:


> Do you expect 9k to have the same purchasing power in 28 years as today? I don't.
> 
> I would make allowance for inflation in planning your drawdowns.


Great point on inflation,  I've been using excel to work out this, our "official " inflation and real inflation appears to be two different things. 
Official is about 1%, real, my view , about 3% all our expenses are up, utilities,  broadband, insurances to name just a few.
I have put and extra line in my analysis for inflation as a minus % on the annual closing balance bit like pension levy, don't know if that is accurate and would like a better method if anyone can suggest one.


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## NoRegretsCoyote (14 Jan 2020)

Paul O Mahoney said:


> Official is about 1%, real, my view , about 3% all our expenses are up, utilities,  broadband, insurances to name just a few.



Your personal inflation rate may differ, but in general headline inflation measures overstate actual increase in prices as they don't account for quality improvements very well. But that's OT.

Bear in mind that 3% for 28 years will see your drawdown amount more than double! I would use something like 1.5% to 2% myself.


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## Daddy Ireland (14 Jan 2020)

Did an excel working assuming flat 5% withdrawal, 2.5% inflation and 4% growth in pot.  Says my pot will run out 19 years.


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## Daddy Ireland (14 Jan 2020)

Sorry think it should be pot runs out after 23 years and not 19 as I stated.


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## Daddy Ireland (14 Jan 2020)

Its 19 years based on 6% withdrawal i.e my opening post query.


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## jpd (14 Jan 2020)

I don't know how you calculated your figures but they are not at all correct. The spreadsheet you upload is empty


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## jpd (14 Jan 2020)

Of course, the real problem here is that 9,000 in 2040 will not buy anything like 9,000 in 2020
For example, consider how much you could have bought with 9,000 in 2000 and according to the CSO, that would cost 12,000 now
So unless you want to see your living standards decline drastically, a flat 9,000 is completely un-realistic

Also, 4% return may be quite optimistic over 20 years


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## mtk (14 Jan 2020)

if withdrawal is fixed amount like 9k increasing with inflation AND you assume inv. return=inflation rate 
The simple formula = pension pot/ income drawn down =150/9= 16 years approx


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## RedOnion (14 Jan 2020)

Daddy Ireland said:


> Sorry think it should be pot runs out after 23 years and not 19 as I stated.





Daddy Ireland said:


> Its 19 years based on 6% withdrawal i.e my opening post query.


Yes, correct.
So in first example, you're taking 5% of you pot in year 1, and increasing the amount you're taking each year by 2.5%, while expecting an investment return of 4% on the remaining pot each year.

That's all fine, but for planning purposes, I wouldn't expect your investment returns to produce any more than inflation (if even that) as in @mtk example above.


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## Daddy Ireland (14 Jan 2020)

Thanks all for input. But assuming investment return only equalling inflation seems an absolute worse case scenario.  Thats like saying that if I started a pension today I should expect no return other than a rate of inflation return.  Cant imagine anyone taking out a pension under that scenario.


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## RedOnion (14 Jan 2020)

Daddy Ireland said:


> But assuming investment return only equalling inflation seems an absolute worse case scenario.


I 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.


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## Daddy Ireland (14 Jan 2020)

jpd said:


> I don't know how you calculated your figures but they are not at all correct. The spreadsheet you upload is empty


Where are the figures incorrect for assumptions used.


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## jpd (14 Jan 2020)

When I used 6% and 4%, the pot ran out after 26 years rather than 19 or 28


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## Daddy Ireland (14 Jan 2020)

Ok


RedOnion said:


> I 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.


Ok thanks for explaining


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## Conan (14 Jan 2020)

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”.


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## Daddy Ireland (14 Jan 2020)

jpd said:


> When I used 6% and 4%, the pot ran out after 26 years rather than 19 or 28


You dont have inflation built in.


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## Daddy Ireland (14 Jan 2020)

Conan said:


> 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”.


Further food for thought.


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## MrEarl (15 Jan 2020)

Hello,

My view is that 4% average growth, net of charges, is no where near realistic, for most people in retirement.

Conan is entirely correct to draw everyones attention to the need to invest heavily in equities and remain in them for the long term, if your hoping for 4% growth (net) pa.

