Diminishing returns on a private pension

LucyTheWestie

dunstonh said:

For example, the average family will have little money left for their future, once they have paid for the things they need today. 

But a good chunk of them will spend money on things they do not need to keep up with the Jones.   Some spend more money on a mobile phone each month than they do their pension.   They buy more x-box games or eat out constantly or change their BMW every 2-3 years.   Then claim they couldn't afford to save for retirement.

I am not sure if failure to plan or failure in expectation is fair.  In many cases, being unable to prepare for the future is probably more likely.

It very often is a failure to plan.    Or a failure to keep under review.    You often see cases like someone who started paying £30pm in 1988.    That was a good contribution back then.   However, 30 years later, they are still paying £30pm and never increased it.  That is a failure.

.... in 1990 struggling to pay their mortgage, as the rates go off the scale.... or pay is reduced because they are forced to take a lower paid job..... or the divorce......the repairs to the car (that was hit by the BMW).... the list of essential bills goes on.   Paying a small amount into a pension, which you can't access for another 30 years becomes the straw that breaks the camel's back.
Not everyone chooses to keep up with the Jones family, have tattoos, smoke, drink, gamble or go to Benidorm every summer.     Some of us have simple modest lives.   
I have no interest in politics, but feel my generation has been stuffed by the various governments who have shaped our lives.    The state can't afford or will not pay for your care at the end of your working life, where you have religiously been paying your taxes from day one, yet you are expected to fund your retirement, from a small pot of money,  which is constantly being stretched to its limits.  There are not many businesses who say, "lets charge our customers the smallest amount possible."  
I get distressed when I see arrogant pseudo middle class bullies abuse the people around them who have those low paid jobs that are critical to everyday life.   I have been lucky in my life.... others have been less fortunate through no fault of their own.
I know many elderly people who have been prudent and saved all their working lives struggling to survive - bus drivers, nurses, farm workers, cleaners.  Too little money left to live on, too much saved so they have no state aid.
.... rant over!  #justsaying
 

[Deleted User]

AnotherJoe said:

Deleted_User said:

BritishInvestor said:

Prism said:

Deleted_User said:

dunstonh said:

I have seen the stress and worry of a retired relative, as they watched their investments fail. 

Investments in the mainstream do not fail.     That is a generalistic statement with caveats but it is extremely rare for mainstream stuff to go wrong.   And where it has done, it is in areas where you would only typically have a limited amount allocated.

If he lost money due to failure then its likely he went into extremely high risk unregulated investments away from the mainstream.   e.g. a cold caller scammer.          Greed is a common factor with those. Along with naivety.

We have to define “failure”. I define it as retiring and dying poor. And categorical statements like the one above are very wrong; demonstrate fundamental lack of understanding of investment risks. 

Here is a simple test for a mainstream Canadian investor who retired with  $1M in the year 2000. The portfolio value has been tracked  for over a decade. The products used were standard 20 years ago. There are 4 portfolios with various asset allocations. Right now all of them have a chance of lasting for the total of 30 years, but the all equity portfolio came close to failure early on and would have been nerve breaking to have. Might still fail, as of Jan 1st our retiree is left with only 500k. Thats not that different from the value of this portfolio in 2008. Never fully recovered once depleted early on in the retirement. The “Growth” portfolio with some bonds isn’t doing much better. 

https://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=108990&hilit=2000+retiree

I would see it as encouraging that someone who retired at one of the worst times in recent history and used a now out dated withdrawal rate has still managed to likely not run out until year 20+. A small adjustment to the withdrawal rate calculation is probably all that would have been needed. In those early years it there is more chance of being able to top up any income shortfall with a bit of part time income.

I think the data in the link would need further investigation as retiring in 2000 from a UK perspective with a 4% withdrawal rate from a global 60/40 portfolio gives me much more positive numbers.

In 2000 you could get 2.4 CAD for 1 GBP.  Today its 1.7.  That’s a 30% difference right there as the pound got a lot cheaper. 

Balanced (60/40) portfolio did better than the equity and aggressive portfolios I quoted. 

Thats irrelevant to a Canadian retiring in Canada which was your scare story. 

 I will type slower for you.
1. A Canadian year 2000 retiree with high proportion of equities struggled. Badly. But may still pull through regardless. Its a hypothetical example based on actual returns tracked for many years.  Those who retired in the same year with fixed income did a lot better. 
2. This is relevant to someone thinking of retiring with a mortgage. Thats the opposite of having fixed income. Thats leverage. Someone leveraged who retired in 2000 in Canada would have been even worse off. Does not mean bad things will happen. Means it is plausible.
3. Prism (correctly) stated that a British Y2K retiree with a balanced portfolio did a lot better than my Canadian example. 

