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

Ibrahim5

Property is an interesting one. I was recently listening to an 80 year old man who has just downsized saying how wonderful the experience had been. Sold his house in a day for a fabulous price. Now has lots of cash to spend. One of our neighbours was saying our houses had gained £200K in the pandemic. For me downsizing was always the back stop for my retirement plans. I had from 50 to 67 to bridge with investments. If it all went wrong I could always downsize. I never bought my house for financial reasons. It was just a nice place to bring a family up in. The FIRE people say spend the minimum on property so you can invest the most. Maybe spending a bit more on a bigger property in your 30s and 40s isn't too bad an idea.

cfw1994

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.

He also says it was historically just the worst case scenario, & could be higher: in 2006, suggesting 4.5% - maybe the 4% ‘rule’ is too low 🧐

I find it interesting when people try to extrapolate the final 30+ years of their life to the nth degree….including precisely guessing inflation/growth & more 🤓

Life is never straightforward.  There will always be some need to be flexible.  If only we had a perfect crystal ball…

Ibrahim5 said:

Property is an interesting one. 

…

For me downsizing was always the back stop for my retirement plans. 

…

Maybe spending a bit more on a bigger property in your 30s and 40s isn't too bad an idea.

Agreed.  
People often slip in the “possible but highly unlikely” whatif scenario of requiring care for many years in later life.  

My view is that if you can be flexible during the early years of retirement, moderately cautious but watch things closely, then enjoy living!  Property can certainly be the buffer for those “worst case scenarios”.

ex-pat_scot

cfw1994 said:

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.

He also says it was historically just the worst case scenario, & could be higher: in 2006, suggesting 4.5% - maybe the 4% ‘rule’ is too low 🧐

I find it interesting when people try to extrapolate the final 30+ years of their life to the nth degree….including precisely guessing inflation/growth & more 🤓

Life is never straightforward.  There will always be some need to be flexible.  If only we had a perfect crystal ball…

Ibrahim5 said:

Property is an interesting one. 

…

For me downsizing was always the back stop for my retirement plans. 

…

Maybe spending a bit more on a bigger property in your 30s and 40s isn't too bad an idea.

Agreed.  
People often slip in the “possible but highly unlikely” whatif scenario of requiring care for many years in later life.  

My view is that if you can be flexible during the early years of retirement, moderately cautious but watch things closely, then enjoy living!  Property can certainly be the buffer for those “worst case scenarios”.

A couple of general thoughts.

1. the delighted 80 year old who sold immediately, will find that he might struggle to buy easily

2. the 4% rule is a broad base, which is pessimistic as it "works" for roughly 97% of iterations/outcomes.  As others have said, a higher withdrawal rate would still give a high probability of "success"

3. the 4% rule as calculated is rather unnecessarily rigid, as it does not account for a flexible approach (I'm expecting to flex my approach based on market returns, inflation etc and not rigidly stick to 4%). It helps here to be wealthy in retirement: there's a world of difference between flexing +/- around £5,000 vs £50,000 withdrawal, as the former will have to cover a fair bit of essential spends, and latter is much more adaptable to adjust for the nice-to-have items.

4. the shape of spending in retirement is far from steady: 
 - it is generally noted as a bit of a "U" shape, with higher withdrawals early and towards end of life. This is understandable as the early retirement time is when retirees ought to be more healthy and active and able to make the most of their newfound freedom, and end of life with care (care home, assisted living, home help, gardener etc) costs rising
- also expect early withdrawal to be higher ahead of SP kicking in

5. where to derisk?
Traditional theory is to move into bonds, but they certainly feel as if they have the price and risk characteristics of equities at the moment.
Frankly I'm getting my diversification from low cost global tracker. Mine is 100% equity, and there are others that have a bond element.
Remember also that you may have other assets that form part of your portfolio. Any DB acts effectively in lieu of bond, which is quite handy if you want some de-risking.  Cash savings could be popped into premium bonds.  ISA funds can be used for more risky investments (emerging markets?) perhaps.
Frankly I see cash as pointless, if pension and ISA investments can be immediately sold. (the only benefit of cash is if your other investments are in illiquid assets eg private companies, property etc).

cfw1994

ex-pat_scot said:

cfw1994 said:

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.

He also says it was historically just the worst case scenario, & could be higher: in 2006, suggesting 4.5% - maybe the 4% ‘rule’ is too low 🧐

I find it interesting when people try to extrapolate the final 30+ years of their life to the nth degree….including precisely guessing inflation/growth & more 🤓

Life is never straightforward.  There will always be some need to be flexible.  If only we had a perfect crystal ball…

Ibrahim5 said:

Property is an interesting one. 

…

For me downsizing was always the back stop for my retirement plans. 

…

Maybe spending a bit more on a bigger property in your 30s and 40s isn't too bad an idea.

Agreed.  
People often slip in the “possible but highly unlikely” whatif scenario of requiring care for many years in later life.  

My view is that if you can be flexible during the early years of retirement, moderately cautious but watch things closely, then enjoy living!  Property can certainly be the buffer for those “worst case scenarios”.

