Will You Run Out? Income And Cashflow In Retirement
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- Опубліковано 19 чер 2024
- Will you run out of money when you retire? Imagine you’ve worked all your life to save for retirement, but then you get to your late 70s and the money runs out, and you have to make big changes to how you live your life.
Today, I want to run through how to avoid that, at all costs.
#meaningfulmoney #meaningfulacademy #retirementplanning
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Chapters:
00:00 Intro
00:37 Cashflow Ladder - The Principle
01:53 Wrappers
02:44 Example part 1
05:12 Example part 2
06:34 Reviewing the ladder
07:30 A simpler version
08:28 Conclusion
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Thanks for this Pete. I was one of the people who was asking for a video on cash ladder. Invaluable content for those of us who can’t afford a financial advisor, frugal lifestyles and very modest portfolios.
Happy new year Pete 🎉
Clear and informative, thanks for sharing
Thanks for another decent video Pete. Definitely something to think about.
Thanks Pete. Happy new year to you!
A timely video as I’ve just arrived at the Cash-flow Ladder section in Meaningful Academy 😊
This is the same framework that I came up with. So very glad you are presenting the same approach - which is very reassuring. Thanks for all the vids and podcasts.
So useful- thank you
Another superb video.
I tried to do this over the Xmas break, I like your version much better than mine, so off to rebuild it. Many thanks
Another great video,thanks Pete and Happy New Year
And to you, Graham!
Excellent video.
This is great. I’d sort of got to the last option myself when I built a model (monte carloing the last 100 years of returns in random orders for sequence of returns risk). Realised that holding 5 years of cash (or cash like - money market funds etc) and then the rest in globally diversified equity (my personal risk threshold) was statistically the most likely to succeed. I am however only 38… !
Thanks so much for this video - it really bring the cashflow ladder to life and see how you use it. Sorted out a view things in my mind.
Glad it was helpful!
Great video. I would comment this approach may add to the number of investment funds needed adding to complexity, however this may not be as difficult as you say and this approach is something we all need to think about.
Good video, nice explanation of this concept. Obviously need to factor in inflation, likely reduced spending in future years and potential downsizing etc but really good to cover the basics
I've got decades before I retire, so I will use this as a planner to build a good pot where I can. Thank you.
Good to see you again, I've been searching for your new content. I've recently relocated as part of my retirement plan. On my local travels and after going up a moving staircase I saw a sign, ten minutes later my subconscious told me it was your office.
I'm ploughing down the income investment trust route, although recently reinvesting into growth and income . Hoping for a long retirement so I desire security of income and will forgo upwarding trending volatility of outright growth investing. Psychology is important when my funds are up i'm happy, when they are down I look at my dividend spreadsheet and take comfort rather than panic selling!
Can you do a video on a ladder where you frontload your retirement spending? Decreasing after, say, 25 years of retirement from 55.
Reason being that later on in life (80+) it's unlikely you will need as much to spend.
Second ladder makes more sense to me. If you are drawing down/reviewing yearly you end up with a risk of a market impact just before you review and then you only have about 12 months cash at that point not 2 years cover
Hope you're feeling better now Pete.
I like this idea
First comment! Thanks for the videos, really enjoy watching them
Thank you!
Thank you for your videos, the explanations are excellent and I have taken up one thing already, which is to turn off lifestyling in my DC pension :)
I did the same a while back, it’s shocking how we get asked at very early stages when signing up to the pensions and know very little that we set how the funds are managed.
The companies charging us to manage our funds just sail
Happily on the default lifestyle ship even when they know that for the last year this has been a poor move for many. I have recently also dropped my financial advisor as other than an annual standard letter I received zero from them. One smallish £50K pot is what they were “managing” which has lost ground over the last three years. This is crystallised so will be my main income for the next year utilising my tax allowance. Feb 25 I get. Company pension so can then draw less from this fund, Feb 26 state pension becomes a big bonus.
I have a second DC fund I have in a growth investment fund I hope not too touch until 2028
Thanks for the video Pete. I normally invest in just a low cost global tracker fund and have cash. When you talk about the different risk levels where do you put your money?
