Investing for Decumulation - Recommended Reading

westv

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

Historical data shows that when real interest rates are low. Returns on both equities and bonds tend to be lower rather than higher. 

But don't forget we aren't necessarily interested in whether returns are lower rather than higher, just not that they are outside the boundaries we have made our assumptions on, the lower boundary which has contained some pretty challenging times.  

There's no historical precedent for the unchartered waters we find ourselves in today. 

You could say that about any period of uncertainly as no two are the same.

I wouldn't regard now as a period of uncertainty. As they are certainies. Given the high levels of indebtedness that exist now not pleasant ones. 

There is uncertainly as to how bad things will/could get and how quickly they will recover - which I guess is similar to previous uncertain times..

Which uncertain time are you making direct comparison too? 

Any, unless you know of one where we knew beforehand exactly how things would be and the precise recovery.

Any? Then your lifetime experiences must be limited to date. You haven't lived yet. You'll be somewhat wiser as a result. 

That's not really an answer is it though.
 I'll ask again, name me one period of uncertainly in the past where we knew beforehand exactly how things would be and the exact recovery path. 

I was questioning you when i said Any? 

My current thoughts are more focussed on the breath and depth of the current downturn. 

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

Historical data shows that when real interest rates are low. Returns on both equities and bonds tend to be lower rather than higher. 

But don't forget we aren't necessarily interested in whether returns are lower rather than higher, just not that they are outside the boundaries we have made our assumptions on, the lower boundary which has contained some pretty challenging times.  

There's no historical precedent for the unchartered waters we find ourselves in today. 

You could say that about any period of uncertainly as no two are the same.

I wouldn't regard now as a period of uncertainty. As they are certainies. Given the high levels of indebtedness that exist now not pleasant ones. 

There is uncertainly as to how bad things will/could get and how quickly they will recover - which I guess is similar to previous uncertain times..

Which uncertain time are you making direct comparison too? 

Any, unless you know of one where we knew beforehand exactly how things would be and the precise recovery.

Any? Then your lifetime experiences must be limited to date. You haven't lived yet. You'll be somewhat wiser as a result. 

That's not really an answer is it though.
 I'll ask again, name me one period of uncertainly in the past where we knew beforehand exactly how things would be and the exact recovery path. 

I was questioning you when i said Any? 

My current thoughts are more focussed on the breath and depth of the current downturn. 

Well yes, any.
Pick ANY previous period of uncertainty and you won't find ANY where we knew where would would get to and how we'd get back.
So my earlier statement "There is uncertainly as to how bad things will/could get and how quickly they will recover - which I guess is similar to previous uncertain times." is correct.

coyrls

TBC15 said:

coyrls said:

TBC15 said:

BritishInvestor said:

Audaxer said:

BritishInvestor said:

Audaxer said:

TBC15 said:

I’ve been retired for just over a year and didn’t change my investment strategy ( 100% market no bonds) coming up to retirement apart from building up a cash buffer of about 4 yrs of cash.

The remarks of BritishInvestor gave me cause to revisit the 4yr cash buffer comfort blanket part of my plan. I’m now reasonably convinced my supper king size is a bit over the top and a double (1-2ys expenditure) would be more appropriate.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

I think it's important to clarify what "high risk" is. For some, it's not taking enough equity exposure and running out of money. For others, they see high risk as their portfolio falling too far during periods of turbulence.
Regarding a poor series of returns, we already have historical returns and can perform this analysis, unless you are suggesting modelling something worse than we have seen previously/have data for?

Yes, you could run out of money if you don't have enough equity exposure to fund your retirement, but I think you could also run out of money with too much equity exposure and a bad sequence of returns when you are having to sell capital for income. Historically I'm not sure if 100% equities has done any better throughout a long retirement than having a more balanced portfolio including a percentage of bonds and other defensive assets.

If someone has enough other forms of secure income and/or built up a larger portfolio than they will need to fund their retirement, they might decide to go 100% equities, which is fine and not necessarily "high risk" in that they will still not run out of money. However in these circumstances some might take the view that going 100% equities is just not necessary for them, and they would rather have more available cash for spending when young enough to enjoy it.   

