We are already retired, so maybe it’s a bit late to be talking about our Drawdown Strategy. But the answer is, if we had not had a Drawdown strategy then we would have been foolish to retire.
Retirement Money Strategy
When we did the initial sums for early retirement about 8-10 years ago, we had a broad strategy.
- Year 1 – take my company pension a couple of years early and pay the 5% p.a. actuarial discount (aged 56). This would be enough to meet all our needs for the next 3 years.
- Year 3 – take husband’s company pension (aged 65). Delay state pension, which would grow at 10% p.a. for a maximum of 5 years.
- Year 8 – take husband’s state pension (aged 70), because it couldn’t be deferred past that
- Year 10 – take my state pension (aged 66)
- Year 12-15, consider starting drawdown depending on inflation etc
- The above plans included a couple of long trips each year, they allowed for maintenance to our home and a replacement car every 5 years.
- Each year we would move money into tax efficient investments to minimise any long term tax impact. e.g. even though I am not earning, I can put £2,880 (instantly becomes £3,600 with tax back) into a pension. We each have an ISA allowance this year of £20,000. (When we first retired this annual allowance was about £11,000)
Retirement Money – Actual
Six years in, the reality didn’t quite match the planning
- Year 1 – husband briefly stopped work, then a few months in, he got an invitation he didn’t want to refuse, which was to work part-time, in his own time, on his own terms, working remotely. Result: additional income we weren’t expecting
- Year 1 – we also discovered we didn’t need as much as we thought to live on. Result: more money to save
- Year 3 – we took husband’s company pension as expected. Result: even more income
- Year 5 – following a discussion we took a long hard look at the Opportunity Cost of not taking husband’s state pension, and worked out that we really should take it. Then tax raised it’s ugly head. Because of the pensions and part-time salary, husband was in danger of moving into a different tax-bracket. Result: Husband’s salary is now being put away into his pension fund. This is very tax efficient in the UK because it all gets put away net of tax.
- Year 6 – (now). We still effectively live on my pension. The rest gets saved. Our plan is to initiate drawdown sometime around 2022-2025 depending on when inflation starts to bite. In the meantime, I have discovered how to be ‘careful’ on a day to day basis. We don’t seem to want ‘stuff’. It doesn’t affect our day to day living, but it means we are able to save far more than we expected. Hence all good so far, because we are nowhere near initiating drawdown at this stage.
Retirement Investment Portfolio
Broadly our investments fall into the categories below
- Cash 4%
- Short term investments are mainly equities, with some 5 year cash deposits 10%
- ISA’s are UK tax-free accounts. All withdrawals are free of tax. Mainly invested in Vanguard / Fidelity 45%
- Pension funds are the UK equivalent of Roth IRA’s. Ours are Low Risk balanced investments. 41% All withdrawals are subject to tax, but the first 25% are tax free, thereafter withdrawals are charged at your usual tax rate. (There is an additional benefit to these, if we do not touch them, they can be left to our children free of inheritance tax)
Retirement Drawdown Strategy
Our Drawdown Strategy is straightforward. When it becomes evident that our income is not matching our spending needs
- cash is the first area to be used, but we will still leave an emergency fund
- we will liquidate any short term investments
- then ISA’s will be used
- finally and only when most of the above have been used will we start on our pension funds.
If the planning is correct, we will never get to the pension funds unless we need long term care. If we start lifting 3-4% p.a. in 2022, it should easily last until I am 100, so I think we should be OK. However, I do worry about high inflation like we had in the mid 1970’s because it will eat into our savings. (I know our savings will grow at the same time, but by enough to keep pace? I know my pension won’t because it is limited to 3%…)
The big difference in the UK, to those of you in the US, is that we don’t need to factor in healthcare costs, but we do need to factor in long term care options, hence why a lot of our drawdown strategy takes effect towards the back end of our lives
The #Drawdown Strategy Chain
I’m taking part in a initiative on Drawdown Strategies started by a few bloggers, mentioned in the chain below, I am now one of the official links…
Anchor: Physician On Fire: Our Drawdown Plan in Early Retirement
Link 1: The Retirement Manifesto: Our Retirement Investment Drawdown Strategy
Link 2: OthalaFehu: Retirement Master Plan
Link 3: Plan.Invest.Escape: Drawdown vs. Wealth Preservation in Early Retirement
Link 4: Freedom Is Groovy: The Groovy Drawdown Strategy
Link 5: The Green Swan: The Nastiest, Hardest Problem In Finance: Decumulation
Link 6: My Curiosity Lab: Show Me The Money: My Retirement Drawdown Plan
Link 7: Cracking Retirement: Our Drawdown Strategy
Link 8: The Financial Journeyman: Early Retirement Portfolio and Plan
Link 9: RetireBy40: Our Unusual Early Retirement Withdrawal Strategy1
Link 10: Early Retirement Now: The ERN Family Early Retirement Captial Preservation Plan
Link 11: 39 Months: Mr. 39 Months Drawdown Plan1
Link 12: 7 Circles: Drawdown Strategy – Joining The Chain Gang
Link 13:Retirement Starts Today: What’s Your Retirement Withdrawal Strategy?
Link 14: Ms. Liz Money Matters: How I’ll Fund My Retirement
Link 15: Dad Dollars Debt: DDD Drawdown Plan – Part 1: Living With A Pension
Link 16: Penny And Rich: Rich’s Retirement Plan2
Link 17: Atypical Life: Our Retirement Drawdown Strategy1
Link 18: New Retirement: 5 Steps For Defining Your Retirement Drawdown Strategy
Link 19: Maximise Your Money Practical Retirement Withdrawal Strategies Are Important!
Link 20: ChooseFI: The Retirement Manifesto – Drawdown Strategy Podcast
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