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How much should you take from your pension each year?

Retirees opting for drawdown pensions will need to figure out how much money they can withdraw each year without running out.


by Michelle McGagh on Feb 23, 2016 at 09:00

How much should you take from your pension each year?

Drawdown is becoming the go-to option in retirement thanks to the flexibility it offers but retirees should be aiming to take no more than 4% of their savings a year to avoid running out of cash.

With the advent of pension freedom, more over-55s are choosing to put their pension into drawdown and continue investing for income as well as accessing lump sums.

The regulator has recorded a 46% jump in the number of drawdown policies since pension freedom; 22,741 were sold in the first quarter of 2015 and 33,218 were sold in the second quarter. Over the same period, annuity sales fell 18%.

Adrian Boulding, pension expert at the Tax Incentivised Savings Association, said drawdown was also becoming more widely available within pension schemes and ‘58% of people did not have to move pension provider’ in order to benefit from drawdown.

Although it may be easier and more attractive to go into drawdown, retirees must not underestimate the challenges they face in making their money last throughout their retirement.

Boulding said there were four main questions that retirees in drawdown faced: where to invest the money, the appropriate level of withdrawal, how to respond when the market falls, and what charges were realistic.

‘A good investment approach…is going to take account of the needs of the retiree, their risk profile…tolerance for loss...and will diversify [their investments]. [The investments] need to selected by someone who knows what they are doing and [who will] act in the member’s best interest,’ he said.

While getting the right investments is crucial, knowing how much money to take from the drawdown policy is arguably of greater importance.

Boulding said: ‘If you are 55 and you are taking out 14% of your pension year-on-year then it’s not going to last very long. Equally, if you are 70 years old and you are taking 3.5% there will be a great wake at the end [of your life]. People need help, they need to know what a safe withdrawal rate is.'

Safe withdrawal rate

He said there was a ‘US rule of thumb’ which is to take 4% of the pension fund as income each year.

The US research took a drawdown policy invested in 50% US equities and 50% US bonds and it found if you took 4% income a year, then there was a 95% chance of dying before the money runs out – meaning you have only a 5% chance of outliving your money.

‘The research then looked at different equity markets around the world,’ said Boulding ‘Looking at UK markets (with a 50/50 UK equity and UK bond split) the safe rate [of withdrawals] was 3.5%, if you take out 3.5% a year you have a 95% chance of dying before you run out of money.’

While annuity sales may have fallen, Boulding went on to compare how long a drawdown policy would last if a retiree took the equivalent annuity rate.

He said the average annuity was currently paying 5.6% (meaning a £100,000 annuity would pay £5,600 a year).

‘If you took that out of drawdown every year you have a 29% chance of running out of money – that means one in two taking the same out of drawdown as they would get through an annuity would run out of money,’ he said.

‘People need help [to determine] the appropriate rate of withdrawal – they need to be alerted if they take too much and they may need encouragement to take more.’

Graham Vidler of the Pensions and Lifetime Savings Association said there were ‘new risks’ that emerge as people were tasked with ‘managing their money over a long time and judging their own longevity’.

‘They have to make a judgement to avoid spending too little and not enjoying their retirement or spending too much and running out of money before they die,’ he said.

He said there was a lack of confidence when it came to making financial decisions in retirement.

‘Half of people feel confident about making financial decisions but that gets worse when it is a retirement decision as only a third feel confident. The majority of people would like regular income but the ability to dip into it now and again – a managed form of drawdown.’

But he added that as such a product ‘doesn’t, by and large, exist out there’, retirees were forced to make their own, difficult, retirement choices.

28 comments so far. Why not have your say?

Keith Cobby

Feb 23, 2016 at 09:41

Good article thanks. There is a lot of research about how much to take and 4% seems about right to me.

Although I am in drawdown I am not currently taking an income from my SIPP. What I am doing is positioning the fund so that I will be able to take the natural income which will be about 4%. I think the best way to achieve this is having a combination of income and growth funds which will give an overall yield of 4%.

