Fixed term annuity

westv

Do those figures assume 100% of guaranteed income from the start of retirement or do they also take account of a phased increase?
Also, is this something cfiresim allows for this in its calculations?

jamesd

Those assumed that the guaranteed income was available from the start. The most important part is that it must start before the failure which causes it to be relied on. Even retiring at 55 it's unlikely that there will be a failure before state pension age is reached.

Cfiresim always includes guaranteed income in its calculations if you tell it about that income. It's very important to include state or work DB income if you're retiring before they start. If you don't do that the calculations will result in income levels that are far too low for the years before they start.

You can also add in things like spending capital to buy annuity income at whatever ages you like and that decreased capital and increased guaranteed income will be part of the calculation. If you're going to defer your state pension just have it start later at the higher level.

If you choose to use the Guyton-Klinger approach, that will normally cut income faster than the five percent a year that Blanchett used, reducing the chance of bigger cuts later.

I have some examples of the effect of changing the success rate requirement and guaranteed income need on the initial income here. A quick summary for that specific case:

75%: £24,420.
90%: £20,656 with minimum set to £16,500 as for the rest. Increases to £26,918 if you cut the minimum to £12,000.
95%: £17,909.
100%: £10,554.

The things that produce bad outcomes are known. Biggest is sustained low returns, next is big drop just after retiring, if we ignore war. If you're living through low returns you'll know it and can choose to cut income e more, as Kitces suggests in one of his articles. And you can protect against the big drop using Guyton's sequence of returns risk reduction method, or by using a rising equity glide path. Models are nice but you're allowed to adjust based on what you actually experience for your particular retirement point.

bostonerimus

[QUOTE=jamesd;72724454
"An important takeaway from Table 5 is that targeting a very high probability of success (e.g., 95 percent) will not likely be optimal for most households. Although targeting a high probability of success creates a perception of safety, it appears that for most retirees it may lead to initial safe withdrawal rates that are too safe, especially for those households with high levels of existing guaranteed income. Therefore, although it may be difficult to explain why targeting 75 percent (or even 50 percent) is actually quite safe (versus 95 percent), not doing so will likely result in below-optimal consumption during retirement."

[/QUOTE]

In this context optimal income maximizes withdrawals and depletes the pension pot to zero on the day you die. Whether that is your personal optimum depends on your circumstances and lifestyle. If you want to leave an inheritance it's definitely not the optimum withdrawal rate. The reduction in withdrawal rate when market returns are projected using current market trends rather than historical returns is also worth noting.

jamesd

Optimal income if you live through unusually bad times would try to leave nothing. Blanchett didn't increase income for good times so the more likely result is very substantial inheritance in the non-bad cases. If someone does want to give higher priority to inheritance than their bad case income they can set up a desired ending wealth level. I expect that if those bad cases were the case that happened their children, if the planned beneficiaries, would be telling them not to do that.

The current conditions reduction is based on current equity and bond values and the implied future returns at those prices. It's fairly easy to avoid that effect here, given that P2P paying raw 12% is readily available, perhaps 10% after bad debt in that secured lending. The historic return used was 12% for equities and 5.5% for bonds with 3% inflation. You have a good probability of beating the historic returns here if you do P2P as a substitute. My IRR is over 19% for the place I use most if I assume all bad debt is total loss, about 1% higher for total recovery.

It is interesting to notice that with those implied future returns the safe withdrawal rate is 4.1% with 70% equities, 50% of wealth from guaranteed income and 50% non-discretionary spending with moderate income stability preference, from table 4. But that is with a willingness to vary income, not staying with it constantly during bad times. For background, that 50-50 assumption here would be a household with two state pensions of £8,000 each and £534,000 of investments, assuming the state pension can be purchased at 3% income level. That much capital is moderately uncommon and the guaranteed income is likely to be more like 75% with 5.2% safe withdrawal rate. Still lower than the 6.5% for the historic case but pretty good for anyone who was inclined to use the 4% rule.

jayjays

I am a little surprised about the negativity around a "fixed term annuity"
I am about to hand over my £115k Sipp (held as cash) for a 5 x £7590 with a £82715 guaranteed after 5 years.
This seems to deliver a net 1% guaranteed growth which suits me fine
I wonder am I missing something ? o

dunstonh

This seems to deliver a net 1% guaranteed growth which suits me fine
I wonder am I missing something ? o

Inflation would be the key thing you are missing.

How many times do you plan to rollover the fixed term annuity?

jayjays

Cheers Dunston, I am not sure at this point .
I have a £37.4k company pension (been taking for 11 years), circa £2k bits and bobs and want to flirt with 40% but not pay it.
i plan to take £6500 pa with a guarantee £87???, if 40% rate turns against me a little in the 5 years I can use the £2880 contribution.
When the 5 year term ends my SP kicks in £8k (once topped up), so a recalc will be essential I think

OldMusicGuy

If my quick calc is correct, you could take 77,050 and put it in a 5 year bond at 2.31% with Charter Savings bank and be left with 86,370, which is more than you would get with the annuity. And of course you could invest some of the income (7590 pa) in shorter term bonds which would gain you more interest as well. So at the gross level it doesn't look like good value to me.

The interest would be subject to tax though, so I guess the overall situation depends on your tax status.

jayjays

Thanks OMG, why 77050, I have 115000 ?
I must admit these bond things have never of interest to me before. Could this be done within the Sipp ?, if not I will face a 40% tax bill ,are they guaranteed ?
My father in law has recently invested in a 2 year Tesco Corporate Bond 5.5%, I have been unable to establish if this is "guaranteed", maybe I need a new thread to gain more understanding !

redux

jayjays wrote: »

I am a little surprised about the negativity around a "fixed term annuity"
I am about to hand over my £115k Sipp (held as cash) for a 5 x £7590 with a £82715 guaranteed after 5 years.
This seems to deliver a net 1% guaranteed growth which suits me fine
I wonder am I missing something ? o

I think that works out as 1.15%, assuming monthly payments.

Is it possible to do as well or slightly better with cash deposits you organise yourself?