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

MaxiRobriguez

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.

I guess the "all else being equal" part is the key part.

Companies and individuals are in debt to their eyeballs. Share of wealth is dominated by asset prices rather than income now.

Any action by the BoE to tame inflation, by rising rates quickly, poses a serious risk to equity, bonds and property prices. Dividends may prove more sticky granted as those who pay them tend to be the companies with more predictable cash flows and have the ability to pass on cost increases to their customers - but still, I do think there would be a small impact.

AlanP_2

Ibrahim5 said:

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.

Well you must live in a more desirable area than we do.

Had our house valued about 2 months ago, it has gone up (theoretically) by 75% in 17 years. My investments have done a lot better than that. 

SouthCoastBoy

This just illustrates the differences in area, in 20 years ours has gone up about 170%, around 20% in the last year. Some of my assets held in SIPPs and ISAs have easily outperformed this we a return of around 300%.

The big difference though is leverage, for example with a house you can make a 300k investment with only 15k, therefore relatively speaking get a better return, especially as interest rates have been so low for the last 12 or so years.

Albermarle

AlanP_2 said:

Ibrahim5 said:

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.

Well you must live in a more desirable area than we do.

Had our house valued about 2 months ago, it has gone up (theoretically) by 75% in 17 years. My investments have done a lot better than that. 

This seems low so I checked out our house against the Nationwide House Index and house prices in this area have gone up over 400% in 25 years . However when I checked against the value in 2004 ( so 17 years ago) it was only 80% which was surprising.
There was a big growth between 1996 and 2004 and then of course a big dip in 2008/2009.

One of our neighbours was saying our houses had gained £200K in the pandemic.

I think your neighbour is getting carried away . About 10% is the typical increase ( more Up North and less in London) although this info is always slightly out of date and it seems like they are still increasing . Unless of course you live in a big house in an expensive area.

jamesd

michaels 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.

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.

Yes, but bonds cover far longer than any sensible amount of cash does. Still, there's no law preventing the need to draw on equities eventually.

jamesd

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 🤓

Thanks. That one is going to be added to one of the Drawdown: safe withdrawal rate posts probably along with the KItces "the single most important chart ever devised pertaining to 'sustainable withdrawals'" post if it's not there already.

The mention of 7% as average for the 4% rule should go a long way towards reassuring people who think that the starting 5.5% (before costs) of Guyton-Klinger is high when it's really just starting closer to average then adjusting based on what happens.

michaels

On cfiresim guyton-klinger is giving me much lower average withdrawals than simple rpi linked fixed sum from a pot plus 2 x state pensions - not sure how this makes sense?

marlot

michaels said:

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.

...

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

It is quite a conundrum, and I don't believe there is an easy answer.

I worked a few years more than I might have done, simply to give a buffer that I would still be fine if there was a stock market crash or other untoward event.

I consider myself very fortunate to have some Db pensions.  Though if inflation takes off, even they are limited.

JohnWinder

Karsten has modelled this 'working a few years more'. He found that with only one year extra work:

'The impact of 'one more year' on the safe withdrawal amounts is surprisingly uniform. Whether it’s a 30-year horizon or 50-year horizon, whether it’s with or without additional cash flows, you boost the failsafe withdrawal amount by about 7.5-8%.'

https://earlyretirementnow.com/2021/01/13/one-more-year-swr-series-part-42/

michaels

JohnWinder said:

Karsten has modelled this 'working a few years more'. He found that with only one year extra work:

'The impact of 'one more year' on the safe withdrawal amounts is surprisingly uniform. Whether it’s a 30-year horizon or 50-year horizon, whether it’s with or without additional cash flows, you boost the failsafe withdrawal amount by about 7.5-8%.'

https://earlyretirementnow.com/2021/01/13/one-more-year-swr-series-part-42/

Which is surprisingly counter intuitive given that 50 year SWRs are not 2/3rds lower than 30 year rates?