The major issue for me with someone with 100% equity exposure is investor, not investment behaviour. If you look at historical drawdowns I'm sure that there will have been people that couldn't stomach multi-year equity drawdowns.


If someone has a larger portfolio than required, surely they will take less equity exposure - I don't understand why you would want unnecessary volatility (as you point out in your last sentence)?

If you have got enjoyment out of the thrill of the chase over a considerable no of years and find yourself comfortable at retirement why not carry on?

Because the chase is over?

Buy your annuity pick your plot and wait for nature to take it’s course.Well that was fun.

There's more fun to be had than just watching your investments grow (or shrink).

Thrugelmir

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

Historical data shows that when real interest rates are low. Returns on both equities and bonds tend to be lower rather than higher. 

But don't forget we aren't necessarily interested in whether returns are lower rather than higher, just not that they are outside the boundaries we have made our assumptions on, the lower boundary which has contained some pretty challenging times.  

There's no historical precedent for the unchartered waters we find ourselves in today. 

You could say that about any period of uncertainly as no two are the same.

I wouldn't regard now as a period of uncertainty. As they are certainies. Given the high levels of indebtedness that exist now not pleasant ones. 

There is uncertainly as to how bad things will/could get and how quickly they will recover - which I guess is similar to previous uncertain times..

Which uncertain time are you making direct comparison too? 

Any, unless you know of one where we knew beforehand exactly how things would be and the precise recovery.

Any? Then your lifetime experiences must be limited to date. You haven't lived yet. You'll be somewhat wiser as a result. 

That's not really an answer is it though.
 I'll ask again, name me one period of uncertainly in the past where we knew beforehand exactly how things would be and the exact recovery path. 

I was questioning you when i said Any? 

My current thoughts are more focussed on the breath and depth of the current downturn. 

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

westv said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

Historical data shows that when real interest rates are low. Returns on both equities and bonds tend to be lower rather than higher. 

But don't forget we aren't necessarily interested in whether returns are lower rather than higher, just not that they are outside the boundaries we have made our assumptions on, the lower boundary which has contained some pretty challenging times.  

There's no historical precedent for the unchartered waters we find ourselves in today. 

You could say that about any period of uncertainly as no two are the same.

I wouldn't regard now as a period of uncertainty. As they are certainies. Given the high levels of indebtedness that exist now not pleasant ones. 

There is uncertainly as to how bad things will/could get and how quickly they will recover - which I guess is similar to previous uncertain times..

Which uncertain time are you making direct comparison too? 

Any, unless you know of one where we knew beforehand exactly how things would be and the precise recovery.

Any? Then your lifetime experiences must be limited to date. You haven't lived yet. You'll be somewhat wiser as a result. 

That's not really an answer is it though.
 I'll ask again, name me one period of uncertainly in the past where we knew beforehand exactly how things would be and the exact recovery path. 

I was questioning you when i said Any? 

My current thoughts are more focussed on the breath and depth of the current downturn. 

Well yes, any.
Pick ANY previous period of uncertainty and you won't find ANY where we knew where would would get to and how we'd get back.
So my earlier statement "There is uncertainly as to how bad things will/could get and how quickly they will recover - which I guess is similar to previous uncertain times." is correct.

Makes me wonder what your decision process is that you use in selecting your investments. 

TBC15

coyrls said:

TBC15 said:

coyrls said:

TBC15 said:

BritishInvestor said:

Audaxer said:

BritishInvestor said:

Audaxer said:

TBC15 said:

I’ve been retired for just over a year and didn’t change my investment strategy ( 100% market no bonds) coming up to retirement apart from building up a cash buffer of about 4 yrs of cash.

The remarks of BritishInvestor gave me cause to revisit the 4yr cash buffer comfort blanket part of my plan. I’m now reasonably convinced my supper king size is a bit over the top and a double (1-2ys expenditure) would be more appropriate.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

I think it's important to clarify what "high risk" is. For some, it's not taking enough equity exposure and running out of money. For others, they see high risk as their portfolio falling too far during periods of turbulence.
Regarding a poor series of returns, we already have historical returns and can perform this analysis, unless you are suggesting modelling something worse than we have seen previously/have data for?

