Decumulation: a real life plan

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• 1 Michelle - Fire & Wide February 23, 2021, 10:56 am

  Nothing like doing something for real to really test out your financial belief & strategy.

  We pulled the trigger two years ago now and it’s gone pretty well financially. Some shockers and some upsides. But absolutely – never underestimate the ability to adapt as needed.

  Portfolio-wise, similar on the equity side, a different defence strategy. Plus a different view on the UK given a higher probability for us not remaining in the UK long-term. Which makes a difference I think?

  I also somewhat target towards tax allowances, e.g. some div shares, some interest income etc alongside CGT and personal allowance usage. Never at the cost of investing in something I don’t believe in but when there’s a choice, it can make a big difference to that real return post tax & inflation. I.e. the one we really care about!

  Exciting times ahead though! Look forwards to the next part…
• 2 Al Cam February 23, 2021, 11:21 am

  @TA:
  Good post – nice to see how you envisage the various moving parts interacting from here on.
  I note that you assessed safety first as too expensive – I can understand that conclusion. However, have you considered a partial floor, ie some safety first. In due course, your state pension(s) will provide such a Floor and that might be a natural flooring level to aim for in the lead up to those events?

  There are many good posts on risks or threats as you called them. Pfau has written extensively on this matter, and IIRC there is a free ebook available at the Retirement Researcher site. My personal favourite is from the late great Dirk Cotton, see: http://www.theretirementcafe.com/2017/07/retirement-is-risky-business-heres-list.html

  One of the few distinct advantages DC schemes have over DB schemes is that the Pot survives death intact. Thus, in your circumstances, survivor scenarios are probably less problematic than had you been using a single DB scheme as your Floor. I am assuming you and Mrs A (or is it soon to be Mrs D?) are actually married?

  IMO, there is one key risk you may have possibly over-looked: your spending. For example, spending shocks or unavoidable tax increases, etc. FWIW, I think this is the single most important data point post jumping ship. Others will no doubt disagree, but there is an absolute level of spend that is truly essential to survive and you do not want to find out a few years down stream that you have under-estimated.
• 3 The Investor February 23, 2021, 11:29 am

  IMO, there is one key risk you may have possibly over-looked: your spending. For example, spending shocks or unavoidable tax increases, etc. FWIW, I think this is the single most important data point post jumping ship.

  Just a quick note to say that while we’re delighted to hear comments and even constructive criticisms, it’s a fair bet that having blogged about this subject for 10+ years, there’s absolutely nothing mainstream that @TA has overlooked 🙂

  We discussed income floors back in 2013:

  https://monevator.com/the-most-important-goal-for-every-retiree/

  The other thing to remember is this is a three-part post. The original post was over 4,000 words long!

  Clearly excessive, even for our talking-for-Britain standards.

  So I chopped and reshaped it into a three-part series. Various risks will be discussed in part three.

  I know it’s tricky (you don’t know what’s coming!) but ideally comments should focus on what’s in the article not what isn’t, at least until we get to part three. That way we have the best focused conversations for maximum reader utility.

  In summary, part one is as above, part two is about dynamic asset allocation and withdrawal and the chosen SWR, and part three is about risks, back-up plans, and inflation issues including hednonic inflation.

  Cheers!
• 4 Al Cam February 23, 2021, 11:49 am

  @TI:
  Fair enough. We all have blind spots!
  Editing is never easy; and on that theme a sentence based on your final para towards the start of the post may have been helpful.
• 5 xxd09 February 23, 2021, 11:56 am

  Well done
  We are further down the road (both 74) -and survived-so far!-learnt some lessons
  On retiring -1 at 57 the other at 60
  We spent the same amount in retirement as working-lots of free time -travel etc-will this continue- probably because even though old and travel less need better grades of accommodation etc -difficult to rough it as you get older
  Withdrawal % rate stayed the same but released more income as value of portfolio continued to increase
  Reduced complexity of investments as aged-for the sake of myself-other thing’s to do and wanted to sleep at night
  Now 3 funds only-U.K. Tracker,World ex UK tracker and global bond tracker
  (All in Accumulation format)
  Plus a “high interest “ cash account with 2 years living expenses kept topped up once a year by selling units in our 2 ISAs and 2 SIPPs
  Joint bank account and Visa credit accounts (easy to keep track)
  Use Visa credit for all payments-easy to track-months credit leeway for day to day expenses payments
  I do the money and disinterested wife has to understand the process
  Easier for the kids who will take over at some stage
  A financial spreadsheet is mandatory for us
  We use Quicken 2004 and enter weekly
  Continually reconcile with the Bank -joint current and visa credit account
  Easy to spot scams-had a few over the years
  Home page set up so each of us knows our current financial situation-no arguments!
  I noticed that over the years my wife notes how we are doing and will remark on our current finically position
  She does most of the day to day spending and therefore the most Quicken entering
  That’s enough for now!
  xxd09
• 6 JDW February 23, 2021, 12:07 pm

  Another great post @TA (sorry, @TD now?), good luck!

  Although this is ignoring the whole point of the ‘I’ bit of ‘FI’ and removing yourself from the workplace and all the bs that comes with that, what are your thoughts on possible part-time work as a backup or to supplement retirement income, if needed?

  I’m still a long way off FI, but see on various blogs people reaching FI and then choosing to work part-time, if only for a small supplement of income and not relying completely on their portfolios or SWR, or because they miss the social interaction after pulling the trigger, or just want to gradually pull out, or for other reasons (like the FIRE members we see in the US working part-time for the healthcare benefits from their employer etc – glad to be a UK resident at times, less so recently!) For the record, I’m mid-30s, currently in year three of 30% saving goal and aiming for FI at 55/60 or shift to PT work within the next ten years. I’m sometimes saving more but will need to shift a little towards cash in the next few years for upsizing house – the only house move I plan for the next 30/40 years – and a growing family) One concern for me would be leaving an industry and employment, then struggling to get back in, if needed, a few years down the line. But I already feel the irrelevance of my place within my industry, the longevity of my office (I work for the UK office of an overseas based tourist board) and currently going through what I suspect is the first stage of eventually them deciding not to have offices overseas or within local markets) andfor role in my ways, which is one motivation for having a plan for FI and getting out! (I use FI rather than FIRE, I don’t want to ‘retire’, I just want to do what I want to do, when I want to it.)
• 7 JP February 23, 2021, 12:23 pm

  Thanks for another very interesting read (you are keeping us all going in lockdown!). I worked part-time in a much lower paid/grade (related field) role for a time after leaving my main career/profession and it certainly helped with the transition – switching from an accumulation to a decumulation mindset is not easy. After a couple of years I was ready to give up work entirely (though never say never!). It just felt right. I am currently making decisions about how much secure floor I can afford and when (topping up some DB pension at 60). Your posts make good timing.
• 8 Andy February 23, 2021, 12:25 pm

  Your growth assets add up to 65%, but the header says 60%.
• 9 The Investor February 23, 2021, 12:46 pm

  @Andy — Oops! Cheers for that. My fault in chopping around @TA’s original table insertion.
• 10 G February 23, 2021, 12:49 pm

  We tend to front load spending in retirement because the assumption we will spend almost nothing by the time we hit our 70s.

  I’m struck by a few things when it comes to spending that might challenge that. For example, what are the chances of technology making the previously impossible, possible?

  For example, I would dearly love a trip into space – and in my lifetime that’s moved from near impossible to possibly being somewhat possible for the price of a decent car in the next decade or two.

  We can’t cheat death (yet), but it seems to me that the biggest amount spent on healthcare is in the last year (month!) or so of life – and that there will be enormous advancements over the next 2-3 decades. If I hit my mid 70s, and there’s an accumulation of health related breakthroughs that mean I can live well for another decade or three I’d sure like to be able to afford them – even if the NHS won’t pony up.
• 11 s3pc February 23, 2021, 1:54 pm

  I shall watch this with close interest being in a very similar position although probably a few years older (guessing at ages….). In my case a modest DB pension commencing in a few years time should thankfully give me an important foundation should other investments underperform. I enjoy the column – thanks for your work! Of course one of the key questions is what are we going to do with this new found time and freedom – I have a list but must admit its rather like a leap off a diving board into an opaque swimming pool which could be lovely and warm or a bit chilly!!
• 12 earlyretirefree February 23, 2021, 2:14 pm

  Having ‘retired’ early in 2018 I am interested in this and a few things come to mind.
  1. Being early retired does not mean no income. Without really trying a few consulting projects have landed in my lap which I can do with relatively little effort (15-20 hours a week). Which i think usefully fills in time I might just fritter away.

  2. I fully expect spending to decline later in life – by how much I don’t know. Most of the models which look at retirement spending are US based and they show that spending on healthcare increases significantly. While I expect an increase in health care costs living in the UK it won’t be anything like that in the US.

  3. Tax is a big worry. The inheritance tax threshold is perilously low for anyone with a decent retirement home and package of retirement assets and I simply hate the thought of paying all that hard-earned over to the tax man. I would love to spend it but ….frankly….what exactly do I need that I don’t already own?
• 13 mr_jetlag February 23, 2021, 2:19 pm

  Long time lurker here… congrats TA, waiting to see where this goes with parts 2 & 3. I am about 1 year away from FIRE myself and keen to see the decumulation plan (and others’ comments). I plan to be travel-heavy and therefore have fairly high spend during my mobile years, but want to balance this against a sensible growth strategy and SWR.
• 14 Gary February 23, 2021, 3:10 pm

  Hi both,

  Another interesting and useful topic, thanks. I look forward to the next two posts.

  We’re (hopefully) only a few years behind on our journey, so thoughts of which assets to use to decumulate have been in my mind recently.

  I’m interested to know whether this allocation is what you’ll switch to at point of retirement, or if it’s been this way for some time, in preparation? Or have you been all-in on equities and will now switch?

  I suspect it’s somewhere in between, but it would be good to know your thoughts on what you did in the few years up to this point.

  Cheers
• 15 Brod February 23, 2021, 5:15 pm

  @TA – a most excellent series! I can’t wait for parts 2 & 3.

  And great timing for me personally as I’ve reached skinny-FI and want to do the RE bit too. Just not sure about the timing. Couple more years I reckon.
• 16 Jonathan B February 23, 2021, 6:25 pm

  @TA, interested to see you have changed your mine about a 50:50 portfolio in retirement. Is that because modelling suggests it would have too little appreciation to match your plan, or a change because of current circumstances?

  (Asking because I am adjusting our own retirement investments back to 60:40 – in our case it is because I fear that in a low interest rate environment the volatility risk of bonds has a bigger downside tail than upside).
• 17 Accidentally Retired February 23, 2021, 6:38 pm

  Yeah I am similar to @Brod in that that I am at FI, but just barely.

  I am working on my decumulation strategy, but that partly includes some level of income generation even if only $10-15K a year unless the markets continue to wow. I am working on my plan, but I also think that dynamic asset allocation strategy is the only way to go unless you have really hit Fat FIRE with a huge buffer to live off dividends and a conservative portfolio.

  Gotta make a plan and then make adjustments during downturns.
• 18 The Accumulator February 23, 2021, 6:51 pm

  @ Michelle – I’m glad FIRE is going well for you. What’s been the biggest adaptation you’ve had to make?

  @ Al Cam – thanks for the link, that is a great news. It was sad to hear of Dirk’s death recently. A timely reminder to get on with life.

  You’re absolutely right, I could think of the State Pension as a floor. I tend not to because it’s almost 20 years away, but I have a bare bones budget in mind that is our de facto floor in the meantime. I’d front-load this spend if I had to, knowing that the State Pension could save the day eventually.

  I’m gonna cover spending flexibility in the next post, and I suspect those tax rises you mention are in the pipeline.

  @xxd09 – thank you for the insight. Like you, managing the money has naturally fallen to me. I make regular reports which aren’t meticulously scrutinised but are appreciated all the same. (I think.)

  I read an interesting piece recently that theorised that couples use each other like extra RAM. Delegating separate functions to each other for parallel processing but thinking of each other as part of the same unit. I kinda like that.

