How risk averse are you?

chucknorris

jamesd wrote: »

Right, it's not just about that. You can spend say £10k to get the income from an annuity or invest 5k to get the same income from investments.

James, you might be able to help me with my dilemma, I would like to retire very soon, but I think (perhaps incorrectly based on what you are saying) that buying additional pension in the teachers pension fund is exceptional value. Unfortunately I am a transitional member and I have bought the max allowed in the old scheme. But I can buy more (£6,500) in the new scheme, but I have to wait 4 years to join that scheme, and it would take me 3 years to buy it. I think that it would cost me about £105k to buy £6,500 additional annual pension, which I think is great value (and it is roughly twice the value of an annuity), but you seem to be saying that is easily achievable with other investments, am I wrong in thinking that it is exceptional value?

Perhaps bizarrely, but I think that it would be good news for me to learn that it is not particularly good value, and I would be free to retire and pass up working on to buy the additional pension. If it helps I would be buying it over 3 years until I am 65, and start to draw it when I'm 66.

BananaRepublic

jamesd wrote: »

Right, it's not just about that. You can spend say £10k to get the income from an annuity or invest 5k to get the same income from investments. Leaving you 5k left over, which you can also invest and get a higher income unless you get very unlucky with the investment timing and have a long run of bad years, at which point all that happens if you've used a proper planner is that your income drops to what you would have had with the annuity. But as a worst case, not a normal case which is what it is with the annuity. The normal investment case is twice the income and potentially more than that.

So what do you invest in to guarantee beating an annuity? 3.5% index linked from an annuity is poor. But had you retired in 2008, with investments in the UK, European and US markets, you would have seen stock market investments plummet, and take years to recover.

Glen_Clark

jamesd wrote: »

You can spend say £10k to get the income from an annuity or invest 5k to get the same income from investments.

Sounds optimistic, but assuming its correct isn't that like house insurance? If
statistically, the risk of your £100k house burning down is one in a thousand, thats a £100 risk to the insurers. If they charge a premium of £200 (to cover their expenses and profits, Osborne's insurance premium taxes, fraudulent claims etc), I'd still pay the £200 premium for peace of mind

jamesd

chucknorris wrote: »

I can buy more (£6,500) in the new scheme, but I have to wait 4 years to join that scheme, and it would take me 3 years to buy it. I think that it would cost me about £105k to buy £6,500 additional annual pension, which I think is great value (and it is roughly twice the value of an annuity), but you seem to be saying that is easily achievable with other investments, am I wrong in thinking that it is exceptional value?

It's exceptional value. You bear no investment risk with it. That makes it an excellent choice for achieving a guaranteed income level.

chucknorris wrote: »

I would like to retire very soon ... I can buy more (£6,500) in the new scheme, but I have to wait 4 years to join that scheme, and it would take me 3 years to buy it. ... If it helps I would be buying it over 3 years until I am 65, and start to draw it when I'm 66.

At a minimum you might look to borrow to get all of the extra in one year if you're allowed to do that and don't have the cash available. Annual allowance and lack of sufficient carry-forward might be one issue with that.

Beyond that, though, there's the question of the trade off between working and being retired and the income level achievable at any particular age. That trade off is one only you can make. Do you value the extra income in retirement enough to do the extra work years?

jamesd

BananaRepublic wrote: »

So what do you invest in to guarantee beating an annuity? 3.5% index linked from an annuity is poor. But had you retired in 2008, with investments in the UK, European and US markets, you would have seen stock market investments plummet, and take years to recover.

To guarantee it, defer the state pension.

For investments, you pick an income level that fits one of the well regarded drawdown plans and adjust that upwards each year if you don't happen to encounter the bad case, if the plan you're using doesn't do that anyway or doesn't do it fast enough to keep up with the good times if you happen to be a person who retired at a fortunate time.

2008 wasn't a particularly bad year to be retiring. There wasn't a long drawn out period of very decreased markets or very high inflation. The year or two of buffer plus the natural income from the investments topping it up would have been very effective at avoiding the need to draw during the time when markets were very low.

Yet in 2008 markets in many places were at unusually high levels compared to their cyclically adjusted price-earnings levels. That was a signal that it was better to be relatively low in equities and is an approach that has been shown to be effective at reducing sequence of return risk. To read more on how to deal with this risk see:

Jonathan Guyton Tames a Gorilla
Sequence-of-Return Risk: Gorilla or Boogeyman?

Personally I've been acting on that sort of thing by shifting out of equities and towards P2P as a substitute for bonds.

chucknorris

jamesd wrote: »

It's exceptional value. You bear no investment risk with it. That makes it an excellent choice for achieving a guaranteed income level.

