How do professionals manage sequence of return risk?

kidmugsy

bowlhead99 wrote: »

I don't see that with such questions it is 'puzzling' why (s)he wouldn't mention his/her marital status.

You are being muddled.

(i) I did not suggest that the OP should have told us about any wife. You made that up.

(ii) I did suggest that a remarkable number of posters don't tell us their marital status even though that might well influence the suggestions that others make. I stand by that.

(iii) I was responding to a commenter who recommended a sort of annuity that might make sense for a married man (or woman) but would often make less sense for the unmarried.

If you disagree with what I said why not refer to what I did say rather then to your own invented version?

michaels

Dox wrote: »

It has to be done individually, a key issue being the client's attitude to risk. No professional will guarantee that any portfolio will deliver a specific outcome - it just depends what sort of risk the client is prepared to take, as well as how much risk.

I have done a few online' attitude to risk calculators', every one has been so banal and simplistic as to be completely valueless in determining real attitude to risk.


What is the rationale for a 75% or even 95% chance of success factor - that the higher income now from an appreciable risk of failure is enough to outweigh a 25% / 5% chance of spending ones final decade in penury?

jamesd

michaels wrote: »

What is the rationale for a 75% or even 95% chance of success factor - that the higher income now from an appreciable risk of failure is enough to outweigh a 25% / 5% chance of spending ones final decade in penury?

Blanchett's paper that I linked to explains in much detail. Briefly:

"To provide some perspective as to how long the retirement period would be expected to last for the base household scenario, though, there is a 43 percent chance that at least one member of the couple (or both) will survive 30 years in retirement, a 16 percent probability of surviving 35 years, and a 3 percent probability of surviving 40 years. ...

Overall, the analysis here suggests that targeting a lower success level (e.g., a 75 percent success rate versus a 95 percent success rate) is likely more appropriate, although the optimal target is highly dependent on the retiree scenario."

Blanchett's table 5 provides a range of success rate targets which vary depending on how much of the individual's minimum required spend is covered by guaranteed income and how willing they are to have their income change.

If you use a success rate that's too high you waste money, dying with money you could have spent to improve your quality of life.

There isn't really a final decade in penury event. All IFAs will anticipate periodic reviews and so should individuals. If there's a sustained period of low investment returns income can be and should be adjusted downwards. How long and how bad depends on the drawdown method and individual.

It's not accidental that I'll typically suggest state pension deferral then, later, some annuity buying.

michaels

Thanks, an adjustable peg makes much more sense than a 'splurge until the money runs out if I live too long' one.

k6chris

jamesd wrote: »

If you use a success rate that's too high you waste money, dying with money you could have spent to improve your quality of life.

I’m not sure that the correlation between money and quality of life is equally linear in both directions? Not having enough money for a comfortable existence strikes me as being a far more penal outcome than the risk of a potential underspend??

Thrugelmir

jamesd wrote: »

The theoretical objective of drawdown is to fully deplete the capital on the day of death in order to maximise the income that can be taken.

Where can I obtain my date of future death from?

Thrugelmir

kidmugsy wrote: »

Why the ten year guarantee? We don't even know if the OP is married.

Purely a suggestion not a recommendation. Many people consider annuities to offer poor value in the event of an early demise. Yet guarantees are relatively inexpensive in the broader scheme of things. .

bostonerimus

Thrugelmir wrote: »

Where can I obtain my date of future death from?

Exactly, which is why retirement funding should use conservative numbers...well maybe not for life expectancy, go big on that one.

bostonerimus

jamesd wrote: »

If you use a success rate that's too high you waste money, dying with money you could have spent to improve your quality of life.

I never understood this logic as it argues that more spending is better and I've always found that enough will suffice, which I think is why I now have way more than I need. I want to leave lots of money to my heirs and to some charities so that what I've worked for will be useful after I die.

MK62

My main concern has to be the potential to run out of money....

This is closely followed by provision for my wife in the event of my early exit.
I think if you are married or have a partner, you have to plan for their potential lifespan too......if there's a bit of an age gap that makes things more interesting, as you may have to plan for a 40+yr retirement rather than the more usual 30+yrs....so the theory of depleting my pension on the day of death probably wouldn't work for me (there is of course the possibility of me being the lone survivor, but in that case, the secondary concern would then become my kid's inheritance).


Of course, for single people who have no kids......