Yes, you could run out of money if you don't have enough equity exposure to fund your retirement, but I think you could also run out of money with too much equity exposure and a bad sequence of returns when you are having to sell capital for income. Historically I'm not sure if 100% equities has done any better throughout a long retirement than having a more balanced portfolio including a percentage of bonds and other defensive assets.

If someone has enough other forms of secure income and/or built up a larger portfolio than they will need to fund their retirement, they might decide to go 100% equities, which is fine and not necessarily "high risk" in that they will still not run out of money. However in these circumstances some might take the view that going 100% equities is just not necessary for them, and they would rather have more available cash for spending when young enough to enjoy it.   

The major issue for me with someone with 100% equity exposure is investor, not investment behaviour. If you look at historical drawdowns I'm sure that there will have been people that couldn't stomach multi-year equity drawdowns.


If someone has a larger portfolio than required, surely they will take less equity exposure - I don't understand why you would want unnecessary volatility (as you point out in your last sentence)?

If you have got enjoyment out of the thrill of the chase over a considerable no of years and find yourself comfortable at retirement why not carry on?

Because the chase is over?

Buy your annuity pick your plot and wait for nature to take it’s course.Well that was fun.

There's more fun to be had than just watching your investments grow (or shrink).

There certainly is and how to get all the high end stuff.

[Deleted User]

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

TBC15 said:

Audaxer said:

TBC15 said:

I’ve been retired for just over a year and didn’t change my investment strategy ( 100% market no bonds) coming up to retirement apart from building up a cash buffer of about 4 yrs of cash.

The remarks of BritishInvestor gave me cause to revisit the 4yr cash buffer comfort blanket part of my plan. I’m now reasonably convinced my supper king size is a bit over the top and a double (1-2ys expenditure) would be more appropriate.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

Keep in mind that simulations are based on a ~100 year dataset (usually), that the monetary system is very different now from what it has been for most of the dataset and that you might need your pot for the next 40. That is a long time and you can easily see events happening that are different from the preceding 100 years. 

I am not saying that simulations are completely useless but they give people false confidence. Perhaps the future will be exactly like the past but the small chance that it won’t is exactly what a retiree needs to plan for. 

I agree with this, and would go further.  Data on the past 100+ years is the best we have but to treat it as any more than a useful random set of potential test problems of the type investors may have to face is assigning it more relevence than is justified.  The chance that the future is not like the past isnt small, it's a virtual certainty. We hopefully are not going to have 2 world wars again and if we are there may be little point in planning to survive them with our wealth intact.  Does the rise of automation and AI really correspond in some useful way to the rise of oil? To use historic data to derive meaningful values of % chance of future success is just playing with numbers. 

We have to accept we dont know what the future will bring.  The best we can do is to mitigate against some mainly shorter term eventualities and trust in the long term rise of the global markets.  If we cant do that one can ask whether it is sensible to invest in the first place.

I'm not sure anyone is suggesting the future is like the past. What is suggested as a reasonable starting point is that someone planning for retirement now doesn't have a worse outcome than the worst period over the last 100+ years. Do you think that is unreasonable?

There are many criteria one could use for assessing whether a retirement strategy is sensible, none of which are definitive.  Passing the past history test is just one of these.  If it gives you the confidence to retire then fine, that is the only real purpose of checking. Perhaps, only when it is too late to do much about it will you discover whether that confidence is justified.  To take the results of historical simulations any more seriously than this does not seem justified to me.  In particular worrying about precise failure rates is pointless especially when the failure appears very unlikely.   People are too impressed with numbers and should really think through where they come from before over-relying on them.

The method I used was to create a year by year financial model with parameterised expenditure, % return and %inflation.  One fiddles with the numbers, stress tests the model etc until one has the confidence to jump.  Of course reality has been very different to original plan, but that has not been a problem for 15 years thanks to very cautious assumptions.  The financial model approach makes it easy to adjust the plan in line with actuals, and so one moves forward.

I think we are 90% in agreement. Future market outcomes are by no means certain and that should be emphasised. That said, I think we must retain a sense of optimism/balance and there is always a chance that someone retiring today may have a great outcome

Someone who is in his thirties should be “an optimist” as an investor. He can afford to. His best scenario is a long bear market.  