4. I explained that there are two reasons for this difference in fortunes between hypothetical British and Canadian investors in our examples: asset allocation and the exchange rate.    To put it simply, world stocks returned a lot more over 20 years if you count in GBP than in most other currencies. Thats because the pound has been so weak against most currencies.  If you count in CAD, the trends in exchange rates were not as helpful. 

5. We dont know if the pound will continue its downward spiral or strengthen against other currencies in the next 20 years. Currency trends have helped them but could well work against British investors in the next little while. 

6. I dont think retiring with a mortgage is a great idea. Could work but the risks are high. 

Please try to read and follow the plot before commenting. 

[Deleted User]

Thrugelmir said:

LucyTheWestie said:

.....UK interest rates are at a 325yr historic low.     

Which forces investors to take on increasing higher levels of risk to have any hope of generating a decent return. 

Nominal interest rates are not meaningful in this context. Real interest rates (accounting for inflation) are not particularly low by historic standards. They have often been negative in the past. 

Don’t agree that fixed income has no hope of generating a decent return. 

AnotherJoe

Deleted_User said:

AnotherJoe said:

Deleted_User said:

BritishInvestor said:

Prism said:

Deleted_User said:

dunstonh said:

I have seen the stress and worry of a retired relative, as they watched their investments fail. 

Investments in the mainstream do not fail.     That is a generalistic statement with caveats but it is extremely rare for mainstream stuff to go wrong.   And where it has done, it is in areas where you would only typically have a limited amount allocated.

If he lost money due to failure then its likely he went into extremely high risk unregulated investments away from the mainstream.   e.g. a cold caller scammer.          Greed is a common factor with those. Along with naivety.

We have to define “failure”. I define it as retiring and dying poor. And categorical statements like the one above are very wrong; demonstrate fundamental lack of understanding of investment risks. 

Here is a simple test for a mainstream Canadian investor who retired with  $1M in the year 2000. The portfolio value has been tracked  for over a decade. The products used were standard 20 years ago. There are 4 portfolios with various asset allocations. Right now all of them have a chance of lasting for the total of 30 years, but the all equity portfolio came close to failure early on and would have been nerve breaking to have. Might still fail, as of Jan 1st our retiree is left with only 500k. Thats not that different from the value of this portfolio in 2008. Never fully recovered once depleted early on in the retirement. The “Growth” portfolio with some bonds isn’t doing much better. 

https://www.financialwisdomforum.org/forum/viewtopic.php?f=30&t=108990&hilit=2000+retiree

I would see it as encouraging that someone who retired at one of the worst times in recent history and used a now out dated withdrawal rate has still managed to likely not run out until year 20+. A small adjustment to the withdrawal rate calculation is probably all that would have been needed. In those early years it there is more chance of being able to top up any income shortfall with a bit of part time income.

I think the data in the link would need further investigation as retiring in 2000 from a UK perspective with a 4% withdrawal rate from a global 60/40 portfolio gives me much more positive numbers.

In 2000 you could get 2.4 CAD for 1 GBP.  Today its 1.7.  That’s a 30% difference right there as the pound got a lot cheaper. 

Balanced (60/40) portfolio did better than the equity and aggressive portfolios I quoted. 

Thats irrelevant to a Canadian retiring in Canada which was your scare story. 

 I will type slower for you.
1. A Canadian year 2000 retiree with high proportion of equities struggled. Badly. But may still pull through regardless. Its a hypothetical example based on actual returns tracked for many years.  Those who retired in the same year with fixed income did a lot better.

Why? If the Canadian Dollar fell and their equities were invested globally they should have been fine. Only if they were mostly invested in Canadain stocsk woudl it have been an issue.

Also, depends what their starting "fixed income" was whether it was better

2. This is relevant to someone thinking of retiring with a mortgage. Thats the opposite of having fixed income. Thats leverage. Someone leveraged who retired in 2000 in Canada would have been even worse off. Does not mean bad things will happen. Means it is plausible.

Yes, itsa fair point its better not to reture with a mortgage. But its also better not to lose 30-40% in an effort to do that.

3. Prism (correctly) stated that a British Y2K retiree with a balanced portfolio did a lot better than my Canadian example.

I dont know what a "balanced" portfolio was, if its mostly UK Id say that not balanced.

4. I explained that there are two reasons for this difference in fortunes between hypothetical British and Canadian investors in our examples: asset allocation and the exchange rate.    To put it simply, world stocks returned a lot more over 20 years if you count in GBP than in most other currencies. Thats because the pound has been so weak against most currencies.  If you count in CAD, the trends in exchange rates were not as helpful.

From what i'm reading the CAD has been falling for 15 years. isnt that better if you have overseas investments?

5. We dont know if the pound will continue its downward spiral or strengthen against other currencies in the next 20 years. Currency trends have helped them but could well work against British investors in the next little while.

