Do you want to be in the 1% of people who know a better withdrawal strategy in retirement? Vanguard’s research has shown that this strategy can increase income withdrawals and the end value of your pot compared to conventional withdrawal methods…
⏰ TIMESTAMPS ⏰
0:00 Start
1:39 The Two Most Common Methods, and Why They Fail
4:02 Dynamic Spending and How It Works
5:43 Vanguard’s Dynamic Spending Research Findings
10:46 How To Apply Dynamic Spending Yourself
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✅ ABOUT DYNAMIC SPENDING ✅
Most people use one of two withdrawal strategies in retirement, but both can carry risks…
The well known 4% rule is an example of a ‘pound plus inflation’ withdrawal strategy, which can lead to a higher chance of your money running out during retirement.
Other people use a ‘percentage of value’ or ‘percentage of portfolio’ approach, and while this will ensure you don’t run out of money, it will also see your income swing widely from year to year.
Dynamic Spending aims to provide a better combination of both of these methods to protect your capital more but stabilise your income, while also increasing your withdrawal potential.
In this video I explain Vanguard’s research on Dynamic Spending, and provide simple examples of how you can apply Dynamic Spending to your own situation.
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Title: The Hidden Strategy: Unveiling the Secret Known by Only 1% of People
Introduction
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Unlocking the Secret
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The Secret Behind the Strategy
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Conclusion
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If your aim is to make your money last longer in retirement and you have money in pensions, ISAs and general investment accounts, what do you think is the best order of withdrawal from these?
You're a legend Chris. Thanks for all the advice you're giving, exceptionally helpful
Would love you to do a video on high dividend paying funds, just don't see how they can be beaten in a draw down scenario because your never really drawing down if your taking just the dividends and the pot continues to grow to some extent if its selected correctly. Just look at Vanguards UK equity income fund and its rates for example (around 6%), would love to know your thoughts.
Very interesting. Are IFAs going towards Vanguard Dynamic Spending or similar nowadays?
I expect I will go down the DIY approach. Presumably the Vanguard approach may reduce the need of having a large cash buffer?
Being a cautious individual I am aiming for 3 years of cash buffer and 5 years of wealth preservers (PNL, RICA, CGT). I need to sleep at night.
Great video! Just a quick question though… on year one, if your base target is £25500, do you remember that figure forever and keep adding the inflation figure to this each year indefinitely? Even if for instance, your pot decreased in value for a few years in a row.
I am very interested in this dynamic drawdown. I am actually interested if a company can offer this and 'do all the maths for me'? Or this has to be myself manually on a spreadsheet working out all the maths ..
Would this then apply to investing, should you invest dynamically ??
Great video maths looks good, only point I would make, the advice we are given at retirement seminars at work, look at 3 stages of retirement,
1 go go years
2 slow go years
3 no go years
Each stage of retirement requires difference levels of money, the early go go years requires a lot more than the no go years, living 30 years after retirement is possible but living a long time healthy when you can travel and enjoy you money is a lot harder, I would say spend approx 50% in first 10 years go go stage 1 by the time you hit no go years your outgoings are very little.
Hi Chris. I have just come across your site and immediately impressed! Subscribed! The Dynamic Spending technique is really interesting but unless I have missed something, can you explain how you arrived at the Max of £26775 and Min of 24,862 for the £500K pot example?
Wow! So glad I stumbled across this whilst looking into my imminent retirement. Having approached several "Advisors" it's quite clear to me they don't really understand me or my needs (despite their searching Questionnaires) and whilst they can promise the world (with zero comeback) they ALL make damned sure THEY get paid (a pretty tidy sum) come what may, and entirely at my expense. An hour or two with this guy and I'd feel SO much happier.
With high inflation today of over 10% I wonder how the strategy fares in the simulation? I have a feeling that it won’t end well!
I've just watched this video and I'm not stupid but I've no more idea as to what dynamic spending is now than I did before I watched it. Why do the explanations have to be so complicated and why do the amounts used in the examples vary so slightly? Most people would say say that taking £33k pa, £36k pa or £39k is pretty much immaterial in the great scheme of things. And why, whatever you decide to take, take it as a lump sum at the beginning or end of each year? Why not just sell what you need to raise each month? After all, making affordable monthly contributions is how we are advised to build our portfolios. Why not do the same when taking money out? And can I make a request for age related models? Assuming that the only useful or helpful model is one based on a 55 year old pensioner likely to live for 30 years isn't optimum given the age profile of pensioners in the UK. I'd like them based on 55, 65 and 75 year olds. (Apologies is this is a little ranty.)
Very helpful, thanks.
Hi Chris. It would be interesting to see a video, including the pros and cons for a retirement income) of using high dividend yield ETFs such as vanguard’s VHYL and/or dividend aristocrat ETFs (maybe 3 – 5%), averaging on 4% but using guiderails on the withdrawals, only withdrawing dividend pay-outs (not capital), and reinvesting any dividends not taken in the good times back into the ETF portfolio.
Also maybe on the flip side, if some capital was taken out, without guiderails, instead of reinvestment to take account of other pensions income paying out after a period of time in early retirement when the ETF running out might not be a problem as it would be covered by other pensions kicking in (not least the state pension, DB pensions, amongst others). This might be in an ISA, a SIPP or in a GIA with the upcoming tax changes.
Hi Chris
Is there any benefit from drawing down a monthly income or take it annually ?
Thanks Graham
Clear and well informed guidance. Great stuff!