  @ JDW – you’re very wise to sense the winds of change and prepare. If the worst doesn’t happen then you’ve only got more options. Agree with you that it’s the FI that’s important. I’m retiring to something, not nothing. Something means doing projects I find interesting / meaningful / fun. If I’m paid to do them, then so much the better.

  I think earlyretirefree is right. A lifetime of contacts makes it relatively straightforward to pick up projects – unless your industry is in crisis that is.

  @ G – Agreed. I don’t buy into the idea of declining retirement spend for exactly the same reasons. I cover this more in part 3, but part of ‘sleeping at night’ for me means sticking to conservative assumptions rather than trying to load everything in favour of splashing the cash now. So I haven’t modelled declining spend – hopefully that’ll mitigate against health shocks later or someone invented the elixir of youth.
• 19 The Accumulator February 23, 2021, 7:14 pm

  @ Gary – Bar the gold I’m there now. Made the last of my bond allocation moves a couple of years ago.

  @ Jonathan B – historic modelling says 50:50 is fine but so is 80:20 if you can handle it. My timeline is relatively long and current yields aren’t going to wring much out of bonds which suggests trimming your exposure if you can. I’d like to be relatively conservative for the first few years but I have the risk tolerance to accept 60:40 for now and higher if that’s where the dynamic asset allocation takes me over time.
• 20 MrOptimistic February 23, 2021, 7:48 pm

  Look forward to the rest of the articles. Presumably the editor will intervene if the answer looks like it might be……4% pa
• 21 Whettam February 23, 2021, 9:00 pm

  Thank you @TA I have really been looking forward to you tackling this subject, so glad @TI has made it into a series.

  I’m a few years behind you. Do you intend to keep your cash allocation at 5%? I was planning to keep approx. 3 years income as cash, but I was planning to manage the portfolio without a % cash allocation, so the cash will be extra.

  Think your description of gold as ‘one shot’ is really interesting, I notice you have not bought this to you intend to do this in a single go or drip feed to pound cost average buying your allocation? I’m undecided about Gold, although I use a mix of active funds in addition to my passive core and this includes a couple of IT’s with a gold allocation.

  Interested that your UK allocation is higher than a passive world portfolio, interested to understand reason?

  This is an active decision, but although I’m planning a total return strategy, I am planning to include some “Alternatives” e.g. infrastructure, renewables, etc for their income generating ability.

  Really looking forward to parts 2 and 3.
• 22 Brod February 23, 2021, 9:58 pm

  @Whettam -I’ve got (what used to be) 10% gold. Like TA said, it marches to it’s own beat. It got above my 20% of target rebalancing band so I sold back down to 10% and now, for whatever reason (stocks doing well? QE? who knows) it’s now down to about 8%. I won’t top up.

  I’ve also got about 15% cash in a mortgage offset account and 5% in Premium Bonds. The PBs destined for ISA next year but not sure how to account for the offset account but I don’t include it in my FI fund. Maybe I should but since the mortgage payments come out of the offset it’s (mentally) accounted for. it’ll go down to zero with the mortgage. I guess on a massive draw down I could sweet talk the Financial Controller to let me have a flutter but i dunno… I’ll keep about £3k in PBs, because it makes me feel like a high roller. If I never post again it’s cos my lottery numbers came up tonight… Thanks for all the fish!
• 23 bingo February 24, 2021, 12:38 am

  At the risk of mentioning something obvious, presumably Mr and Mrs A already qualify for the maximum state pension. For anyone who doesn’t and intends living 3 or more years beyond their pension age it’s usually worth paying voluntary NI contributions to fill any gaps.

  The ultimate line of defence might be ordering one’s life such that if all else fails and only pensions remain, then at least a modest home and a modest diet are going to be sustainable.
• 24 c-strong February 24, 2021, 12:39 am

  First of all, TA, very best of luck as you embark on this next stage, and thank you for sharing your thoughts.

  I’m excited to read the upcoming posts, as I’m borderline obsessed with this decumulation stuff even though it’s quite a way off for me – minimum 10 years and 15+ would be more realistic.

  Your asset allocation is interesting. Everyone will have a different view. My thoughts for what they are worth:

  Even 40% defensive assets seems on the high side to me for a 45 year time period, though of course there is a lot of debate about this. But my reading of Karsten Jeske’s work in particular suggests no more than 30% is optimal. I’m interested to see how the dynamic allocation works.

  Personally I’m all out of the US market (except my US SCV ETF) on valuation grounds, so would get non-US regional funds rather than the World one, but that’s obviously an extreme departure from the global portfolio 🙂

  I like the multifactor allocation – how are you getting this?

  Government bonds – ugh. But I understand why they’re there.

  Not a big fan of buying gold, a volatile asset that is merely expected to keep pace with inflation in the long term, near to its all time high in real terms. Good in theory, but theory should yield to valuation here IMO (my target price is $800/ounce).
• 25 Matthew February 24, 2021, 1:15 am

  When we get very old, if we were to go bankrupt for running out of money (if you were actually able to spend it) – theres no way you’d be chucked out onto the street – they would probably have to find a care home for you before they can evict you

  You simply need enough money to last till then. Since inheritance isnt a concern I’d usually suggest an annuity but a centarian/centurian/however you spell it wouldn’t need to worry about bills
• 26 The Investor February 24, 2021, 1:40 am

  @Matthew — I presume you don’t have much experience of being a very old person with no money in a care home living off the mercy of the State.

  Yes, you’ll get fed and watered. But you’ll still be a human being, with thoughts, feelings, and a desire to enjoy your day. And very little opportunity to, save what your wits and social skills can wrangle.

  “Count no man happy until the end is known” – Sophocles
• 27 Seeking Fire February 24, 2021, 8:19 am

  Really interesting update. Your strategy feels quite low risk to me given your combined state pension -18k seems to cover 65% of your spending – 28k and presumably covers most of your bare bone spending. Yes there is political risk but I find it hard to believe it will affect you both. You can draw on your state pension in 20 years and so with forty per cent in defensive assets again it’s hard to see too many scenarios that blow this strategy out of the water – rampant inflation combined with rising interest rates here would not be pretty. But again you’ve a massive indexed linked bond in the form of your state pension given how much of your spending it covers.

  You also presumably have living costs covered – presume you don’t rent? – so again that’s a big piece of the ‘floor’ if so? The other risk is psychological – last years suck out isn’t what I mean – it’s a decade of anaemic performance punctured by extreme volatility as the 1970’s or 2000’s demonstrated. Even if that doesn’t blow you off course, it wouldn’t be much fun in 100 per cent risk assets. For that reason 40% in defensive assets seems sensible. A long way away but once you get closer to drawing the state pension I would think closely about increasing equities allocation by say ten per cent. to hedge longevity risk further.

  I assume you plan on re-balancing each year and assessing spending.

  The other issue is work – again it looks as if you could, at least for the next ten years, subject to unexpected ill health, pick up even basic work that would pay for a substantial amount of your expenses so that is another substantial buffer – the issue is the impact on your happiness in doing menial work. So concentrating on interesting projects that have the potential to reduce the pressure on your portfolio seems the way forward.

  Again super helpful, not least because your position is nothing like mine and I don’t have your defensive bulwarks to fall back on.

  Looking forward to the next few pieces.
• 28 Matthew February 24, 2021, 8:30 am

  @TI – not old but I work with a lot of elderly, I’m thinking that with loss of mobility and possibly dementia we wont want to/be able to do much more than eat or go to the toilet or watch tv, let alone, we’d be lucky to simply be alive and lucky to not have pain – so money sort of loses its meaning when it makes no difference to your life and you have no dependants.
  At most just live in the bungalow you want for as long as you can
  As a guesstimate 85-90 before arthritis limits us too much?
• 29 Ben February 24, 2021, 11:50 am

  Broadly in line with your thinking @TA, with the exception of 5% cash. This would be appropriate for someone with personal business or other illiquid holdings, but yours are 100% hyper liquid. Are you sure you don’t just like the number 5? I’d consider cash as outside the portfolio but up to you.
• 30 Marcus February 24, 2021, 11:52 am

  “I see gold as a one-shot wonder. It’s a shotgun blast in the face of some crisis occurring during the first 10-15 years of decumulation.
  That early period is when we’re most exposed to sequence of returns risk. ”

  When does exposure to sequence of returns risk fade away? I guess it is when you have had a good sequence of returns, putting you in a position where you can weather a bad spell. Do you have a view on calculating that?
• 31 Tom-Baker Dr Who February 24, 2021, 1:23 pm

  @TA – This is great! As someone who is considering pulling the plug soon as well, this is the series that I have been waiting for. Thanks, TA!

  While I am still in the accumulation phase, I have been trying to get as much data as possible on portfolio performance. I’m not sure what asset allocation is really best to adopt in these crazy times of ultra low interest rates and QE, you see? So, while I make sure that the total allocation is very ballanced, diversified, and sensible, the stash is divided into sub-portfolios held with different brokers for extra safety. Yes, it’s a bit of a nightmare to rebalance! But it does allow me to study the real world behaviour of each different portfolio very easily. I get data meticulously each week and analyse them periodically. The Covid crisis drawdown was a unique opportunity to understand how each allocation behaved following that shock and how long they took to recover.
• 32 Brod February 24, 2021, 1:32 pm

  Personally, I think the bond allocation is spot on. I’m waiting to pull the trigger and am just 33% equities at the mo. If/when I retire, I’ll consume 0.4% a month for 12 years until I can draw the state and small DB pension (if I don’t, I’ll just move the 0.4% into equities.) Assuming no real return if Global markets go nowhere, I’ll be left with 40% of my SIPP mostly all in equities and the pensions. That’s plenty of floor. At which point the kids are gone and we can downsize the house and live off state and DB pensions, SIPP and the house capital we’ve released.

  Sure, I’ll miss most of any upside from the markets, but I’ve protected my capital.
• 33 Brod February 24, 2021, 1:38 pm

  @Marcus – Big ERN’s done loads of fabulous work on this. Try:

  https://earlyretirementnow.com/safe-withdrawal-rate-series/

  That’s where my reverse glide path above comes from. Should have credited him. My bad.

  Just remember, his analysis only uses a US 60% large cap and 40% 10 Year Treasuries portfolio and the returns/SWR might need to be reduced a bit for other portfolios.
• 34 Jon B February 24, 2021, 1:56 pm

  I would be interested to know which funds you use, especially for the multifactor part. I have used offerings from ASI and Invesco.

  Also I was looking at the Vanguard US Government Bond fund (hedged to GBP) as an alternative to Gilts. Reasons include lower duration (7 vs 14 years), higher yield, and historically higher negative correlation to global equities, which are after all 50% US. Does this make sense or am I missing something?
• 35 Vanguardfan February 24, 2021, 2:56 pm

  Quick technical question about the ONS median income data. It gives £29k as the median ‘equivalised’ household income – what’s the standard household there? Two adults?
  And (you don’t have to answer this) are you aiming for less than the median income for all households or for retired households (which is significantly less at about £25k). Interestingly the retirement living standards project reckons on £29k for the ‘moderate’ lifestyle for a couple. I guess all these numbers are normative to an extent. I certainly think more normatively than absolutely when I’m trying to judge income requirements far into the future (and for that reason I think using wage or GDP inflation is a better measure of long term cost of living increases than price inflation, even personalised)
• 36 Factor February 24, 2021, 2:57 pm

  @bingo #23

  Yes, I was going to make the very important voluntary NI contributions point had you not already done so. To all I would say, if allowed at this stage @TI/TA, be careful about thinking of the state pension as a tolerable “floor”.

  Fast forward to the point where two state pensions may have become just one, and do a brutally honest income/expenditure budget, including the cost of keeping a roof over your head, the cost of necessary “tech”, the cost of the repair/replacement of white goods etc, the cost of some form of transport, and of course the cost of feeding and clothing yourself: how many of you really know the detailed lie of the land in your nearest supermarket and can “rattle off” what your weekly bill there would be, let alone be able to do your own healthy “cheffing”?

