Investing for Decumulation - Recommended Reading

Malthusian

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.

Unless you are retiring quite early (relative to both you and your spouse) the success rate is 100% - at some point in (both) your 60s you would be able to buy an inflation linked annuity from an insurer, and if they went bust you would be compensated 100% by the Government.

You could conjure scenarios where you could be financially ruined (UK Marxist takeover etc) but once you get to that point you are in the zone where 99.999...% is mathematically the same thing as 100%.

Putting all your money into buying an annuity would almost certainly be a terrible idea, but it illustrates the success rate.

Remember that under þe olde 4% safe withdrawal rate, "failure" does not actually mean running out of money and spending the rest of their life eking out State Pension for a real person. It means making some adjustments - reducing income, stopping withdrawals temporarily, cutting back on gifts to children, going back to work, downsizing - that may not be desirable (and should have been avoidable) but are better than blindly continuing to spend money in a death spiral until all your money runs out.

So even fewer people actually run out of money than in the pessimistic outlier situations in SWR academic studies.

[Deleted User]

“you would be able to buy an inflation linked annuity from an insurer, and if they went bust you would be compensated 100% by the Government.”

You might be compensated by the government. If the insurers are going bust, its likely a major event. And its likely more than one. And banks. At that point the government is in financial trouble.  They have a decision to make whether they can afford to keep their promises.

Hasn’t happened yet but we got a warning of what might happen in 2008. It was touch and go after AIG went belly up. 

Linton

Deleted_User said:

“you would be able to buy an inflation linked annuity from an insurer, and if they went bust you would be compensated 100% by the Government.”

You might be compensated by the government. If the insurers are going bust, its likely a major event. And its likely more than one. And banks. At that point the government is in financial trouble.  They have a decision to make whether they can afford to keep their promises.

Hasn’t happened yet but we got a warning of what might happen in 2008. It was touch and go after AIG went belly up. 

 - Pensions in payment are 100% protected by the FSCS.
 - The government can always pay its £ debts and payments to pensioners will surely be pretty high up the list anyway. 

So in this scenario you are effectively talking about global economic collapse and collapse of the UK as an independent nation state.  Yes, such events may make payment of pensions somewhat risky but they surely come into the category of an Armageddon situation when all bets on anything are off.  Each one of us will have to deal with it at the time to the best of our abilities.  It isnt a problem that is soluble by pension strategies.

[Deleted User]

Linton said:

Deleted_User said:

“you would be able to buy an inflation linked annuity from an insurer, and if they went bust you would be compensated 100% by the Government.”

You might be compensated by the government. If the insurers are going bust, its likely a major event. And its likely more than one. And banks. At that point the government is in financial trouble.  They have a decision to make whether they can afford to keep their promises.

Hasn’t happened yet but we got a warning of what might happen in 2008. It was touch and go after AIG went belly up. 

 - Pensions in payment are 100% protected by the FSCS.
 - The government can always pay its £ debts and payments to pensioners will surely be pretty high up the list anyway. 

So in this scenario you are effectively talking about global economic collapse and collapse of the UK as an independent nation state.  Yes, such events may make payment of pensions somewhat risky but they surely come into the category of an Armageddon situation when all bets on anything are off.  Each one of us will have to deal with it at the time to the best of our abilities.  It isnt a problem that is soluble by pension strategies.

Countries can and do lose control over currencies. The government will have to prioritize and obligations to annuity holders might not be a priority. A low probability event, yes. Possible.

Your strategy can deal with this scenario by diversifying rather than putting everything into an annuity. 

mark55man

Malthusian talks about Marxist risks to our pensions.  Can I check does he mean genuine Marxists actually achieving power or does he mean a veiled slur at the Labour party.  Its hard to tell as the two have become so conflated on here, even though they are different almost by definition.  Also to be clear and balance the narrative I'm not sure many economies in Europe have benefited from the consequences of fascist/far right actions in the last 81 years

As Linton says neither of the above is soluble by pension strategies.  I do feel for the OP as I'm not sure his question was ever answered, but its been a fascinating thread

michaels

mark88man said:

Malthusian talks about Marxist risks to our pensions.  Can I check does he mean genuine Marxists actually achieving power or does he mean a veiled slur at the Labour party.  Its hard to tell as the two have become so conflated on here, even though they are different almost by definition.  Also to be clear and balance the narrative I'm not sure many economies in Europe have benefited from the consequences of fascist/far right actions in the last 81 years

As Linton says neither of the above is soluble by pension strategies.  I do feel for the OP as I'm not sure his question was ever answered, but its been a fascinating thread

And yet the last Labour manifesto planned to nationalise the means of production starting with the confiscation of 10% of everyone's' savings - but no need to worry about Marxism.....

cfw1994

mark88man said:

As Linton says neither of the above is soluble by pension strategies.  I do feel for the OP as I'm not sure his question was ever answered, but its been a fascinating thread

"Can anyone recommend any good reading for the amateur investor."
I reckon they've had plenty of good reading suggested.   Maybe even enough to stop reading on   

mark55man

Edited to remove slightly spicy words about being called anti-semitic, which is deeply ironic considering my upbringing.  Although I have reported the post

Quote - Actually can't be bothered Quote "If thin-skinned anti-Semites want to take a quick caveat as an insult they can knock themselves out."

I suggest its not me being thing skinned if you escalate this hard this quickly. honestly right wing people are such snowflakes these days. 

Plus Corbyn isn't in charge any more.  The Tories make a habit of completely rehabilitating their party by changing leader (although the nature of the beast never changes).  But that's OK as its the Tories doing it

Also calling nationalisation "seizing the means of production" is also a bit rich,and criticism of a wealth tax from the poll tax party likewise.

[Deleted User]

Malthusen is being factual here. 

By the way, https://www.adl.org/education/references/hate-symbols/88

The reality is that at the turn of the 19s century Russia had the 4th largest stock-market. And that investors got zero return within 20 years. 

Corbyn’s government proposed expropriation on a scale exceeding Venezuela’s as part of its manifesto. Corbyn for years worked as a pro-Soviet propagandist for Soviet funded and marxist Morning Star. 

So, UK came quite close to a major event. The ideas are still popular. Who knows what will happen over the next 40 years? 

mark55man

well I truly respect the ADL, but I didn't know that about 88.  so thank you Mordko for pointing that out - even being of Jewish upbringing (but not actively religious) I had never seen that before 

my choice of that number is based on the Chinese use of 8 for good luck, a user name from when I played online poker for a while - so now I have to change - ho hum