Investing during retirement

OldMusicGuy

bostonerimus wrote: »

Investing style is a very personal thing. If you can meet your income goals by being conservative then it's a nice place to be. Unfortunately many people end up either needing or wanting more income that say an annuity or a conservative dividend stock portfolio can provide and so they need to take more risk.

Quite right about investing style, it's taken me about 5 years to really get to a style that suits my risk profile.

My biggest issue was that for 20 years prior to that I was far too conservative in my investment choices when I should have been going for more growth. I could have retired earlier if I had done that. Wish I'd taken the time to learn more back then.

Thrugelmir

OldMusicGuy wrote: »

My biggest issue was that for 20 years prior to that I was far too conservative in my investment choices when I should have been going for more growth..

Identifying "growth"options is a challenge at the best of times. With hindsight an easy thing to do. As is riding the wave of a bull market and assuming that oneself has better investing abilities than the average investor. Conservative choices are the best route in the long term. As Warren Buffett famously said ""Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1."

talexuser

If you're retiring at 65 you should have another good 20+ years ahead if in reasonable health, and on that timescale I would be wary of going too far into bonds (or say the pretty well discredited absolute return funds) too early in a large way because you still need some growth to counter inflation over that timescale or perhaps the unaffordability of the state pension over time as populations age and industry wanes. All depends on personal circumstances of course.

Stirfry

I am also investing in retirement, although DH still working. We will have 2 state pensions at 66 mine falls short by 5 years and will top up nearer the time. Also one small DB and DH has 2 very small annuities in payment. We will be relying on savings for 50% of our number around 50k. My biggest dilemma is how much to hold in cash, savings ladders etc. I have only been investing for about 2 years and have less than 40% invested around 75% in equities 25% in bonds. Like OMG I am on the cautious side. My plan is to stay ahead of inflation. I also plan to keep investing dividends and will give this a 10 year trial run to see how I get on. By that time I will be 70.

I am just worried that I have not been brave enough or invested enough. I guess time will tell.

Stirfry

What I would really like to know has anyone got an opinion on how much of overall savings should be invested when retired?

bostonerimus

A popular amount of cash to have is one or two years worth of spending. Then you can back that up with some gilts and high quality bonds, the exact ratio between equities and bonds/gilts is going to be determined by your personal circumstances....but it's not that different form the accumulation phase; instead of reinvesting dividends and capital gains you spend them. So ratios like 50/50 or 60/40 are often seen in retirement. The key is budgeting and having a well thought out plan to provide stable and sustainable income over several market cycles.

So keep at least a year's cash in the bank (some people have multiple years), match a bond/equitry asset allocation to your circumstances and keep your annual drawdown from your invested assets to and inflation adjusted 4% and you'll very probably be ok.

bowlhead99

Stirfry wrote: »

What I would really like to know has anyone got an opinion on how much of overall savings should be invested when retired?

This will differ for everyone because everyone will have different needs (in terms of target annual income for now, longer term provision such as care costs, whether to leave an inheritance to someone or not, etc etc etc.) and will be starting off with different amounts of 'overall savings' and different attitudes to risk.

You mention that as you have DB pensions, annuities and state pensions you will need to get half your number from 'savings' (~£25k). You mention the question is what portion of savings is to be invested, so presumably you mean the £25k will come from a mix of savings and investments.

Let's look at a couple of examples on how you could get that level of income using made-up round numbers

Say you have £800k to save and invest and have three quarters of it in an investment portfolio and the other quarter in cash. £600k: £200k;

The £600k Investment portfolio is aiming to deliver an overall return of, say, 3.5% plus inflation over the long term : so that's allowing you to withdraw 3 5% of the money as income or capital withdrawal each year (£21k) while still preserving the value of the £600k in real terms.

The £200k cash might get you 2% a year, somewhat lower than inflation. So if you actually take that 2% interest out of the account each year (£4k) you will be able to meet your overall £25k spending target the first year (the £4k interest income together with the £21k taken from investments), but the £200k will be losing value in real terms. If inflation runs at 3% a year for the next couple of decades, the £200k will at that point only be worth £110k in today's money, because cash isn't a good long term way to hold your wealth if you want to preserve its value in the face of inflation.

The £200k of cash which is by that point only worth £110k, might still be generating £4k nominal a year, but it's not worth as much as £4k today; more like £2k in today's money. So while your investments are still generating £21k in today's money, the cash is only generating £2k in today's money, and you're falling short of the overall £25k target, if you were hoping to keep that £25k rolling in each years in real terms.

You might of course be ok with that, if you don't really need to fully inflation protect the £25k income. Perhaps a couple of decades into later life you won't be spending as much per year as you do in the early days of your retirement. Or you might be thinking, why the hell do I need £200k in the bank and £600k of investments when I'm in my 80s - I don't need it when I'm dead. So you might be quite happy to burn through the 'capital' part of your savings and investments at a much faster pace.

Just for fun, you could redo the sums in a second scenario where instead of having the quarters of the £800k add investments and a quarter in cash (£600k:£200k) you instead follow your current plan of "less than 40% invested" - so you have £300k investments and £500k cash instead.

