How long will your savings last?

bigadaj

HappyMJ wrote: »

That depends on you definition of inflation too.

Tesco's Fixed Rate Saver pays 2.5% for a term of 5 years and takes up to £5,000,000. As much cash as possible could be put into the high interest current accounts and regular savers and the remainder put into a fixed rate saver and the income used to live off.

I'm quite sure inflation is less than 2.5%.

Which you are presumably then guaranteeing for 5 years?

Don't think you'd get that guarantee from any financial institutions.

LXdaddy

HappyMJ wrote: »

That depends on you definition of inflation too.

Tesco's Fixed Rate Saver pays 2.5% for a term of 5 years and takes up to £5,000,000. As much cash as possible could be put into the high interest current accounts and regular savers and the remainder put into a fixed rate saver and the income used to live off.

I'm quite sure inflation is less than 2.5%.

The OP was not saying he would "live off the interest.


He was simply saying that he could spend a thirtieth of the original capital in real terms each year and as long as interest and inflation were equal he would take 30 years to consume all the capital.


He was postulating a much simpler drawdown calculation which presumed that he knew how long he needed the capital to last for. His later postings suggested that he saw a safety net in terms of State Pension and reducing capacity to spend as he approached dotage.

aldershot

jamesd wrote: »

That's not a particularly bad assumption, though in practice you'll probably do better than just matching inflation, with the long term UK stock market average being a bit over inflation plus 5%.

That or 4-6% is typically the assumption I use for quick work on short term plans, like a few years until state pension age, or for first approximations, because it's both convenient and very conservative.

Without banging too hard on the past is no guide to the future drum, expecting real equity returns of >5% when inflation linked gilts are negative is a dangerous game. The past 30 years have seen (nominal) rates and yields go from >15% to 0.5% and that is not going to happen in the next 30. Take a look at Japan to see what real long term equity returns can look like.

bigadaj

aldershot wrote: »

Without banging too hard on the past is no guide to the future drum, expecting real equity returns of >5% when inflation linked gilts are negative is a dangerous game. The past 30 years have seen (nominal) rates and yields go from >15% to 0.5% and that is not going to happen in the next 30. Take a look at Japan to see what real long term equity returns can look like.

Maybe but that's more of a reason why annuity rates are so poor rather than assuming particularly disastrous equity returns.

Equity returns have been buoyant over the last few years, depending on the time period your views then significantly above 5% for many sectors and regions over many time periods.

What has happened since the gfc is a significant split in returns between high and low risk assets. So high quality bonds and gilts and risk free savings have done terribly, whereas main stream equities, vcts, p2p lending etc have done well.

Some people may consider that a hassle or be uncomfortable with the risk but using a mix of asset classes, including property, then a blended return of >5% may not well be too difficult to achieve.

jamesd

aldershot wrote: »

Without banging too hard on the past is no guide to the future drum, expecting real equity returns of >5% when inflation linked gilts are negative is a dangerous game.... Take a look at Japan to see what real long term equity returns can look like.

Already have looked at Japan, also see my immediately preceding post about cfiresim and its use of the worst case US historic performance. I have fair idea of what might happen, not just from that but from years of Equity Gilt Study reading on the variance of returns but still it's OK to use approximations for initial planning even though it's then good to do more.

Personally I have been and continue to switch from both equities and corporate bonds/gilts to P2P because I think that in the current environment P2P offers a better risk-reward combination. I've no issues with waiting until the cyclically adjusted P/Es of major markets have dropped before going back into equities so heavily again. I'm familiar with the news about assorted P2P firms that have had trouble of various sorts recently.

jamesd

bigadaj wrote: »

I wouldn't disagree with your statement James but the thread is all about having the money in cash, which has led to the debate about whether you can meet inflation from returns on cash investments.

No reason not to hint that cash may not be the best option and point to more resources. Here are the returns for various periods from the 2013 edition of the Equity Gilt Study:

Real investment returns (% pa)
		Equities	Gilts	Index-linked	Cash
1902-1912	3.8		-0.4			1.6
1912-22		-1.9		-3.8			-1.6
1922-32		7.5		9.9			6.1
1932-42		4.3		0.8			-2.5
1942-52		1.7		-3.5			-2.6
1952-62		12.6		-0.7			1.1
1962-72		7.7		-1.7			0.8
1972-82		-1.2		-1.0			-1.9
1982-92		12.7		6.1			5.8
1992-2002	3.9		7.2	5.1		3.4
2002-2012	5.0		3.4	3.5		-0.2

Even so, we know that at a retail level it has recently been possible to beat inflation for modest amounts of money that for many people will be sufficient. More of a challenge as the amount to be used increases.

jamesd

gadgetmind wrote: »

Hmmm, research needed here on my behalf regards (1) and (2).

