DC Pot is 'big enough' but can't see how to lock in the value in real terms?

michaels

The markets are high, my pot is big enough to support my annual income number to age 99 if I could fix it in real terms.

Made up numbers example: age 55, pot size £0.5m, 44 year time horizon of which 12 are before SPA
Replace state pension until it is available: 12x9.4k = 112.8k subtract from 500k gives £387.2k
Remaining pot over 44 year lifetime: 387.2/44 = 8.8k pa
Total annual spending = 9.4+8.8 = £18.2k

Staying in equities should give me more as 'overall' the funds would probably grow in real terms each year removing most of the inflation risk but leaving a big volatility risk.

Switching to fixed interest via a bond ladder would remove the equity volatility risk but would not cover the inflation risk.

Are annuities / index linked bond ladder the only option to fully de-risk?  They are both 'loosing' strategies in that the cost of the certainty takes a decent chunk of the current pot value if modelled as a lump sum rather than an annual % loss.  2% real terms annual cost is obviously huge over the 44 year time horizon I am looking at.

Are there any products I am missing that look to protect real value (at the expense of possible equity gains)?

Linton

Protectiing real value at minimal risk is now rather difficuit.  There is no way to simply match inflation.  I use the Wealth Preservation funds (iTs: CGT. PNL, possibly RCP and RIT, plus the OEIC/UT Trojan O or X ) which have that as their priomary objective and hope that the managers can do the job better than I can.

Your other option is to go for something like 80% safe-ish bonds/20% equity.  I dont as I have little faith in "safe" bonds in the lmedium to long term as they will quickly unwind the gains they have made in recent years should interest rates rise.

Index linked bonds are now at a price that guarantees they will under perform inflation by 2-3% per year until maturity.  Fine if you want protection against very high inflation but not so good if inflation stays at moderate levels for the next few decades

SouthCoastBoy

I have the same concern. The one asset class that appears to be outpacing inflation is residential property in the UK. Where I live prices have gone up around 20% in the last year, if not more. Is it sustainable, personally I am not convinced, however I've been thinking that for 20 years.

I am seriously considering getting a 10 year fixed rate mortgage at the current low interest rates and renting a property out as a holiday home. The rental income should have some correlation with inflation and also I may get some capital growth as well. If I put 50% deposit down and then 50% fixed rate for the mortgage (against my current property, as cheaper) that could be used as an inflation hedge. The risk is a property crash, nothing is without risk. It is a challenge to ensure investments keep up with inflation, there is no easy answer, and all come with risks.

Thoughts?

tacpot12

I'm not aware that you are missing any products that would help you. Welcome to the difficulties of managing your own pension and longevity risk! 

I'm basically in the same position as yourself, but I have already started drawing on my personal pension. I am one quarter of the way through that gap between 55 and SPA. Overall my pot has increased in value by 7% despite having taken out enough to live on for three years. My pot is rising in value at about the rate of inflation despite withdrawals. I have other income streams such as a flat that I rent out, and a cash buffer. 

My pension is invested in a broad range of Investment Trusts along with a few EFTs and UTs where the choice in the IT world was not enough.  

dunstonh

The markets are high

are they?

Are annuities / index linked bond ladder the only option to fully de-risk? 

An RPI annuity with a 0% floor and no upper limit is the only true option to fully de-risk.   All alternatives will fall short of that to varying degrees.

Are there any products I am missing that look to protect real value (at the expense of possible equity gains)?

De-risk the portfolio without looking to go 100% into any one asset class.

You have to accept that as it stands, there is no best option at the lower-risk end.   It's more a case of the least worst option.

Moonwolf

Is it worth considering keeping high cash reserves outside the pot despite the loss of value.  I hope to have at worst 2 years cash so I could ride out a temporary fall in value by not drawing down and hoping for some recovery.

The other thing on my radar is potentially getting an annuity at 70 with some of the pot, I haven't looked at the rules and your position might be different but in my case with an older partner and no direct dependants, sacrificing potential for security seems worthwhile.

I do have solid DB pensions as well.

michaels

So a lifetime rpi indexed annuity from the 387k for a 55 year old would give 6.2k pa compared to the 44 year constant drawdown of 8.8k that could be taken if the pot could be invested to keep pace with inflation, so the inflation hedge seems to cost a lot more than the pooling of longevity risk saves.

MaxiRobriguez

This is why retirement planning is so difficult for those not in DB schemes or who do not buy an annuity - there is no guaranteed way to make your money last, you just have to build up a big enough pot at start of retirement and diversify it properly and, at least a little bit, cross your fingers it all works out.

Mix of equities/bonds/cash should be enough to match inflation if the split is something like 60/30/10. With a 40+ year horizon having a large-ish equity allocation is still OK. Use the cash to live off by selling equities if equities have gone up, or bonds if equities have gone down (and hope that the negative correlation sticks).

Other thing to consider is property, which over the long run tends to track inflation pretty closely.

Thrugelmir

michaels said:

Staying in equities should give me more as 'overall' the funds would probably grow in real terms each year removing most of the inflation risk but leaving a big volatility risk.

Volatile assets are high likely to underperform inflation on occassions. As an example for an entire decade US equities underperformed the US rate of inflation. Equities carry no firm guarantees. 

dunstonh

michaels said:

So a lifetime rpi indexed annuity from the 387k for a 55 year old would give 6.2k pa compared to the 44 year constant drawdown of 8.8k that could be taken if the pot could be invested to keep pace with inflation, so the inflation hedge seems to cost a lot more than the pooling of longevity risk saves.

You could factor in value protection if you are concerned about early death.  Or a 20 or 30 year guarantee period.

Or you can mix and match solutions.   Take the index-linked annuity to cover your committed expenditure (not covered by the state pension)  and leave the investment-backed drawdown to cover lifestyle expenditure.

Do not be afraid of cash.  It may not give any return and it will not keep up with inflation.  However, if you keep some money invested in equities then the overall outcome may give you a lower return but probably still enough to cover inflation in most periods.  Don't look at each asset class in isolation.  

Moonwolf

michaels said:

So a lifetime rpi indexed annuity from the 387k for a 55 year old would give 6.2k pa compared to the 44 year constant drawdown of 8.8k that could be taken if the pot could be invested to keep pace with inflation, so the inflation hedge seems to cost a lot more than the pooling of longevity risk saves.

I'm not sure if that was aimed at my suggestion but it it was it isn't exactly a like for like comparison with what I said.

1. I specifically suggested, only planning to take part of the pot, you quoted the full amount.
2. Delay taking the drawdown until later, I specifically said 70 years old, I wouldn't buy an annuity at 55 but as time goes on, if you are reducing the pot size with drawdown the risks of volatility increase while annuity rates improve.
3. The whole point is that an annuity is guaranteed, a large "market correction" could make your drawdown prediction useless.