By investing in investment trusts/companies with good dividend records this should enable a relatively secure income with income and capital growth.

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tony m

Feb 23, 2016 at 10:14

I'd be interested in your investment choices

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Keith Cobby

Feb 23, 2016 at 11:32

Income: City of London, Henderson High Income, Lowland, Henderson Far East Income, Aberdeen Smaller Companies High Income, Perpetual Income & Growth, Henderson International Income.

Growth: Scottish Mortgage, Henderson Smaller Companies, F & C Global Smaller Companies, Henderson Eurotrust, Bankers.

To hit 4% yield have to allocate funds appropriately.

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Keith Cobby

Feb 23, 2016 at 11:35

Forgot Finsbury - one of my best!

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Feb 23, 2016 at 11:40

This is all well and good, but as far as I can see the "average annuity" (whatever that is) is not paying 5.6%. Assuming a healthy 65 year old taking out a single life annuity with no guarantees and no inflation protection, you would be lucky to get 5.3%. Plus annuity rates are forecast to fall even more over the coming months. Also this is not comparing apples with apples. In order to compare drawdown with buying an annuity, you may need to look at the joint life amount with a guarantee, and that's currently paying less than 5%.

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stephen hill

Feb 23, 2016 at 13:48

Why would you want 50% of the sipp in bonds at such low rates 70/30 equities /bonds would be fine and then the growth in dividends will allow a higher drawdown say 4.5%. Also the draw down should increase as one ages.

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Feb 23, 2016 at 14:10

Where does the 5.6% figure come from that's not something I'm finding? Take it that it is a single life with not health related adjustments? Because I can now give my pension to my wife and indeed I believe she could then leave anything remaining to our children.... the annuity looks like a very restricted and one life dependent option...

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jo soap

Feb 23, 2016 at 14:27

i now think of my pension as a tool for inheritance tax planning, just taking a cash sum out yearly to add to my government pension bringing it up to the tax free limit ( also using my 25% tax free element ) and using my isa`s to add to my standard of living.

If my sip was all I had and say there was 100k in it, I would have no problem in taking 5k out per year, giving me 20+ years of income. After you`re 85 who needs money. My mother is 92 and that`s the advice she gave me.

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Trevor T

Feb 23, 2016 at 14:40

The 5.6% example is comparing apples with oranges. Whereas the annuity payment of £5,600 is a fixed annual amount regardless of inflation, the 5.6% is a percentage of the underlying and inflating portfolio - in other words, it increases with inflation.

Very misleading article in this respect.

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Feb 23, 2016 at 14:42

the article failed when it said the annuity rate was 5.6% - this is not the average annuity rate and makes invalidates the US and UK examples cited for two reasons:

one: the annuity rate and drawdown rate should be the same else either the annuity company is going broke or the lower annuity rate is too low..

two: nobody in their right mind should be solely invested 50:50 in equities and bonds whilst in retirement in their drawdown scheme, unless they have other sources of income, the maximum should be 30% and should be under to 20% - there is to much risk/volatility in the portfolio

remember you can only use draw down if you have 20,000 in other income (including the state pension) and remeber also that you are, on average, likely to live only 15 years in retirement (from 65 to 80) - that means you can draw down 100%/15 years or 6.7% per anum if you just draw down all your own capital in drawdown and earn zero from your investments.

the annuity rate quoted of 5.6% implies an annity company profit of 1.1% per annum (or 16.5% over the 15 year life of the annuity). The actual annuity rates are going to be closer to only 4% per annum in the real world, meaning the annuity company makes a profit of 2.7% per annum (40% capital profit over 15 years.

if you think you will live 25 years then you can only draw down 4%, assuming zero investment return.

the investment return assumptions provide icing on the capital cake. if you earn more than your drawdown rate, your pot never goes down at all! for example, if you can make a return of 5% whilst taking 4% , your capital goes up 1% a year.