It's well worth your time IMO.

Also worth noting that the rules apply at any time so after a boom few years you can reset your income level higher if you want to - it doesn't lock you in if things go well, even though it does have some built in escalation to help avoid staying too low.

gadgetmind wrote: »

(3) seems easy but I'd always be nervous drawing 100% on the cash portion of my portfolio. However, as I currently hold three years of reasonably lavish spending as cash, I guess spending 1-2 years of this in extreme situations is acceptable.

While the FT has a columnist who recently mentioned just doing cash you can do better, I think, without academic study, by having the natural income going into the savings account. This way the drop in value will be quite slow, with the savings mostly a smoothing buffer. naturally you'd top up when markets are doing well but not when doing badly. Hence this is what I'd generally suggest.

gadgetmind wrote: »

(4) seems odd but perhaps I just don't understand. When do you gear up and down?

Draw only when markets are down, to avoid selling risk-based investments at times of low value. Or if at the end of your life expectancy you find that you have been spending more than you could actually have spent given your misfortune of having lived in retirement in a situation where returns were unusually poor. Repay during the next boom, repeat as needed.

See my post here Equity release for risk reduction and Wade Pfau's The Case for Reverse Mortgages that appeared in the WSJ. The UK equivalent of a reverse mortgage of the type he discussed is the equity release mortgages that allow drawing as desired rather than having to take all of the money at once.

bigadaj

jamesd wrote: »

No reason not to hint that cash may not be the best option and point to more resources. Here are the returns for various periods from the 2013 edition of the Equity Gilt Study:

Real investment returns (% pa)
		Equities	Gilts	Index-linked	Cash
1902-1912	3.8		-0.4			1.6
1912-22		-1.9		-3.8			-1.6
1922-32		7.5		9.9			6.1
1932-42		4.3		0.8			-2.5
1942-52		1.7		-3.5			-2.6
1952-62		12.6		-0.7			1.1
1962-72		7.7		-1.7			0.8
1972-82		-1.2		-1.0			-1.9
1982-92		12.7		6.1			5.8
1992-2002	3.9		7.2	5.1		3.4
2002-2012	5.0		3.4	3.5		-0.2

Even so, we know that at a retail level it has recently been possible to beat inflation for modest amounts of money that for many people will be sufficient. More of a challenge as the amount to be used increases.

James I'm aware of the equity gilt study and referenced it earlier in the thread.

The issue is how accurate the cash element of the analysis is. Most pointedly do you think the average person, let alone those aware enough to shop around, earned -0.2% return on cash on the last decade?

The returns available on cash will almost certainly be better than those quoted but to what extent I don't k ow and don't know a reasonable source, though there may well be one for the last few decades.

jamesd

I think that the average person would have done significantly less well than the average user or participant here on their cash. I think that people here could have beaten inflation provided the amount didn't become too large.

I still don't think that cash alone is a sensible choice for the term considered in the original post, though for a person with ample money to meet their needs it's definitely an option that could be considered.

Even if cash is considered, though, something like state pension deferral would be an improvement on it with minimal risk. And later in life annuity purchase may well beat cash.

jamesd

I mentioned Guyton's taming of sequence of returns risk in an earlier post. See:

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

Those explain how Guyton found that using the cyclically adjusted price/earnings ratio was effective in greatly reducing the impact of sequence of returns issues.

With many equity markets now at highs the method currently indicates a reduced holding in equities. And importantly:

"Though exhaustive study on the combined impact of dynamic withdrawal and allocation policies has yet to be undertaken, results of their stand-alone impact offer strong reason to believe that employing them together would add around 100 basis points to the sustainable withdrawal rate under static policies"

That's 1% higher sustained withdrawal rate, from 4.5% to 5.5% for anyone still using the "4%" rule. Or perhaps from 6% to 7% for someone using Guyton and Klinger's rules combined with a year of planned investment income in cash savings.