VLS results over last year shows still worthwhile holding bonds

Linton

itwasntme001 wrote: »

Yes you are right. But at death there's another 8 years till maturity, that too a reduced bond amount as he would have spent most of it by death. So the actual loss is not as much plus you would still have some capital left over vs an annuity where nothing is left. The question really is what happens to the term structure of rates over the lifetime of the retiree.

How do you know? If we knew when we were going to die retirement planning would be a lot easier.

itwasntme001

So surely, instead of buying bonds as part of a multi-fund portfolio, shouldn't retirees be buying inflation linked annuities instead of the bond allocation (assuming normal life expectancy)?

itwasntme001

Linton wrote: »

How do you know? If we knew when we were going to die retirement planning would be a lot easier.

Everything is calculated on an expected basis. So obviously entirely depends on one's individual circumstances but the original question assume normal life expectancy.

Linton

itwasntme001 wrote: »

Everything is calculated on an expected basis. So obviously entirely depends on one's individual circumstances but the original question assume normal life expectancy.

Planning retirement on sverage life expectancy seems very risky to me - you have a 50% chance of spoiling your plans by living too long. From the 2014 Central Statistical Office data, if you are a male and live to 68 in 2019 your life expectancy is around 87. If you reach that age your further life epectancy is around 96.


So perhaps 95-100 would be a better basis.

MaxiRobriguez

Linton wrote: »

Planning retirement on sverage life expectancy seems very risky to me - you have a 50% chance of spoiling your plans by living too long. From the 2014 Central Statistical Office data, if you are a male and live to 68 in 2019 your life expectancy is around 87. If you reach that age your further life epectancy is around 96.


So perhaps 95-100 would be a better basis.

Better to plan to an upper percentile and leave an inheritance than plan to average and run out of money because you make it past your planned death date.

My pension planning is based around an assumption of living until 100. Planned retirement age of around 55 makes it quite difficult (and quite a sacrifice now) to make the numbers meet, but, rather that than convince myself it'll all be OK in the end without proper planning.

itwasntme001

Linton wrote: »

Planning retirement on sverage life expectancy seems very risky to me - you have a 50% chance of spoiling your plans by living too long. From the 2014 Central Statistical Office data, if you are a male and live to 68 in 2019 your life expectancy is around 87. If you reach that age your further life epectancy is around 96.


So perhaps 95-100 would be a better basis.

Yeh agree which makes me wonder even more why wouldn't retirees just buy an annuity instead of bonds? You are hedging inflation and longevity risks and you don't have any rates risk as you would with bonds. And if you don't need the income from the annuity you can just pass to heirs and you would be in a similar position as if you held bonds from an inheritance perspective.

Linton

itwasntme001 wrote: »

Yeh agree which makes me wonder even more why wouldn't retirees just buy an annuity instead of bonds? You are hedging inflation and longevity risks and you don't have any rates risk as you would with bonds. And if you don't need the income from the annuity you can just pass to heirs and you would be in a similar position as if you held bonds from an inheritance perspective.

The example you gave for an annuity in post #76 is unrealistic. As of now, the rates for index linked annuities at 65 are around 2.7% for a single life and 2.3% for a couple.

Bonds are unsuitable as the core of most retirement plans as they cannot provide inflation matching. So the choice is not between an annuity and bonds but rather an annuity and a moderately high equity investment portfolio.

As a rule of thumb such a portfolio could be expected to sustain a drawdown of about 3.5% of initial investment, inflation adjusted, and would cover a couple. Also one would expect a substantial pot to be left after the death which would provide an inheritance - the 3.5% is pessimistic unless the number and size of crashes that occur in the future are in excess of those that happened in the past. An annuity would provide no inheritance except at an even higher cost. So annuities are difficult to justify for many people.

The main exception to this general statement is an "enhanced" annuity for ill health which can provide much higher income on the expectation that life expectancy will be limited. That will cover the risk that the annuitant lives much longer than expected.

MarkCarnage

Linton wrote: »

The example you gave for an annuity in post #76 is unrealistic. As of now, the rates for index linked annuities at 65 are around 2.7% for a single life and 2.3% for a couple.

Bonds are unsuitable as the core of most retirement plans as they cannot provide inflation matching. So the choice is not between an annuity and bonds but rather an annuity and a moderately high equity investment portfolio.

As a rule of thumb such a portfolio could be expected to sustain a drawdown of about 3.5% of initial investment, inflation adjusted, and would cover a couple. Also one would expect a substantial pot to be left after the death which would provide an inheritance - the 3.5% is pessimistic unless the number and size of crashes that occur in the future are in excess of those that happened in the past. An annuity would provide no inheritance except at an even higher cost. So annuities are difficult to justify for many people.

The main exception to this general statement is an "enhanced" annuity for ill health which can provide much higher income on the expectation that life expectancy will be limited. That will cover the risk that the annuitant lives much longer than expected.

Inflation linked, or escalating annuities remain as a relatively small minority of annuity sales though.....which suggests that either purchasers believe they need the higher level of income now, aren't aware of the impact of inflation on a 20-30 year view, or just see the higher amount and go for it.

One option more favoured in US/Canada, may be to go for a deferred annuity which only kicks in at age 80 or 85 say. I think this makes a lot of sense, though getting people to buy them may still be a challenge. Otherwise there may be a hell of a lot of people who have a significant drop in real income in later retirement.

I agree that equities would be significant component for those with a longer expected retirement, and also where there is appetite to vary the drawdown rate, for example where there is already a DB pension and/or State pension.

[Deleted User]

I think hyper inflation would make bonds worthless which is my fear

moneyfoolish

bostonerimus wrote: »

...but you could take the view that you are safe and can take risk to increase your net worth so you can pass on more to your heirs.

I could also die in the next few years just as the market collapses and leave them a lot less!