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

Albermarle

The whole point is that an annuity is guaranteed, a large "market correction" could make your drawdown prediction useless.

As I understand it , drawdown scenarios take into account there will be numerous market corrections during the drawdown period , with probably a couple being quite large and maybe even prolonged.

The big risk is if there is a large slump in the early years of drawdown, and you do not have sufficient cash reserves to stop with drawing until the market recovers .So the answer to the question below is yes in my opinion .

 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.

For the OP , another potential solution is to keep working and contributing for longer, so you have such a big safety net you can stop worrying about it , Crude but effective.

michaels

Moonwolf said:

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.

Nope, it wasn't aimed at any particular reply, more a continuation of the first post putting some numbers on how an annuity compares to some imaginary instrument that keeps a constant value in real terms. 

In a way it seems odd that the pooling of longevity risk in an annuity doesn't seem to in any way offset the cost of providing protection against inflation.  £6.2k is a lot less than £8.8k or a 3.5% 'SWR' which would give £13.5k pa - so there is historically 'safe' vs guaranteed where the latter is only 50% of the former.

Thrugelmir

Albermarle said:

The whole point is that an annuity is guaranteed, a large "market correction" could make your drawdown prediction useless.

As I understand it , drawdown scenarios take into account there will be numerous market corrections during the drawdown period , with probably a couple being quite large and maybe even prolonged.

Scenarios are endless.  Factoring in future spending patterns, rates of inflation, investment returns, and tax into forecasts will require constant updating of ones personal model. 

Phrygian

Being prepared to do some part-time work in desperate times might be the ultimate hedge if cash portion gets low or inflation erodes it. At least it gives time for investments to recover.

bostonerimus

An annuity would give you a lifetime income, but they are really very bad value for money right now and if you live an average life span you are almost better off just sticking the money into a savings bond ladder. I would probably be looking into a Total Return approach with a few years worth of cash spending in the bank and a portfolio of investment grade bonds and dividend stocks that might give you a natural yield of 2% or 3% and some growth, but also some capital protection, you could look at a partial annuitization later on. You should also investigate the various withdrawal strategies and have a good grasp of your budget and spending so you can trim expenses if necessary...being frugal helps make any income plan more robust. It would be great if you could adjust your lifestyle so that SP and natural yield would cover your needs. This is very different from many plans that spend down capital with the goal of dying broke, or indeed a full annuity that guarantees you will die broke, as it gives you a capital buffer to survive downturns and also something to leave to the next generation.

jamesd

State pension deferral is the best value in income per Pound of capital spent for those in normal good health. Limited in how fast you can buy it, since the fastest you can do is 5.8% of your state pension per year. It's good for longevity protection.

The back testing of the main income drawdown rules survives all of the high inflation and other nasties in the last 125 or so years. While it's not guaranteed, that's a lot of history of success at handling inflation and everything else that happened.

For those with plenty of money retiring in their fifties I've sometimes suggested gradual buying of level annuities, with the regular buying providing a measure of inflation protection while the decline in value is to some extent offset by the normal decline in spending. Eventually state pension deferral and later age or health improved annuity rates arrive. At young enough ages to make derisking in the later stages of retirement good value for money,

MaxiRobriguez

Albermarle said:

The whole point is that an annuity is guaranteed, a large "market correction" could make your drawdown prediction useless.

 the answer to the question below is yes in my opinion .

 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.

Personally I will carry a 3-5 year cash buffer depending on market conditions at the time, which will hopefully represent 8-12% of my portfolio.

Big risk for those with a relatively sizable portfolio will be a big market correction shortly after stopping work which doesn't recover quickly. Easily avoided with a bigger cash buffer.

jamesd

FWIW Bill Bengen of the 4% rule thinks that the biggest concern is high inflation, not sustained poor performance or early crash.

Because of dividends and interest the effect of a cash buffer is likely to last two or three times as long as the amount set aside allows for. Then you draw on bonds not equities so there's considerable extra margin before equities have to be touched, for most people.

michaels

jamesd said:

FWIW Bill Bengen of the 4% rule thinks that the biggest concern is high inflation, not sustained poor performance or early crash.

Because of dividends and interest the effect of a cash buffer is likely to last two or three times as long as the amount set aside allows for. Then you draw on bonds not equities so there's considerable extra margin before equities have to be touched, for most people.

However there are also lots of worked examples showing markets can remain low for much longer than any sensible cash buffer would last (sensible as in not so large as to instead materially reduce overall returns) especially if the strategy for recharging the buffer is sensibly thought through.

JohnWinder

No, I don't think there are any products you’ve missed. That there seem not to be any is a result of inflation adjusted yields being negative for the safest asset class you could choose. And no other asset meets your 'lock in' requirement.
Plenty of imperfect ways to address the problem including those mentioned already, some more expensive but no more certain than others.
For an extensive discussion of many options, this is a good resource: https://earlyretirementnow.com/safe-withdrawal-rate-series/