Pensions Planning: The NUMBER

bostonerimus

Terron wrote: »

Since I use agents to manage my properties I have very little actual work to do so there is no reason to stop, and when my pensions start to kick in a couple of years I'll be moving up towards Which's luxurious lifestyle.

Owning a rental property is a great income diversifier, but it should be backed up by income from other sources. However, if you have tracker mortgages on the homes you can quickly get into difficulties when interest rates increase.

BTL is part of my retirement income. I have no mortgage on the property and from rent of $20k/year I declare $14k taxable income after expenses are subtracted. The apartment was empty for around 6 months last year when a long time tenant moved out and I took the chance to renovate, so you must have reserves to take you through times without rental income and be able to pay for capital expenses.

gadgetmind

jamesd wrote: »

Ten percent is above likely lifetime safe withdrawal rates but it could also be very sensible as a percentage of pot to take in years before the state pension starts, with a plan to reduce then.

My wife will be clobbering her SIPP by 10% pa to ensure it's at zero by the time SP kicks in and all at 0% tax. Mine will be hit at 5% as more than that will take me into HR tax.

TomSurrey

So our amount of saving is likely to be well beyond what we need for comfortable retirement, we are planning on maxing out our pension life time allowances (1m each) and our ISA allowances each year until the first one of us hits 55.

To live comfortably I'd guess our number as a couple is about £50k a year gross, to live the type of retirement we want probably £80-£100k a year (gross) during the first 15-20 years of retirement, then dropping fairly dramatically.

fatbeetle

I'm now budgeting on £2000 pcm for the first 6 years of my retirement, (we have a mortgage paid off house.) After that we will have a couple of pensions kick in, which, depending on the £ vs $Au exchange rate, will pay us a fair income.

This forum is already proving invaluable in money saving, long may it thrive.

michaels

Investments plus cash buffer strategy?

The 'consensus' model seems to be that you should remain invested in equities to maximize fund growth and keep a cash reserve buffer so that when share prices are low you do not have to sell (liquidate) but can use the buffer.

Simplifying this model to the absolute, there are 2 asset classes, 'cash' that maintains its real value over time and 'shares' which grow in real terms over time but fluctuate around a trend growth line (of say 4-5%).

This model then says compare the current share price with the trend line and if it is below (by some amount) then current expenditure ('draw down') should be funded from the cash buffer, if it is above the trend line then expenditure can be taken from the shares and the cash buffer replenished if needed.

Problem is this approach does not meet with the rational markets hypothesis which states in simple terms that even if shares are expected to grow in real terms (to compensate for their variability 'risk') then at any point in time their current value is 'normal' and that the trend line should always move to run from the current value rather than some historic value so it is never possible to say 'share prices are now low' and more likely to rise above 'trend'.

Does this make sense? Is the cash buffer model based on assumptions (that whilst probably historically correct) do not fit with the rational markets hypothesis?

coyrls

michaels wrote: »

Investments plus cash buffer strategy?

The 'consensus' model seems to be that you should remain invested in equities to maximize fund growth and keep a cash reserve buffer so that when share prices are low you do not have to sell (liquidate) but can use the buffer.

Simplifying this model to the absolute, there are 2 asset classes, 'cash' that maintains its real value over time and 'shares' which grow in real terms over time but fluctuate around a trend growth line (of say 4-5%).

This model then says compare the current share price with the trend line and if it is below (by some amount) then current expenditure ('draw down') should be funded from the cash buffer, if it is above the trend line then expenditure can be taken from the shares and the cash buffer replenished if needed.

Problem is this approach does not meet with the rational markets hypothesis which states in simple terms that even if shares are expected to grow in real terms (to compensate for their variability 'risk') then at any point in time their current value is 'normal' and that the trend line should always move to run from the current value rather than some historic value so it is never possible to say 'share prices are now low' and more likely to rise above 'trend'.

Does this make sense? Is the cash buffer model based on assumptions (that whilst probably historically correct) do not fit with the rational markets hypothesis?

Two points:

1) Cash will generally not maintain its real value over time
2) Your model is based on maximising growth not supporting drawdown. The difference is that with drawdown money must be taken out. The point of a cash buffer is manage the sequence of returns risk associated with drawdown, which is not something you need to worry about so much during the growth phase.

AnotherJoe

michaels wrote: »

Simplifying this model to the absolute, there are 2 asset classes, 'cash' that maintains its real value over time and 'shares' which grow in real terms over time but fluctuate around a trend growth line (of say 4-5%).

Does this make sense?

No of course not.

michaels

coyrls wrote: »

Two points:

1) Cash will generally not maintain its real value over time
2) Your model is based on maximising growth not supporting drawdown. The difference is that with drawdown money must be taken out. The point of a cash buffer is manage the sequence of returns risk associated with drawdown, which is not something you need to worry about so much during the growth phase.

But the cash reserve model basically assumes that any market setbacks are cyclical/temporary and therefore can be 'tided over' using the cash reserve. But this assumes that if the market has fallen and is thus 'low' that it is more likely to then grow above trend. As I say historically this may be accurate but it is not compatible with rational markets theory.

coyrls

michaels wrote: »

But the cash reserve model basically assumes that any market setbacks are cyclical/temporary and therefore can be 'tided over' using the cash reserve. But this assumes that if the market has fallen and is thus 'low' that it is more likely to then grow above trend. As I say historically this may be accurate but it is not compatible with rational markets theory.

There is an underlying assumption that there is an upward trend in the market, if you don’t make that assumption then you wouldn’t invest in the market at all.

AnotherJoe

michaels wrote: »

But the cash reserve model basically assumes that any market setbacks are cyclical/temporary and therefore can be 'tided over' using the cash reserve. But this assumes that if the market has fallen and is thus 'low' that it is more likely to then grow above trend. As I say historically this may be accurate but it is not compatible with rational markets theory.

I dont know what "rational markets theory" is but it would be irrational to invest in the first place if you didn't think, long term, it would grow.

And I disagree that there's an assumption it will grow "above trend" after a fall either. Just that it will grow long term. The growth "above trend" may have already happened before the fall and it may grow "below trend" for a while - but that's still growth.