'Annuities are poor value' - what do they know that we don't?

zagfles

Deleted_User said:

zagfles said:

michaels said:

Deleted_User said:

michaels said:

Deleted_User said:

1. “No failure SWR” does not exist. Its a misnomer.  There is a conceptual problem with defining a constant withdrawal rate from an inherently volatile asset like stocks. SWR is based on a portfolio of mostly stocks.  

2. SWR is typically calculated based on past 100 years’ worth of data for the next 30 years. Annuity has no expiry. The main risk for the vendor is that you will live way too long. 

3. You pay for buying an insurance policy. Thats what annuity is.  A company is pooling risks and providing you with an insurance product. They take a cut. 

4. You should really compare annuity rates to coupons on long term government bonds.  Thats a truly safe product, up to the point of expiry.  Makes annuities look pretty good, huh? In fact, one of the strategies in this environment involves a 60 year old buying an annuity with a portion of your portfolio and spending the proceeds to buy bonds. You gain vs just holding bonds right away if you live to 75 or so. 

Part of what the markets do is pool and share risk, thus we would expect an annuity provider to be able to provide a higher return that simply buying govt bonds to cover the likely distribution of policy holder longevities.

Seems like the big discrepancy is telling us that SWRs based on historical returns are actually higher than current market consensus for probable future returns and if you believe in efficient markets you are basically betting on the market being wrong if you plump for a 'historically conservative' 3.25% SWR for a retirement that might last more than 30 years.

You are discovering that SWR does not exist. Otherwise insurance companies selling annuities would have used it.  Instead they use long term government bonds because SWR isn’t for real. 

So given an annuity pools longevity risk, despite the provider profit margin it is actually probably better value for an individual than drawdown - is that the conclusion I should be drawing?

Yes, if you want a guaranteed income for life, then index linked annuities are what you should go for. As above, there's no such thing as a "SWR" from a drawdown pension. There's only speculation, usually based on the assumption that the future will be similar to the past.

Personally I'm willing to tolerate some financial risk, after all we tolerate risk in virtually every other walk of life, if I can live with a 1 in 2 chance of getting cancer I can certainly live with a chance my pension might be less than I'd hoped for. Like all things you weigh up the risk and cost/benefit of your options.

Cancer is something we can’t control so its different.  Having a pension “less than hoped” isn’t a problem. The main risk is outliving your money.  Not a pleasant scenario. Even a 5% probability seems unacceptable to me. 

We can control our risk of getting cancer. Don't smoke, don't get fat, don't get sunburnt, don't drink excessively, learn to spot signs of things which may become cancerous, 5 a day, etc etc. Like with investing, whatever we do there's still a risk, but like with most things, we have some control over the risk, to a greater or lesser extent.

BritishInvestor

Deleted_User said:

zagfles said:

michaels said:

Deleted_User said:

michaels said:

Deleted_User said:

1. “No failure SWR” does not exist. Its a misnomer.  There is a conceptual problem with defining a constant withdrawal rate from an inherently volatile asset like stocks. SWR is based on a portfolio of mostly stocks.  

2. SWR is typically calculated based on past 100 years’ worth of data for the next 30 years. Annuity has no expiry. The main risk for the vendor is that you will live way too long. 

3. You pay for buying an insurance policy. Thats what annuity is.  A company is pooling risks and providing you with an insurance product. They take a cut. 

4. You should really compare annuity rates to coupons on long term government bonds.  Thats a truly safe product, up to the point of expiry.  Makes annuities look pretty good, huh? In fact, one of the strategies in this environment involves a 60 year old buying an annuity with a portion of your portfolio and spending the proceeds to buy bonds. You gain vs just holding bonds right away if you live to 75 or so. 

Part of what the markets do is pool and share risk, thus we would expect an annuity provider to be able to provide a higher return that simply buying govt bonds to cover the likely distribution of policy holder longevities.

