How do professionals manage sequence of return risk?

bostonerimus

kidmugsy wrote: »

These are American writers. In the US "reverse mortgages" seem to be widely available on good terms but inflation-linked annuities seem to be (almost?) unavailable.

Be aware that Wade Pfau became enthusiastic about at least partial annuitization soon after he got sponsorship from US insurance companies. So you need to look at the assumptions that lead to the conclusions in is papers.......which I think are generally very informative.

Be careful with translating things from the US to the UK....many people in the US have HELOCs (Home Equity Lines of Credit) which are one step removed from a reverse mortgage. HELOCs are very flexible as you can borrow as much as you want when you want against the equity you have in the house, So it's useful for one time emergencies rather than lifetime income

Malthusian

kidmugsy wrote: »

1. Spend conservatively.
2. Maintain spending flexibility.
3. Reduce volatility, including using derivatives to cut downside risks.
4. Use buffer assets so that you can avoid selling at a loss e.g. set up a line of credit on a "reverse mortgage" [i.e. equity release].

This list sounds to me like it is supposed to be in order of priority. And if you can manage the first two you can pretty much do whatever you like with your investments.

Borrowing to invest is a deeply dubious idea. It's risky enough in the accumulation phase, let alone decumulation. As any fule kno, the market can stay irrational longer than you can stay solvent. There's an inherent risk that you hit the limit of what you can borrow on equity release and end up with a debt on the house that you can never maintain or pay back without draining your pension fund at such a high rate that exhaustion becomes inevitable, the problem you were trying to avoid in the first place. This leaves you in a nasty situation should you ever need to move. And then what do you do when the next crash comes?

The third point is bad advice in the UK at least. Nobody needs to be messing around with deriviatives unless they are so stinking rich that they are effectively an institutional investor. Most of us can achieve the same end with lower risk, lower cost and higher reward using best-buy cash accounts. I don't know what best-buy cash accounts are like in the US.

Paul_Herring

Malthusian wrote: »

I don't know what best-buy cash accounts are like in the US.

A fact sheet I pulled of the first likely looking Google result indicates common ones are below 0.1% (0.07% was the highest rate quoted, with a potential to increase it by 20% if you jump through some hoops (i.e. bumps it up to 0.084%. Wow!))

And that includes CD's and IRA's for some obscure reason...

jamesd

Malthusian wrote: »

The third point is bad advice in the UK at least. Nobody needs to be messing around with deriviatives unless they are so stinking rich that they are effectively an institutional investor. Most of us can achieve the same end with lower risk, lower cost and higher reward using best-buy cash accounts. I don't know what best-buy cash accounts are like in the US.

It's good advice in the UK and using cash accounts doesn't come close to doing the same job because it destroys long term investment returns.

A protective option, covered warrant or spread bet for this purpose might be bought that pays nothing until the relevant market is down 20%, then pays to cover the bigger 40-50% drops. Because 20% down is so far out of the money it's likely to be cheap to buy, perhaps 1-2% a year to cover the FTSE.

You don't need to be stinking rich to see a couple of hundred thousand Pounds of drop in a big bear market.

Meanwhile, I expect that in reduce volatility he was including things like Guyton's sequence of returns risk reduction method. That swaps some equities into bonds when equities appear to be expensive.

TBC15

Thrugelmir wrote: »

Where can I obtain my date of future death from?

What’s your address? Am I flying or taking east coast rail?:rotfl:

jamesd

Malthusian wrote: »

Borrowing to invest is a deeply dubious idea. It's risky enough in the accumulation phase, let alone decumulation. As any fule kno, the market can stay irrational longer than you can stay solvent. There's an inherent risk that you hit the limit of what you can borrow on equity release and end up with a debt on the house that you can never maintain or pay back without draining your pension fund at such a high rate that exhaustion becomes inevitable, the problem you were trying to avoid in the first place. This leaves you in a nasty situation should you ever need to move. And then what do you do when the next crash comes?

He wrote "Use buffer assets so that you can avoid selling at a loss" and you wrote about borrowing to invest. The two things are different and buffer assets don't always mean borrowing. Though his research showed that both improve drawdown success rates, with the biggest improvement the earlier you use the tools.It'll normally be a bad move to sell equities for living expenses after a 40% drop. That's when you'd use the buffer assets to avoid Pound cost ravaging of your retirement pot.

TBC15

Jamesd

Any advice/illustrations on how an offset mortgage can be used in lieu of cash/bonds to wait out a downturn for someone who wishes to stay invested?

Thrugelmir

jamesd wrote: »

That swaps some equities into bonds when equities appear to be expensive.

US treasuries were offering yields well in excess of 4% at the time. Hasn't been the case for a while now.

Thrugelmir

tacpot12 wrote: »

Reflecting on my question and having looked at annuity rates, it appears that annuity providers manage sequence of return risk by paying derisory rates! The best annuity (linked to CPI) plus my other income streams still wouldn't cover my minimumn income requirements.

Then your may well be disappointed. If you expect equities to provide an high inflation linked guaranteed return , while still providing capital returns.

bostonerimus

TBC15 wrote: »

Jamesd

Any advice/illustrations on how an offset mortgage can be used in lieu of cash/bonds to wait out a downturn for someone who wishes to stay invested?

This all comes down to asset allocation, whether you spend out of a saving account linked to an offset mortgage or one that isn't having a cash buffer is useful so that you don't have to sell equities in a down market.

So your buffer assets will be cash and short term bonds and also a plan to reduced spending...the latter isn't a physical asset, but it makes the first two go further. Your labor is also an asset and you could go back to work. Next on the list might be items you can sell, the biggest being a house. I'm not a fan of borrowing to provide income as you always have to pay back with interest..