Someone within 5 years of retirement has to plan for different scenarios, including with low likelihood. By that point you should have won the game, so why keep playing? Stocks are a good asset class, they handle certain risks well.  Not all risks by any means. Like deflation is deadly to stocks. And quite possible. 

BritishInvestor

Deleted_User said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

TBC15 said:

Audaxer said:

TBC15 said:

I’ve been retired for just over a year and didn’t change my investment strategy ( 100% market no bonds) coming up to retirement apart from building up a cash buffer of about 4 yrs of cash.

The remarks of BritishInvestor gave me cause to revisit the 4yr cash buffer comfort blanket part of my plan. I’m now reasonably convinced my supper king size is a bit over the top and a double (1-2ys expenditure) would be more appropriate.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

Keep in mind that simulations are based on a ~100 year dataset (usually), that the monetary system is very different now from what it has been for most of the dataset and that you might need your pot for the next 40. That is a long time and you can easily see events happening that are different from the preceding 100 years. 

I am not saying that simulations are completely useless but they give people false confidence. Perhaps the future will be exactly like the past but the small chance that it won’t is exactly what a retiree needs to plan for. 

I agree with this, and would go further.  Data on the past 100+ years is the best we have but to treat it as any more than a useful random set of potential test problems of the type investors may have to face is assigning it more relevence than is justified.  The chance that the future is not like the past isnt small, it's a virtual certainty. We hopefully are not going to have 2 world wars again and if we are there may be little point in planning to survive them with our wealth intact.  Does the rise of automation and AI really correspond in some useful way to the rise of oil? To use historic data to derive meaningful values of % chance of future success is just playing with numbers. 

We have to accept we dont know what the future will bring.  The best we can do is to mitigate against some mainly shorter term eventualities and trust in the long term rise of the global markets.  If we cant do that one can ask whether it is sensible to invest in the first place.

I'm not sure anyone is suggesting the future is like the past. What is suggested as a reasonable starting point is that someone planning for retirement now doesn't have a worse outcome than the worst period over the last 100+ years. Do you think that is unreasonable?

There are many criteria one could use for assessing whether a retirement strategy is sensible, none of which are definitive.  Passing the past history test is just one of these.  If it gives you the confidence to retire then fine, that is the only real purpose of checking. Perhaps, only when it is too late to do much about it will you discover whether that confidence is justified.  To take the results of historical simulations any more seriously than this does not seem justified to me.  In particular worrying about precise failure rates is pointless especially when the failure appears very unlikely.   People are too impressed with numbers and should really think through where they come from before over-relying on them.

The method I used was to create a year by year financial model with parameterised expenditure, % return and %inflation.  One fiddles with the numbers, stress tests the model etc until one has the confidence to jump.  Of course reality has been very different to original plan, but that has not been a problem for 15 years thanks to very cautious assumptions.  The financial model approach makes it easy to adjust the plan in line with actuals, and so one moves forward.

I think we are 90% in agreement. Future market outcomes are by no means certain and that should be emphasised. That said, I think we must retain a sense of optimism/balance and there is always a chance that someone retiring today may have a great outcome

Someone who is in his thirties should be “an optimist” as an investor. He can afford to. His best scenario is a long bear market.  

Someone within 5 years of retirement has to plan for different scenarios, including with low likelihood. By that point you should have won the game, so why keep playing? Stocks are a good asset class, they handle certain risks well.  Not all risks by any means. Like deflation is deadly to stocks. And quite possible. 

I think it depends on how you define "won the game" and at what point you say I've accumulated enough given expected spending, longevity etc to be confident enough to stop work.
For example at 58 you may have 95% chance of a successful retirement (based on historical data) without having to make any spending adjustments given your current portfolio*
At 59 the success rate may be 100%. You may have had enough of work and are really keen to finish. Do you keep going another year to build a buffer?

*There is always the option to alter spending patterns along the way if we hit true Armageddon

[Deleted User]

BritishInvestor said:

Deleted_User said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

TBC15 said:

Audaxer said:

TBC15 said:

I’ve been retired for just over a year and didn’t change my investment strategy ( 100% market no bonds) coming up to retirement apart from building up a cash buffer of about 4 yrs of cash.