Seems like the big discrepancy is telling us that SWRs based on historical returns are actually higher than current market consensus for probable future returns and if you believe in efficient markets you are basically betting on the market being wrong if you plump for a 'historically conservative' 3.25% SWR for a retirement that might last more than 30 years.

You are discovering that SWR does not exist. Otherwise insurance companies selling annuities would have used it.  Instead they use long term government bonds because SWR isn’t for real. 

So given an annuity pools longevity risk, despite the provider profit margin it is actually probably better value for an individual than drawdown - is that the conclusion I should be drawing?

Yes, if you want a guaranteed income for life, then index linked annuities are what you should go for. As above, there's no such thing as a "SWR" from a drawdown pension. There's only speculation, usually based on the assumption that the future will be similar to the past.

Personally I'm willing to tolerate some financial risk, after all we tolerate risk in virtually every other walk of life, if I can live with a 1 in 2 chance of getting cancer I can certainly live with a chance my pension might be less than I'd hoped for. Like all things you weigh up the risk and cost/benefit of your options.

Cancer is something we can’t control so its different.  Having a pension “less than hoped” isn’t a problem. The main risk is outliving your money.  Not a pleasant scenario. Even a 5% probability seems unacceptable to me. 

Agreed that outliving your money is not the outcome you desire. But assuming that monitor your retirement journey periodically (e.g. annually), you should get plenty of warning that adjustments might need to be made. Taking the worst case outcome for a random case study....someone retiring in 1968 at aged 60 would be hit early in retirement by the prolonged market falls and lumpy inflation in the 1970s (in sharp contrast to our Covid discussion), and withdrawals may need to be adjusted. 



Assuming spending was cut by 5% at this point (aged 66, so for example an inflation-adjusted £40k is reduced to £38k going forwards), the eventual outcome is a lot more favourable. 

michaels

I was just looking on cfiresim, my current pot plus SP entitlement gives me a 100% 'safe' annual income for 45 years of retirement of £34k - in some periods the pot falls as low 6x annual withdrawal after only 15 years - anyone fancy continuing withdrawals at the historically safe rate when you are down to only 6 years cover left at age 65?

BritishInvestor

michaels said:

I was just looking on cfiresim, my current pot plus SP entitlement gives me a 100% 'safe' annual income for 45 years of retirement of £34k - in some periods the pot falls as low 6x annual withdrawal after only 15 years - anyone fancy continuing withdrawals at the historically safe rate when you are down to only 6 years cover left at age 65?

That comes back to the discussion around finding an asset allocation that you are comfortable with. 100% equities may give a higher SWR than something with less equity content but you have to be prepared for some pain along the way.

NottinghamKnight

zagfles said:

Deleted_User said:

zagfles said:

michaels said:

Deleted_User said:

michaels said:

Deleted_User said:

1. “No failure SWR” does not exist. Its a misnomer.  There is a conceptual problem with defining a constant withdrawal rate from an inherently volatile asset like stocks. SWR is based on a portfolio of mostly stocks.  

2. SWR is typically calculated based on past 100 years’ worth of data for the next 30 years. Annuity has no expiry. The main risk for the vendor is that you will live way too long. 

3. You pay for buying an insurance policy. Thats what annuity is.  A company is pooling risks and providing you with an insurance product. They take a cut. 

4. You should really compare annuity rates to coupons on long term government bonds.  Thats a truly safe product, up to the point of expiry.  Makes annuities look pretty good, huh? In fact, one of the strategies in this environment involves a 60 year old buying an annuity with a portion of your portfolio and spending the proceeds to buy bonds. You gain vs just holding bonds right away if you live to 75 or so. 

Part of what the markets do is pool and share risk, thus we would expect an annuity provider to be able to provide a higher return that simply buying govt bonds to cover the likely distribution of policy holder longevities.

Seems like the big discrepancy is telling us that SWRs based on historical returns are actually higher than current market consensus for probable future returns and if you believe in efficient markets you are basically betting on the market being wrong if you plump for a 'historically conservative' 3.25% SWR for a retirement that might last more than 30 years.

