Is guaranteed retirement income a fixed interest asset?

[Deleted User]

In a word, “yes”. DB pension is a type of fixed income, which allows us to have a very high stock-market allocation.

More specifically, I consider DB income as an inflation linked annuity (for the portion that is inflation linked).

Annuities will play a different role in our retirement strategy compared to bonds. They are to deal with the longevity risk, aka risks of

a) outliving your money or
b) making poor financial decisions which people are prone to do after a certain age.

The decision to delay our state pensions (or not) will be taken by simply comparing the total income lost per year of delay vs the cost of an annuity for the added amount the state pension would provide. Usually it’s worth delaying, which means one can actually have a wealthier retirement.

bostonerimus

Deleted_User wrote: »

In a word, “yes”. DB pension is a type of fixed income, which allows us to have a very high stock-market allocation.

More specifically, I consider DB income as an inflation linked annuity (for the portion that is inflation linked).

Annuities will play a different role in our retirement strategy compared to bonds. They are to deal with the longevity risk, aka risks of

a) outliving your money or
b) making poor financial decisions which people are prone to do after a certain age.

The decision to delay our state pensions (or not) will be taken by simply comparing the total income lost per year of delay vs the cost of an annuity for the added amount the state pension would provide. Usually it’s worth delaying, which means one can actually have a wealthier retirement.

Delaying state pensions is a decision that requires that thorniest of estimations ie when do you expect to die. It will work out well for those that live longer than average, but there will be losers too. Of course maybe the extra guaranteed income for a few years later in life is worth it to some people, it's a very personal decision.

Thrugelmir

Audaxer wrote: »

I agree, but some people could also take the opposite view that if all income required is covered by guaranteed income, there is no need to take any unnecessary risk with other savings or investments.

All investments come with risk of one kind or another. Savings at the current time will suffer from the compound ravages of inflation. Taking a risk is neccesary to obtain a return. Having a secure guaranteed income takes away the timing element i.e. when to cash in. Also one can take a longer term approach with holdings.

[Deleted User]

bostonerimus wrote: »

Delaying state pensions is a decision that requires that thorniest of estimations ie when do you expect to die. It will work out well for those that live longer than average, but there will be losers too. Of course maybe the extra guaranteed income for a few years later in life is worth it to some people, it's a very personal decision.

Not how I look at it. Longevity is a probability; from the financial point of view living to a hundred is a risk. I don’t care all that much about the risk of dying early and not getting my money’s worth from an annuity. I do care about the risk of dying in poverty.

itwasntme001

A few years ago i got my Dad to take out a 10% GAR annuity from part of his pension that allowed him to do so. At the same time i got him to increase equity exposure in his ISA to more than offset the reduction that came from buying the annuity. He has rental income and state pension for both my parents in a couple of years so together with the annuity my parents have enough income from these sources. Hence the increase in equity exposure.

So makes total sense.

bostonerimus

Deleted_User wrote: »

Not how I look at it. Longevity is a probability; from the financial point of view living to a hundred is a risk. I don’t care all that much about the risk of dying early and not getting my money’s worth from an annuity. I do care about the risk of dying in poverty.

Yes, I agree, always be optimistic in your longevity planning, unless there's a definite medical reason to be pessimistic.

westv

The only problem with state pension deferral is that it's not possible to get surviving spouse benefits.

DairyQueen

bostonerimus wrote: »

You should take a holistic approach to retirement planning. That's what Wade Pfau and co-authors are doing in the paper. I have rental and pension income to cover my retirement spending and so I have a 75% equity allocation with the rest of my investments and plan to let that percentage increase as I get older and state pensions start.

As you have income covered why not go 100% equities now? Is the bond allocation a slight hedge against the (not guaranteed) BTL income?

bostonerimus wrote: »

The paper suggests a common US strategy and that is to delay taking the US equivalent of the State Pension as long as possible so that you can get a higher amount after age 70. UK retirees can also delay their state pension to get a larger amount, but you obviously need a way to fund the "gap years". I've done the calculations for delaying US state pension and taking it at age 65 vs age 70 I will have to live past age 83 for it to pay off, but there might be utility in just having the larger monthly payout for many people.

Yes, UK deferral of SP incurs 5.9% each year but it's much less generous now than under the oSP. I'm not sure of the payback in years but I'm sure someone more knowledgable can advise.

I was surprised that some types of US pensions dictate the min withdrawal rate each year after age 70. Any idea why?

DairyQueen

Apodemus wrote: »

Makes sense to me! I should just about cover my minimum retirement needs from DB pension, State Pension and a drawdown strategy on my DC pension, so I am not looking to de-risk my other investments as much as I would if I was totally dependent on them for basic living costs.

Agree, but how do you determine the asset allocation in this scenario?

DairyQueen

Audaxer wrote: »

I agree, but some people could also take the opposite view that if all income required is covered by guaranteed income, there is no need to take any unnecessary risk with other savings or investments.

But surely the risk is academic in this scenario. Why accept lower long-term returns if you don't have to. In the accumulation phase with <10 years to retirement I was 100% equities and slept perfectly well. If you have sufficient income to meet your needs and wants, and unless you wish to ring fence a %age as a legacy or for, say, care home fees, why bother de-risking?