Good point…I think that’s the million $ question! Personally I have gov bonds as next step above cash, then corp bonds and dividend paying ETFs in defensive sector like utilities, then global index growth funds in the long term bucket. I also have 5% in gold (ETF) as a back-up.
Thank you very much. Great video and explanation as always. Having just dug out my personal pension paperwork (I’m in the building wealth stage) I was shocked to see the effect of charges on the possible future value of my pension pot. Basically I would have lost a fifth in value to fees by the time I come to retire! I feel quite deflated knowing they (Quilter) will take such a large chunk out my pension. Please could you do a video on how best to reduce pension provider fees to a minimum? Many thanks! James
This country is all about how much the government can take of you all through your working life and when you retire and die
could you talk about potential ratios for ISA vs pension? eg based on withdrawal to minimise tax at retirement through balancing pension vs isa withdrawal; tax advantages of pension etc.
Helpful video explaining the cash flow ladder concept…but, most of us won’t have conveniently organised our investments across the different tax wrappers
If I only have a pension and don’t have the diversification across ISA, GIA, Bonds or general cash, is there a view that I should diversify my pension investments using the risk profile categories you’ve mentioned for the timeframes years 1-11+
Appreciate I have the issue of withdrawals having the limitations of TFC and the limitations of my personal tax allowance
So…move some money into cash for the early retirement years, move some investments into lower risk investments and then periodically review my investments etc etc
Hi, I really enjoy you videos and the clear explenations you give. I soon reach pension age and have just been to by my private UK pension company that because I live abroad that my old choice with my pension plan and 2 annuities is to cash them in and pay tax (minus the first 25%.) Do you know if this is true ? I set up these plans to get a regular income on retirement, Thanks for your time.
Hi Pete, when you say "Bank", what wrapper and investement are you referring to? What about its tax regime? Please can you expand...many thanks
Welcome back 😂
I think you mentioned an office move, hope things went well…
In this you mentioned ‘a pension kicking in’ even though Jane was already taking from her pension, was this something like a DB pension?
Also, if you have multiple pensions, do they all have their own crystallisation date or is there only one date for the person?
Way too complex for me, mine is 100% equities and 2 years cash
Hi Pete, great video, as always! I have a one off question, please feel free to ignore if you think I’m taking liberties 😆 when looking at gifts from surplus income…. Would the gains in a year of a stocks and shares isa be able to count as income, if only the gains are withdrawn and the main capital doesn’t go down? and if not, should people wishing to do such a thing favour dividend paying funds so that the dividends can count as income? Hopefully that makes sense 😬 can’t seem to find an answer anywhere in google.
The problem I always have with bucket systems like this is how to move the money down the ladder without incurring all sorts of costs and taxes (CGT) etc. I suspect the simpler models with only two steps like at the end of the video would be more realistic for most people. And in the investment part you could have a mix of shares and bonds which hop[efully most of the time would be negatively correlated.
CGT isn't a problem with pensions and ISAs of course, but you're absolutely right about GIAs. For the most part, I agree that the simpler versions will serve more people more easily...
I can understand that the 'bank' column in years 1-2 will be from built-up cash assets before retirement. Where is the money in the bank coming from from years 3 onwards? It is not pensions, ISAs or state pension (which you entered as positive in the 'total needed' column).
i think overall i would prefer to just have a bond/equity allocation or maybe bond/portfolio cash*/equity and withdraw a regular and rising with inflation income while re-balancing to the target allocation. in most cases avoiding selling assets for a couple of years max in a market downturn works out well but it's those once or twice in a lifetime occasions where the markets go down year after year then take year after year to recover the first few years of not selling assets become a mistake. you end up selling even lower than you would have if you just took the hit all the way through. the re-balancing does some buy high sell low but more gradual. it's also less judgements we have to make. purely algorithmic. no deciding if 5% or 10% or 20% falls is enough to decide not to sell for a while. we just follow the algorithm. if bonds do well you sell more of them than equities but it's not all or nothing.
