Equity percentage in the deaccumulation phase

NedS

Deleted_User said:

Just a note that these percentages don’t mean a lot unless you specify your family’s DB income. Including state pension and whatever other bits you may have. Thats part of your FI allocation. 

How would you express that?

Say I have a £300k DC pot 100% invested in equities that I drawdown at 4% (£12,000pa), and I have £24,000pa of fixed income from DB and state pension, would you say I'm 1/3rd equities and 2/3rds fixed income? So my equity allocation can in effect never exceed 33% so I should always be 100% equities in my DC pot.

[Deleted User]

zagfles said:

Thrugelmir said:

zagfles said:

Deleted_User said:

Just a note that these percentages don’t mean a lot unless you specify your family’s DB income. Including state pension and whatever other bits you may have. Thats part of your FI allocation. 

Definitely something that needs considering for people with a possibly 30-40 year potential retirement horizon, a few years of high inflation (almost inevitable over a 30-40 year period) could halve the value of your DB pensions. Anyone got other strategies for this?

If stagflation were to return then we would all be in trouble. A very different world to the 70's. 

I would tend to agree the future is unlikely to be similar to the past, but all modelling of investment returns, safe withdrawal rates etc seem to use historic data on equity/bonds returns & volatility etc and "back-test" the strategy over various periods in the past.

Doing the same with capped DB pensions gives scary results... it's not just the 70's, even over the 1980's a capped DB pension would have lost 20-30% of its value (down to 71-83% of it's value)

If the inflation is high, you will be protected by your equities. They typically do ok during periods of high inflation (but terribly during deflation). There are other vehicles you can use. I have TIPS and some preferred shares (which provide an escalating dividend if interest rates go up. Or you can buy inflation protected  annuity with a portion of your portfolio.  

zagfles

Deleted_User said:

zagfles said:

Thrugelmir said:

zagfles said:

Deleted_User said:

Just a note that these percentages don’t mean a lot unless you specify your family’s DB income. Including state pension and whatever other bits you may have. Thats part of your FI allocation. 

Definitely something that needs considering for people with a possibly 30-40 year potential retirement horizon, a few years of high inflation (almost inevitable over a 30-40 year period) could halve the value of your DB pensions. Anyone got other strategies for this?

If stagflation were to return then we would all be in trouble. A very different world to the 70's. 

I would tend to agree the future is unlikely to be similar to the past, but all modelling of investment returns, safe withdrawal rates etc seem to use historic data on equity/bonds returns & volatility etc and "back-test" the strategy over various periods in the past.

Doing the same with capped DB pensions gives scary results... it's not just the 70's, even over the 1980's a capped DB pension would have lost 20-30% of its value (down to 71-83% of it's value)

If the inflation is high, you will be protected by your equities. They typically do ok during periods of high inflation (but terribly during deflation). There are other vehicles you can use. I have TIPS and some preferred shares (which provide an escalating dividend if interest rates go up. Or you can buy inflation protected  annuity with a portion of your portfolio.  

What are TIPS? Not an easy acronymn to google!

Article in the Telegraph basically saying higher inflation is inevitable (probably behind a paywall):

https://www.telegraph.co.uk/business/2020/11/23/inflation-inevitable-wont-happen-overnight/

jerrydan

Read through this forum very well , there is answer already.

[Deleted User]

zagfles said:

Deleted_User said:

zagfles said:

Thrugelmir said:

zagfles said:

Deleted_User said:

Just a note that these percentages don’t mean a lot unless you specify your family’s DB income. Including state pension and whatever other bits you may have. Thats part of your FI allocation. 

Definitely something that needs considering for people with a possibly 30-40 year potential retirement horizon, a few years of high inflation (almost inevitable over a 30-40 year period) could halve the value of your DB pensions. Anyone got other strategies for this?

If stagflation were to return then we would all be in trouble. A very different world to the 70's. 

I would tend to agree the future is unlikely to be similar to the past, but all modelling of investment returns, safe withdrawal rates etc seem to use historic data on equity/bonds returns & volatility etc and "back-test" the strategy over various periods in the past.

Doing the same with capped DB pensions gives scary results... it's not just the 70's, even over the 1980's a capped DB pension would have lost 20-30% of its value (down to 71-83% of it's value)

If the inflation is high, you will be protected by your equities. They typically do ok during periods of high inflation (but terribly during deflation). There are other vehicles you can use. I have TIPS and some preferred shares (which provide an escalating dividend if interest rates go up. Or you can buy inflation protected  annuity with a portion of your portfolio.  

What are TIPS? Not an easy acronymn to google!