You are discovering that SWR does not exist. Otherwise insurance companies selling annuities would have used it.  Instead they use long term government bonds because SWR isn’t for real. 

So given an annuity pools longevity risk, despite the provider profit margin it is actually probably better value for an individual than drawdown - is that the conclusion I should be drawing?

Yes, if you want a guaranteed income for life, then index linked annuities are what you should go for. As above, there's no such thing as a "SWR" from a drawdown pension. There's only speculation, usually based on the assumption that the future will be similar to the past.

Personally I'm willing to tolerate some financial risk, after all we tolerate risk in virtually every other walk of life, if I can live with a 1 in 2 chance of getting cancer I can certainly live with a chance my pension might be less than I'd hoped for. Like all things you weigh up the risk and cost/benefit of your options.

Cancer is something we can’t control so its different.  Having a pension “less than hoped” isn’t a problem. The main risk is outliving your money.  Not a pleasant scenario. Even a 5% probability seems unacceptable to me. 

We can control our risk of getting cancer. Don't smoke, don't get fat, don't get sunburnt, don't drink excessively, learn to spot signs of things which may become cancerous, 5 a day, etc etc. Like with investing, whatever we do there's still a risk, but like with most things, we have some control over the risk, to a greater or lesser extent.

You can't control your risk of getting cancer but actions or activities including lifestyle will modify that risk. There's also the issue about what you mean by cancer, some cancers have a recovery rate of nearly 100%, especially if caught early, whereas many others might have a mortality rate of 70% or more.

Thrugelmir

BritishInvestor said:

Deleted_User said:

zagfles said:

michaels said:

Deleted_User said:

michaels said:

Deleted_User said:

1. “No failure SWR” does not exist. Its a misnomer.  There is a conceptual problem with defining a constant withdrawal rate from an inherently volatile asset like stocks. SWR is based on a portfolio of mostly stocks.  

2. SWR is typically calculated based on past 100 years’ worth of data for the next 30 years. Annuity has no expiry. The main risk for the vendor is that you will live way too long. 

3. You pay for buying an insurance policy. Thats what annuity is.  A company is pooling risks and providing you with an insurance product. They take a cut. 

4. You should really compare annuity rates to coupons on long term government bonds.  Thats a truly safe product, up to the point of expiry.  Makes annuities look pretty good, huh? In fact, one of the strategies in this environment involves a 60 year old buying an annuity with a portion of your portfolio and spending the proceeds to buy bonds. You gain vs just holding bonds right away if you live to 75 or so. 

Part of what the markets do is pool and share risk, thus we would expect an annuity provider to be able to provide a higher return that simply buying govt bonds to cover the likely distribution of policy holder longevities.

Seems like the big discrepancy is telling us that SWRs based on historical returns are actually higher than current market consensus for probable future returns and if you believe in efficient markets you are basically betting on the market being wrong if you plump for a 'historically conservative' 3.25% SWR for a retirement that might last more than 30 years.

You are discovering that SWR does not exist. Otherwise insurance companies selling annuities would have used it.  Instead they use long term government bonds because SWR isn’t for real. 

So given an annuity pools longevity risk, despite the provider profit margin it is actually probably better value for an individual than drawdown - is that the conclusion I should be drawing?

Yes, if you want a guaranteed income for life, then index linked annuities are what you should go for. As above, there's no such thing as a "SWR" from a drawdown pension. There's only speculation, usually based on the assumption that the future will be similar to the past.

Personally I'm willing to tolerate some financial risk, after all we tolerate risk in virtually every other walk of life, if I can live with a 1 in 2 chance of getting cancer I can certainly live with a chance my pension might be less than I'd hoped for. Like all things you weigh up the risk and cost/benefit of your options.

Cancer is something we can’t control so its different.  Having a pension “less than hoped” isn’t a problem. The main risk is outliving your money.  Not a pleasant scenario. Even a 5% probability seems unacceptable to me. 