*your outside of portfolio cash fluctuates with your spending patterns and is considered separate. for example when you've just bought your latest car you'd have less cash than right before your old car breaks.
This is a great and helpful video , very generous considering you are an IFA . Two box for me . I draw the state pension and I have two small db pensions so I’m not totally reliant on the drawdown . Got to be better than an annuity . HSBC have very good alternatives to lifestrategy funds , they are the global strategy portfolios more us than uk and outperform lifestrategy when plotted , if anyone is looking for alternatives.
Watching UK and USA retirement videos makes me so happy about the Australian Superannuation system. Essentially, retiring after age 60 ALL money we have in our Superannuation (plus state pension) is tax free. Including future earnings from those investments. Makes our system so much easier to navigate!
lucky you
Maybe I've misunderstood but I see ISA as very liquid, so almost cash.
As a result, keep ISA funds and as little cash as possible.
And, I'd prefer to draw from an ISA until zero before touching the pension. This allows contributions into a pension to continue without any MPAA allowance reductions.
Thank you Pete your videos are very helpful. If
you crystallise a pension pot, say £100k, and move it to drawdown with the intention of spreading the taxable £75k as income over 3 years because you have a DB pension to draw on in year 4, would you put all the £75k into cash? And do you still have to pay management fees for funds that are just sitting in cash?
That would be up to you. My approach would be to probably put the £75k into a money market cash fund if you intend to take it out over three years.
Sounds like a bucket system with a twist at the end .
For a future video can you cover retirement planning with a spouse, specifically how do you manage what happens when one dies with a DC pension and you either lose it all our only get half or less etc. Just like your own death we don't know when this will happen so it's hard to adjust our own draw down to account for the loss of income. I was planning to support my wife with my DC scheme until her DB scheme starts at state pension age but this might fail of she dies early and my portfolio hasn't recovered. Many thanks
I was thinking that you could implement the simple 2 level ladder approach in the 3 level ladder.... spend from invested capital if markets not in decline, but that's effectively what you are doing when refilling your cash from the higher risk stocks level (assuming you do that when they are not in decline. What's the difference? It's a shame UK pension providers don't implement a cash/ladder, bucket system which implements all this in the most investment and drawdown efficient manner with customers setting a few basic parameters based on their situation and preferences.
I do the third ladder. Four years of cash and everything else in index funds.
It's been 5 years this year since I stopped work, and my cash bucket is at 2.3 years due to a recent car purchase.
I use the 16k x 2 method each tax year to keep cash flowing in, but I may have to crystallise a larger portion to get a tax free top up
So you use FAD as oppose to UFPLS for the 16K x 2 income?
@@boombustinvest I use ufplus. I do it in one go and then claim back the tax using form P55 which takes a few weeks to process.
@@boombustinvest Yes, I'd like to know this too @ChrisShawUK, thanks.
Is the 16k x 2 method via UFPLS and FAD Chris? Thanks
@colincowie3730 I do ufplus because it's easier (and the p55 form to claim back the large tax that's taken because it's paid in one month).
You can always use FAD if you want to crystallise a larger sum tax free.
For example, if you crystallise £40k, then you can take 22k tax free (25%=10k plus 12k allowance). The other £18k remains invested but is obviously subject to income tax when withdrawn later.
More sound advice from the man who knows his onions . . . & his cash!
I love this but how do you move money from your investments into cash without incurring tax. It's where you say move money down the ladder but to do that don't you have to draw it first at which point you incur tax. I'm 52 and want to retire in 5 years time but my investments aren't neatly balanced as you show in the ladder.
When I heard your introduction Pete, I immediately thought "don't buy a motor home"
If drawing from the cash part of your pension fund during periods of low stock prices is advantageous, wouldn't it be equally sensible while still contributing to your pension to allocate your pension investments to cash when stock values are high and transition from cash to stocks when stock prices are low?