Article in the Telegraph basically saying higher inflation is inevitable (probably behind a paywall):

https://www.telegraph.co.uk/business/2020/11/23/inflation-inevitable-wont-happen-overnight/

https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

michaels

I ran some scenarios through cfiresim and the SWR spreadsheet and with my circumstances (no db, 2 x SP but not for 15 years) the highest (100% success) swr comes at about 25% cash 75% equities but I have dialled that back a bit based on PE.  Anywhere between 78% and 68% the SWR is very similar.  Basically the equities give real growth but the cash element dials back the sequence or return risk at the expense of absolute growth so my 30% cash reduces the volatility of the portfolio of that much, holding down the upside but reducing the downside.  I assume 1% negative real return on cash.

shinytop

NedS said:

Deleted_User said:

Just a note that these percentages don’t mean a lot unless you specify your family’s DB income. Including state pension and whatever other bits you may have. Thats part of your FI allocation. 

How would you express that?

Say I have a £300k DC pot 100% invested in equities that I drawdown at 4% (£12,000pa), and I have £24,000pa of fixed income from DB and state pension, would you say I'm 1/3rd equities and 2/3rds fixed income? So my equity allocation can in effect never exceed 33% so I should always be 100% equities in my DC pot.

If I do a calculation very similar to that and include my DB pension then I'm about 20% equities.  If my aim were to die with as much left as possible I'd be 100% equities as you say.  But it's not so I'm prepared to swap a lower return for less volatility so am about 55% equities in my DC pension

NottinghamKnight

michaels said:

I ran some scenarios through cfiresim and the SWR spreadsheet and with my circumstances (no db, 2 x SP but not for 15 years) the highest (100% success) swr comes at about 25% cash 75% equities but I have dialled that back a bit based on PE.  Anywhere between 78% and 68% the SWR is very similar.  Basically the equities give real growth but the cash element dials back the sequence or return risk at the expense of absolute growth so my 30% cash reduces the volatility of the portfolio of that much, holding down the upside but reducing the downside.  I assume 1% negative real return on cash.

If it's saying 100% there is an error somewhere in the data or calculations.

zagfles

Deleted_User said:

zagfles said:

Deleted_User said:

zagfles said:

Thrugelmir said:

zagfles said:

Deleted_User said:

Just a note that these percentages don’t mean a lot unless you specify your family’s DB income. Including state pension and whatever other bits you may have. Thats part of your FI allocation. 

Definitely something that needs considering for people with a possibly 30-40 year potential retirement horizon, a few years of high inflation (almost inevitable over a 30-40 year period) could halve the value of your DB pensions. Anyone got other strategies for this?

If stagflation were to return then we would all be in trouble. A very different world to the 70's. 

I would tend to agree the future is unlikely to be similar to the past, but all modelling of investment returns, safe withdrawal rates etc seem to use historic data on equity/bonds returns & volatility etc and "back-test" the strategy over various periods in the past.

Doing the same with capped DB pensions gives scary results... it's not just the 70's, even over the 1980's a capped DB pension would have lost 20-30% of its value (down to 71-83% of it's value)

If the inflation is high, you will be protected by your equities. They typically do ok during periods of high inflation (but terribly during deflation). There are other vehicles you can use. I have TIPS and some preferred shares (which provide an escalating dividend if interest rates go up. Or you can buy inflation protected  annuity with a portion of your portfolio.  

What are TIPS? Not an easy acronymn to google!

Article in the Telegraph basically saying higher inflation is inevitable (probably behind a paywall):

https://www.telegraph.co.uk/business/2020/11/23/inflation-inevitable-wont-happen-overnight/

https://www.treasurydirect.gov/indiv/products/prod_tips_glance.htm

Thanks - so basically the US version of index linked gilts, which like the UK version seem to have negative yields. I think I'll stick mainly with equities, as they can hopefully provide real growth over the long term even if there is high inflation for a period.

michaels

NottinghamKnight said:

michaels said:

I ran some scenarios through cfiresim and the SWR spreadsheet and with my circumstances (no db, 2 x SP but not for 15 years) the highest (100% success) swr comes at about 25% cash 75% equities but I have dialled that back a bit based on PE.  Anywhere between 78% and 68% the SWR is very similar.  Basically the equities give real growth but the cash element dials back the sequence or return risk at the expense of absolute growth so my 30% cash reduces the volatility of the portfolio of that much, holding down the upside but reducing the downside.  I assume 1% negative real return on cash.

If it's saying 100% there is an error somewhere in the data or calculations.

100% success vs historic experience over the last 100+ years or monthly data which is how these tools work.  Obviously monte carlo gives a different answer.