Agreed that outliving your money is not the outcome you desire. But assuming that monitor your retirement journey periodically (e.g. annually), you should get plenty of warning that adjustments might need to be made. Taking the worst case outcome for a random case study....someone retiring in 1968 at aged 60 would be hit early in retirement by the prolonged market falls and lumpy inflation in the 1970s (in sharp contrast to our Covid discussion), and withdrawals may need to be adjusted. 



Assuming spending was cut by 5% at this point (aged 66, so for example an inflation-adjusted £40k is reduced to £38k going forwards), the eventual outcome is a lot more favourable. 

How many people in 1968 could afford early retirement?  My late father spent 8 years in the British Army in Palestine between 1940 and 1948. Never had a DB pension scheme despite a successfull career post war.  Never recovered those best earning years of his life that he lost. Ended up working part time well into retirement. As no family inheritances to speak of.  

zagfles

NottinghamKnight said:

zagfles said:

Deleted_User said:

zagfles said:

michaels said:

Deleted_User said:

michaels said:

Deleted_User said:

1. “No failure SWR” does not exist. Its a misnomer.  There is a conceptual problem with defining a constant withdrawal rate from an inherently volatile asset like stocks. SWR is based on a portfolio of mostly stocks.  

2. SWR is typically calculated based on past 100 years’ worth of data for the next 30 years. Annuity has no expiry. The main risk for the vendor is that you will live way too long. 

3. You pay for buying an insurance policy. Thats what annuity is.  A company is pooling risks and providing you with an insurance product. They take a cut. 

4. You should really compare annuity rates to coupons on long term government bonds.  Thats a truly safe product, up to the point of expiry.  Makes annuities look pretty good, huh? In fact, one of the strategies in this environment involves a 60 year old buying an annuity with a portion of your portfolio and spending the proceeds to buy bonds. You gain vs just holding bonds right away if you live to 75 or so. 

Part of what the markets do is pool and share risk, thus we would expect an annuity provider to be able to provide a higher return that simply buying govt bonds to cover the likely distribution of policy holder longevities.

Seems like the big discrepancy is telling us that SWRs based on historical returns are actually higher than current market consensus for probable future returns and if you believe in efficient markets you are basically betting on the market being wrong if you plump for a 'historically conservative' 3.25% SWR for a retirement that might last more than 30 years.

You are discovering that SWR does not exist. Otherwise insurance companies selling annuities would have used it.  Instead they use long term government bonds because SWR isn’t for real. 

So given an annuity pools longevity risk, despite the provider profit margin it is actually probably better value for an individual than drawdown - is that the conclusion I should be drawing?

Yes, if you want a guaranteed income for life, then index linked annuities are what you should go for. As above, there's no such thing as a "SWR" from a drawdown pension. There's only speculation, usually based on the assumption that the future will be similar to the past.

Personally I'm willing to tolerate some financial risk, after all we tolerate risk in virtually every other walk of life, if I can live with a 1 in 2 chance of getting cancer I can certainly live with a chance my pension might be less than I'd hoped for. Like all things you weigh up the risk and cost/benefit of your options.

Cancer is something we can’t control so its different.  Having a pension “less than hoped” isn’t a problem. The main risk is outliving your money.  Not a pleasant scenario. Even a 5% probability seems unacceptable to me. 

We can control our risk of getting cancer. Don't smoke, don't get fat, don't get sunburnt, don't drink excessively, learn to spot signs of things which may become cancerous, 5 a day, etc etc. Like with investing, whatever we do there's still a risk, but like with most things, we have some control over the risk, to a greater or lesser extent.

You can't control your risk of getting cancer but actions or activities including lifestyle will modify that risk. There's also the issue about what you mean by cancer, some cancers have a recovery rate of nearly 100%, especially if caught early, whereas many others might have a mortality rate of 70% or more.

