Reducing volatility risk prior to retirement

[Deleted User]

bostonerimus said:

Many studies (admittedly US based) have shown that keeping a high percentage of relatively risky equity funds in a retirement portfolio leads to better income producing outcomes than annuities or portfolios with high percentages of bonds. Of course you don't get the guarantee of lifetime income that an annuity gives, but right now annuities are very bad value for money so a cash buffer and a Total Return strategy seems sensible. You could also insure against longevity risk by deferring state pension.

Here is a set of US studies, which shows that having a portion of your portfolio in annuities leads to a better set of outcomes, including the ability to spend more in the early years and potentially higher inheritance at the end. 

https://www.amazon.ca/Safety-First-Retirement-Planning-Integrated-Worry-Free-ebook/dp/B07X2TW623

DairyQueen

Deleted_User said:

bostonerimus said:

Many studies (admittedly US based) have shown that keeping a high percentage of relatively risky equity funds in a retirement portfolio leads to better income producing outcomes than annuities or portfolios with high percentages of bonds. Of course you don't get the guarantee of lifetime income that an annuity gives, but right now annuities are very bad value for money so a cash buffer and a Total Return strategy seems sensible. You could also insure against longevity risk by deferring state pension.

Here is a set of US studies, which shows that having a portion of your portfolio in annuities leads to a better set of outcomes, including the ability to spend more in the early years and potentially higher inheritance at the end. 

https://www.amazon.ca/Safety-First-Retirement-Planning-Integrated-Worry-Free-ebook/dp/B07X2TW623

I suspect that when the next prolonged bear hits, and despite their perceived poor value, annuities will regain popularity.

[Deleted User]

bostonerimus said:

Deleted_User said:

Drawdown or not, poor sequence of return is a very serious risk to people immediately prior and soon after retirement.  The risk is that as portfolio is depleted during the lean years, it may never recover and the pension may run out of money too early.  

You can deal with it by having more fixed income.  That could include DB pensions, bonds or various types of annuities. 

The DB pension is becoming a rare luxury and annuities are such bad value for money now that I wouldn't look at them until relatively late in life, so cash and very short term bonds seem to be the best things to mitigate sequence of return risk.

Most of us have some DB, such as state pension. 

Disagree on annuities.  Its a complex tool with many options, but as per above comment, they provide much better value than cash or bonds (any duration) if used correctly. 

Cash = guaranteed loss in real terms. Short term bonds = guaranteed loss too.  Bonds are a problem for retirees because you need to align duration with unknown retiree’s duration to minimize risk and maximize return.  Insurance companies which issue annuities have very long durations and can pool between investors maximizing bond returns for you. On top of that you get a significant benefit as you get older and the other annuitants of your age die off.  And thats true for 60 and 65 year olds as well as someone in his 80s.  And then you can buy an annuity now which will start paying until after 80, benefiting from other annuitants dying, but also from investment returns between your current age and 80. 

Annuities tend to get bad rap here. Unfairly so. 

[Deleted User]

DairyQueen said:

Deleted_User said:

bostonerimus said:

Many studies (admittedly US based) have shown that keeping a high percentage of relatively risky equity funds in a retirement portfolio leads to better income producing outcomes than annuities or portfolios with high percentages of bonds. Of course you don't get the guarantee of lifetime income that an annuity gives, but right now annuities are very bad value for money so a cash buffer and a Total Return strategy seems sensible. You could also insure against longevity risk by deferring state pension.

Here is a set of US studies, which shows that having a portion of your portfolio in annuities leads to a better set of outcomes, including the ability to spend more in the early years and potentially higher inheritance at the end. 

https://www.amazon.ca/Safety-First-Retirement-Planning-Integrated-Worry-Free-ebook/dp/B07X2TW623

I suspect that when the next prolonged bear hits, and despite their perceived poor value, annuities will regain popularity.

Even if the prolonged bear does not come for a while, partial annuities still allow retirees to be far more comfortable and aggressive with the rest of their portfolio and to spend more.

There is a contradiction between people here saying “I can only safely spend 3% per year” and then saying that annuities are bad value. 