  “Heat or eat” might be an exaggeration but I wager your budget won’t leave you with much if any “rainy day money”.
• 37 Phillycheese February 24, 2021, 3:29 pm

  Ever since your post announcing your imminent FIRE status, I have been waiting for this article – here it is! Thankyou so much! As usual, another excellent article, a bit of friendly hand holding in an uncertain world. Having semi retired last year, currently living off cash saved for the purpose, I am about to start de cumulation very soon ( not sure when yet). Very much looking forward to reading your next article and hopefully more about your forays into the other side of FIRE…as an avid monevator follower for several years – Thankyou both so much for your cheerful, witty, (irreverent!) upbeat company on this journey!
• 38 Al Cam February 24, 2021, 3:35 pm

  @Marcus(#30), @Brod (#33):
  See in particular, part 38 at: https://earlyretirementnow.com/2020/07/15/when-can-we-stop-worrying-about-sequence-risk-swr-series-part-38/
• 39 Al Cam February 24, 2021, 3:48 pm

  @Brod (#32):
  Interesting plan – are you holding the balancing c.10% (or approx. 2 years expenditure) in cash for contingencies or have I misunderstood?
  Also intrigued about your intended timings e.g. is it your intention to operate this plan (inc. moving any unspent budget into equities) monthly, or annually, or ….?
• 40 MrOptimistic February 24, 2021, 3:49 pm

  I look forward to the articles. With a 45 year time horizon and 18 years to state pension you are younger than I assumed. I wonder how closely your portfolio matches the slow and steady portfolio. I have a bequest objective and want to cover potential care home fees for my wife ( I assume she will outlive me) and these are rather like balloon payments which hitch up the threshold for ruin/ ‘failure’.
• 41 MarkR February 24, 2021, 5:22 pm

  A very timely article for me as I look ahead to a major career upheaval in just over 12 months time, and consider my options.

  Much of the advice I have read on asset allocation has used the usual suspects (i.e. equities, bonds, cash, property, gold etc) and I do like the more generic ‘growth’ and ‘defensive’ allocation pots with their subsets (rather than defensive equity assets).

  Given the deteriorating value of my own bond funds recently, it has really made me realise that their function (for me) should be to not lose value rather than grow which the classification of your pots expresses most succinctly.

  I have seen plenty of discussions about asset allocation (focused on equity and bond mix) to survive retirement. I found this article to be very interesting http://www.caniretireyet.com/the-best-retirement-withdrawal-strategies-digging-deeper/ and whilst readers may not agree with the conclusions the food for thought is clear and succinct.

  My simple brain does like to think in percentage terms when it comes to the retirement. You have stated your timeframe is 45 years therefore the question I had is (ignoring inflation etc) how years worth of “planned annual expenditure” do you have in your pot now? So how many do you need to grow to meet this timeframe? (Or do you have it covered already and only need grow to cover inflation?)
  To me, it is easier to think of it in ‘number of years’ rather than ‘percentage growth terms’. I think it will make the maths easier when you do an end of year review, “have we spent more or less? Why?” then “how many years do I have in my pot now after accounting for the year’s inflation?”; particularly when/if you rebalance.

  Just my 2 pence.

  Mark
• 42 Cigano99 February 24, 2021, 5:23 pm

  @TA Really pleased to see this Decumulation series landing on Monevator, its timely as I am transitioning to Decumulation later this year and have been avidly reading much of the material reffered to in the comments. Like you we have no-legacy requirement and that opens up the possibility to spend some of the property equity at some point late in retirement. FWIW our home is valued at roughly 50% of the current Portfolio value so in theory if that was invested the portfolio it might finance another 15+ years of living expenses. How to factor the property value into the decumulation strategy is something i am really struggling with at the moment, hoping @TA or other readers may have some suggestions to share
• 43 Naeclue February 24, 2021, 5:50 pm

  Excellent article and I am looking forward to the subsequent parts.

  The only thing that strikes me is that this may be heading towards a lot of complexity. Fine if you can handle it, but how does Mrs Accumulator feel about your plan? We started a new drawdown strategy about a year ago and I had to whittle it down to the bare bones before my wife deemed it to be acceptable. Even then I had to promise to make it simpler still in the future.
• 44 Naeclue February 24, 2021, 5:55 pm

  @Cigano99, I consider our property to be part of plan B.
• 45 Brod February 24, 2021, 6:41 pm

  @Al Cam – umm… I presume (0.4% of bonds x 12 months x 12 years) +33% equities = 90%? I’ve 10% Gold so maybe that’s where the missing 10% is? It’s my one shot “the sky’s fallen in.” Otherwise you’ve lost me.

  I won’t be consuming ALL 0.4% but 0.3% (so a target 3.5% WR), 0.1% back into equities. And, at the moment, ii are offering one “free” trade a month, so I’ll do it bi-monthly. Or every two months and it shouldn’t cost me owt. Not terribly convinced this offer will last 50 years, but it’s a start. My floor will be index linked and liveable, so I only need to get past the first 12 years really. Then whatever’s left is fun money or to help the kids out.
• 46 SueJ February 24, 2021, 6:54 pm

  @Matthew @TI
  Regarding providing for one’s very final years, I’m with Matthew. It’s lack of capability, whether physical or mental, rather than lack of money that usually sends one to a care home. If the plan is to move into a private facility offering near one-to-one care, then all other post retirement spending probably pales into insignificance. And even with that, most very elderly people sadly reach a stage where money can do little to improve their state of (un) happiness.
• 47 Al Cam February 24, 2021, 9:19 pm

  @Brod:
  Thanks for the info.
  Got it – your “missing” 10% is gold.
  Which begs the following question – what, if anything, are you planning to use for an emergency fund (EF)? IMO, your EF can also be used to smooth month-to-month variations in spending.

  I do not know about you, but our monthly expenditure is very variable, and much more variable than our annual expenditure – thus the question about intended timings. For info, our annual spending range (min to max) is at least 2:1, but on a monthly basis it is more like ten times this! Thus, I have tended to look at things annually and hold an (instantly accessible cash) EF of at least 1 years spending too.

  I am some four years plus into a not entirely dissimilar plan (bridging the Gap until SP’s & DB come on stream) and have found that I have been quite reluctant to push any surplus (vs planned spend) directly back into equities.
  What I have done instead is up the equities exposure of my upside Pot. However, this can only continue for so long.

  @Gigano99 – I view our home as deep reserves, I guess this is very similar to @Naeclue’s plan B. I understand from earlier @TI note (#3) that Part 3 will discuss Risk.
• 48 Al Cam February 24, 2021, 9:24 pm

  @Naeclue:
  RE: “We started a new drawdown strategy about a year ago and I had to whittle it down to the ….”
  I remember the post where this topic arose and our subsequent discussions well. I entirely agree with you that KISS becomes increasingly important!
• 49 Mark C February 24, 2021, 9:44 pm

  @bingo (#23)

  “For anyone who doesn’t and intends living 3 or more years beyond their pension age it’s usually worth paying voluntary NI contributions to fill any gaps.”

  This is a thing I’ve been thinking about quite a bit recently. I’m 42 (state retirement age currently 68) with a hope of giving up work mid to late 50s. I have 10 years for which I can make voluntary NI contributions which at the current rate would cost me £7,956 (assuming I paid for all 10 years).

  The gov.uk website advises that “each qualifying year on your National Insurance record after 5 April 2016 will add about £5 a week to your new State Pension.”

  I’ve been trying to weigh up whether buying the extra years or putting the £7,956 into my SIPP (with, hopefully, its gains over 26 years before state pension age) would be best – presumably you think the former? I’m not overly sure why but I’m leaning towards the latter at the minute.
• 50 xxd09 February 24, 2021, 10:31 pm

  There has been some discussion of ones house as a part of peoples savings plan-an idea that is a hardy perennial
  This especially understandable when this item currently seems consumes so much of ones capital
  However it not a good road to go down
  A house is where you and your family live their lives out of the pouring rain
  It will always be needed in some form throughout your whole life
  That is its primary (and arguably its only) purpose
  Therefore it is best not to include it in your portfolio
  Downsizing and reverse mortgages are some of the ways to realise the monies invested in a house but these are not a very satisfactory solutions-to be used in an emergency only
  Buy the smallest house you live with satisfactorily and get your remaining monies invested in Pensions and ISAs which are liquid and easily available
  A house is a necessary living expense like insurance and should be treated as such
  xxd09
• 51 miner_2049'r February 24, 2021, 10:41 pm

  Thankyou for sharing this information. I’m so itching to see the actual numbers involved but fully respect you for not disclosing, I’m just interested to see how mine match up as I’m 23 months away from being FI on paper with a predicted outgoing of mid £20’sk using state pension as a possible “luxury” safety net. Using a principle of about 500k not including a few pensions bringing in 15k.
  Thanks again for sharing your journey with us
• 52 MarkR February 24, 2021, 11:14 pm

  Just evaluated my portfolio using your Growth and Defensive assets criteria, which I commented about above) and found that my percentages are 61%:39% (though I haven’t yet broken them down into the subsets).
  Not sure if that is “great minds…” or “fools seldom…” !!
  (But really it did make me smile.)

  Mark
• 53 HariSeldon February 24, 2021, 11:49 pm

  I think I am 14 years down the road from TA , 3 1/2 years to go for State Pension.

  Adjusted for inflation I started with a similar sum and it worked out, retiring in late 2007 with a 90+% Equity portfolio.. yes, I experienced sequence of returns risk for real, a timely switch of assets gave a good recovery…. Cash reserve is very useful.

  14 years on, spending is 2% to 3% and inflation adjusted capital is 100%+ up.

  Still 90% equity … of course I have only one experience and it was ok, there were many alternatives that didn’t happen. ( I was sufficiently competent not to make errors but clearly there is a large chunk of luck)

  I think a few years income in hand and flexibility to reduce expenditure is very helpful. I could reduce expenditure in a future crisis to around the median income level and the drawdown would be less than 1.5%

  I must admit the 40% bonds would be a cause of FOMO for me, but is clearly the level to provide comfort, However the extra return that a high allocation may bring can provide a much larger pot and if it works out, a huge increase in the safety margin longer term.
• 54 Nearlyrich February 25, 2021, 12:15 am

  A great article TA which has got the everyone talking. It’ll do us good, in this ‘era of the binge’ to wait a week for another thrilling instalment. I can’t wait to hear what dynamic approaches you gave chosen. I guess your plans for your gold allocation are really part of that wider picture.
  I’m not convinced multifactor will earn its keep. What will you benchmark against?

  Finally, specifically on the subject of income floors and additional NI contributions, I am increasingly concerned that the Pensions forecasts available from the UK govt are misleading us all into thinking we will receive more than we’ll actually get. I’m now off to check that you haven’t already covered this 😉
• 55 Bret @ Hope to Prosper February 25, 2021, 1:59 am

  That’s an incredibly comprehensive decumulation plan. Thanks for sharing.

  I’m 56 and trying to decide when to pull the pin. I wanted to go out at 55, but it wasn’t economically feasible, so I shifted my FI date to 60. I could work part-time and go out now, but I make six-figures at my day job and it doesn’t seem logical to trade that in for low-paying jobs and gigs with no health insurance. I’m better off hanging in there for a couple more years.

  I look forward to reading the next segment.
• 56 Peter February 25, 2021, 8:45 am

  I’m puzzled by the multi-factor growth component. In the article you referenced, yes, there’s some out-performance over a 1 year period.

  Yet, when I compared it to SWDA ( iShares Core MSCI World UCITS ETF) just now, then clearly the multi-factor is underperforming SWDA on any measured time period: more than 3%, 4% and 2% on 1, 3 and 5 years respectively.

  This sounds expensive.
• 57 Boltt February 25, 2021, 9:28 am

  @MarkC

  When I looked at paying voluntary NI for extra pension it was unbelievably good value.