it is risable that some plonker can juggle numbers with a spreadhseet to make sweeping generalizations, in much the same way that my numbers are general. the author is no expert, nor is he relevant to an individuals circumstances.

if you do think you will live 15 years in retirement and can make a few per cent on your investments in your SIPP, you can drawdown 7% per annum, thus keeping the profits the SIPP and annuity providers would otherwise make with their fat fees..

i urge everyone to think about this and not follow this plonkers drivel

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Feb 23, 2016 at 14:57

Although I'm still currently planning on the 20k figure I thought that restriction had been removed?

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Feb 23, 2016 at 14:59

i stand corrected, not keeping up with all the rule changes, thanks broomtree..

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Feb 23, 2016 at 15:28

Basically annuities providers are in the hole they are in, public perception wise, because they want it all. Their greed should shame them but, of course, in the cynical, dishonest times in which we live, there is no such thing as shame.

If professional investors - people who consider themselves expert enough to charge fees for their services - can't make 3.6% a year then they are in the wrong business.

Of course, if they can make 3.6% a year it means they are paying their annuitants out of the annuitants' own income leaving them to pocket the fund when the annuity ends as they all must.

And all the while they have been milking their clients' funds they have been charging for the privilege of being allowed to do so.

Thieves, all of them.

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Feb 23, 2016 at 15:40

exactly briesmith.

we are lving in an age of financial transparency that has highlighted the "rip-offs" within all industries, including the massive financial services industry.

you don't need to be an actuary to do the sums necessary for your personal circumstances - you can do it on a spreadsheet

the use of averages by investment professionals (average returns over a long term) life expectancy (if you are 64, half of all people will die before they reach 85 and half will die after - what a crock.

for myself, i can face up to another 20 years, and will act accordingly. I will use my drawdow as part of my retirement planning, along with company pensions and other sources of income - there is no one size fits all and the algorithms available on websites are laughable in their assumptions.

for example on HL, apparently I will exhaust my capital in twenty years with a 5% investment return and 6% drawdown.. that is complete rubbish - in less than 20 years i can only have drawn down 20% of capital using these assumptions..

there is nothing holding anyone back from forming an annuity company that pays a fair rate, other then the regulators..

my remaining huge "beef" is that i can only cash out my company pension at an annuity rate of 8% - this is criminal in my eyes - its my money, but the trustees take advice from ... an actuary - which brings the whole actuarial profession into disrepute and are part of the problem.

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A Swann

Feb 23, 2016 at 16:27

Of course everyone is different but for me 4% seems too low.

I am 60 and been in drawdown for three years

Whilst I haven't been drawing 4%,just drawing enough to use my tax allowance and living on tranches of tax free 25%'s as and when I need them.

When these are used up I will drawdown much more than 4%, my thought process is its only the next 10-15 years that I will be healthy enough to enjoy it,after that my expenditure needs will drop and saving it for care home fees doesn't appeal!

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jo soap

Feb 23, 2016 at 16:37

exactly right Swann,,, I`m trying to judge whether leaving money to the tax man through inheritance tax is more distasteful than leaving it to ungrateful kids.

All this hype about `pensioners` drawing down their pension to go buy a Ferrari is nonsense... shares in a Brothel, now you`re talkin.. hehe

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Feb 23, 2016 at 21:47

3% to 4%withdrawl rate to start off is about right for a 65 year old and then you can increase the payout 3 - 4% each year and it should will luck last you for the rest of your life including the wife and you should have most of the fund available for your children

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Feb 23, 2016 at 21:47

3% to 4%withdrawl rate to start off is about right for a 65 year old and then you can increase the payout 3 - 4% each year and it should will luck last you for the rest of your life including the wife and you should have most of the fund available for your children

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Feb 24, 2016 at 01:50

it will take you 33 years to drawdown your capital at 3% (100% capital divided by 33 years = 3 years) ..

similarly it will take you 25 years to draw down your capital at 4% (100 divided by 25)

if you are 65 when you start, 33 years will take you to 98 years old when you die (25 years will take you to 88).

the actuaries will tell you will be lucky to live that long. Remember that actuarial assumptions are averages, but the cumulative probability of death increases in the population the closer you get to an average.

if you can earn 3% a year, and draw down 3% your capital remains untouched, forever.