That is time out of the market and trying to time the market.😵💫
@@terrybrown3486 yes, I wouldn't know where to start
depending on your inheritance circumstances you might want to empty the SIPP's as quicky and as tax efficiently as possible or the complete opposite. so wouldn't you be better treating what is invested in each tax wrapper independently of how much withdraw from it? if you want to empty the SIPP ASAP put the lowest long term expected return asset in it. look at your overall asset allocation in the whole. if you sell one type of asset you didn't want to from the SIPP one year just sell the asset you did want to sell and re-buy the SIPP asset there instead keeping your cash/ minus / equal / plus allocations as they should be.
If my ‘normal risk profile’ is to allocate to 100% global equities, what sort of thing would my ‘risk+1’ pot be invested in?
Lol - you probably would just stick to 100% equities throughout
I think best option is to stay invested, generating growth and taking market volatility. From past studies majority of the outcomes workout better to be invested
Yeah but what if you retire as COVID 2 hits and the economy tanks. Then the plan that works the majority of the time won't work.
Sequence of returns risk would make it worth having a few years in cash or you could end up in a position where you are having to sell off investments that have collapsed in value in the early years of your retirement and after that you would be unlikely to recover and so suffer a lower income than you expected for the rest of your life.
@@person.X. The scenario you described is one in which keeping cash might work out better. But need to weigh the likely good of this vs the many others where growth is foregone by keeping cash. A better option would be, if possible, to remain flexible on retirement and pushing drawdown out of the first year sees material drop in investment. Another perhaps more robust option is to retire when there is sufficient savings such that a drop in first year can be absorbed.
@@jan2000nl Yes flexibility is a great hedge against sequence of returns. But at the cost of uncertainty of when you can actually properly retire. The opportunity cost of holding cash for a couple of years or so living expenses is not that great and is good value vs the stress and potential downsides of a crash just as you wish to retire.
It isn't quite as simple as the theoretical model, though. There's value in having a buffer and worrying a little less.
I'm coming up to retirement and some models that make sense on paper start to feel very uncomfortable in volatile markets, especially if you've already built up a reasonable DC fund but don't want to quickly lose the capital to a poor sequence of returns and need to actually cover living expenses. I'd **feel** a lot happier having a buffer equivalent to (say) 3 years retirement spending to draw on so I didn't have to sell in a poor market. The drag that it causes on overall potential growth doesn't bother me so much as the potential downside of having to choose to cut down spending a lot in retirement or selling more units than I'd like.
You seem to favour index multi asset funds but the yields are low . Am I correct in assuming that you just sell units when the market is up to achieve your 4% or whatever you chose is appropriate.
I prefer total return investing to investing purely for yield. So yes, you sell shares when you need to access funds, but there is a mechanism I call the cash flow ladder which seeks to minimise the chances of selling shares when they are distressed.
@@MeaningfulMoney tremendous info , I’m with HL on a discounted platform rate would you believe , the advisers there push for yielding funds either multi asset or a collection of funds . Thing is these are pretty expensive with high transaction costs eg Artemis monthly distribution. Looks a good fund though to be fair but the costs are charged even when the fund is negative. Your method makes you think before you withdraw and the costs are low . Very pleasant people at HL though and very quick on return calls .
I forget to mention I’m about take income as I’m retired , so looking to use a two fund method , one a cash fund for the next five years income and a MA or global tracker fund maybe mixed with some Royal London and vanguard bond funds as the feeder fund to the cash one .
@@MeaningfulMoney is this cash flow ladder system mentioned in your book , I have a few books on basic fiancé but they’re all US 401k . We need a good uk one .
I’m with HL and spoke to an adviser briefly lovely guy 1% is their charge if I proceed so it’s 1.6 k . Tempted but I’m sure I’ll end up in a HL multi manager fund or similar which have been panned for their underperformance . Annuities well good rates but with health issues not a good choice .
I really don't mean this to be rude so please don't take it that way. My fear is what happens when people get older and less mentally proficient. I 100% agree with your logic it's just that even I wonder how good at management of portfolios and funds and forward planning I'll be in my 80s. And I'm saying that as someone who already manages their own SIPP, ISA as well as my wife's and my 10yo sons Junior ISA and junior SIPP. So I'm not incompetent..... Yet.
