90-100% equities for those already retired

David_66

I’ve just been reading this post https://edrempel.com/reliably-maximize-retirement-income-4-rule-safe/

People on the forums generally seem to go for an equity mix something like VLS60 when they are retired rather than VLS100 as the much higher volatility of VLS100 means that when the next crash happens it would tend to drop a lot lower and so you are eating into your capital more as you withdraw for those years before it recovers.

Don’t the examples in the link show that over 30 years VLS100 would still work out better for a retiree than VLS60 as the increased performance over time would more than make up for withdrawals eating into capital during a market crash, even if the crash happened early on after retirement.

MaxiRobriguez

You're not looking for the most optimal way to make gains during retirement, you're looking to protect your capital. There's a difference.

Usually when comparing a 60/40 against a 100 and saying 100 is better, you're comparing like for like - two funds which an investor will buy, and continue to buy during accumulation phase. I bet the numbers are very different when comparing a scenario whereby two investors are in drawdown phase.

David_66

I might be reading the article wrongly, but I thought it was showing historically what the effects of different equity ratios would be in drawdown (of 4% per year) over 30 years in retirement

Thrugelmir

At the current time the 60/40 portfolio is lacking the security of guaranteed income from bonds. Alternatives are available but come with considerable risk.

arwain

David_66 wrote: »

I might be reading the article wrongly, but I thought it was showing historically what the effects of different equity ratios would be in drawdown (of 4% per year) over 30 years in retirement

You are reading it correctly that's exactly what the article is showing. I think I have read something similar to this some time back but can't remember where.

It certainly provides data that seems to contradict most of the advice one sees provided to people about to retire. I am hoping a few or the regular (and much more savy) posters on here will read the article and respond, thanks for posting it.

quirkydeptless

Thanks. Intesting article. Highlights the risks of inflation which really seems to clobber the low equity portfoilios

talexuser

A possibility is that since artificial QE keeping property assets valued and zombie companies afloat with low interest rates, bond returns have reduced to such an extent that they can no longer support their part of the historic 4% rule long term, so the added risk of more equity growth is needed to keep pace with inflation in drawdown?

masonic

A few points:

• The data for equities is for the US stockmarket so it does not follow that an investment in VLS 100 (which is global and significantly overweighted to the UK) will perform similarly. Most markets have performed worse than the US historically, and it is entirely possible that the US market may not perform as well as it did in the past.
• Moving into low risk investments as you approach retirement is the standard advice for someone who wishes to buy an annuity on a fixed date. For those who wish to remain invested until they die, then the main concern is risk tolerance, which is covered in the article. This could change as you age.
• Another factor is the need to take risk - in general you should not take more risk than is necessary to achieve your objectives, because there are always unknowns. The table suggests that 70:30 is the optimal mix for someone who wishes to start on a 4% withdrawal rate or less.

Thrugelmir

The data for equities is for the US stockmarket so it does not follow that an investment in VLS 100 (which is global and significantly overweighted to the UK) will perform similarly. Most markets have performed worse than the US historically, and it is entirely possible that the US market may not perform as well as it did in the past.

Historic data needs to be considered in terms of home not local currency.

David_66

I’m just using VLS100 and VLS60 as easy examples, I’d use HSBC Global Strategy to avoid the Vanguard UK weighting, but using VLS as an example when posting makes it easier to see what the equity percentage is.

As an example if a person has a retirement portfolio of £300,000 and is taking out 3.5% (£10,500) from its growth each year.

The next credit crunch level crash arrives and the VLS100 falls 50% and VLS60 falls 25% and both stay down for two years, during those two years the person still takes out £10,500 a year.

VLS100 has fallen 50% in the crash to £150,000. Withdrawing £10,500 for two years takes away £21,000 from the capital leaving £129,000,

VLS60 only falls 25% in the crash to £225,000, so the same £21,000 withdrawal only takes the capital down to £204,000.

The VLS100 recovers its dropped 50% so goes back up to £258,000, the VLS60 recovers its 25% drop back up to £272,000.

The VLS100 lost 14% of it’s capital whereas VLS60 only lost 9.3% and is now £14,000 better off than VLS100, the question is will the likely higher returns of VLS100 in-between crashes more than make up for that 4.7% £14,000 difference over a period of 30 years, If I’m reading the article linked in my original post correctly the author is suggesting it’s very likely it will unless there are crashes a lot longer or more frequently than there have been historically.

masonic

David_66 wrote: »

The VLS100 lost 14% of it’s capital whereas VLS60 only lost 9.3% and is now £14,000 better off than VLS100, the question is will the likely higher returns of VLS100 in-between crashes more than make up for that 4.7% £14,000 difference over a period of 30 years, If I’m reading the article linked in my original post correctly the author is suggesting it’s very likely it will unless there are crashes a lot longer or more frequently than there have been historically.

Your other assumption is that a global fund will have the same (or better) performance in GBP after UK inflation as a US tracker in USD after US inflation. I don't think that assumption is valid.