The remarks of BritishInvestor gave me cause to revisit the 4yr cash buffer comfort blanket part of my plan. I’m now reasonably convinced my supper king size is a bit over the top and a double (1-2ys expenditure) would be more appropriate.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

Keep in mind that simulations are based on a ~100 year dataset (usually), that the monetary system is very different now from what it has been for most of the dataset and that you might need your pot for the next 40. That is a long time and you can easily see events happening that are different from the preceding 100 years. 

I am not saying that simulations are completely useless but they give people false confidence. Perhaps the future will be exactly like the past but the small chance that it won’t is exactly what a retiree needs to plan for. 

I agree with this, and would go further.  Data on the past 100+ years is the best we have but to treat it as any more than a useful random set of potential test problems of the type investors may have to face is assigning it more relevence than is justified.  The chance that the future is not like the past isnt small, it's a virtual certainty. We hopefully are not going to have 2 world wars again and if we are there may be little point in planning to survive them with our wealth intact.  Does the rise of automation and AI really correspond in some useful way to the rise of oil? To use historic data to derive meaningful values of % chance of future success is just playing with numbers. 

We have to accept we dont know what the future will bring.  The best we can do is to mitigate against some mainly shorter term eventualities and trust in the long term rise of the global markets.  If we cant do that one can ask whether it is sensible to invest in the first place.

I'm not sure anyone is suggesting the future is like the past. What is suggested as a reasonable starting point is that someone planning for retirement now doesn't have a worse outcome than the worst period over the last 100+ years. Do you think that is unreasonable?

There are many criteria one could use for assessing whether a retirement strategy is sensible, none of which are definitive.  Passing the past history test is just one of these.  If it gives you the confidence to retire then fine, that is the only real purpose of checking. Perhaps, only when it is too late to do much about it will you discover whether that confidence is justified.  To take the results of historical simulations any more seriously than this does not seem justified to me.  In particular worrying about precise failure rates is pointless especially when the failure appears very unlikely.   People are too impressed with numbers and should really think through where they come from before over-relying on them.

The method I used was to create a year by year financial model with parameterised expenditure, % return and %inflation.  One fiddles with the numbers, stress tests the model etc until one has the confidence to jump.  Of course reality has been very different to original plan, but that has not been a problem for 15 years thanks to very cautious assumptions.  The financial model approach makes it easy to adjust the plan in line with actuals, and so one moves forward.

I think we are 90% in agreement. Future market outcomes are by no means certain and that should be emphasised. That said, I think we must retain a sense of optimism/balance and there is always a chance that someone retiring today may have a great outcome

Someone who is in his thirties should be “an optimist” as an investor. He can afford to. His best scenario is a long bear market.  

Someone within 5 years of retirement has to plan for different scenarios, including with low likelihood. By that point you should have won the game, so why keep playing? Stocks are a good asset class, they handle certain risks well.  Not all risks by any means. Like deflation is deadly to stocks. And quite possible. 

I think it depends on how you define "won the game" and at what point you say I've accumulated enough given expected spending, longevity etc to be confident enough to stop work.
For example at 58 you may have 95% chance of a successful retirement (based on historical data) without having to make any spending adjustments given your current portfolio*
At 59 the success rate may be 100%. You may have had enough of work and are really keen to finish. Do you keep going another year to build a buffer?

*There is always the option to alter spending patterns along the way if we hit true Armageddon

Having to alter your spending isn’t a problem. Running out of money early is. 

Any model which says “100%” of anything is dumb. Sh-t in, sh-t out. 

cfw1994

Deleted_User said:

BritishInvestor said:

Deleted_User said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

TBC15 said:

Audaxer said:

TBC15 said:

I’ve been retired for just over a year and didn’t change my investment strategy ( 100% market no bonds) coming up to retirement apart from building up a cash buffer of about 4 yrs of cash.

