Growth Rate in Drawdown

[Deleted User]

“Have they? Any evidence? They certainly havent on this forum.”

The Institute of Faculty of Actuaries set 3.5% as the drawdown rate individuals should use in a 2018 policy paper. Prior to that the pension industry followed the 4% rule.

[Deleted User]

bostonerimus wrote: »

Straight historical simulations with 100 years of data could come up with 70 rolling 30 year investment periods, but Monte Carlo can use the historical data to come up with as many sets of investment data over as many years as you want.

That’s true, but the dataset you are sampling is short when compared to a 30 year retirement period they assumed (150 years total?) - let alone 40 or 50 year retirements which are not uncommon today.

The model is useful in as much as it answers the question of probability of success “what if I retire today, die in 30 years and the conditions are the same as in the US over 150 years prior to 1990”. Which, incidentally, was the period over which US became dominant in the world economy. Quite unique, really.

bostonerimus

Deleted_User wrote: »

That’s true, but the dataset you are sampling is short when compared to a 30 year retirement period they assumed (150 years total?) - let alone 40 or 50 year retirements which are not uncommon today.

The model is useful in as much as it answers the question of probability of success “what if I retire today, die in 30 years and the conditions are the same as in the US over 150 years prior to 1990”. Which, incidentally, was the period over which US became dominant in the world economy. Quite unique, really.

Exactly, you have to understand the limitations. If the statistics of the next 30 years of investment results are significantly different from the last 100 or 150 then today's Monte Carlo simulations won't be applicable to today's retiree.The projections are only valid if the assumptions are also valid.

So that's why I don't rely directly on the stock market for my retirement income. My DB plan has a governmental guarantee between me and the stock market and my rental income comes in as long as someone needs a roof. My market investments and workplace pensions are mostly earmarked for inheritance.

Thrugelmir

Deleted_User wrote: »

Last 10 years have been so good that many have portfolios in multiple millions, at which point they don’t have to lose any sleep over bear markets.

Suggest you revisit this period of history.

Between January 1990 and June 2013, large cap Japanese stocks experienced a return (in real terms) of -58.2%.

Somewhat more dramatic.

With US companies spending some $1 trillion on buying back shares. Only time will tell if this has added value for shareholders or simply remunerated executives for achieving better EPS. Without correspondingly increasing the company's profitability. While possibly burdening the company with additional debt.

Linton

Deleted_User wrote: »

“Have they? Any evidence? They certainly havent on this forum.”

The Institute of Faculty of Actuaries set 3.5% as the drawdown rate individuals should use in a 2018 policy paper. Prior to that the pension industry followed the 4% rule.

Have you read the paper?



It is of interest to note that they identify 5 investment strategies that vary from "cautious" to "adventurous". I believe they used the middle investment strategy known as "balanced" for their calculations:


Balanced drawdown portfolio:
Gilts 25%
Corporate Bonds 45%
Equity 25%
Property 5%


Is this an allocation you would recommend? Its nothing like mine. Even their "adventurous" portfolio looks pretty cautious to me.



What I havent found explicitly stated in their document is whether the drawdown increases with inflation, clearly an important factor. However when they compare drawdown with annuities they use fixed rate annuities for the purpose so I guess that they assume fixed drawdown.



What could be said on the IoAs behalf is that they state they are aiming the figures at "Middle Britain" who they define as having pots of £30K-£250K, operating without advice and presumably with little understanding of investing. Their intention is to provide guidance for policy makers in an environment where currently it appears most people in the target group currently in drawdown are taking well in excess of the recommended amount.


So sadly it seems to me that the work of the IoA is of little relevence to our discussions here and is not comparable with previous studies which tend to use a 60/40 equity bond split. It certainly should not be used to drive IFA recommendations.

[Deleted User]

Thrugelmir wrote: »

Suggest you revisit this period of history.



Somewhat more dramatic.

With US companies spending some $1 trillion on buying back shares. Only time will tell if this has added value for shareholders or simply remunerated executives for achieving better EPS. Without correspondingly increasing the company's profitability. While possibly burdening the company with additional debt.

Over the last 10 years VT (world stockmarket) more than doubled in real terms. Bonds did amazingly well while inflation stayed low. For those who count in pounds, the returns were juiced up by a major fall in the value of the currency.

Share buy-backs are more tax efficient than returning money to shareholders via dividends. Fundamentally it’s the exact same thing. Both dividends and buybacks could be misused by rogue executives, same as with almost any financial tool.

[Deleted User]

Linton wrote: »

Have you read the paper?



It is of interest to note that they identify 5 investment strategies that vary from "cautious" to "adventurous". I believe they used the middle investment strategy known as "balanced" for their calculations:


Balanced drawdown portfolio:
Gilts 25%
Corporate Bonds 45%
Equity 25%
Property 5%


Is this an allocation you would recommend? Its nothing like mine. Even their "adventurous" portfolio looks pretty cautious to me.



What I havent found explicitly stated in their document is whether the drawdown increases with inflation, clearly an important factor. However when they compare drawdown with annuities they use fixed rate annuities for the purpose so I guess that they assume fixed drawdown.



What could be said on the IoAs behalf is that they state they are aiming the figures at "Middle Britain" who they define as having pots of £30K-£250K, operating without advice and presumably with little understanding of investing. Their intention is to provide guidance for policy makers in an environment where currently it appears most people in the target group currently in drawdown are taking well in excess of the recommended amount.


So sadly it seems to me that the work of the IoA is of little relevence to our discussions here and is not comparable with previous studies which tend to use a 60/40 equity bond split. It certainly should not be used to drive IFA recommendations.

Yes, it’s all a bit strange. They don’t account for inflation. Indeed all of their portfolios, particularly the cautious ones, would be devastated if inflation were to increase. And “balanced” isn’t anywhere near 60/40. Also like how they define “wealthy”. Anyone >250k? Really? Are they in the right decade?

Linton

Deleted_User wrote: »

......

Share buy-backs are more tax efficient than returning money to shareholders via dividends. Fundamentally it’s the exact same thing. Both dividends and buybacks could be misused by rogue executives, same as with almost any financial tool.

I am afraid you have been misled again by your US reading matter. In the UK tax differences are very much less a factor for dividends than in the US which is why dividends are much more popular here and share buybacks relatively rare.

[Deleted User]

Linton wrote: »

I am afraid you have been misled again by your US reading matter. In the UK tax differences are very much less a factor for dividends than in the US which is why dividends are much more popular here and share buybacks relatively rare.

That’s irrelevant though. I was responding to a comment re buybacks in the US. And in any case deferring taxation is good for anyone with a taxable account

AnotherJoe

pensionpawn wrote: »

Are you willing to share your actual observed growth and inflation rates, it would be interesting to know? I ask because, and I acknowledge that there are many on this forum who have greater experience and have done more extensive analysis than I have, when you can achieve 2.6% via an online 5 year bond some of the rates being suggested for modelling growth seem very conservative..

That will be a flat 2.6% not including CPI though.