  1)
  So you pay £8k out, on average 5 years before the pension starts
  2)
  £8k buys ~ £50 a week £2600 a year extra pension (index linked)
  3)
  Based on annuity rates of 2.5% this means the £2600 extra pension is worth ~£100k
  4)
  £8k in a Sipp plus tax relief plus 6% growth pa is £15k ish, so likely less than £1k pa income

  In fact probably too generous, I’d buy the credits as soon as possible!

  B

  Ps if you like you can put money in the Sipp until you have to pay the top up, and get value from both.
  PPs I’ve paid top ups for the last 5 years and now I’m “full”, one less thing to think about
• 58 Mr+Slow February 25, 2021, 10:07 am

  Thanks for another great article!

  I am also holding a decent percentage of my portfolio in factor funds. I see it as a hedge against the risk that pure passive investing (ie a global tracker, which is the bulk of my portfolio) turns out to be inefficient somehow – eg too much concentration on the biggest couple of names, passive flows pumping up those names even higher above fair value, etc – and we get a correction away from those names.

  I have been using the Size and Value factors to do this – Size because the smaller companies are by definition not held as much in a market-cap weighted tracker, and Value because it should be taking both company fundamentals and current market price into consideration (and also because the current top-weighted stocks are growth stocks).

  I’m not currently using Momentum as when I did some quick research I saw it only rebalances every 6 months which strikes me as a bit slow to capture “momentum” in the internet era (let alone the Reddit-style bandwagons which are perhaps the real momentum trades!)

  Quality – I’m not familiar with this and its use cases but will take a look

  I also noted that the individual factor funds have fees of 0.3% each, rather than the 0.5% of the multi-factor fund – so it seems you can save a few basis points by holding them separately
• 59 c-strong February 25, 2021, 10:09 am

  @Peter
  TA may answer for himself, but the case for investing in risk factors is not based on returns over 1-5 year time periods – even 5 years is far too short when considering the expected performance of volatile assets.

  Over the very long term, risk factors (at least long/short factors as measured by academics) have delivered returns in excess of the market, and which are uncorrelated with the market – the holy grail. There is huge debate about, amongst other things, whether these factors will still do this now everyone knows about them, and whether private investors can capture them using long-only funds. But five year returns are neither here nor there.

  TA has written some good articles about factors in the past, which I would recommend.
• 60 Al Cam February 25, 2021, 11:16 am

  @MarkC (#49) & @Boltt (#57):

  FWIW, I agree with @Boltt’s conclusion at #57.

  Just in case you do not know:
  a) the purchase price generally increases as time goes on; and
  b) usually you can only go back a max of 6 tax years – there is currently a TIME LIMITED “SPECIAL OFFER” to allow you to go back farther associated with the introduction of the New State Pension.

  BTW, if you can find a way to access Class II NI rather than Class III then that is even better value for money – believe it or not!

  Royal London publish a very comprehensive explanatory document called, from memory, something like: Topping up your State Pension which is attributed to Steve Webb – the former LibDem pensions minister who was central to introducing the New State Pension.
• 61 Al Cam February 25, 2021, 11:30 am

  @MarkC;
  I have just noticed your age.
  Please be aware that under the new scheme if you end up with >35 qualifying years you will get no extra state pension from any surplus years/contributions.
  You may also have some entitlement under the old scheme too – which could further complicate the matter.

  Take a look to the Royal London guide – it is comprehensive if a bit hard to follow; but that is only because the rules are really complicated!

  Rumour has it that HMG will try again to get rid of Class II too – but that is just speculation.
• 62 Peter February 25, 2021, 11:56 am

  @c-strong

  Just saying that today I can’t see any out-performance from IFSW compared to SWDA, over 1, 3 and 5 year periods. It’s just not there.

  Perhaps, as you suggest, 5 years is just not long enough, although, TA did write in the article he mentioned: “In all honesty, we’ll need a minimum of three to five years of data before we’re judging on anything more than noise.”.

  Who knows. Maybe the 10-year return will look different. Annualized under-performance over the last 5 years is currently 2.44%. Expecting IFSW to catch up with SWDA, requires IFSW outperforming SWDA by ~ 2.56% annually during the next 5 years.

  Nothing is impossible. But that’s not a bet I would make. I hope I’ll be proven wrong, for all those that invest in IFSW.
• 63 Kraggash February 25, 2021, 12:34 pm

  What happens if China becomes the dominant economy in the world, as USA has been òver the last 100yrs? I believe China only forms a small part of any global etf/fund, as most of its companies are not internationally listed. Would that mean that your Global fund would only be covering less that 50% of the global economy (and the less vigorous part at that)?
• 64 Andy W February 25, 2021, 12:50 pm

  The Meaningful Money Personal Finance Podcast with Pete Matthew just aired an episode with Abraham Okusana of Timeline which discusses decumulation from a data based perspective which was quite interesting.

  To summarise, we tend to spend less on average in retirement (traditional ages) and this slowly trends down with time. Some interesting discussion of care costs and using your house as an asset for these costs and reasonable time frames to use.

  I have no affiliation with the show or Abraham/Timeline, just listened to the show yesterday and it reminded me of this article.
• 65 Naeclue February 25, 2021, 1:30 pm

  Making sure you you fully qualify for the state pension is a must as the returns from topping up are substantial. One other thing worth considering is delaying the state pension. Last time I looked, delaying by 1-2 years gave a much better return than buying an index linked annuity with the forgone payments. It will not suit everyone, but worth looking into when the time comes, especially for those thinking of buying an annuity.
• 66 The Accumulator February 25, 2021, 1:46 pm

  @ Mr Optimistic – you know how this movie ends, right?

  @ Whettam – yes, after I draw my annual income, I’d maintain cash around 5%. That would keep us going for 2 years on the bare bones budget in dire circumstances. We have short duration bond holdings too, and they behave a lot like cash.

  Over time I’ve come to think of cash (outside of my stipend) as A.N. Other asset, so it’s properly integrated into my asset allocation now.

  Tilt to UK equity is because I pay my bills in pounds. Mitigates against currency risk. Perhaps because we vote to rejoin Europe tomorrow. I’m sorry. I’m sorry. Wrong thread! I didn’t mean to bring this back up

  Think I’ll drip-feed into gold given it’s recent run-up.

  I get why you’re thinking of infrastructure et al.

  @ Seeking Fire – nice analysis. I agree, it’s pretty low risk, especially because we can cut spending hard in extremis. Am also with you on the probability of the political risk. Debating state theft is great comment thread fodder though

  Yes, own the house and 100% equities is deffo too scary in decumulation.

  @ Ben – haha. I do like the number 5! Half of 10. Keeps it simple for me Interested in your thoughts on why you separate cash from the portfolio?

  I’ve come to have renewed respect for cash as an asset. Especially after I discovered how it often behaved differently to equities and bonds in a crisis:

  https://monevator.com/how-to-protect-your-portfolio-in-a-crisis/

  Also, I can get higher interest rates and shorter maturities on some cash than I can on government bonds.

  @ Tom Baker – Cheers! I think your analytical brain would have a lot of fun with the 30-day free trial of Timeline.

  @ C-Strong and Jon B – Re: Multi-factor:
  https://monevator.com/building-a-multi-factor-portfolio-with-ishares-factorselect-msci-world-etf/

  @ Jon B – That’s a very interesting idea re: US Treasuries. I’ve written a piece about this:

  https://monevator.com/do-us-treasury-bonds-protect-uk-investors-better-than-gilts/

  I think there is a danger in assuming the golden track record of US assets continues but I can certainly see the argument for diversifying your government bond holdings at a reasonable cost.

  Gold – yes, I have a similar ‘ugh’ feeling after recent price spikes. But I am where I am. I’m decumulating now and it could be a get-out-of-jail card when I need it most. I’ll hold my nose, drip-feed in and vow not to hold it for the long-term (by which I mean 20 years or so).

  @ Vanguardfan – I was just trying to give people my ballpark rather than nail it down specifically. Mostly because I don’t want to anchor the discussion too much to a particular number. I think the plan I’m outlining scales but we’re executing it against a pretty modest five figure number. This is no fatFIRE. Absolutely happy to debate the pros and cons of my approach though.

  @ Phillycheese – hey, thank you! Much appreciated.
• 67 Factor February 25, 2021, 1:54 pm

  @ all interested in whether or not to “max out” their state pension(s).

  I have been in receipt of mine (full) for quite a while now, and it is the best of best friends! It reliably trundles in every fourth Friday, come hell or high water, cocking a snook at the travails of the Bitcoins and Gamestops of life.

  Highly recommended.
• 68 Matthew February 25, 2021, 1:59 pm

  @kraggash – If china grew in stature itd also grow its way into a global/ developed world index without you having to do anything, its automatically adjusting from our perspective like when companies enter or leave an index or rise or fall within it, and i wouldnt worry about taking your gains from america and putting it into china if america was to sink, since traders do that rebalancing for you – like say by indexing you benefitted from enron, etc despite them going bust because money was taken off the table for you
• 69 The Investor February 25, 2021, 2:00 pm

  I’ve come to have renewed respect for cash as an asset.

  We’ve got an article on that… 😉

  From 2010:

  I believe cash is king of the asset classes, which might come as a surprise given that I most often talk about investing in equities…

  https://monevator.com/cash-and-your-portfolio/
• 70 bingo February 25, 2021, 2:12 pm

  @Mark C
  To add to others comments, the gov.uk website allows one to quickly check one’s NI contribution history and one’s state pension entitlement based on those contributions to date. Even those who expect to have 35 or more years of contributions on reaching pension age may benefit from buying extra years if they have previously (before ‘new state pension’) had an occupational pension and been ‘opted out’ of paying full NI contributions.
• 71 The Accumulator February 25, 2021, 2:24 pm

  @ Mr Optimistic – other than selling the family home, is there an insurance product that covers that scenario?

  @ Cigano99 – I’m sure someone else will have thought more deeply about your property question than me but, could you convert it into theoretical income by multiplying its market value by your SWR?
  Or perhaps you could look at the rates you can get on equity release products?

  Personally, like Naeclue and Al Cam I think of the house as Plan B.

  [Side note: Wade Pfau wrote an interesting article about using equity release as an income supplement from age 65 and found that it upped success rates by alleviating risk on the portfolio.]

  @ Naeclue – Mrs Accumulator is massively against it. It’s open warfare in The Accumulator household. Ha. OK, not really. Mrs A is fully onboard, but if I go down then there are emergency instructions: essentially, switch to Vanguard LifeStrategy 60, ring The Investor for advice, and draw X amount, adjusting for inflation.

  Happily there are other people clued up on finance in our wider family, too.

  If I make it into our seventies then I’ll strongly consider annuitising to simplify things and take advantage of those sweet, sweet mortality credits.

  Did you simplify so you can both ‘drive’, and how simple did you make it?

  @ SueJ and Mattthew – I read a couple of pieces from the States claiming that the average stay in a care home amounted to a matter of months. Does that sound right to you, or way off base?

  @ Miner – haha. We’re not dissimilar – sounds like we’ve got less in pensions and more in portfolio. I’d rather be in your shoes

  @ MarkR – it must be “great minds”. It must be.

  @ Hariseldon – Wow! Well done. What was 2008 like with 90% equities and being a novice decumulator?

  @ Nearlyrich – Thank you! Agreed about the multifactor. It certainly hasn’t earned its keep so far. Benchmark against MSCI World.

  @ Peter – yes, that article was written a while ago and it’s been a torrid time for factor investors ever since. The question is: do you judge by recent performance? Or, if you buy into the theory then do you hang in there and hope your time will come?

  There are a number of reasons why factor investing is something of a punt – I definitely wouldn’t invest if you don’t buy the theory, or think it’s likely obsolete, or can’t abide the FOMO. I take nothing for granted. Value has been off the pace for a decade. That’s not unusual, but it could also mean it’s had its day. Factors are certainly riskier than sticking to the vanilla index.