The remarks of BritishInvestor gave me cause to revisit the 4yr cash buffer comfort blanket part of my plan. I’m now reasonably convinced my supper king size is a bit over the top and a double (1-2ys expenditure) would be more appropriate.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

Keep in mind that simulations are based on a ~100 year dataset (usually), that the monetary system is very different now from what it has been for most of the dataset and that you might need your pot for the next 40. That is a long time and you can easily see events happening that are different from the preceding 100 years. 

I am not saying that simulations are completely useless but they give people false confidence. Perhaps the future will be exactly like the past but the small chance that it won’t is exactly what a retiree needs to plan for. 

I agree with this, and would go further.  Data on the past 100+ years is the best we have but to treat it as any more than a useful random set of potential test problems of the type investors may have to face is assigning it more relevence than is justified.  The chance that the future is not like the past isnt small, it's a virtual certainty. We hopefully are not going to have 2 world wars again and if we are there may be little point in planning to survive them with our wealth intact.  Does the rise of automation and AI really correspond in some useful way to the rise of oil? To use historic data to derive meaningful values of % chance of future success is just playing with numbers. 

We have to accept we dont know what the future will bring.  The best we can do is to mitigate against some mainly shorter term eventualities and trust in the long term rise of the global markets.  If we cant do that one can ask whether it is sensible to invest in the first place.

I'm not sure anyone is suggesting the future is like the past. What is suggested as a reasonable starting point is that someone planning for retirement now doesn't have a worse outcome than the worst period over the last 100+ years. Do you think that is unreasonable?

There are many criteria one could use for assessing whether a retirement strategy is sensible, none of which are definitive.  Passing the past history test is just one of these.  If it gives you the confidence to retire then fine, that is the only real purpose of checking. Perhaps, only when it is too late to do much about it will you discover whether that confidence is justified.  To take the results of historical simulations any more seriously than this does not seem justified to me.  In particular worrying about precise failure rates is pointless especially when the failure appears very unlikely.   People are too impressed with numbers and should really think through where they come from before over-relying on them.

The method I used was to create a year by year financial model with parameterised expenditure, % return and %inflation.  One fiddles with the numbers, stress tests the model etc until one has the confidence to jump.  Of course reality has been very different to original plan, but that has not been a problem for 15 years thanks to very cautious assumptions.  The financial model approach makes it easy to adjust the plan in line with actuals, and so one moves forward.

I think we are 90% in agreement. Future market outcomes are by no means certain and that should be emphasised. That said, I think we must retain a sense of optimism/balance and there is always a chance that someone retiring today may have a great outcome

Someone who is in his thirties should be “an optimist” as an investor. He can afford to. His best scenario is a long bear market.  

Someone within 5 years of retirement has to plan for different scenarios, including with low likelihood. By that point you should have won the game, so why keep playing? Stocks are a good asset class, they handle certain risks well.  Not all risks by any means. Like deflation is deadly to stocks. And quite possible. 

I think it depends on how you define "won the game" and at what point you say I've accumulated enough given expected spending, longevity etc to be confident enough to stop work.
For example at 58 you may have 95% chance of a successful retirement (based on historical data) without having to make any spending adjustments given your current portfolio*
At 59 the success rate may be 100%. You may have had enough of work and are really keen to finish. Do you keep going another year to build a buffer?

*There is always the option to alter spending patterns along the way if we hit true Armageddon

Having to alter your spending isn’t a problem. Running out of money early is. 

Any model which says “100%” of anything is dumb. Sh-t in, sh-t out. 

& the opportunity-cost downside to the "One More Year" syndrome is massive!!

BritishInvestor

Deleted_User said:

BritishInvestor said:

Deleted_User said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

TBC15 said:

Audaxer said:

TBC15 said:

I’ve been retired for just over a year and didn’t change my investment strategy ( 100% market no bonds) coming up to retirement apart from building up a cash buffer of about 4 yrs of cash.

The remarks of BritishInvestor gave me cause to revisit the 4yr cash buffer comfort blanket part of my plan. I’m now reasonably convinced my supper king size is a bit over the top and a double (1-2ys expenditure) would be more appropriate.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

Keep in mind that simulations are based on a ~100 year dataset (usually), that the monetary system is very different now from what it has been for most of the dataset and that you might need your pot for the next 40. That is a long time and you can easily see events happening that are different from the preceding 100 years. 