A couple of general thoughts.

1. the delighted 80 year old who sold immediately, will find that he might struggle to buy easily

2. the 4% rule is a broad base, which is pessimistic as it "works" for roughly 97% of iterations/outcomes.  As others have said, a higher withdrawal rate would still give a high probability of "success"

3. the 4% rule as calculated is rather unnecessarily rigid, as it does not account for a flexible approach (I'm expecting to flex my approach based on market returns, inflation etc and not rigidly stick to 4%). It helps here to be wealthy in retirement: there's a world of difference between flexing +/- around £5,000 vs £50,000 withdrawal, as the former will have to cover a fair bit of essential spends, and latter is much more adaptable to adjust for the nice-to-have items.

4. the shape of spending in retirement is far from steady: 
 - it is generally noted as a bit of a "U" shape, with higher withdrawals early and towards end of life. This is understandable as the early retirement time is when retirees ought to be more healthy and active and able to make the most of their newfound freedom, and end of life with care (care home, assisted living, home help, gardener etc) costs rising
- also expect early withdrawal to be higher ahead of SP kicking in

5. where to derisk?
Traditional theory is to move into bonds, but they certainly feel as if they have the price and risk characteristics of equities at the moment.
Frankly I'm getting my diversification from low cost global tracker. Mine is 100% equity, and there are others that have a bond element.
Remember also that you may have other assets that form part of your portfolio. Any DB acts effectively in lieu of bond, which is quite handy if you want some de-risking.  Cash savings could be popped into premium bonds.  ISA funds can be used for more risky investments (emerging markets?) perhaps.
Frankly I see cash as pointless, if pension and ISA investments can be immediately sold. (the only benefit of cash is if your other investments are in illiquid assets eg private companies, property etc).

Not sure on your point 1….if I get to 80 and need to sell, why would I be buying: more likely I sold to head to a home for some quality EoL care.   Besides, in our case we are working hard to train our offspring  how to “do the right thing” 🤣👍

Cash as pointless?
I’ll disagree there.   I feel 1-3yrs in cash is key to relaxing in a downturn.  Cash includes PBs - any cash that is guaranteed to not fall, apart from against inflation!).

On your plan on selling pension or ISA “immediately”: I doubt very much whether your ducks would align to the precise moment the market crashes.  If you monitor and manage things every single day, maybe you could be a day or two behind before things sold….if you were enjoying life, on holiday, etc, you could be many days behind the crash.
As a result, you would be doing that at the worst time, which sounds like perhaps the most common mistake made by less experienced investors.  Better to HALT the sale of those assets and use the cash!

I’ll go along with 2/3/4 😎👍

JohnWinder

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.

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

You've outlined a 45 year investing period. Now, are there any prejudices on display in those statements?

Equities will likely grow in real terms; can't quibble with that. A bond ladder, could be a rolling bond ladder going out 10 years and pushed out another year each year, since you didn't specify, won't give better than a zero real return; now you're specifying some interest rate and inflation conditions that can't occur during the next 25 years at least. Not sure we can do that.

MaxiRobriguez

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.

I'd hazard a guess a period of high inflation would cause poor performance/crashes and reduce dividend payments...

Albermarle

Cash as pointless?
I’ll disagree there.   I feel 1-3yrs in cash is key to relaxing in a downturn.  

Yes not all investing/saving decisions need to be 100% rational . If it helps you sleep at night then having a lot of cash is a good thing.

 Maybe spending a bit more on a bigger property in your 30s and 40s isn't too bad an idea.

Again it may not be the 100% rational decision from a purely investing point of view ( according to the FIRE crowd anyway ) but you get to live in a bigger house !

Thrugelmir

MaxiRobriguez said:

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.

I'd hazard a guess a period of high inflation would cause poor performance/crashes and reduce dividend payments...

Any number of events could cause a correction in a particular sector of the markets to occur.  Dividend payments ultimately depend on companies generating sufficient free cash flow. 

Linton

MaxiRobriguez said:

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.

I'd hazard a guess a period of high inflation would cause poor performance/crashes and reduce dividend payments...

I cant see any obvious corrrelation between inflation and crashes.  All other things being equal one would expect dividends to rise with inflation. Companies' costs and income rise with inflation and so you would expect profits to broadly do so as well.

SouthCoastBoy

Linton said:

MaxiRobriguez said:

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.

I'd hazard a guess a period of high inflation would cause poor performance/crashes and reduce dividend payments...

I cant see any obvious corrrelation between inflation and crashes.  All other things being equal one would expect dividends to rise with inflation. Companies' costs and income rise with inflation and so you would expect profits to broadly do so as well.

In an inflation environment there will be companies that do well and others not so well. Any discretionary spending items could be squeezed and therefore companies that rely on this could suffer, it is dependant on the elasticity of demand. Companies that produce goods with inelastic demand should be able to weather higher inflation easier.

Supply chains are key, the more points in the supply chain, the more inflation will impact the production of goods as high inflation will be added at every point, if these costs can't be passed onto consumers the company will suffer.