  @ Mr Slow – yes, I see multi-factor as more of a diversification play too. Here’s a bit more on Quality:

  https://monevator.com/how-to-invest-in-the-profitability-or-quality-factor/
• 72 Matthew February 25, 2021, 2:40 pm

  @TA – in this country off base but I see the iller ones who won’t get better and bear in mind that people might be more likely to avoid care support and struggle in the US where they might not have the same welfare system and where theres more expectation to leave an inheritance.
  Short care stays might be short because of death…

  Also dont forget the option of equity release, if you dont draw it then the care system might, then you or the mrs have less reason to avoid accepting care if you need it
• 73 The Accumulator February 25, 2021, 2:45 pm

  @ C-Strong – Loving your comments but I’d like to debate one point. I’ve come to the conclusion there is ’no optimal’.

  For a really good encapsulation of this, see table 3 of this paper by Wade Pfau:
  https://core.ac.uk/download/pdf/211600279.pdf

  It shows an equity allocation of anywhere between 33% and 72% lies within 0.1% of the best SWR for a 40-year period with a 90% success rate.

  In other words, ‘optimal’ data-points are highly contingent on the inputs. Vary them slightly and you’ll get a different optimal.

  I’m a massive fan of Karsten AKA Early Retirement Now – his work is brilliant. But it’s based on historical US returns, which isn’t ideal from a UK investor’s perspective.

  I can also torture Timeline’s global historic returns until it reveals that optimal is 100% small cap. I can’t bank on history repeating itself with that degree of accuracy.

  Essentially different researchers reach different conclusions that can turn on details like using a different US historical returns database, or different government bond maturity.

  I think it’s better to think of the optimal allocation as a range rather than a single number.
• 74 The Accumulator February 25, 2021, 2:49 pm

  @ Matthew – yes, the tenor of the articles was definitely that the ‘end was nigh’ for many at that point which brought the averages down.

  You’d think that one day this mess will be fixed and we’ll be paying higher taxes as a result but have a better system because of it.
• 75 Brod February 25, 2021, 3:44 pm

  @Al Cam – when to use the Gold? Well, if Equities are down and Bonds are down, Gold is more likely to be up? Maybe? Flight to safety as it were.

  So EF is currently mortgage off-set account but I’ll have to off-set the diminishing off-set in 5 years or so as the balance won’t be enough. But currently ii don’t charge for drawdowns so I’ve got gold, equities and bonds to sell too and the receive the cash relatively promptly. Unless I can get redundancy, I’m not pulling the plug till Xmas 2022 so I’ve time to refine the approach (not sure plan is justified.)
• 76 Kraggash February 25, 2021, 4:37 pm

  @matthew – normally, for most counties, agreed. But I am not at all sure if that applies when the class A shares are (were?) not not really available to foreign investers, and their goverment has such a large ‘interest’. Atm, China forms a part of the smallish Asia/Emerging markets holding in an all-world fund, and I suspect its actual position is somewhat larger (depending on how you measure it!)
• 77 Cigano99 February 25, 2021, 5:14 pm

  @TA and others who have commented that their home is outside their portfolio and is really “Plan B” I totally concur, I think many people with kids will do as my parents have done and see their home as insurance against care costs, and if it survives that, its will become the bulk of the legacy that they want to pass down to their Kids/Grandchildren and theres nothing wrong with that ! For @TA and those of us that have no immeadiate wish to leave a legacy the house is a rather large asset to leave to charity once the last of us departs the earthly life 🙂 What i would like to do is spend a tad more in the early days of retirement knowing that separate to the portfolio we have a large illiquid asset which could be equity released, downsized or even used to fund an annuity if we chose to rent a home in a retirement village or similar in our 80’s. At the moment all options are open and i’m certainly not proposing to include the value of our home in the portfolio which we will soon start drawing down !! but at some point ideally while one or both of us are still alive it does need to be “Decumlated” as we have no desire to leave it to HM Gov.
• 78 Al Cam February 25, 2021, 5:21 pm

  @Brod:
  To quote von Moltke: “No battle plan ever survives contact with the enemy.”
  IMO good FI planning is no different – but, the enemies may initially be less obvious! If my experience is anything to go by, clarity will come quite quickly for some issues and the others will de-mist in due course. I would imagine that most things will have been satisfactorily resolved by around half way through your Gap.
  Looks like you will also have the advantage of a good few relevant Monevator articles to browse too!

  An end of career redundancy can be a great sweetener – engineering such an outcome takes some skill and/or luck. But it is worth remembering that such a scenario often works well for the employer too.

  Best of luck.
• 79 Al Cam February 25, 2021, 5:31 pm

  @Naeclue (#65):
  Re state pension (SP), deferral rates in New system are nothing like as good as they were in old system – and lump sum option has gone too, IIRC.
  Also, worth bearing in mind that under the New system there is zero survivor benefits in the SP – so, in theory at least, you could defer your way to a total zero pay-out situation!
• 80 Al Cam February 25, 2021, 5:38 pm

  @bingo (#70):
  Good spot re contracting out deduction – but just be extra careful which system (old vs new) you are buying “missing” years in – I fell foul of this rather well hidden trap a few years back.
• 81 Factor February 25, 2021, 6:06 pm

  @Cigano99 #77

  In case you are not au fait, bear in mind that equity release can only be accessed up to a certain proportion of the value of the property, even if there is no outstanding mortgage, and that the resulting drawdown facility (so called) will be far less than the amount of the actual equity.
• 82 Lloyd February 25, 2021, 6:46 pm

  @TA – Your idea of holding gold in case everything else has gone down got me thinking.
  In the decumulation phase I wonder if there is any logic to holding a far larger number of funds, split into geographical areas / company size / factors etc. rather than just a few more general funds.
  By doing this you might always be able to sell something that has gone up even if the markets generally are down or at least sell something that has not gone down as much.
• 83 The Accumulator February 25, 2021, 7:14 pm

  @ Lloyd – Yes, I think that’s why Whettam is exploring infrastructure funds. Low Volatility is a factor that’s historically suffered less drawdown than the vanilla index (a bit anyway).

  I tend to think of this like my multi-factor funds – some hope that it might work but be prepared for disappointment. Correlations go to 1 in a crisis and all that.

  The evidence for bonds / cash / gold digging you out of a hole is much stronger.
• 84 Whettam February 25, 2021, 8:48 pm

  Thank you again @TA both for the article and your detailed answers to mine and everyone else’s questions.

  I must admit I have always struggled with my defensive allocation. I have an allocation, many would regard as too low, I’m only 3-4 years away from retirement and Defensives are only 25% of my portfolio. Although I have another 20% REITs / Alternatives, as you say evidence for Bonds is probably stronger. But I’m hopeful my ‘bond proxy’ infrastructure funds will continue to do a job.

  I’m also really lucky to have an old with profits policy, which guarantees 4% pa until I’m 65. This is about 7% of my portfolio, not really a diversifier though, because it just does that nothing more or less. My initial plan had been to transfer out of this at retirement, but thanks to @A1Cam in another Monevator comment, my plan is to hang on to this and just drawdown from rest of portfolio.

  I’m currently increasing cash and short term bonds in the portfolio, to prepare for taking tax free cash and I’m not comfortable topping up intermediate bonds currently.

  With regards to property I agree it’s mainly a plan B. However we are planning to move shortly after we retire and we’ll downsize to a smaller property to release some equity, so it does factor in our plan.
• 85 Al Cam February 25, 2021, 11:41 pm

  @Whettam:
  Looks like your with profits checked out as suspected!
  Sometimes it is not a bad idea to take a second look at things.
• 86 Maximus February 26, 2021, 12:18 am

  @MarkC (#49) & @Boltt (#57) & AlCam (#60)
  Here’s that Steve Webb article:
  https://www.royallondon.com/siteassets/site-docs/media-centre/good-with-your-money-guides/topping-up-your-state-pension-guide.pdf
• 87 Al Cam February 26, 2021, 7:18 am

  @Maximus:
  Thanks – note that this document dates from the 2018/19 tax year, so any £-note amounts/costs may be out of date and watch relative durations , etc too.
  And, as the document states at the outset, in the conclusion and several times in between: the rules , etc are complicated.
• 88 Whettam February 26, 2021, 12:17 pm

  @A1Cam it did thank you to you again 🙂 for making me question my own rather daft logic. I think I just got a bit of a mental block that I should put all pensions into drawdown at same time. The approach actually has a couple of additional benefits too (1) I’m likely to exceed the LTA so this will actually delay that and (2) having now studied the T&C’s in addition to the 4%, there is a final bonus on the policy if you stay the full duration, this is subject to market adjustments, etc. etc. but could be a small additional amount at end.
• 89 Hague February 26, 2021, 12:54 pm

  Re this conversation about using a home as Plan B.

  Of course all circumstances (and individual preferences) vary but I tend to conceptualize it using imputed rent meaning that I can put it on both sides of the assets/income equation.

  E.g. Suppose, I have 1 million in (non-house) assets and a 1 million house. I’m drawing 30K (3% SWR) as income for expenses but I’m also calculating 3% imputed rent. My ongoing ‘real’ expenses are therefore 60K p.a.

  The ‘Plan B’ therefore is a fairly drastic reduction of expenses by selling (or letting) the house and moving to (much) cheaper accommodation. I see living in expensive accommodation as a ‘Fat FIRE’ option.

  Equity release has advantages (especially if there’s no legacy requirement) but that should really be modelled as a faster drawing down of capital/increasing the withdrawwal rate whilst not reducing expenses.
• 90 Naeclue February 26, 2021, 1:20 pm

  @TA, “Did you simplify so you can both ‘drive’, and how simple did you make it?”

  Essentially so we could both drive, but I also appreciate simplicity. Prior to the change of tack, we had a very simple system. After allowing for some exceptional one off items (house improvements, new boat), the approach was to rebalance back to 60:40 once per year and set a budget to spend over the coming year of 3% of the value of the investments at the start. This was a budget, not a target and once I looked at it properly I could see that we were consistently underspending and the amount of underspend was rising, partly due to rising asset prices, partly due to accumulated underspending. Last year’s Covid crash was the catalyst for a rethink.

  The goal was to give as much money to our kids as we could, whilst leaving in place sufficient assets to meet our likely needs and desires. In addition, if and when investments performed well we needed a way to determine how much more capital we could distribute.

  We switched to something similar to a Buffett style 90/10 allocation, but with the 10 in cash rather than bonds, plus cash to take us through to state pensions. In a nod to McClung, we decided not to rebalance back into more equities, just out of them into cash, so we would not maintain 90/10. Unlike with McClung, dividends would not be reinvested and just get accumulated into the cash allocation, from which we spend. We have simple rules indicating when to sell equities and when to give away cash. Amount to draw is now based on our estimated spending, but again is a budget, not a target. We will review the spending estimate every few years.

  Another simplification is that I have stopped trying to keep our asset allocation inline with targets. We are mostly cap weighted trackers weighted to approximate the FTSE World Index anyway, but have some small cap ETFs, a US REITs ETF and a US minimum volatility ETF. When we next sell I will check the allocation and sell so as to push the weights closer to where they should be, otherwise I am just going to leave it. I have been contemplating putting some of the US allocation into a US value ETF, but my wife may well veto that.

  There are still plenty of complications. For example with minimising, preferably eliminating, CGT on investments outside tax shelters, whilst also keeping income tax down. We don’t draw from ISAs and have temporarily stopped drawing from SIPPs, so with time the unsheltered investments complication should go away as we get everything sheltered.

  Another complication is with our SIPP investments. I only count 80% of the amount in SIPPs, to allow for tax, but I also deduct an amount based on what LTA charges I think we will pay when we each reach 75. Once we reach 75 this LTA complication goes away, unless the rules change.