Well yes, that's what I meant. We can alter the risk. There are loads of known risk factors for cancers, some of which we can control (eg what we eat, drink, smoke, sunbath etc) and some of which we can't (eg genetics, age, random mutations etc). Acting in a particular way will increase or decrease that risk, but nothing will eliminate it.

Same with drawdown in principle, even if the extent of the control is different. You can't eliminate the risk of running out of money, and you can't eliminate the risk of getting cancer. But it seems lots of people worry more about what they can do to reduce financial risk than health risks.

newatc

With Covid being an additional risk, I would have thought that should translate into higher annuities (which I suppose it may have done but is hidden by low bond yields).

BritishInvestor

Thrugelmir said:

BritishInvestor said:

Deleted_User said:

zagfles said:

michaels said:

Deleted_User said:

michaels said:

Deleted_User said:

1. “No failure SWR” does not exist. Its a misnomer.  There is a conceptual problem with defining a constant withdrawal rate from an inherently volatile asset like stocks. SWR is based on a portfolio of mostly stocks.  

2. SWR is typically calculated based on past 100 years’ worth of data for the next 30 years. Annuity has no expiry. The main risk for the vendor is that you will live way too long. 

3. You pay for buying an insurance policy. Thats what annuity is.  A company is pooling risks and providing you with an insurance product. They take a cut. 

4. You should really compare annuity rates to coupons on long term government bonds.  Thats a truly safe product, up to the point of expiry.  Makes annuities look pretty good, huh? In fact, one of the strategies in this environment involves a 60 year old buying an annuity with a portion of your portfolio and spending the proceeds to buy bonds. You gain vs just holding bonds right away if you live to 75 or so. 

Part of what the markets do is pool and share risk, thus we would expect an annuity provider to be able to provide a higher return that simply buying govt bonds to cover the likely distribution of policy holder longevities.

Seems like the big discrepancy is telling us that SWRs based on historical returns are actually higher than current market consensus for probable future returns and if you believe in efficient markets you are basically betting on the market being wrong if you plump for a 'historically conservative' 3.25% SWR for a retirement that might last more than 30 years.

You are discovering that SWR does not exist. Otherwise insurance companies selling annuities would have used it.  Instead they use long term government bonds because SWR isn’t for real. 

So given an annuity pools longevity risk, despite the provider profit margin it is actually probably better value for an individual than drawdown - is that the conclusion I should be drawing?

Yes, if you want a guaranteed income for life, then index linked annuities are what you should go for. As above, there's no such thing as a "SWR" from a drawdown pension. There's only speculation, usually based on the assumption that the future will be similar to the past.

Personally I'm willing to tolerate some financial risk, after all we tolerate risk in virtually every other walk of life, if I can live with a 1 in 2 chance of getting cancer I can certainly live with a chance my pension might be less than I'd hoped for. Like all things you weigh up the risk and cost/benefit of your options.

Cancer is something we can’t control so its different.  Having a pension “less than hoped” isn’t a problem. The main risk is outliving your money.  Not a pleasant scenario. Even a 5% probability seems unacceptable to me. 

Agreed that outliving your money is not the outcome you desire. But assuming that monitor your retirement journey periodically (e.g. annually), you should get plenty of warning that adjustments might need to be made. Taking the worst case outcome for a random case study....someone retiring in 1968 at aged 60 would be hit early in retirement by the prolonged market falls and lumpy inflation in the 1970s (in sharp contrast to our Covid discussion), and withdrawals may need to be adjusted. 



Assuming spending was cut by 5% at this point (aged 66, so for example an inflation-adjusted £40k is reduced to £38k going forwards), the eventual outcome is a lot more favourable. 

How many people in 1968 could afford early retirement?  My late father spent 8 years in the British Army in Palestine between 1940 and 1948. Never had a DB pension scheme despite a successfull career post war.  Never recovered those best earning years of his life that he lost. Ended up working part time well into retirement. As no family inheritances to speak of.  

