Maximum drawdown ARF

K

KOW

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60 in May. Will go the ARF route. Not huge amount in pension 300k. Without going into detail I am retired now and will get state pension in due course. I will take my 25% tax free lump sum and I am considering drawing down around 23k from the pension each year as this will only be taxed at 20% lower rate. At that rate I would exhaust the pension in around 10 yrs. Age 70. I would have other funds seperate to my pension to carry on until the grave when pension exhausted. Just to mention I put all monies within a cash fund about 18 months back . What do people think about such a strategy? Also if you agree with such a plan would you keep it in cash within the ARF.
 
Keeping it all in cash is the wrong thing to do, even if you plan to exhaust the fund in 10 years time. The recent inflation spike finally altered people to the presence of inflation but it has always been there.

Even if inflation runs at 2% per annum, the value of €23,000 in 10 years time will be €18,868 in today's money.

You also have to look at all of your assets when planning an investment strategy and not just look at each in isolation.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
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KOW said:
Just to mention I put all monies within a cash fund about 18 months back . What do people think about such a strategy?
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If you plan to exhaust it all in ten years' time then I don't see why you should have much if anything outside cash, particularly if you have other assets. Over ten years you could have a very bad sequence of early returns with equities (aka "bomb-out risk") leaving you with nothing by year 5 or 6.

But I agree with @Steven Barrett that looking at this in isolation makes it harder to give advice.

Try a money makeover maybe:

Money makeover

Budgeting and dealing with debt moved to Mortgage Arrears and Debt Forum .
www.askaboutmoney.com
 
Without the detail, it’s impossible to share any meaningful thoughts.
 
ClubMan said:
Bit late to ask for opinions on that choice now?
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Clubman the two previous replies to my post could understand how I was considering keeping the fund in cash going forward. If you could not understand my post sorry.
Why do you bother with such replies have you nothing better to do?
 

As @NoRegretsCoyote says the risk, short term, in equities could see a significant reduction in capital, which may never recover within 10 years.
Coupled with management charges, this is a risky strategy, for someone planning to spend this money over the next few years.

It brings me back to my recurring issue, of people who want access to their cash, quickly and cheaply. It should be possible to put the cash into a vehicle , which gains the basic deposit interest rate, no charges and tax declared via the annual tax return.
 
That's just a savings account - and the tax, DIRT, will be collected automatically so no need even for a tax return!
 
Thanks for helpul replies.What I had in my own mind was something like a 50/50 split. Cash and equities tracking S&P 500 or world index.
Taking around 23k per year because it will be at 20% and the lean years with corrections taking just my 4%.
I am not reliant on the maximum draw down I suggest or really any draw down and can hold off when corrections arrive.
 
jpd said:
That's just a savings account - and the tax, DIRT, will be collected automatically so no need even for a tax return!
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Except you can't put a pension into a savings account. So, if I have an AVC and accumulate 100k, after maximising my tax free sum, I have to put the remainder into an ARF. The ARF comes with charges, even if I just want to hold the money as cash (ie; no equities, or fancy bonds, whatever).

If I then want to spend the money, quickly, in my early years of retirement and not take any risks, I have to pay the same charges as someone investing the sum in complex markets. Just seems unfair.
 
You get tax relief on the way in, there have to be some disadvantages on the way out

In any case keeping an ARF in cash is just throwing cash away - inflation, even at 2%, will eat into it big time
 
jpd said:
You get tax relief on the way in, there have to be some disadvantages on the way out

In any case keeping an ARF in cash is just throwing cash away - inflation, even at 2%, will eat into it big time
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But if I want to wind down my ARF in 7 or 8 years, using the maximum 15% per year, I am taking a potential risk by investing in equities.
What if my ARF falls by 25% in the first two years, I will see a big reduction in my payment. On top of that I have to pay the fund managers, for the pleasure of my reduced income.
A 6 or 7 year investment window, is quite tight to smooth out the market variations.
 
You can take all the money out of an ARF whenever you want - it will be taxed as income, of course
 
Changing to cash 18 months ago was a good move. If you had remained in equities you would have lost money.
 
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Luck of the draw - my portfolio, a mixture of shares and ETF, is back to where it was 18 months ago and in that time I had very little turnover, less than 3% of the portfolio
 
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You don't have to put it all in equities. And you can elect which fund the withdrawals come from. Also, 10 years is a long enough time. Only in the worst scenarios does an all equity investment portfolio (which I am not recommending) lose money over a 10 year period. So while it can happen, the chances are low.

The OP can also adjust the income that they take from their ARF. Taking a fixed amount increases the chances of your fund running out as there is no adjustment based on market conditions. Taking a % reduces these chances as when markets are down, your withdrawals are reduced.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
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