  I fear next week’s budget may add to complexity 😉
• 91 Al Cam February 26, 2021, 1:48 pm

  @Whettam:
  No worries- you are welcome.
  Managing an impending LTA impact is a very tricky dance. This may become even more tricky next week – but let’s wait and see.
  I understand folks desire to keep any DB pensions within the LTA, and, IMO, using either phased retirement or an appropriate UFPLS schedule on any DC pensions can be helpful in this situation. I suspect you are not the first, or last person, who has assumed the only option is full crystallisation at one time.
  As it happens, I did fully crystallise my DC in one go. But, I did this at the earliest opportunity as that way I could hopefully retain enough LTA headroom to take my DB pension at or near normal retirement age (NRA).
  Swapping this order would almost certainly have led to a big LTA hit!!
• 92 Grumpy Tortoise February 26, 2021, 5:20 pm

  I’ve been a follower of this site for a number of years and this has got me thinking about FIRE. I finally got around to putting some numbers into a spreadsheet and doing a bit of modelling. Having worked in the NHS for over 30 years I should be due 30/80th of my final salary plus a few years of the newer CARE scheme. If and when they rectify the age-discrimination case for public sector pensions I also stand to add another 7 years making this 37/80s plus my PCLS.

  Plugging this into my modelling I find was suprised to find that I could probably retire early at 58 (taking a small hit for the actuarial reduction) and still have approx. 67% of my net salary if I at this age and use 50% of my PCLS). Once I reach my Normal Pension Age at 67 this will increase to 71% when the State Pension and other NHS CARE are added.

  When doing their calculations do people have a figure in mind on which they can comfortably live (assuming for example that a mortgage is paid off) or a proportion of their current net salary (in my case around 2/3rds)?
• 93 Al Cam February 26, 2021, 5:39 pm

  @Grumpy T:
  There are several recommendations around – all of which basically say the richer you are the lower the required replacement ratio. However, lifecycle economists will tell you that you really need to work out your needs from the bottom up, see e.g.:
  https://www.forbes.com/sites/kotlikoff/2018/06/22/the-70-replacement-rate-in-retirement-is-rubbish/
  One thing to bear in mind is that you should probably not need to save for your retirement once retired – but beyond that it is very personal/situational.
• 94 NewInvestor February 26, 2021, 8:03 pm

  @Grumpy Tortoise

  When doing their calculations do people have a figure in mind on which they can comfortably live (assuming for example that a mortgage is paid off) or a proportion of their current net salary (in my case around 2/3rds)?

  Sort of the first one. I estimate my future living costs from my current expenditure pattern adjusted for how much it will cost to do what do I want to do after retirement/cessation of current career. If one good thing has come out of the last 12 months, it is that it has been excellent for providing an indication of what I need to live a basic lifestyle (my ‘floor’ costs).
• 95 Whettam February 26, 2021, 8:36 pm

  @A1Cam “ I suspect you are not the first, or last person, who has assumed the only option is full crystallisation at one time.”

  It’s worse than that I did know that I did not need to crystallise at once. But just did not consider phasing it, I was just focused on using the with profits policy for TFC. This sort of blinded me to the fact that guarantee of 4% is a pretty defensive asset, so should hang on to it until the guarantee ends.

  I’m resigned that I will hit the LTA, my pension is just DC schemes, so at end of day consider myself to be quite fortunate to have that problem.
• 96 Al Cam February 27, 2021, 1:37 am

  @Whettam:
  Got you.
  This is a pretty good example of some of the additional benefits of the Monevator blog – people with similar [niche?] interests just chatting & bouncing things around!
• 97 Passive+Investor February 27, 2021, 7:37 am

  @ TA (? The Decumulator). The 15% allocation to international index linked fixed income hedged to sterling caught my eye. Do you have any pointers to how these behave if the UK gets unexpected inflation but rest of world doesn’t? Seems to me that they even may work better if not hedged to sterling. (I understand the structural difficulties with UK linkers – long duration, limited supply and over priced due to demand from pension fund). Great article, thank you.
• 98 SirRik February 27, 2021, 9:28 am

  Congratulations TA! For the achievement of your target and for the article. Really interesting…actually your article made me think I’m doing better than I thought. Accepting the idea of “Capital preservation: no”, I could already begin to think… thank you! A simple statement that I never considered before, being focused only on the concept: total net worth at least 33 times my annual needs (for the 3% SWR rule). A big “Ciao!” from Italy to you and to all the other readers!
• 99 Warren Bogle February 27, 2021, 9:30 am

  The great Warren Buffett recommends 90% S&P 10% bonds. I appreciate academic theory recommends 60:40, but maybe Warren was onto something. You can be too conservative, and worse off for it, particularly with bonds at c. 0%.
• 100 Vanguardfan February 27, 2021, 9:46 am

  @TA, you didn’t answer my technical question (I shouldn’t have muddied the water with a second question). Is the £29k median applicable to two adult households, or is the standard household a different composition? (I know equivalising is done to allow comparison of households with different compositions, but I don’t know what type of household they use as ‘standard’).

  Care homes. It’s surprisingly hard to find good unbiased data that would be useful for individual planning. What I have found suggests median survival of about 9 months. However that is massively skewed, with a lot of end of life admissions, and a long tail of longer survivors. But the main thing to realise for planning is that you still have all your planned income to go towards the cost, so savings/house only has to make up the difference.

  Re LTA. The more I research this the more I feel that the optimum approach is to delay crystallisation as long as possible, and don’t try to limit growth in the pension. This is based on an assumption that money taken out of the pension that is not needed for spending will be liable to IHT. This will give a worse outcome than leaving the legacy in the pension wrapper. So my rule of thumb is to take money from a SIPP when it is needed, and not before. (Worst case scenario you die before 75 and have lost the tax free inheritance benefit).
  I have stopped adding to my SIPP, but there are circumstances when even that is a bad idea – if you’re getting employer contributions for eg.
  It would be good to have a proper Monevator treatment of the LTA, although I appreciate @TA might feel little personal benefit (although maybe not, given the long time frames involved).
• 101 Brady February 27, 2021, 9:58 am

  @MarkC (#49) & @Boltt (#57) @alcam

  …and anyone else thinking about additional NI contributions to access state pension.

  Recently been asked this question by my mother in law who was about to pay c£4-5k to access full pension. Whilst the return definitely stacks up, I told her not to and to apply to transfer my wife’s NI credits instead as they have regularly helped out with our childcare since she stopped working 4 years ago. (My wife & I don’t need them as she & I both in salaried employment). 2 links below explain.

  https://www.gov.uk/government/publications/national-insurance-credits-for-adults-who-care-for-a-child-under-12-fact-sheet/specified-adult-childcare-credits-fact-sheet

  https://www.moneysavingexpert.com/news/2017/01/grandparents-who-help-with-childcare-at-risk-of-missing-out-on-full-state-pension—act-now-to-protect-it/
• 102 The Accumulator February 27, 2021, 10:40 am

  @ Naeclue – thank you for taking the time. It’s a great example of how each of our decumulation plans is tailored to our individual circumstances.

  @ Grumpy – I did it like New Investor. Tried not to be too Pollyannaish.

  @ Passive Investor – if the UK experienced unexpected inflation and the rest of the (developed) world didn’t then by definition the fund would be much less effective. It’s assumed that the historical relationship between developed world economies and their inflation rates continues to some extent. Historically the US and UK inflation rates have tracked each other consistently – although with UK inflation being higher. The fund is over 50% US and 30% UK, so we’d have to go pretty banana republic for the fund to prove useless. That’s not inconceivable of course but we have a very open economy and it’s hard to see that changing. I don’t want the volatility of currency risk bouncing my bond holdings around, so hedging it is for me. Let me know why you’d prefer to do without – would be interested in your thoughts.

  @ Warren – Buffet as ever was bang on, if you can *afford* to take the risk. In Buffet’s case, the portfolio is so large that the 10% bond allocation is more than any human could reasonably need to live on. So, there’s no need to be cautious with the other 90% and you may as well shoot for growth.

  His situation definitely doesn’t apply to me but it kind of does to my Dad. My Dad isn’t Warren Buffet, btw. My Dad’s outgoings are more than covered by DB pensions and the State Pension. He doesn’t need to hold bonds in his liquid portfolio bar a smidge for diversification’s sake.

  Are you tempted by a very high equity allocation? If so, is that because you’ve a strong floor of other income sources?

  @ SirRik – hope things are OK in your neck of the woods and that you’re closing in fast on your target!

  @ Vanguardfan – The Details Man did a dive into the Lifetime Allowance in this piece:

  https://monevator.com/the-lifetime-allowance-for-pensions/

  There was a good discussion in the comments thread too. It seemed to me the way the benefit crystallisation events worked was pretty non-intuitive. Let me know specific areas you’d like a follow up piece on and I’ll put it on my list.

  I don’t know if the ONS use a baseline idealised household either but they link to various sources that contribute to their methodology.

  @ All – thanks for a great discussion on this thread. A pleasure to read.
• 103 Mr Slow February 27, 2021, 11:40 am

  @Passive investor
  @TA
  Yes I have also wondered if unhedged US short dated TIPs may be useful as a cheap short duration UK inflation hedge…
  High US and high UK inflation = gain value
  High US specific inflation = gain value, but potentially dollar weakens so GBP value overall flattish
  High UK specific inflation = no impact on TIPs, but if it leads to GBP weakness then they gain in GBP terms

  However I haven’t run any detailed analysis, for now I am just using TA’s recommended RLAM global short duration fund. It does hold a decent number of UK linkers, and also my other unhedged global equity funds might gain in value if we do get UK specific inflation and associated sterling depreciation.
• 104 Nearlyrich February 27, 2021, 11:56 am

  Just to finish my point (#54) on state pension forecasts from the government website and to contribute to the sub-thread on here about Class III top-ups, I’ve encountered at least two examples where the wrong figure has been given. You might say this is just a forecast but I’m sure lots of folk take this figure as ‘gospel’and insert it into their retirement planning spreadsheets especially Monevatorians.

  First, a teacher, coming up to retirement age checked her forecast every 6 months which kept saying she was entitled to a full pension until now just before retirement when it, more correctly, reduced it because she was contracted out for her whole carer. This has left her scurrying to buy Class IIIs but fortunately in the nick of time.

  Second a retired private sector consultant who is forecast to receive full pension despite being also being contracted out. The pensions number/ call centre on two occasions insisted that this figure will not be reduced. Even accounting for a small number of contributions since the 2016 change this is incorrect and he’s keeping a close eye on the figure in case it changes like the first example.

  I’d therefore encourage retired readers who gave yet to draw their, stsre pension, especially those mostly contracted out until 2016, to calculate their own starting amount and entitlement and compare that to the gov.uk provided figure.

  Sorry TA, I know this is slightly drifting off topic.
• 105 Vanguardfan February 27, 2021, 12:02 pm

  @ta thanks I’ll take (another?) look at that LTA article. Funny I was just thinking it was a perfect topic for TDM. Obviously my short term memory loss is already kicking in…( more likely I just wasn’t thinking as hard about the LTA at that time).
• 106 Al Cam February 27, 2021, 12:49 pm

  @Vanguardfan & @TA
  Re the LTA:
  The referenced article provides good coverage of the rules, and there are indeed some good pointers within the usual quality comments.
  However IMO strategies for managing the LTA are a whole other game and are very situational, to give just a few examples: for some people the LTA will never be an issue; for some people there are IHT considerations; and there may be significant interplay with personal tax brackets too.
  To my mind, there is no “one size fits all” LTA strategy.
  A simple example at the next level of detail being, in a rising market, for a case with no LTA issues using the UPFLS method almost certainly pays out with the lowest average tax rate – introduce the constraint of approaching the LTA limit and things change due to the different way the relevant BCE’s calculate the LTA impact – and full crystallisation FD may well be better.
• 107 Al Cam February 27, 2021, 12:55 pm

  @Brady (#101)
  Good one! Thank you for sharing this.

  State pension (both old system and new system) are complicated.
• 108 Al Cam February 27, 2021, 1:06 pm

  @Nearlyrich:
  Re: “I’d therefore encourage ….”
  Good idea – and in the past I have tried to do this.
  However, I have never found a clear and definitive guide that shows you precisely how to calculate the starting amount. My main difficulty has been in calculating the “contracted out deduction”. Do you know of such a resource?