And hence the reason for getting a trusted financial advisor to do it for you.
When you’re in your 80s you should get a good return on an annuity - might be time to use at least some of the remaining investments for one of those and then no need to worry…
That's a really good idea. Thanks. @@richardharnwell3331
I'm 60 now and work full time for the nhs. I've got a deferred local gov pension. Can i draw that but still work?
If you’re in the 1995 NHS pension scheme, then yes, you should be able to ‘retire and return’
@@MeaningfulMoney I've only been in the nhs for 2 yrs my deferred pension is with local government
This has made me think about my father's pension income. I think his total income is less than £16760 but he's paying tax. He gets his reduced state pension and 2 small defined benefits pensions. One definitely didn't provide any kind of lump sum. The other may have provided a minimal lump sum. Does the same 25% tax relief apply to Defined Benefits pensions which have had no lump sum withdrawn? I couldn't find a decent answer with my searches but I'm probably looking in the wrong place! Thanks.
Sadly not Jim, although it would arguably be a fairer tax regime if it did. Only a DB lump sum qualifies for the 25%. If you don't take the TFLS when you commence pension payments you 'lose' that tax benefit. That's the main reason I took the cash! Not sure those with a DB pension always realise this unfairness before it's too late.
@@drexpert8197 Thanks for your really helpful answer. I’ve looked into pensions a fair bit over the last couple of years and have never seen this clarified anywhere. My Dad does okay with what he has but it would have been nice to surprise him with a chunky tax rebate. My wife and I are also due to receive moderate DB pensions so will need to look again at our projections. We will take advice but I like to line up my aces by doing my own research too. I’m also unconvinced by the competence of financial advisors to give comprehensive guidance. Their integrity may very well be unquestionable but I do worry about kissing the best frog! I’ve not spoken with many finance experts but my limited sample has not been great - they all seemed to be set on a formula. Don’t feel you need to respond to that stream of consciousness. Thanks again for chipping in with a helpful response.
👍🙏😊
Think there are lot of people in old age not spending their savings, hang onto money and then too old, infirm or sick to enjoy it.
Definitely! I spend my life trying to get my clients to spend/give more!
ok so guessing any cash held inside a pension would obviously still count as taking money out of your pension and would contribute to the 25% tax free cash
Yes, that's right!
How can money run out, state pension can cover it!
You can NEVER run out as the state pension will be with you forever! To be honest you will be fine in yours 80s on state pension alone anyway.
State pension . 😂 it’s peanuts. That’s assuming you qualify for the full amount , and youre around to collect it! 😂
Btw if you move abroad they freeze it, no increases, and eventually it’s worth nothing .
@@user-fv1576 all I am saying is that you can NEVER run out! You will still have the state pension in the UK even if you didn’t work 35 years you get less. If you decide to move to some countries like Canada it will get frozen but not if you move in the Mediterranean or EU. Enjoy and spend your retirement early because if you reach your 80s you may not be fit to do so and the state pension will be a luxury and provide the minimum income you need
@@porschecarreras992cabriole8 Agree that there is a minimum safety net if you do "run out" in the U.K. It's much more than just a State Pension too.
After 80 exactly what, and how much, are you going to want to do with any money you have left? Most of the population don't make it to 80. If you have your health it's unlikely that you will even be that bothered about travel, meeting new people, a bigger house or a Ferrari.
@@sassasins031 simple maths. Assuming you have saved 105k You retire at 60 taking 15k per year. For simplicity ignore growth/inflation or losses. In 7 years you spent you 105k and then state pension starts at 11,500 till death. So yes you used your private pension but then it is replaced with state pension and you have still money. Why use complex voyant retirement tools when things are so simple? You simply won’t be broke and hence using your energy on calculations is pointless.
@@porschecarreras992cabriole8err, that’s the whole point. You can’t ignore inflation or market losses!
Ok for couples but what about a Single Person?