I am not saying that simulations are completely useless but they give people false confidence. Perhaps the future will be exactly like the past but the small chance that it won’t is exactly what a retiree needs to plan for. 

I agree with this, and would go further.  Data on the past 100+ years is the best we have but to treat it as any more than a useful random set of potential test problems of the type investors may have to face is assigning it more relevence than is justified.  The chance that the future is not like the past isnt small, it's a virtual certainty. We hopefully are not going to have 2 world wars again and if we are there may be little point in planning to survive them with our wealth intact.  Does the rise of automation and AI really correspond in some useful way to the rise of oil? To use historic data to derive meaningful values of % chance of future success is just playing with numbers. 

We have to accept we dont know what the future will bring.  The best we can do is to mitigate against some mainly shorter term eventualities and trust in the long term rise of the global markets.  If we cant do that one can ask whether it is sensible to invest in the first place.

I'm not sure anyone is suggesting the future is like the past. What is suggested as a reasonable starting point is that someone planning for retirement now doesn't have a worse outcome than the worst period over the last 100+ years. Do you think that is unreasonable?

There are many criteria one could use for assessing whether a retirement strategy is sensible, none of which are definitive.  Passing the past history test is just one of these.  If it gives you the confidence to retire then fine, that is the only real purpose of checking. Perhaps, only when it is too late to do much about it will you discover whether that confidence is justified.  To take the results of historical simulations any more seriously than this does not seem justified to me.  In particular worrying about precise failure rates is pointless especially when the failure appears very unlikely.   People are too impressed with numbers and should really think through where they come from before over-relying on them.

The method I used was to create a year by year financial model with parameterised expenditure, % return and %inflation.  One fiddles with the numbers, stress tests the model etc until one has the confidence to jump.  Of course reality has been very different to original plan, but that has not been a problem for 15 years thanks to very cautious assumptions.  The financial model approach makes it easy to adjust the plan in line with actuals, and so one moves forward.

I think we are 90% in agreement. Future market outcomes are by no means certain and that should be emphasised. That said, I think we must retain a sense of optimism/balance and there is always a chance that someone retiring today may have a great outcome

Someone who is in his thirties should be “an optimist” as an investor. He can afford to. His best scenario is a long bear market.  

Someone within 5 years of retirement has to plan for different scenarios, including with low likelihood. By that point you should have won the game, so why keep playing? Stocks are a good asset class, they handle certain risks well.  Not all risks by any means. Like deflation is deadly to stocks. And quite possible. 

I think it depends on how you define "won the game" and at what point you say I've accumulated enough given expected spending, longevity etc to be confident enough to stop work.
For example at 58 you may have 95% chance of a successful retirement (based on historical data) without having to make any spending adjustments given your current portfolio*
At 59 the success rate may be 100%. You may have had enough of work and are really keen to finish. Do you keep going another year to build a buffer?

*There is always the option to alter spending patterns along the way if we hit true Armageddon

Having to alter your spending isn’t a problem. Running out of money early is. 

Any model which says “100%” of anything is dumb. Sh-t in, sh-t out. 

You would alter your spending to avoid running out of money early. 
I'm not sure a model showing 100% historical success rate is an issue, more the interpretation of it. Does a 100% historical success rate mean 100% success rate in the future? Absolutely not. But where do we draw the line? Carry on working indefinitely in case 1 year after retiring an asteroid hits the earth and investments go to zero? 
If you are getting to that point surely securing a guaranteed income to avoid potential future Armagedons has to be the only option, and hope the firm that is paying your income doesn't go bust?

[Deleted User]

BritishInvestor said:

Deleted_User said:

BritishInvestor said:

Deleted_User said:

BritishInvestor said:

Linton said:

BritishInvestor said:

Linton said:

Deleted_User said:

TBC15 said:

Audaxer said:

TBC15 said:

I’ve been retired for just over a year and didn’t change my investment strategy ( 100% market no bonds) coming up to retirement apart from building up a cash buffer of about 4 yrs of cash.

The remarks of BritishInvestor gave me cause to revisit the 4yr cash buffer comfort blanket part of my plan. I’m now reasonably convinced my supper king size is a bit over the top and a double (1-2ys expenditure) would be more appropriate.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

Keep in mind that simulations are based on a ~100 year dataset (usually), that the monetary system is very different now from what it has been for most of the dataset and that you might need your pot for the next 40. That is a long time and you can easily see events happening that are different from the preceding 100 years. 

I am not saying that simulations are completely useless but they give people false confidence. Perhaps the future will be exactly like the past but the small chance that it won’t is exactly what a retiree needs to plan for. 

I agree with this, and would go further.  Data on the past 100+ years is the best we have but to treat it as any more than a useful random set of potential test problems of the type investors may have to face is assigning it more relevence than is justified.  The chance that the future is not like the past isnt small, it's a virtual certainty. We hopefully are not going to have 2 world wars again and if we are there may be little point in planning to survive them with our wealth intact.  Does the rise of automation and AI really correspond in some useful way to the rise of oil? To use historic data to derive meaningful values of % chance of future success is just playing with numbers. 

We have to accept we dont know what the future will bring.  The best we can do is to mitigate against some mainly shorter term eventualities and trust in the long term rise of the global markets.  If we cant do that one can ask whether it is sensible to invest in the first place.

I'm not sure anyone is suggesting the future is like the past. What is suggested as a reasonable starting point is that someone planning for retirement now doesn't have a worse outcome than the worst period over the last 100+ years. Do you think that is unreasonable?

There are many criteria one could use for assessing whether a retirement strategy is sensible, none of which are definitive.  Passing the past history test is just one of these.  If it gives you the confidence to retire then fine, that is the only real purpose of checking. Perhaps, only when it is too late to do much about it will you discover whether that confidence is justified.  To take the results of historical simulations any more seriously than this does not seem justified to me.  In particular worrying about precise failure rates is pointless especially when the failure appears very unlikely.   People are too impressed with numbers and should really think through where they come from before over-relying on them.

The method I used was to create a year by year financial model with parameterised expenditure, % return and %inflation.  One fiddles with the numbers, stress tests the model etc until one has the confidence to jump.  Of course reality has been very different to original plan, but that has not been a problem for 15 years thanks to very cautious assumptions.  The financial model approach makes it easy to adjust the plan in line with actuals, and so one moves forward.

I think we are 90% in agreement. Future market outcomes are by no means certain and that should be emphasised. That said, I think we must retain a sense of optimism/balance and there is always a chance that someone retiring today may have a great outcome

Someone who is in his thirties should be “an optimist” as an investor. He can afford to. His best scenario is a long bear market.  

Someone within 5 years of retirement has to plan for different scenarios, including with low likelihood. By that point you should have won the game, so why keep playing? Stocks are a good asset class, they handle certain risks well.  Not all risks by any means. Like deflation is deadly to stocks. And quite possible. 

I think it depends on how you define "won the game" and at what point you say I've accumulated enough given expected spending, longevity etc to be confident enough to stop work.
For example at 58 you may have 95% chance of a successful retirement (based on historical data) without having to make any spending adjustments given your current portfolio*
At 59 the success rate may be 100%. You may have had enough of work and are really keen to finish. Do you keep going another year to build a buffer?

*There is always the option to alter spending patterns along the way if we hit true Armageddon

Having to alter your spending isn’t a problem. Running out of money early is. 

Any model which says “100%” of anything is dumb. Sh-t in, sh-t out. 

You would alter your spending to avoid running out of money early. 
I'm not sure a model showing 100% historical success rate is an issue, more the interpretation of it. Does a 100% historical success rate mean 100% success rate in the future? Absolutely not. But where do we draw the line? Carry on working indefinitely in case 1 year after retiring an asteroid hits the earth and investments go to zero? 
If you are getting to that point surely securing a guaranteed income to avoid potential future Armagedons has to be the only option, and hope the firm that is paying your income doesn't go bust?

Asteroid isn’t a problem but there are other events which could be. A company paying your “guaranteed” income going bust is among them.  The answer depends on your age, health and how well off you are and includes the words “asset diversification”.  100% in stocks is rarely the answer for a retiree.