  About ten years ago under the old system I tried to calculate my SERPS, S2P, AP, etc and could not get to the figure I was given by HMRC. So, I spent some time on the phone with them and finally managed to persuade them to do the calculation for me and share the details with me. Some time later (I think it was about 6 months) I did get said letter with the details – all I will say is that the letter ran to fifteen pages and whilst it was comprehensive it did actually lack any helpful explanation, just screeds of numbers and tables.
• 109 MarkR February 27, 2021, 1:39 pm

  @Nearlyrich #104.
  Thank you for this warning. I have recently heard something about my situation that suggests I may be in a similar situation – the gov.uk site states full pension but I’m fairly certain I shall not.
• 110 The Accumulator February 27, 2021, 2:23 pm

  @ Al Cam – could you recommend, say, 3-5 example case studies that I could investigate that might encapsulate the common scenarios for people?
• 111 Al Cam February 27, 2021, 2:59 pm

  @TA:
  I am certainly not an expert – but these are “my starter for ten” thoughts:

  1) Thankfully, I think the most likely scenario is no LTA issue.

  2) Next most likely are probably pure DC holdings; then pure DB holdings.
  a) for the former Flexible Drawdown vs UPFLS and/or Phased Retirement may be of interest
  b) may be worth exploring effect of PCLS in a DB scheme – ie it can often be used to reduce the LTA

  3) Then there are folks with both DC & DB holdings.
  Where order / type of crystallisation may also be of some interest – e.g. DB first, or DC first, or some DC, then all DB, then balance of DC, etc

  4) Some folks see the ability to possibly (in due course) pass on a SIPP Pot free of IHT (but not income tax) to their dependants as important. This particular scenario could be a good one to flesh out if they are basic rate tax payers or, alternatively higher (or even additional) rate tax payers.

  5) Lastly, definitely worth explaining the potential impact of what I call the sting in the tail – ie mandatory LTA test(s) at age 75 – and how this relates to IHT desires too

  I am sure there are many other scenarios, but as I said I am not an expert!
• 112 Vanguardfan February 27, 2021, 3:30 pm

  Yes, I see that not only did I read that LTA article, but I engaged in a long and useful discussion with @naeclue and @pingpong about whether it’s better to take an LTA charge from a DC or a DB pension. And it was only 14 months ago! I blame the intervening pandemic….

  Anyway, my ideas for follow ups are really around decisions people Will commonly face. I take the point that situations vary, but I think there are (probably) some general rules (it’s just my maths isn’t quite up to proving them). I think the main point is that many people seem to want to ‘avoid’ the LTA charge, by stopping contributing to pensions, or by reducing growth assets in their pensions, or by crystallising and withdrawing from their pensions before they need to.. The more I think about this the more I wonder if those actions are likely to result in poorer outcomes. After all, the point is not to minimise your tax bill but to maximise your after tax wealth. A bigger pension might mean a higher LTA charge but you will still benefit from a proportion of the extra pension growth. The LTA isn’t a ceiling or a 100% tax.

  So, my ideas for questions worth exploring:

  1. In what circumstances is it a good idea to continue pension contributions despite likely LTA charge? (TDM linked a very useful set of case studies showing that in some cases it’s best to continue, to benefit from employer contributions for eg).

  2. In what circumstances (if any) is it a good idea to remove money from a pension (tax free or from drawdown funds) before it is needed for spending, with the aim of reducing LTA? (Included in this is whether taxable pension money should ever be taken before ISA money).

  3. In what circumstances (if any) should legacies be given before death, if the gift is going to trigger LTA excess charge? Is there an optimum timing tax wise? (Given that death before 75 means pension inherited tax free, minus LTA charge; there is an LTA test at 75; and if you die after age 75 without crystallising your pension you (your beneficiaries) have lost the tax free cash.)

  I’m coming to the conclusion that it may often be a mistake to draw money from your pension before you need it, simply to reduce the pension value and hence the LTA charge. But I’m sure someone else will be able to tell me where I’m going wrong.
• 113 Al Cam February 27, 2021, 4:33 pm

  @Vanguardfan:
  Re your conclusion: IMO it totally depends on the phasing of the tax regime at play!
  In extremis, the maths can be very simple: if you can empty a SIPP over a period of X years at, say, 0% tax (to keep it simple) and re-invest it annually into ISA(s) or pay, say, 40% for the privilege to draw the SIPP in X years time – then why wouldn’t you? All other tax rate cases then work back from this. Annual tax free allowances is use it or lose it.
• 114 Al Cam February 27, 2021, 5:01 pm

  @Vanguardfan:
  See also:
  comment #33 from Ermine at:
  https://monevator.com/should-you-use-cash-to-bridge-the-gap-between-your-isas-and-your-pension/

  and comments #6 to #8 at:
  the Details Man link provider earlier by TA

  BTW, your three questions are much better than my “starter for ten” ramblings!
• 115 Vanguardfan February 27, 2021, 5:54 pm

  My questions and comments were really about the context of LTA, and about deliberate strategies to reduce it (above and beyond withdrawing money that is needed for living on). Obviously if you aren’t thinking about LTA excess charge then it is (probably) always best to use your personal tax allowance for taxable pension withdrawals. And equally it is always a good idea to shelter any additional funds into an ISA, but is it worth paying income tax on pension money to do that? Sometimes, but not always. (I am of course making an assumption that there is going to be surplus funds on death. I do assume that anyone with LTA issues is likely to leave an inheritance, whether they want to or not).

  There’s a distinction (I think) between the question ‘I need x amount to live on this year, where is the best place to take it from’, and the question ‘how shall I move my money around between pension, ISA and unsheltered accounts to optimise tax efficiency?’ I was focusing on the latter, but it seems to me interesting how people often frame or anchor withdrawals around tax structures, when really they should be first and foremost driven by spending needs.
• 116 Mark C February 27, 2021, 6:42 pm

  Boltt #57, Al Cam #60, Naeclue #65, Factor #67, Bingo #70, Maximus #86, Nearlyrich #104

  Thank you so much for the comments/advice – very much appreciated. I worked on the Isle of Man for 11 years so also have an IOM state pension so getting to the full UK state pension would mean that I should have an ok base amount when/if I get to state pension age. I should say that I am very grateful for the introduction of the new state pension and associated ability to buy years from before the usual 6 year period as this means I can buy years for my UK pension in addition to having contributed to the IOM pension for the same years.

  Brady #101 – thanks but the grandparents rule won’t apply to me – I’ve always been too sensible/selfish/immature (depending on who you listen to :0)) to have/want kids.

  As a long term reader and one-time previous commenter(commentor?), I should take the opportunity to thank @TA and @TI for their brilliant work on this site. Since happening upon this site, I have completely changed my investing behaviour and without doubt for the better. I’ve also lost many hours reading the excellent articles and thought-provoking comments that follow and have often gone down the Monevator rabbit-hole by clicking on various links to other Monevator articles when only setting out to read one or two. Gents, your work really is appreciated and genuinely makes a difference.
• 117 Al Cam February 27, 2021, 7:28 pm

  @Vanguardfan:
  Spending needs are indeed key – and are handled separately.
  FWIW, I reckon the best way to minimise a LTA excess charge is to avoid it totally. Under the appropriate circumstances a “shuffle” as I have described above can achieve this – and, in the admittedly extreme case, move the former SIPP/DC investment to a totally tax free (vs up to 25% tax free) environment at the cost of zero tax paid. I also happen to believe that it is worth paying some income tax to achieve this too, especially if you may be a higher rate tax payer again in due course. The tax differential is key.
  Also, were I not to shuffle, as outlined above, I would almost certainly have exceeded the LTA threshold by the time I came to take my DB. With what I call the “sting in the tail” to follow.
  If you have already passed through the LTA threshold prior to jumping ship, or continue in paid work until jumping ship with no “Gap” then that is another story and minimising the LTA excess charge may well become the focus.
  Perhaps somewhat perversely, I have very little interest in minimising IHT, but am keen to minimise tax paid whilst I am still around.
• 118 hyperhypo February 27, 2021, 8:51 pm

  Well done and thank you both. @TA i’ve been following the S&S for years and you’ve always collectively stressed it was notional rather than real. Does @TA transition to TD make it real as it were ? Over the years i’d often thought i may as well simply align myself to the S&S as i couldn’t come up with anything better off my own wits…i never did because of needing a slightly different equity / bond split, and have never really (honestly) understood the varying proportions of Gilts to linkers. I’m now at same point @TA seemingly, after a house buying / living / saving / working burst compressed uncomfortably at times into only 20 years, 12 years in a db scheme, the wheels have finally come off my working wagon. Can’t do the toad work any more. Looks like i might have an alternative now to converting my mish-mash of passive and active funds into income producing Invesment Trusts (Greybeard got me off on that). Genuinely looking forward to your next installments …
• 119 Passive+Investor February 28, 2021, 8:31 am

  @TA Generally I agree it is sensible to hedge fixed income to sterling. My reason for not hedging international inflation linked bonds is that in the scenario where UK gets inflation ‘goes full banana republic’ but the US doesn’t then the pound would fall relative to the dollar giving a return from the US inflation linked bonds (even though in dollar terms there wouldn’t be a return). I hear what you say about inflation being a global phenomenon but the UK certainly has worse inflation than many other Western economies. I am old enough to remember by grandparents getting wiped out in the 70s while my parents did OK from having their mortgage inflated away. Inflation obviously has different generational effects and as a not-to-far-off retiree it keeps me awake at night.
• 120 Passive+Investor February 28, 2021, 8:34 am

  correction. UK *had* (not has) worse inflation historically than other western economies.
• 121 Factor February 28, 2021, 10:57 am

  @ all

  As a “leavening of the Sunday morning dough”, I wonder if other Monevatorites occasionally do as I do and find themselves imagining, where there is no picture or avatar, what the people behind the user names actually look like!

  More a portrait than a rogues gallery I hasten to add 🙂
• 122 The Accumulator February 28, 2021, 1:23 pm

  @ Vanguardfan & Al Cam – thank you for your thoughts. Got it all on my pasteboard of ideas. I’ve always had it mind to tackle this one day. Seemed impossible before but soon I’ll have the time to dive down this rabbit hole like a Jack Russell. If I disappear for six months you know where I am.

  @ Mark C – thank you so much for those lovely comments!

  @ hyperhypo – congrats on the new phase! Sounds imminent? The Slow & Steady portfolio is a little simpler than what I got up to behind the scenes – mostly because I invested in risk factors, and I needed to incorporate different bond fund durations as my timeframe was shorter.

  There is a large overlap between my portfolio and the S&S though. It’s not like I’ve been 100% in leveraged inverse ETFs all these years. Running the S&S portfolio in parallel has been a lesson in humility though. In a nutshell, factor investing has had a poor decade.

  The strategy outlined in this series is 1:1 what I’m doing.

  Your comment has got me thinking that I should do a deeper dive into the bond side of the asset allocation.

  @ Passive Investor – I hear you. Also I have similar memories of the effects upon parents and grandparents. Although my Dad remains politically traumatised by his experience of the ’70s to this day.

  Even then, inflation was a problem writ across the developed world, but I agree, the UK was a prime basket case.
• 123 TightTom February 28, 2021, 5:36 pm

  Hi Accumulator,

  Thanks for the great article – can you point me to which global bond GBP hedged fund you are using? Thanks
• 124 James February 28, 2021, 5:51 pm

  Hi – Re state pension forecast, if you follow the innocent-looking link about contracting out it gives an estimate of the reduction to state pension. At least, I think it’s the reduction? They’re keen for you not to perceive it as such:
  —
  You’ve been in a contracted-out pension scheme

  Like most people, you were contracted out of part of the State Pension.

  —Contracted Out Pension Equivalent (COPE)

  Your COPE estimate is£13.16 a week.

  This will not affect your State Pension forecast. The COPE amount is paid as part of your other pension schemes, not by the government.

  In most cases the private pension scheme you were contracted out to:

  will include an amount equal to the COPE amountmay not individually identify the COPE amount

  The total amount of pension paid by your workplace or personal pension schemes will depend on the scheme and on any investment choices.
• 125 Naeclue February 28, 2021, 6:12 pm

  @Vanguardfan, @AlCam, @TA, decumulation gets incredibly complicated once one starts thinking about legacies and inheritance tax. Neither of which I think interests @TA and to which @TI is openly hostile!