At a minimum you might look to borrow to get all of the extra in one year if you're allowed to do that and don't have the cash available. Annual allowance and lack of sufficient carry-forward might be one issue with that.

Beyond that, though, there's the question of the trade off between working and being retired and the income level achievable at any particular age. That trade off is one only you can make. Do you value the extra income in retirement enough to do the extra work years?

Thanks, you came back with the answer that I expected, that although other investments might achieve the same, they come with risk. But I thought that it was worth asking the question, just in case I was over valuing buying the additional pension.

I can afford to buy it in one year, but the problem is that:

1. Buying £6,500 in one year when using the multiplier of 16 for the annual allowance equates to £104k, which is way over the annual allowance of £40k .

2. I only work part time (80% fractional) and earn £43k, so I cannot engineer some carry forward by not paying into my SIPP in previous years, because my 'relevant earnings' are far less than £104k. My relevant earnings (as well as the the £40k annual allowance) means that it would take me 3 years to buy the additional pension.

If there were no limitations/legislation, I would invest at least £1m (probably more) in buying additional pension in the TPS.

I easily have enough to retire, I just think that the TPS additional pension is such good value, that it is worth working on for. I do quite like my job, but on the other hand I also like the thought of retirement too, my wife is retiring this December, that might just tip the balance to retiring early. Although she will be only 47 and has mentioned that she might be tempted back into doing more lucrative contract work (paid at much higher rates than she is on PAYE). It isn't that I would be bored if I was retired and she went back to work (far from it), the issue would be that one of the draws of retirement is that we could spend the winters in Spain and/or the Algarve, but if she went back to work, we couldn't do that. So I'll probably do another year and try and make my mind up in that timescale.

jamesd

You're considering seven more years of working instead of being retired. Just how bad is your financial situation if you don't do that? What does cfiresim say (assuming you also make the other adjustments I've mentioned, like the sequence of returns risk reduction strategy from Guyton and the 1 year in savings as a quick hack to remove the effect of it using US investments)?

"easily have enough to retire" makes me inclined to say "get on with doing it, then". But it really is up to you.

Do remember, though, that we're at a time when cyclically adjusted price-earnings ratios are high for many markets so don't go heavily into equities at the moment, have a look at least at that Guyton article.

Personally, I'm now pretty much in the year by year decision of stay working or retire phase. Can go but not without compromising some desired things that require say half a million US Dollars of investable capital on top of retirement income provision. Given work and investment income and each year being one less year to pay for in retirement, each year working currently has a value of perhaps £50-90k to me in terms of retirement pot/income targets.

Glen_Clark

All my family were/are teachers, many of their friends are teachers. But none of them seem to like their job anymore, and several have retired early.

chucknorris

Glen_Clark wrote: »

All my family were/are teachers, many of their friends are teachers. But none of them seem to like their job anymore, and several have retired early.

I'm not a teacher, I am a chartered quantity surveyor working as a university lecturer, and I do really like my job.

But the other side of the coin is that I realise that I won't live forever and as much as I like my job, at the end of the day it is only a job, and it doesn't compare to my other past times such as bowls, hiking (with my dog), jogging (with my dog), cycling (sometimes with my wife and dog, when not pushing myself), if I retire (which I may) I will probably find the time to swim again (I just couldn't keep up the training due to lack of time).

chucknorris

jamesd wrote: »

You're considering seven more years of working instead of being retired. Just how bad is your financial situation if you don't do that? What does cfiresim say (assuming you also make the other adjustments I've mentioned, like the sequence of returns risk reduction strategy from Guyton and the 1 year in savings as a quick hack to remove the effect of it using US investments)?

"easily have enough to retire" makes me inclined to say "get on with doing it, then". But it really is up to you.

Do remember, though, that we're at a time when cyclically adjusted price-earnings ratios are high for many markets so don't go heavily into equities at the moment, have a look at least at that Guyton article.

Personally, I'm now pretty much in the year by year decision of stay working or retire phase. Can go but not without compromising some desired things that require say half a million US Dollars of investable capital on top of retirement income provision. Given work and investment income and each year being one less year to pay for in retirement, each year working currently has a value of perhaps £50-90k to me in terms of retirement pot/income targets.

I'm not in a bad financial situation at all James, I think the thing that you are missing is that I like my job, but as I mentioned above I am very much aware that at the end of the day it is only a job. I'm still thinking it through, we are changing the way that we deliver our courses at the university this summer, and I will learn more about the impact at a meeting that I am attending next week. It may well be that if I don't prefer the new system, I may leave this summer. Last September I did inform the university that I was going to retire this summer, but I had second thoughts and withdrew that notice, but I am still in two minds.

At the moment I am about here:

50% retiring this summer
35% work another year, thus delaying the decision
15% work another 7 years.

If I go this summer, it will be because of information that I learn from next week's meeting