Now assuming the same long term returns of inflation+3.5% on investment and just 2% on cash, you get £10.5k on the investments (while preserving the £300k investment capital in real terms) and £10k on the cash (not preserving the £500k cash capital in real terms). That means you only get just over £20k in year 1, which is short of your £25k target; and after inflation has done its dirty work on your cash pile over the following couple of decades, your income has dropped to only £15k in real terms and the cash pile of £500k is worth less than £300k in real terms.

As you can see, an over-allocation to cash due to being cautious and not investing a large proportion of your savings, is replacing "investment risk" in your portfolio with "shortfall risk" of failing to reach your target - mainly due to cash not being a good defence against inflation.

You can run all kinds of scenarios, but the main things to consider are how much inflation worries you, how much you can handle having a large portion of your wealth subject to going up and down with financial markets, and whether you actually need to preserve large amounts of capital for later life or inheritances / legacies.

When considering how much you can afford to draw from an investment portfolio each year, a key thing is that if you have a large cash buffer you will be able to survive drawing less from the portfolio when markets are down and your investments aren't worth very much, and then in the better years where investments outperform you can pull more out of the investments and top up the cash again. The thing to avoid is rigidly drawing fixed amounts of cash from investments at a time when investments have temporarily fallen to low prices, because they're likely to recover if you can leave them alone and you don't want to damage your wealth by pulling large amounts of money out of the portfolio at a low point.

So, a high cash allocation (several years spending) is great, but a really really high cash allocation means you haven't got much money actually growing your wealth for the future and without such growth, inflation can be painful. So retirement is not all about simply building wealth until retirement starts and then sitting mostly in cash and spending it...

OldMusicGuy

Excellent post as always from bowlhead. However, I think this is key:

bowlhead99 wrote: »

So, a high cash allocation (several years spending) is great, but a really really high cash allocation means you haven't got much money actually growing your wealth for the future and without such growth, inflation can be painful. So retirement is not all about simply building wealth until retirement starts and then sitting mostly in cash and spending it...

The key thing is thinking about how you want to spend your retirement and what you want to end up with. Inflation will be largely irrelevant to us, except when it comes to paying care home fees. Unless you spend a lot of money on consumer goods and holidays (which you may well want to do), your personal rate of inflation could well be lower than the reported CPI measure. We will live a relatively quiet and much more sustainable lifestyle in retirement, so inflation will be largely irrelevant when it is at levels around 2 to 3%. Care home fees will be going up though which is why my long term goal for our investments is to just match or slightly beat inflation, which should be relatively easily achieved.

Also, we don't plan on leaving anything as an inheritance therefore we do not need to grow our wealth. We have enough and we are spending it, not saving it.

We are also using our house to release equity through retirement. We are downsizing now to a 3/4 bed from a 5 bed, in 20 to 25 years we will downsize into a flat, after that the flat will be sold to help finance care home fees if needed. Each move releases equity, and it's probably fair to say that we should match inflation on the capital value of our house over time.

That's why it's important IMO to make a long term plan and have clear financial objectives. A 30 year spreadsheet helps me make all these assertions with some degree of confidence.

Thrugelmir

bostonerimus wrote: »

Then you can back that up with some gilts and high quality bonds, the exact ratio between equities and bonds/gilts is going to be determined by your personal circumstances....but it's not that different form the accumulation phase; instead of reinvesting dividends and capital gains you spend them. So ratios like 50/50 or 60/40 are often seen in retirement.

What's the current yield on UK Government gilts? You need to go back to 2007 to obtain a yield in excess of 4% on any line of stock. Bonds are a very broad generalisation. As has been discussed on many a previous occasion.

The Central Banks have succeeded in their broad aim to encourage investors into riskier assets. Whether this was the right policy to adopt, only time will tell. There's huge sums of money now flowing in and out of the markets that is invested on a whim. No thought to fundamentals.

badger09

What an interesting thread, thanks OP.

My situation:
Early retired at 56 in 2006, I can live comfortably on index linked DB pension and retirement pension. I do realise this is a great position to be in.

Always been a saver but came to investments very late.
Following advice on here in 2013, I started a SIPP and began investing in S&S ISA in earnest. I've since transferred most of my Cash ISA savings into S&S.

Currently have just over 30% of my savings in cash & 70% in equities. Unless I live to an unfathomable age, potential care costs are well covered. So basically I am investing to preserve capital for my son.

My main discretionary expenditure is on long haul travel and cruises, though these are modest affairs, not the round the world on a floating tower block type. I intend to carry on spending on these for as long as our health permits.

As enthusiasticsaver says

"The problem we find is that we are not in a position to say this is definitely going to happen at a certain time as so much depends on health, family situations etc etc. We could be in a position to do lots of long haul holidays for the next 10-15 years but equally we have friends of our age who have been struck down with health issues which have curtailed their plans massively".

We've both had some health issues and don't know what the future holds. I haven't found the transition from saver to spender to be an easy one, but I'm trying very hard:rotfl: