Investing for Decumulation - Recommended Reading

BritishInvestor

Deleted_User said:

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. 

Yes, agreed on diversification.

Audaxer

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

I would say you have "won the game" or definitely have enough to retire comfortably, if you have a large enough portfolio where say a 2% withdrawal rate is all you need to fund a comfortable retirement. I'm not sure of the percentage success rate, but I would think in that case you would be very unlikely to run out of money, even with a particularly bad sequence of returns.

kinger101

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. 

For example at 58 you may have had a 95% chance of a successful retirement (based on historical data) without having to make any spending adjustments given your current portfolio*

Fixed that one for you.

BritishInvestor

kinger101 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. 

For example at 58 you may have had a 95% chance of a successful retirement (based on historical data) without having to make any spending adjustments given your current portfolio*

Fixed that one for you.

Fixed what?

Thrugelmir

BP became the 50th FTSE 100 company today to either cut or cancel their dividend. Not just a question of waiting for an asteroid to cause a big bang.  Attrittion can equally be a problem. Though tends to get ignored (in the short term) if the bigger picture still looks rosy.
As a balance. Worth pointing out that 367 constituents of the S&P 500 are beneath their January 1st prices still.  Hope is concentrated into a concentrated group of stocks. 

kinger101

BritishInvestor said:

kinger101 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. 

For example at 58 you may have had a 95% chance of a successful retirement (based on historical data) without having to make any spending adjustments given your current portfolio*

Fixed that one for you.

Fixed what?

I changed the tense by inserting had.  

michaels

Audaxer 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

I would say you have "won the game" or definitely have enough to retire comfortably, if you have a large enough portfolio where say a 2% withdrawal rate is all you need to fund a comfortable retirement. I'm not sure of the percentage success rate, but I would think in that case you would be very unlikely to run out of money, even with a particularly bad sequence of returns.

Assuming you enjoyed what you were doing whilst accumulating as you did it for many more years than you needed to!

Audaxer

michaels said:

Audaxer 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

I would say you have "won the game" or definitely have enough to retire comfortably, if you have a large enough portfolio where say a 2% withdrawal rate is all you need to fund a comfortable retirement. I'm not sure of the percentage success rate, but I would think in that case you would be very unlikely to run out of money, even with a particularly bad sequence of returns.

Assuming you enjoyed what you were doing whilst accumulating as you did it for many more years than you needed to!

I didn't say that I was in that position. In response to a previous post, I was trying to give an example of when someone would have as they said "won the game", i.e. had accumulated enough so that they had virtually no chance of running out of money. 

Mistermeaner

Great thread really interesting reading 
Is a possible 'middle of the road' strategy:

 to calculate your minimal basic income covering sustenance (e.g. Basic food, utilities etc) then cash enough of your pot in via an annuity to provide that amount on an inflation linked basis 

With that covered you then leave the rest of the pot invested in equities and withdraw 2-5% per year depending on performance as your 'luxuries' pot to pay for sky tv , car , holidays etc 

(Assuming mortgage free)

Obviously determining the right sum for the annuity payment will be key but will give a good balance between risk of destitution while allowing for a bit of life 

Age timing the annuity would also be interesting 

BritishInvestor

Mistermeaner said:

Great thread really interesting reading 
Is a possible 'middle of the road' strategy:

 to calculate your minimal basic income covering sustenance (e.g. Basic food, utilities etc) then cash enough of your pot in via an annuity to provide that amount on an inflation linked basis 

With that covered you then leave the rest of the pot invested in equities and withdraw 2-5% per year depending on performance as your 'luxuries' pot to pay for sky tv , car , holidays etc 

(Assuming mortgage free)

Obviously determining the right sum for the annuity payment will be key but will give a good balance between risk of destitution while allowing for a bit of life 

Age timing the annuity would also be interesting 

Yes, that approach is not uncommon and as you say, timing the annuity is interesting
Case study is worth a read.
https://www.timelineapp.co/blog/revisiting-capacity-for-loss-in-retirement/
As an aside, this is worth a listen
 https://podcasts.apple.com/us/podcast/jonathan-guyton-what-crisis-means-for-retirement-planning/id1462214964?i=1000478317020