I hope I die before I go broke

UnileverA pal of mine is presently looking at his retirement pot, and mulling how much of it he can safely withdraw, year on year, to ensure that it outlives him.
It won't be his only source of income, to be sure. He has a pension pot, too, that will be subject to statutory drawdown provisions, should be decide not to opt for an annuity.
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But even so, it's likely to be a decent-sized pot. The question: how quickly -- or not -- should he eat into it?

Safe withdrawal
The calculation of what are called 'safe withdrawal rates' is much more common in the United States than it is here. Here, we have a tradition of annuities, and government-imposed drawdown limits.
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Which are limits that, at present, are causing not a little hardship to some retirees, who've seen their income halve -- or worse -- as the compulsory three-yearly Government Actuary's Department (GAD) calculations to determine drawdown levels has reflected the fall in interest rates, and the impact of quantitative easing on gilt yields.

In short, having a retirement income held outside a pension, where government actions can arbitrarily impact your standard of living, has rarely made better sense.

But even so, investors must address the vexed question of the safe withdrawal rate. Eat into their capital too fast, and penury beckons. Too slowly, and -- well -- you can't take it with you.

92 and destitute
My pal's first attempt at calculating a safe withdrawal rate involved a basic spreadsheet, using Excel's PMT function and an assumed stock market growth.

In other words, every year your capital increases as share prices rise -- but equally, every year you're consuming some of that capital, so that there's less to grow the following year.

Doubtless he'll refine it over time, and I've already pointed him to a website containing some useful tools.

But the big problem with such calculations is one that is more difficult to plug in as a spreadsheet variable. And it's this: stock market returns aren't consistent, year on year. Some years, the market outperforms the average; and some years, it underperforms it.

Which raises the worrying prospect that a period of market underperformance early in your retirement could see you eat significantly into your capital, leaving you with insufficient reserve to recover when markets turned up again.

Rock solid
Which to my mind, is one more argument in favour of a retirement pot with a distinct bias towards, big, high-yielding defensive non-cyclical shares -- the sort of juggernauts from the stock market that will carry on doing the business year after year.

Indeed, I'd be tempted to lower my required yield range in order get shares that offered consistent dividend growth coupled to strong defensive characteristics. That way, as little as possible of my desired income in retirement would come at the expense of volatile movements in capital.

And for my money, three such companies are worth taking a look at -- especially if opportunistically bought on a market wobble.
  • Unilever products are used by two billion consumers every single day, and are sold in over 190 countries worldwide. What's more, those products are themselves almost prefect diversified, both by geography and type. Foodstuffs, cleaning products, oral care, personal hygiene: sales of Unilever's clutch of global brands come 33% from the Americas, 29% from Europe, and 38% from Africa and Asia. Changing hands today at 2,255p, Unilever's shares offer a reasonably attractive prospective yield of 3.6%, and are rated on a price-to-earnings (P/E) ratio of 16.1 -- not exactly cheap, but do you really want to skimp on your retirement income?
  • GlaxoSmithKline isn't just the world's second largest pharmaceutical company, employing around 99,000 people and manufacturing almost four billion packs of medicines and healthcare products every year. It's also a consumer business with a robust collection of strong brands: Ribena, Horlicks, Lucozade, Aquafresh, Sensodyne, Panadol, Tums, Zovirax -- and, of course, the Macleans range of toothpaste, mouthwash and toothbrushes. Changing hands today at 1,460p, Glaxo's shares offer a juicy 5.3% prospective yield, and are rated on a P/E of 11.5 -- almost exactly the FTSE 100's average.
  • Diageo isn't cheap, and neither are its premium drinks products, which are sold in 180 markets around the world. But that's exactly the point: buy into Diageo, and you're locking in a stake in the world's biggest spirits producer, which owns brands such as Johnnie Walker, Baileys, Smirnoff, Bushmills and Guinness. Over 10 years, Diageo has outperformed the FTSE 100 by 60%, and there's no reason to suspect that this outperformance won't continue. Changing hands today at 1,710p, Diageo's shares offer a prospective yield of 2.9%, and are rated on a reasonably lofty P/E of 16.6 -- quality isn't cheap, so you'll want to buy on a dip.
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