It's 4% of the balance each year. Not 4% of the starting value. If you withdraw 4% of the balance, it will never go to zero. Or am I missing something?I don't understand why Ireland has such enforced high minimum drawdowns. It nearly guarantees portfolio will reach zero before 30 years are up.
Liam, thanks for indicative quote, does that annuity payout change e.g. can it go up or down due to inflation? or is fixed?
(As an aside, although it can sometimes seems counter-intuitive, I often advise against availing of escalation on annuities. If I run a level quote and an escalating quote and model the two side-by-side on a year-by-year spreadsheet, usually it takes over 25 years before the cumulative amounts paid by an escalating annuity will match those paid by a similar level one.
Doesn't it?I accept 4% of each years value will never actually reach 0, but that doesn't change the thrust of my point.
I wish there were more papers studying the Irish case! I will read a bit more about the variable percentage withdrawal methodology as that is what we have here.
Well, it depends what you mean by a "better outcome".We'd need to run the models with equivalent assumptions and see which gives a better outcome.
It's 4% of the balance each year. Not 4% of the starting value. If you withdraw 4% of the balance, it will never go to zero. Or am I missing something?
Again it depends on your sample period. Take two ten-year periods and the HICP, my preferred measure of inflation:
96-06: +34% over the whole period
08-18: +2% over the whole period
In the first period inflation rose by a full third. This would really, really reduce the living standards of a pensioner on a non-indexed annuity. In the second period it rose by an amount you would barely notice, and there would have been little benefit to indexation.
Both of these periods when Ireland's monetary policy was set in Frankfurt too.
The lesson is that inflation in Ireland is historically volatile, and if you are risk averse then index-linking (at least partially) makes sense.
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