If you can earn 4%, your capital will deplete by 1% per annum and will last 100 years, so you can live o it until you are 165 years old.

these numbers do not adjust for inflation, for myself, i am budgeting for a few years in a care home at around 40,000 a year

of course, you will need to adjust some numbers for inflation.

this is why "actuaries" only focus on "real returns" not nominal returns.

if you have faith in the central banks general inflation will be 2%, though we have seen that pensioner inflation is a lot higher, especially as the drug companies and medical profession in general "milk" pensioners for all they are worth (easy target).

I would budget 6% for pensioner inflation and adjust your numbers accordingly to preserve your standard of living.

my parents died a few years ago and their local authority taxes had grown to be as much as their original mortgage repayments in 1975, so you might want to think about that too

good luck


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Feb 27, 2016 at 23:46

"it will take you 33 years to drawdown your capital at 3% (100% capital divided by 33 years = 3 years) .."

Be some portfolio not to incur capital losses in a 33 year period.

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Feb 28, 2016 at 00:38


The 3% return is an average, and therein lies the key. It is not return on its own, it is RETURN AFTER FEES adjusted for RISK

Achieving a long run average return of 3% per annum says nothing about the frequency or size of the potential for a long streak of good and bad years.

The author, Boulding (strikes me as complete idiot) and suggests 50% per in equities and a draw down rate of 3.5% per annum.

Firstly, assuming a zero % investment return with no adjustment for inflation, it will take you 28 years to withdraw the capital at 3.5% per annum (100/3.5 years) - taking you to an age of 93-94 years old, which is well beyond most people's life expectancy, certainly mine.

He then advocates that you need to invest 50% in equities at retirement, which I regard as risible and an encouragement to get your face ripped off by predatory pricing, mediocre fund manager skills at best and high fees.

Assuming the correlation between equities and bonds is 1 (q/e has blown that inverse correlation to bits so now both bonds and equities move in tandem and have a closer correlation to 1), this 50% split between bonds and equities needs to be put in the context of return (after fees) and "risk"

A reasonable assumption for the next twenty years might be that fixed income will give you 1.5% per annum and equities 5% per annum. NET OF FEES

A 50:50 split would give you a portfolio return of 3.25% per annum (50% times 1.5% plus 50% times 5%).

If you are only drawing down 3.5% per annum, your opening capital of £100 will, on average, only deplete by 75 pence a year or 0.75% per annum (deplete by 3.5% drawdown less 3.25% investment return). Your SIPP will last for 400 years in retirement on that basis. In 30 years (when you are 95 years old) it will have fallen by 30 years times 0.75% or 22.5%, leaving 77.5% of your original capital intact.

BUT, hold on, how much risk are you taking? A 50:50 bond/equity portfolio (with perfectly correlate returns between bonds and equities) implies a risk of around half of an (estimated) risk of 20% for equities plus an assumed half a 10% risk for bonds (the bond risk assumes you want bond portfolio with a ten year duration).

The risk for the 50:50 portfolio is 15%. That means the expected returns over the long run are plus or minus 15%. This risk needs to be “wrapped around” the mean return of 3.25% per annum to give you the likely range of outcomes in, say 10, 20 or 30 years.

Simply put, a 15% per annum risk around a portfolio return of 3.25% per annum return indicates a range of somewhere between -11.75% per annum and +18.75% per annum in ten, twenty or thirty years’ time. These outcomes are made even more useful as the range captured by the 15% risk is only a 2/3 probability, with another 1/3 lying outside these bounds. 95% of outcomes (two standard deviations rather than one) will be between -26.75% per annum and 33.25% per annum over 10,20 and thirty years.

