ARF projections

Littlewillow

Registered User
Messages
14
In a bid to try and figure out when my money runs out I'm using a withdrawal calculator and allowing for an average 5.5% annual interest on investment. Is this a reasonable expectation? Wondering could those of you currently receiving income from an ARF shed some light?
 

Littlewillow

Registered User
Messages
14
What are you investing in? I am presuming that is a net return, so what are the charges on top of that?



Steven
www.bluewaterfp.ie
Nothing specific yet. Just trying to calculate how I may be fixed going forward. I haven't factored in any charges, taxes, etc. Currently have 320k in a BOB and expecting a one off lump sum of 80k in 8 years - now 59 - and hope to 'pay myself' 36k pa from age 60. online calculator indicates my money will run out when I'm around 90 assuming a 5.5% interest. wondering what are average ARF returns for somebody who is not inclined to fret when markets jitter knowing they 'even' out over time. Thinking about an ARF with a diverse global spread but this is purely exploratory at this stage.
 

SBarrett

Frequent Poster
Messages
3,129
If you are assuming a return of 5.5%, you will be looking at an equity based investment, which fell by -40% in the last recession. If that happened and you continued to pay yourself €36,000 from your fund, there is a real chance of your fund running out. When managing an ARF, you have to adjust your income as the fund fluctuates in value. Also remember that you are likely to spend more when you are 60 than when you are 80.


Steven
www.bluewaterfp.ie
 

Littlewillow

Registered User
Messages
14
Thanks Steven. Is it a realistic assumption? If you were setting up an ARF for a client, would you expect an average return of 5.5% or more?

Littlewillow
 

SBarrett

Frequent Poster
Messages
3,129
No, I don't think it is a realistic assumption. You would need to add another 1% in fees too.

I do an assessment of clients needs and other sources of income in creating an investment strategy for them. If your only source of income is the ARF, the risk of a -40% fall is probably too great to go all in with an all equity strategy. While they produce superior returns over the long run, it's handling the rollercoaster ride along the way that's the hard bit.

Don't use growth projections to fit the income you want. Adjust your income to the volatility you can handle and afford.

Steven
www.bluewaterfp.ie
 

Conan

Frequent Poster
Messages
965
A single life Annuity from age 60 (no widows benefit, no indexation) is unlikely to exceed 4% pa. With Bond rates now so low, Annuity rates are also falling.
I think Littlewillow is being very optimistic in his assumptions. With a fund of €320k at age 60, I don’t think a drawdown rate of €36k pa is realistic, just as an investment return of 5.5% ( net of say 1% management charges). To expect a gross 6.5% annual return will require a high equity strategy and that involves accepting a higher risk (which at times will pay off but at other times will not pay off).
 

moneymakeover

Frequent Poster
Messages
484
Draw down of 36k is 11.25% first year

If growth was 5% then year 2 would start with 298

Then after 36k withdrawal it would be at 262

Decreasing rapidly
 

Sarenco

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5,590
@Littlewillow

In my opinion, a realistic (if somewhat conservative) assumption is that your money will keep up with inflation - but no more that that - if invested in a balanced manner.

So, if you want your savings to last for 25 years, you need to have saved the equivalent of 25 years' worth of expenses.

Put another way, the maximum you could draw and spend is 4% per annum, adjusted for inflation. So, you would need €250k for every €10k of "income" per annum.
 

Littlewillow

Registered User
Messages
14
@Littlewillow

In my opinion, a realistic (if somewhat conservative) assumption is that your money will keep up with inflation - but no more that that - if invested in a balanced manner.

So, if you want your savings to last for 25 years, you need to have saved the equivalent of 25 years' worth of expenses.

Put another way, the maximum you could draw and spend is 4% per annum, adjusted for inflation. So, you would need €250k for every €10k of "income" per annum.
Thanks I'm obviously not au fait with the financials. However, I'm wondering what, when deciding on a fund for an ARF, what the expected interest would be when annualised over a 20-year timeline? Allowing for glitches, which are to be expected in a historical context, overall are not funds 'expected' to weather these storms? Volatility is to be expected and I don't mind being on a more 'aggressive' fund. Bearing that in mind, where am I going wrong expecting an equity-based fund to achieve an average of 5/6% over that length of time. I'm factoring in an injection of 80k on year 8 and the state pension for two people at 67.
 

Conan

Frequent Poster
Messages
965
Completely different.
If you are assuming a State Pension of say €24k (couple) and drawdown from the ARF of €12k (total €36k) that is much more realistic.
Is that what you are saying?
 

moneymakeover

Frequent Poster
Messages
484
When you say you don't mind being 'aggressive' are you saying you don't mind losses?
Do you have another source of money?

If not then you probably have to be conservative. If only for your own peace of mind.

What if you put 250k into annuity? Guaranteed 10k per year.

Live on that and spend the remaining 70k until age 68 and the state pension. And the additional 80k.
 

Littlewillow

Registered User
Messages
14
Completely different.
If you are assuming a State Pension of say €24k (couple) and drawdown from the ARF of €12k (total €36k) that is much more realistic.
Is that what you are saying?
Essentially yes. But for the first 7 years I will drawdown 36k (and earn 14k interest). When state pension kicks in for a couple (26kappx) I won't be drawing 36 but around 10ish - to make up shortfall. Target year is at 60 so pension should kick in at 67.


When you say you don't mind being 'aggressive' are you saying you don't mind losses?
Do you have another source of money?

If not then you probably have to be conservative. If only for your own peace of mind.

What if you put 250k into annuity? Guaranteed 10k per year.

Live on that and spend the remaining 70k until age 68 and the state pension. And the additional 80k.
I expect there will be losses but over the 20 years the 'gains' should balance things out. Don't want annuity as rates are too low.
Littlewillow
 

Sarenco

Frequent Poster
Messages
5,590
You are planning to draw down €252k (from a €320k pot) over the first seven years of your retirement? That's sheer madness.

What happens if the market drops 50% in the first year of your retirement and takes 5 years to recover?

Sorry to be blunt but you can't afford to retire at 60 with a pension pot of €320k if you need €36k a year to live on.
 

Conan

Frequent Poster
Messages
965
If you go back to 2007 to 2009, Equity markets fell c40%. By early 2009 (the market low) many pension investors “could not take it anymore “ and switched to Cash , only for markets to recover over the following 3 years.
As Warren Buffett said” you only know who is wearing swimming trunks when the tide goes out”. Lots of investors say that they would not panic if markets suffered a big hit, but experience suggests otherwise.
I must agree with Sarenco, what you are now saying is your preferred drawdown plan is not sustainable. I think you need to either review your drawdown rate or your retirement age.
 
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