There's a reason why the large majority of pension funds reduce the risk profile of peoples retirement funds, as they get near retirement age, it's to reduce the volatility to near zero. With that, comes very low growth (in a low interest rate environment), but you get the comfort of knowing that you won't incur significant losses over a short period of time etc.

Anyone looking at their numbers and forecasting average growth of 4% pa net, needs to answer one question very honestly here... Are they really prepared to risk losing 25% of their fund, or possibly even more, in one 12 month period, then perhaps another 15% the following year, particularly if they are no longer working (retired) and need this money to help fund their retirement?

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.

Long term government bond rates remain extremely low, with very little sign of them increasing over the next 5 years or more... Cash deposit rates are even worse. That's where most people need to be getting their expected growth rate from when considering their fund's annual growth in retirement, not the equities market.

Things may change in 10-20 years time, with growth rates increasing without the need to take on significant risk, but my crystal ball tells me that its that far out, and certainly won't happen in the next 5 or so years.


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## Steven Barrett (15 Jan 2020)

MrEarl said:


> *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.*



It depends on each clients personal circumstances. But I don't have any ARF clients who average a return of 1%. All of them understand the need to take investment risk with their fund and have enjoyed returns of 3% + depending on their appetite for risk. I also reduce the risk exposure for older clients as the get into the more passive period of retirement when the cost of their lifestyle decreases. At this stage, it is clear that they have enough money for the rest of their lives and don't need much of a return. 

Steven
www.bluewaterfp.ie


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## Sarenco (15 Jan 2020)

It's probably worth bearing in mind that where the owner of an ARF (or a vested PRSA) reaches 61 years of age, an annual imputed distribution is calculated at a rate of 4% of the market value of assets in the ARF on 31 December each year.

The imputed distribution rises to 5% where the ARF owner reaches 71 years of age.

The imputed distribution at all ages over 60 is 6% for those with ARF assets and vested PRSAs worth over €2 million.

Tax is levied on this amount as if it had been drawn down.

IMO, the imputed distributions levels provide a good framework as to what is sensible to draw and spend from an ARF in any given year.


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## jpd (15 Jan 2020)

I don't think the imputed drawdown is any indication of what is a sensible amount to draw down

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. I am fairly sure that the Revenue don't really care whether they run out or not


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## Sarenco (15 Jan 2020)

jpd said:


> 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.


That's certainly true.

However, I think drawing and spending 4% pa of the value of a balanced portfolio that is positioned to (roughly) keep up with inflation (net of all costs), with an acceptable level of volatility, is sensible for a projected 25 year retirement.

The 6% figure suggested by the OP seems too aggressive to me (unless the OP has substantial assets outside his ARF).


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## Steven Barrett (15 Jan 2020)

The majority of my clients stick to the 4% withdrawal rate or close enough to it. The good thing about that is that it is risk adjusted so the amount withdrawn will reduce in a falling market. For those withdrawing a fixed amount, there is an increased chance of running out of money if they don't adjust their withdrawal rate in a falling market. 

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. But then, the Revenue are only looking at the tax return, which makes the AMRF requirement all the more baffling. No one wants it. 


Steven
www.bluewaterfp.ie


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## Daddy Ireland (15 Jan 2020)

Just to say I appreciate all contributions to my opening post.


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## Sarenco (16 Jan 2020)

SBarrett said:


> 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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## Steven Barrett (17 Jan 2020)

Sarenco said:


> 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:-
> 
> ...



The US bit is hugely important. While home care is hugely expensive in Ireland, if you run out of money, you won't be left sitting at home sitting in your own pee. Or you will get a medical card. That is a massively valuable safety net to have so you can enjoy your retirement while you have the wealth and energy to do so without having to worry about keeping the majority of your assets to pay for medical care when you're not even sure what's going on. 

I find that people who save for retirement are prudent enough in spending the money (some have difficulty adjust to the decumulation stage of life), so you don't get situations where people blow it in their 60's and rely on the State afterwards (as the pension fund managers told Charlie McCreevy when the ARF was being introduced and hence we got the AMRF), so there is usually money there anyway for health care. 


Steven 
www.bluewaterfp.ie


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