My preference for my SIPP that reflects my other assets and risk preference is to have only 10% in equities. I prefer an expected return of (90% times 1.5% per annum fixed income returns PLUS 10% times 5% per annum equity returns) 1.85% per annum with a risk of 9.2% (90% of 10% fixed income risk PLUS 10% times 20% equity risk).

This risk return trade-off is the worst I have seen over 40 years of investment. Leaving aside the 18% 20 year gilt rates of the mid-1970’s, it had long been a rule of thumb to expect around 5% per annum from fixed income and 8% per annum from equities – for the same risk as shown above.

A 90% fixed income/10% equity portfolio would at least have compensated you for taking that 9.2% risk, with a 9.2% return, rather than a miserly 1.85%. Even the 50:50 portfolio returns would have looked much better on a risk adjusted basis with 6.5% returns for that 15% risk (still poor, but there you go).

When you factor in risk, you understand the impact of the suppression of interest rates via QE on the expected returns of capital markets. You have no way of knowing whether an investment is properly adjusted for risk, or that it is even possible to differentiate between the quality of any borrower, since all interest rates and companies are the same, or similar.

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Trevor T

Feb 28, 2016 at 03:06


What is your definition of 'risk' when you ask how much risk you are taking? I don't understand what you mean by a risk of 20% for equities, for example.


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Feb 28, 2016 at 04:21

"RIsk" associated with investment returns, in the classical investment sense, is a statistical measure of how much the returns of securities have varied each calendar year in the past. You can calculate this yourself by taking the calendar year returns for the last, say, 40 years, for the FTAS

It is not a forecast of risk, it is an historic measure - and is used by the investment industry to model things like Value at Risk, option pricing annuity pricing and the variability (degree and probability of how much prices go up and down) of returns from the different investment markets, individual securities and portfolios of securities.

There is a relationship between the ways securities move in relation to each other. This disparate movement between the prices of different securities is captured in a portfolio sense (for multiple securities) using a statistical term called "correlation coefficient".

In other words, unless all securities move in the same direction all the time, you cannot calculate the risk of a portfolio without reflecting both the "riskiness" of individual securities AND the way the securities in the portfolio have moved in relation to each other, in the past. Each security has a correlation coefficient and the overall risk of a portfolio is equal to the sum of all the security weights times their riskiness times their weight in the portfolio.

“Risk” of 20% means that if your forecast for equities (I know it's dumb and doesn't reflect trends or levels of current market prices or forecast returns) is, say, 10% per annum, you will be within -10% and +30% two out of three years (your 10% return plus or minus the risk).

You should be able to grab the calendar year returns from the All Share Index for the last 50 years easily enough. I haven’t used total returns or updated a spreadsheet for CY2015, but here is the last source used for calendar year returns up to CY2014.

Note that to do a professional job you need to get the index of total returns as this index does not include dividends. I focus on risk, so the dividends don’t make much difference. Taxes, costs from active management and survivorship bias will each taint the numbers a little, but not materially, since they ought to impact all risk measures similarly.

The rolling 10, 20 and 30 year “Risk” (which ought to cover most people’s investment horizons – including my own) as measured by the standard deviation of returns of the All Share Price Index for calendar years from CY1973 to CY2014 are below.

For rolling ten year periods, risk has averaged 18% p.a. and tracked between 9% and 51% p.a.

For rolling 20 year periods, risk has averaged 17% p.a. and tracked between 12% and 36% p.a.

For rolling 30 year periods, risk has averaged 19% and tracked between 14% and 31% per p.a.