Great video Chris – you managed to clearly explain to people with no finance background complex topics which are so relevant. I have a couple of questions related to your video, when you referred to Dynamic Withdrawal Strategy (DWS), it seems to me that you focused on annual income. (i) Is there any benefit in running the DWS in a monthly basis to factor in monthly fluctuations in stock markets values (is it a DWS on a monthly basis more likely to give better results than when applied annually) and (ii) i've noticed that there is some seasonality on the valuations on the stock markets in US/UK (i.e. higher values towards end of May and November/December), is this correct? If so, wouldn't it make sense to withdraw the income when the markets are more likely to be the highest on the yea (i.e. end of May and end of November)?
5 months from drawing mine at 65, clueless wouldn't start to cover it!
I do what I call an 80% claw back. Set a base savings, say $1.5M, in an income-focused fund. Every month, withdraw 80% of any gains as long as it does not lower your principal below the base (and no withdrawal when there is any loss). Re-invest half of whatever is excess over expenditures at the end of every month in a more aggressive portfolio. This does require that you not rely solely on your savings, but it offers long term stability and growing savings during strong markets and parsimony during bad. This really works well for me.
Thanks for this video. It was very informative. I still have one question, which I'm not sure this video was meant to address: how much do I need in order to be able to retire?
Your example uses 5%, but is that a recommendation?
Also, do you think this also works for early retirees (i.e. retirement over 30 years)?
Just re-watching this, and it occurs to me, I don’t know how the mechanics of actually taking retirement income work…. Is it recommended to just do one big withdrawal a year? If so, where would you put it – an instance access savings account? Would seem a shame to miss out on any growth from what would start out as a considerable sum each year. Is this subject worthy of a video in its own right?
Great video Chris. How does this strategy compare to the Guyton guard rails plan. Is either better or do they both offer similar levels of protection for your drawdown pot long-term
Excellent and insightful alternative withdrawal strategy Chris .. thank you !!
Chris, which level of inflation do we use? Some say the published rate is half the real rate.
Hi Chris do you offer a financial planner service?
Hi thanks for your videos and and all your hard work. Can you recommend a book or information in general, about NHS pensions? How can I obtain basic information, and definitions about how to manage and understand a pension? Thank you.
ISA – SIPP – AUX – CRYPTO
Great video Chris. Just a thought – Unless I missed it I think it would be helpful to drop in how the guide rail figures are calculated, arrived at for those who may not know where to look or how to work it out.Looks like -2.5 and plus 5 percent. Thanks
These are getting clearer, excellent work Chris.
Generally I'd say GIA first as it's taxable for income tax, CGT and IHT then an ISA which is not liable to income tax or CGT, but does form part of your estate and lastly a pension which is only liable to income tax when withdrawn and is outside of your estate. I forgot to add that if you also have a part time job or a DB pension which uses up your annual tax allowance, the I would say all the more reason to take from the pension last.
General investment account first, then ISA, finally SIPP
We seem to be moving from a low inflation low, interest rate environment to a high interest rate high inflation environment. what is the outlook for the 60:40 share/bonds portfolio in such an environment. Won't the bonds part be killed by the higher interest rates and loose their lack of stock correlation.
All of these rules and rules of thumb make for a nice academic discussion. But as a 15-year retire I can tell you that, especially after you have been retired for a while, you will find your sea legs and figure out how to live your financial life. These theories pretty much all go away. Just read the comments, everybody has their own ideas anyway.
I enjoyed the discussion. Thank you for your work.
Well done Chris another good video. Life is pretty dynamic so it makes sense to have a dynamic strategy to match. I am wondering if you are lucky enough to have a sizeable cash buffer in cash isa’s premium bonds etc and you use this for income in negative / poor performing years. How much impact this would have on sequence of return risk. It feels like a good strategy for mitigating the risks if not for maximising returns. Just wondering if you have looked at this or have any thoughts on this approach.
Hi Chris is it realistic to think you might spend less as you get older and how could this be factored in. Also why do many pension lifestyle plans move towards UK gilts when this approach just doesnt appear to do what it says on the tin, would you consider some adjustment of these approaches ? Thanks Chris …great information.
Chris, I've tried to document the annual drawdown calculation in a way that my simple mind can understand. Is this correct?
STEP 1. CALCULATE THE GUARDRAILS:
Ceiling value = previous year's Drawdown amount adjusted for inflation over the past year, plus 5%
Floor value = previous year's Drawdown amount adjusted for inflation over the past year, minus 2.5%
STEP 2. CALCULATE THIS YEAR'S DRAWDOWN AMOUNT:
This year's Drawdown amount = current portfolio value multiplied by the chosen annual Drawdown percentage (e.g. 4%)
STEP 3. ADJUST THIS YEAR'S DRAWDOWN AMOUNT IF NECESSARY:
Is the Drawdown amount calculated in Step 2 within the Guardrails calculated in Step 1?
Yes – this year's Drawdown amount is the amount calculated in Step 2
No – set this year's Drawdown amount to the Ceiling value or to the Floor value, as appropriate
Is there such a concept as reverse dynamic spending, where you spend 2.5 more when nest egg is up 10 and 0 more when nest egg is down 10. in otherwords, spending less, in terms amount increased, when the market is up by 10 to capitalise on growth and spending at par when the market is down by 10 to use previous growth as a buffer.
Nice video Chris. As I was watching however, I couldn't help thinking how rubbish the current situation is, with ~10% inflation and negative market returns. Plugging these numbers into a simple spreadsheet my £500k pension pot will be toast in no time, even using the dynamic withdrawal approach! Just hope we get back to sensible inflation rate soon.
I would say Liquid assets first i.e. isa's bonds etc, then Gia investments, Etf's etc, then Pensions lastly. All depends on the pot you have and the lifestyle you wish to be accustomed too.
Great video and content as always. Thinking of building a spreadsheet model of this approach with my pot and some historic data. Any references I can leverage ?