I think it doesnt matter. If the UK economy does well, that means the global economy is as well. So your stocks will rise, slightly mitigated by a rise in Sterling, but then again if you have FTSE100 or AS, a rise in the £ will lower their prices anyway

6. I dont think retiring with a mortgage is a great idea. Could work but the risks are high.

Yes but the OP was planning to do that by losing 30-40% in tax to get to that position.And they coudl have arranged to pay their mortgage down fully well before retirement without losing anything tax.

Please try to read and follow the plot before commenting. 

Some text to allow this response to go

[Deleted User]

“Why? If the Canadian Dollar fell and their equities were invested globally they should have been fine. Only if they were mostly invested in Canadain stocsk woudl it have been an issue. 

Also, depends what their starting "fixed income" was whether it was better”

No. Firstly, its an actual Y2K scenario. There is no “if”. Canadian dollar did not fall. Canadian Y2K equity invested retirees have struggled. 

If you read what I said and the link, you would find out that those with fixed income did a lot better. The point is to illustrate the need for asset diversification. Nu? 

[Deleted User]

“I dont know what a "balanced" portfolio was, if its mostly UK Id say that not balanced.”

A balanced portfolio is diversified between asset classes, typically holding 60% equities and 40% fixed income. As is explained above. 

[Deleted User]

From what i'm reading the CAD has been falling for 15 years. isnt that better if you have overseas investments?

Read again. Your information is wrong. 

GunJack

6. I dont think retiring with a mortgage is a great idea. Could work but the risks are high

This is the crucial point for IMHO, the vast majority....it means you need many £k's less income in retirement to be comfortable, and in the vast majority of cases will not become homeless.... 

bowlhead99

AnotherJoe said:

Deleted_User said:

AnotherJoe said:

Deleted_User said:
n 2000 you could get 2.4 CAD for 1 GBP.  Today its 1.7.  That’s a 30% difference right there as the pound got a lot cheaper. 

Balanced (60/40) portfolio did better than the equity and aggressive portfolios I quoted. 

Thats irrelevant to a Canadian retiring in Canada which was your scare story. 

 I will type slower for you.
1. A Canadian year 2000 retiree with high proportion of equities struggled. Badly. But may still pull through regardless. Its a hypothetical example based on actual returns tracked for many years.  Those who retired in the same year with fixed income did a lot better. 

Why? If the Canadian Dollar fell and their equities were invested globally they should have been fine. Only if they were mostly invested in Canadain stocsk woudl it have been an issue. 

Well, you have it exactly backwards, because the Canadian Dollar didn't fall, it was the other way around (as he said, a pound sterling now buys 1.7 CADs instead of 2.4 CADs, so it is the pound that has fallen).

We know from other threads that you are not a fan of having excessive home bias in a portfolio, and you note that a 'mostly UK' portfolio is not a balanced one. As Canada has only 0.5% of the world's population while Canadian-listed equities are currently below 3% of the FTSE global all cap, it stands to reason that a 'mostly Canada' portfolio would not be a balanced one, even if it is balanced between equities and fixed income.   So you would think it quite usual that most of the equities in a Canadian retiree's portfolio would have been ex-Canada, yes?

In 2000 if you were a Canadian buying a portfolio of global stocks, every US Dollar of assets in your portfolio was worth CAD 1.45-1.50 and every GBP in your portfolio was worth CAD 2.25-2.40.   Today, every USD in your portfolio is only worth CAD 1.35 and every GBP is only worth CAD 1.70.   The problem as a Canadian is, your investment portfolio is now worth a lot fewer CADs, yes?

So, the idea about fx rates that: "that's irrelevant to a Canadian retiring in Canada which was your scare story", seems to be a fundamental misunderstanding on your part.  It is not difficult to see why an equities crash in the early 2000s as money started to be withdrawn from the portfolio, coupled with the  general weakening of non-canadian asset values when measured in canadian money, would pose a challenge to someone drawing canadian dollars out to pay for his canadian retirement living.

As we can see that the strengthening of the Canadian currency provided a headwind to a Cnadian investor with an international equities-heavy portfolio when retiring at time of relatively high asset values, we can understand why that cohort of retirees felt it was a bit touch and go for a while and have drawn down their portfolio a lot more than they had hoped.   

We could draw an analogy with current international equity markets being relatively high and GBP being relatively weak by historic standards, and ponder what might happen to currently-retiring UK people who are too gung-ho with their international equities allocations. Perhaps they will face some of the same issues as felt by the 2000-retirees in Canada, so Mordko's perspective on sequence of returns risk, fx rate risk etc is worth considering for those who have perhaps not considered it before.

83705628

This is an interesting debate that belongs in its own thread 😊