I'm not sure re your answer of 1968 and early retirement, but the age chosen was just to demonstrate the impact a small adjustment early on in retirement can have on plan sustainability. 
Re your father, did he get nothing from the Army in terms of pension? My Grandpa (RIP) was in the Army around the same time but I've no idea what he got.

Thrugelmir

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Deleted_User said:

zagfles said:

michaels said:

Deleted_User said:

michaels said:

Deleted_User said:

1. “No failure SWR” does not exist. Its a misnomer.  There is a conceptual problem with defining a constant withdrawal rate from an inherently volatile asset like stocks. SWR is based on a portfolio of mostly stocks.  

2. SWR is typically calculated based on past 100 years’ worth of data for the next 30 years. Annuity has no expiry. The main risk for the vendor is that you will live way too long. 

3. You pay for buying an insurance policy. Thats what annuity is.  A company is pooling risks and providing you with an insurance product. They take a cut. 

4. You should really compare annuity rates to coupons on long term government bonds.  Thats a truly safe product, up to the point of expiry.  Makes annuities look pretty good, huh? In fact, one of the strategies in this environment involves a 60 year old buying an annuity with a portion of your portfolio and spending the proceeds to buy bonds. You gain vs just holding bonds right away if you live to 75 or so. 

Part of what the markets do is pool and share risk, thus we would expect an annuity provider to be able to provide a higher return that simply buying govt bonds to cover the likely distribution of policy holder longevities.

Seems like the big discrepancy is telling us that SWRs based on historical returns are actually higher than current market consensus for probable future returns and if you believe in efficient markets you are basically betting on the market being wrong if you plump for a 'historically conservative' 3.25% SWR for a retirement that might last more than 30 years.

You are discovering that SWR does not exist. Otherwise insurance companies selling annuities would have used it.  Instead they use long term government bonds because SWR isn’t for real. 

So given an annuity pools longevity risk, despite the provider profit margin it is actually probably better value for an individual than drawdown - is that the conclusion I should be drawing?

Yes, if you want a guaranteed income for life, then index linked annuities are what you should go for. As above, there's no such thing as a "SWR" from a drawdown pension. There's only speculation, usually based on the assumption that the future will be similar to the past.

Personally I'm willing to tolerate some financial risk, after all we tolerate risk in virtually every other walk of life, if I can live with a 1 in 2 chance of getting cancer I can certainly live with a chance my pension might be less than I'd hoped for. Like all things you weigh up the risk and cost/benefit of your options.

Cancer is something we can’t control so its different.  Having a pension “less than hoped” isn’t a problem. The main risk is outliving your money.  Not a pleasant scenario. Even a 5% probability seems unacceptable to me. 

Agreed that outliving your money is not the outcome you desire. But assuming that monitor your retirement journey periodically (e.g. annually), you should get plenty of warning that adjustments might need to be made. Taking the worst case outcome for a random case study....someone retiring in 1968 at aged 60 would be hit early in retirement by the prolonged market falls and lumpy inflation in the 1970s (in sharp contrast to our Covid discussion), and withdrawals may need to be adjusted. 



Assuming spending was cut by 5% at this point (aged 66, so for example an inflation-adjusted £40k is reduced to £38k going forwards), the eventual outcome is a lot more favourable. 

How many people in 1968 could afford early retirement?  My late father spent 8 years in the British Army in Palestine between 1940 and 1948. Never had a DB pension scheme despite a successfull career post war.  Never recovered those best earning years of his life that he lost. Ended up working part time well into retirement. As no family inheritances to speak of.  

I'm not sure re your answer of 1968 and early retirement, but the age chosen was just to demonstrate the impact a small adjustment early on in retirement can have on plan sustainability. 
Re your father, did he get nothing from the Army in terms of pension? My Grandpa (RIP) was in the Army around the same time but I've no idea what he got.

Numbers mean very little unless put into context of the era and the years that went before. State pension entitlements for example.