  How much tax is deducted in getting £100 from your SIPP to a beneficiary? It depends on the route and combination of income tax, LTA charge and IHT paid before it gets to the beneficiary.

  You can give any amount of money to a beneficiary free of inheritance tax provided you live for 7 years after the gift. If you don’t live 7 years IHT may be charged at anything up to 40% (depending on annual gift allowances, the gift from income ruse and date of death).

  Under the pension freedom rules, SIPPs can be passed to beneficiaries free of tax. Taking money from a pension is taxed as income at the marginal rate of the person who draws it, except for when a SIPP is inherited from someone who dies under the age of 75, when it can be drawn free of tax. Even after a SIPP is fully crystallised, An LTA charge may be made on part of the SIPP at age 75. The LTA charge is 25% if the excess if left in the SIPP (usually the best thing to do). The LTA charge on £100 at age 75 can be avoided by drawing the £100 before 75 and paying income tax on it, or by dying before 75.

  Here are some scenarios for what happens to £100 in a SIPP on the route to a beneficiary, assuming the SIPP is fully crystallised:

  1) 0% income tax, 0% IHT: £100 to beneficiary
  2) 20% income tax, 0% IHT: £80 to beneficiary
  3) 40% income tax, 0% IHT: £60 to beneficiary
  4) 0% income tax, 40% IHT: £60 to beneficiary
  5) 20% income tax, 40% IHT: £48 to beneficiary
  6) 40% income tax, 40% IHT: £36 to beneficiary
  7) 25% LTA charge, 0% income tax: £75 to beneficiary
  8) 25% LTA charge, 20% income tax: £60 to beneficiary
  9) 25% LTA charge, 40% income tax: £45 to beneficiary

  Scenarios 7-9 are ones where the beneficiary inherits the SIPP but an LTA is charge on the £100. Note how much better 8,9 are than scenarios 5,6 where money is drawn by the SIPP holder and given to the beneficiary. The LTA charge is avoided, but hit by the much higher IHT.

  A couple can have a maximum of £1m in their estate before the estate becomes subject to IHT. £1M does not go far where we live, being about the cost of an ex-council 2 bed house, so we anticipate our estate being subject to IHT. It is uncertain that will always be the case as we may eventually move somewhere cheaper and spend/give away all non-SIPP investments, but highly likely to be the situation for some time. As a result of the likelihood of our estate being subject to IHT, we have decided to stop withdrawing from our SIPPs for a while, even though it is likely that we will end up paying the LTA charge on money we would otherwise have drawn. The likely worse case scenario here is our beneficiaries losing £40 in £100. This compares with the risk of increased tax losses if we draw the money and it ends up eventually being charged to IHT.

  We may yet change our minds on this though as we have a couple of weeks to make the decision for this year. It is not an easy decision to make as we are both relatively young and in good health, so getting away with option 2 and 3 is highly likely. We also have decent sized SIPPs and it is likely that we could get by perfectly well on those + state and very small DB pensions without the ISAs and other investments. Getting rid of non-SIPP investments right now though would significantly raise our SWR.
• 126 Naeclue February 28, 2021, 6:30 pm

  ps, I have had an in depth look at other options for avoiding IHT. Other than SIPPs and gifts, all other options seem to me to have significant drawbacks.

  Investments in discretionary trusts are not tax sheltered and subject to high income tax, CGT and 10 yearly IHT charges. Income tax can be mitigated to some extent, but not CGT. The amount that can be put into trusts is limited in any case.

  EIS/SEIS are risky and have high charges. A DIY AIM portfolio might have lower charges, but is still risky and illiquid. Offshore investments don’t escape IHT unless your executors are prepared to lie about their existence. Some insurance company products might be worth a look, if held in trust, but again are costly.

  If you are a billionaire, you just become non-resident.
• 127 Al Cam February 28, 2021, 6:54 pm

  @naeclue:
  Thanks for taking the time to pull the above together. It is indeed tricky.
  And, IMO, far too complex to carry into even older age if you do not need to.
  As an aside, I actually have very little interest in minimising IHT.
  However, my plan – to totally shuffle my SIPP to ISA(s) before drawing my DB – would allow me to gift whatever I wanted, whenever I wanted to, subject, of course, to having the funds. And, provided I survive for 7 years there would be zero IHT to pay. In the event that one croaks prior to the seven years then, very worst case 40% IHT might be payable. IMO, even this worst case would be more than generous to any beneficiary.

  Removing the SIPP just seems to me to be the most straightforward approach. Fundamentally, once: tax refunds, employer matches, salary sacrifice, employer NI refunds, and other pension benefits (like up to 25% tax free cash) have gone/been used (basically you are no longer in paid work/contributing), then the ISA is a far more attractive vehicle than a SIPP. The actual cross-over point is a tricky call, but the fact that ISAs (at least as currently understood) are totally tax free with no limits apart from the annual contribution makes them so much simpler to understand, and IMO this also makes them less vulnerable to being tinkered with by politicians too.
  However, I appreciate that this is just my particular scenario and opinion, and others will have different constraints and objectives.
• 128 Al Cam February 28, 2021, 7:04 pm

  @naeclue:
  Just to be clear, I should have said I have have very little interest in minimising IHT beyond my wife and I.
• 129 The Accumulator February 28, 2021, 7:59 pm

  @ Tight Tom – sure thing, it’s: Royal London Short Duration Global Index Linked (GBP hedged).

  Also check out: Legal & General Global Inflation Linked Bond Index Fund.
• 130 Al Cam March 1, 2021, 7:49 am

  @naeclue:
  Strictly speaking, the tax efficiency of the “shuffle” process depends on tax differentials.
• 131 Al Cam March 1, 2021, 10:29 am

  @James (#124)

  Yup, but please note that:
  a) this is an estimate – with zero explanation as to how it was calculated and what recourse you may have in the event that it turns out to be wrong – I believe the answer to that Q is: none, see e.g. (#54 & #104 above)
  b) the accompanying text looks like it was written by a lawyer – ie it is so heavily caveated as to be IMO effectively meaningless other than in it’s declaration that the COPE amount (whatever it actually turns out to be) will not be paid by HMG.

  I am generally a tad cynical – but just saying!
• 132 Naeclue March 1, 2021, 12:00 pm

  @AlCam, avoiding IHT when one spouse dies is simple. Just set up wills leaving everything to each other. These are often called mirror wills. When one of you dies, the other inherits everything and no IHT is payable. IHT allowances are transferred as well (they used to be lost), so can be used on the second death.
• 133 Al Cam March 1, 2021, 12:19 pm

  @Naeclue:
  Thanks for that.
  What do you see as the additional benefits (if any) of such wills as the rules of intestacy are now very straight-forward in our case, see e.g.:
  https://www.gov.uk/inherits-someone-dies-without-will/y/england-and-wales/yes/yes/no
• 134 weenie March 1, 2021, 5:02 pm

  Thanks for this article, TA (TD) which I’ve thoroughly enjoyed reading, as well as the numerous helpful and interesting comments. My own decumulation plan is still kind of fuzzy as it’s still some years away. I think I have the basics but not really drilled down to actual numbers or how I will use my SIPPs/ISAs yet for it to be really useful.

  As regards to state pension forecast, I’ve paid 31 full NI years but it states that I need to contribute another 6 years before I’m entitled to the full state pension, ie 37 full NI years in total.

  I assume this is for me to ‘catch up’ on the years where I was opted out but who knows really if that is the case?
• 135 DavidV March 1, 2021, 5:04 pm

  @Al Cam (133) A will allows you to choose your executor. It would also allow you to determine what would happen in circumstances such as both dying together in an accident.
• 136 Naeclue March 1, 2021, 5:07 pm

  If the rules of intestacy do what you want, then arguably there may be no need for wills. I am unsure how easy probate, or the equivalent for intestacy is for executors, compared with the process when there is a will.
• 

  Mogul

  137 The Accumulator March 2, 2021, 7:33 pm

  @ Weenie – definitely worth querying. You should only need 35 years of qualifying contributions:

  https://www.gov.uk/new-state-pension/how-its-calculated#:~:text=You'll%20need%2035%20qualifying,10%20and%2035%20qualifying%20years.&text=You%20have%2020%20qualifying%20years,and%20then%20multiply%20by%2020.
• 138 DavidV March 2, 2021, 11:52 pm

  @TA (137) @Weenie (134) Just above the gov.uk section that TA highlights is the section “Valuing your National Insurance contributions and credits made before 6 April 2016”. This clarifies that a starting amount is calculated at April 2016 as the higher of the the old or new systems, taking account of the contracted-out deduction. It then goes on to say that if the starting amount is lower than the full new state pension, this can be made up to the full amount by post-2016 NI contributions. This seems to me to confirm Weenie’s assumption.
  Incidentally, I already receive my state pension since 2018 and am in the fortunate position that my starting amount was higher than the full new state pension, so receive a ‘protected payment’ in addition. Anyone with a good few years SERPS/S2P contributions before 2016 is likely to be in this position and I encourage them to get regular state pension forecasts. They may be pleasantly surprised.
• 139 Al Cam March 3, 2021, 1:08 am

  FWIW, I agree with DavidV (#138) re weenies (#134) assumption.
• 140 AndyJ March 19, 2021, 2:15 pm

  @TA – this series has been brilliant – thank you for your openness about all your thinking, plans and in some ways most usefully your feelings about this change to deaccumulation. I’m not a million miles from some of your situation and am always interested in choices for the defensive element of post retirement portfolio. The majority of my savings are in the “Long Term Fund” of a well run company DC pension that I paid into from 96 – 2012. 0.18% fees and sensible allocation has made it work steadily for a long time. 50% is in the L&G Diversified Fund and I thought you’d find the make up and analysis interesting as its maybe doing some of things you are trying to do. The presentation on the info page is worth 12 mins I think:
  https://fundcentres.lgim.com/uk/en/fund-centre/PMC/Diversified-Fund/
• 141 colinph970 April 6, 2021, 12:23 pm

  Interesting article. I think in some circumstances the 4% SWR is actually too conservative. In my case me and Mrs H can live off our savings and investments for the next 3.5 years, which takes us to 63 and 4 years short of the State Pension (we both qualify for full S.P.) I have a detailed spreadsheet that shows we can drawdown at a rate of 8% for the four years between the ages of 63 and 67 at which point the S.P. starts taking some of the heavy lifting. Once that happens, we can safely drop down to 4% and live easily for the next 30 years.
• 142 MikeW April 10, 2021, 4:00 pm

  Interesting article, thanks!
  You mention “a strong equity allocation along with our State Pensions is our best protection against longevity risk.”
  Are you also expecting your income needs to drop over the next few decades?
  (go-go, slow-go, no-go years!)
  If not, that might add some protection too – it strikes me that *most* people find their needs drop somewhat around 65-70, and perhaps again around 80.
• 143 Mar Collins April 18, 2021, 5:37 pm

  Excellent article. I am guessing that I am in similar position to you, starting decumulation probably next year.
  With regard to your growth asset allocation what is world multi factor ? Sorry for my ignorance.
• 144 The Accumulator April 20, 2021, 11:43 am

  Hi Mar,

  It’s a developed world equity ETF that tilts in favour of shares that exhibit specific risk characteristics. There is some evidence to show that these characteristics may lead to some outperformance over the long term. This piece explains more:

  https://monevator.com/building-a-multi-factor-portfolio-with-ishares-factorselect-msci-world-etf/
• 145 AndyJ April 20, 2021, 2:58 pm

  While we are talking multi asset funds… On the defensive side of the portfolio does anyone have experience/ info on Multi Asset Credit?
  My pension is going to move to this from standard fixed interest funds next month (and increasing the costs while they are at it) but there is little info as yet.
  Seems like maybe as simple as a more flexible allocation approach perhaps. Wondered if @ZX might be about…