To give you some sense of how this relates to rolling returns (that is how the actual returns you can eat have varied over those same periods, here they are for information

For rolling ten, 20 and 30 year periods, returns have each averaged 9% p.a. This might be have been a robust starting point before central bank intervention fouled the capital markets and governments persisted in borrowing beyond the limits that they could afford

The range of rolling returns (which you could treat as a proxy for risk) is instructive Although these is an almost constant 9% p.a. average return for each of the ten, 20 and 30 year rolling periods, the ranges of rolling period returns are below:

For rolling 10 year periods, returns have been between -2% per annum and +24% per annum. So if you were lucky you got a high return of +24% p.a. over the best ten year period and a NEGATI VE 2% p.a. if you were unlucky. NEGATIVE 2% p.a. !!!!

For rolling 20 year periods, returns have ranged between +4% p.a. and +17% p.a.

For rolling 30 year periods, returns have ranged between +6% p.a. and +13% p.a.

Bod returns over 30 years are not that dissimilar, though both bonds and equities are likely to return closer to the lower numbers (-2% p.a. for the next ten years, for example for both longer term bonds and equities).

I remember markets in the late 70’s when returns were hugely volatile during a crisis of confidence in all western governments (FTAS just 150 and the 30 year Gilt yield was over 15%). I believe that we are heading for the same crisis as government have borrowed so much of the future by running persistently large fiscal deficits, there is no “future” left for anyone.

Hope this helps.

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Feb 28, 2016 at 14:51

"This risk return trade-off is the worst I have seen over 40 years of investment. "

Perhaps it's the end of an era. Which will make historical data irrelevant to the future. There were significant changes in the 70's in terms of monetary policy which on reflection influenced many events. Changes in the global economy since the early 90's have also changed the game.

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Trevor T

Feb 28, 2016 at 16:10

hooligan, thanks for your detailed comments on risk

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Feb 28, 2016 at 17:10

Trevor, most welcome - there is nothing complicated about the "risk" used by investment industry and by market participants, but it annoyes me when participants and regulators pretend that you have to be some sort of "guru" in order to udnerstand it. It irritates me even more when industry participants charge 1-2% for crass advice that is vague, irrelevat to individual circumstances and unaccountable in their salaries and bonuses.

In my view, if you offer advice, you share in the profit AND the loss to the individual investor - over time, the clowns would not be "stuck in the middle with you" but would be finding a job that better suited their skill set.

Using "investment risk" in portfolio managemet is a reasonable starting point for guaging how much your forecast could be wrong, based on historical price volatility.

It is NOT a guarantee of outcomes, just a probability that they are most likely to track between.

If you have a conservative expectations you might have this as a starting point (I have negative returns for both bonds and equities as we enter a global bear market,

To declare my positions, I follow my own advice, I have cash (70%) annuities (20%) and five direct holdings of high dividend stocks (10% evenly split BP, SBRY, NG, BATS and VOD) for a portfolio that costs me £200 a year in all fees.

1. bond returns of 2% p.a with 10% risk (medium dated bonds)

2. equity returns of 8% with 20% risk,

3. assume a correlation of 1 between bonds and equities,

4. have a 50:50 equity/bond portfolio weight

you will get (using these forecast returns and historic risk characteristics) a portfolio forecast "risk" of 15% and a forecast return of 5%.

this means that your returns over the next ten years are two thirds likely to end up between -5% p.a. and +15% p.a.

it also means that your returns are liekly to be within -15% p.a. and +35% p.a. with a 95% probability.

how useful is this?

you could lose half your money (my guess) if you hold this 50:50 portfolio after ten years, i doubt you will lose all the portfolio after 20 years, but I wouldn't be totally shocked as regulations change, central banks kill the economy and the impact of running persisitent 2-5% annual fiscal deficits to "steal" the entire future from our descendants kicks in. I am afraid that I am in the camp that we will only see a high performing economy when governments run surpluses of 2-5% p.a. to recover from this "theft". That implies a cut in spending of 4-10% of GDP right now or around 15% of spending (assuming 40% of government spending to GDP) here is something from a year or so ago that caught my eye.

if you prefer that 15% to 5% set of risk/return numbers to, say risk of only 11% to get 2% returns - to match a succesful Bank of England matching inflation - to a 10% equities and 90% bonds, (drop 4% risk for a drop of 3% in returns) then I think you should know what you are getting into and not be misinformed by authors of this article and the self-serving advisers who can only give you advice if they leave you in ignorance of what might happen,

note that i have used ten year bond returns in my example, but that I personally am holding cash instead. this is because we are in the biggest bull trap for bonds the world has ever seen. mind you, i am using four decades of experience to say that. log dated bonds are a laughable 2% or so for a risk of 20% (I use the duration of bonds as a proxy for their risk).

would i buy 20-40 year government bonds at 2% return and 20% risk? not on your or my life! these are atrocious characteristics and a direct result of central banks monetizing government fiscal deficits (and acting dependently, not independently, as per their charters) and enabling the grand "theft" of the future from its citizens. I doubt whether any poltician would ever have the honesty and moral rectitude to say "past governments have been engaged in protracted theft to further their own interests to feed at the trough of tax revenues".

the returns from short dated investment grade and junk/high yield (sub-7 years) are tempting - they are much higher than 2% (5-8% and carry a risk of their duration, say a mid-point of 6%). Of course, to get these sorts of bonds you have to pay the investment industry 2% per annum. This is usry as the marginal cost to fund managers is less than 1/4% per annum, and probably closer to just 5 basis points (0.05% per annum) the rest pays for their fat cat bankster type life styles.

financial market participants that offer bad/misleading advice and pretend a knowledge they don't have are pariahs and should not be allowed to publish their views - but I won't take a pop at the editors of citywire, since at least they provide the facilities to further the debate and put issues like this out in the open.

so, there you go, hunker down, prepare for negative annual returns for the next ten years (remember the Japanese Nikkei hit a high of 39,000 in 1991 - 25 years of QE and fiscal stimulus).

happy hunting

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Mar 01, 2016 at 17:31

Just a few comments.

Firstly, the amount that can prudently draw down varies with age. The older you are, the smaller your life expectancy in terms of years, and the higher the off-take % you can maintain without running out of funds.

Secondly, the calculation is approached by asking how much of your total wealth today (your pot) can you spend without prejudicing your freedom of action tomorrow.

What your wealth will be tomorrow, is unknown, and unknowable. However, perhaps by having suitable diversified investments, some will do well, and others not so well, but you will still succeed in carrying value forward in time.

The actual amount you draw-down in cash terms should be reappraised periodically to reflect the actual changes in value of your pot and your reducing life expectancy. Note that the longer you still survive, the greater your ultimate forward life expectancy.

Thirdly, you have to find some kind of answer to the question, "how long am I going to live for?". The exact answer to this question is unknowable, but the best that can be done is to base your answer on the experience of earlier generations as reflected in actuarial tables, supplemented by knowledge of the mortality of your family members, or other members of a group with whom you might identify, e.g. office workers, forestry workers etc.. The figure you will find is your expected age at death, but expected only means the half the cohort of individuals in similar circumstances to you will be dead, and half survive. If you plan your draw-down on simple life expectancy, you will have a 50% chance of running out of money before you die. This is not an attractive proposition. One simple answer is to use the actuarial tables again to estimate your expected survival beyond your expected age at death. This enables you to calculate the age by which three quarters of your cohort will be dead, and if that is used as your initial prediction of lifespan for planning purposes, there will only be a 1 in 4 chance of running out of money, not perfect but much better odds than 1 in 2. Further to this, if the rate of draw-down is periodically reviewed as suggested in the second point above, then the chance of running out of money becomes vanishingly small.

Note, the GAD (government actuaries department) publishes mortality tables which may be helpful in undertaking the required calculations.

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Mar 01, 2016 at 18:59

good stuff pilgirm!

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