OldMusicGuy

I certainly plan to annuitize a big chunk of my DC pot (probably around 50%) but not until I am at least 70, most likely 75. However, it does depend how things go over the next 5 years or so.

Inflation is not a worry for me over the next 5 years as we control our own personal inflation rate. However, if it stays high (say over 5%) then that may be a challenge. I personally think this is not likely but we shall see.

bostonerimus

Deleted_User said:

bostonerimus said:

Many studies (admittedly US based) have shown that keeping a high percentage of relatively risky equity funds in a retirement portfolio leads to better income producing outcomes than annuities or portfolios with high percentages of bonds. Of course you don't get the guarantee of lifetime income that an annuity gives, but right now annuities are very bad value for money so a cash buffer and a Total Return strategy seems sensible. You could also insure against longevity risk by deferring state pension.

Here is a set of US studies, which shows that having a portion of your portfolio in annuities leads to a better set of outcomes, including the ability to spend more in the early years and potentially higher inheritance at the end. 

https://www.amazon.ca/Safety-First-Retirement-Planning-Integrated-Worry-Free-ebook/dp/B07X2TW623

Pfau receives some of his funding from the insurance industry...but I'm a big fan of the "safety first" approach where you guarantee a base level of income. That could come from DBs, SP or annuities. Right now locking in low interest rates with a lifetime annuity will be a losing proposition for most people over simply putting the money into a savings bond ladder where you can benefit from any increases in interest rates. I think the chance of rates increasing is higher than them decreasing. So if you live longer than an average lifespan you'll win out, but I suppose that eventuality is part of safety first. Of course if you risk that capital in the markets you could lose a lot; but that isn't safety first. If you want to insure against longevity risk the best option now is to defer SP.

Linton

Deleted_User said:

DairyQueen said:

Deleted_User said:

bostonerimus said:

Many studies (admittedly US based) have shown that keeping a high percentage of relatively risky equity funds in a retirement portfolio leads to better income producing outcomes than annuities or portfolios with high percentages of bonds. Of course you don't get the guarantee of lifetime income that an annuity gives, but right now annuities are very bad value for money so a cash buffer and a Total Return strategy seems sensible. You could also insure against longevity risk by deferring state pension.

Here is a set of US studies, which shows that having a portion of your portfolio in annuities leads to a better set of outcomes, including the ability to spend more in the early years and potentially higher inheritance at the end. 

https://www.amazon.ca/Safety-First-Retirement-Planning-Integrated-Worry-Free-ebook/dp/B07X2TW623

I suspect that when the next prolonged bear hits, and despite their perceived poor value, annuities will regain popularity.

Even if the prolonged bear does not come for a while, partial annuities still allow retirees to be far more comfortable and aggressive with the rest of their portfolio and to spend more.

There is a contradiction between people here saying “I can only safely spend 3% per year” and then saying that annuities are bad value. 

The current rate for an RPI linked single life annuity at 60 is about 2%, which could reasonably be considered bad value compared with an SWR of 3%.

bostonerimus

Deleted_User said:

bostonerimus said:

Deleted_User said:

Drawdown or not, poor sequence of return is a very serious risk to people immediately prior and soon after retirement.  The risk is that as portfolio is depleted during the lean years, it may never recover and the pension may run out of money too early.  

You can deal with it by having more fixed income.  That could include DB pensions, bonds or various types of annuities. 

The DB pension is becoming a rare luxury and annuities are such bad value for money now that I wouldn't look at them until relatively late in life, so cash and very short term bonds seem to be the best things to mitigate sequence of return risk.

Most of us have some DB, such as state pension. 

Disagree on annuities.  Its a complex tool with many options, but as per above comment, they provide much better value than cash or bonds (any duration) if used correctly. 

Cash = guaranteed loss in real terms. Short term bonds = guaranteed loss too.  Bonds are a problem for retirees because you need to align duration with unknown retiree’s duration to minimize risk and maximize return.  Insurance companies which issue annuities have very long durations and can pool between investors maximizing bond returns for you. On top of that you get a significant benefit as you get older and the other annuitants of your age die off.  And thats true for 60 and 65 year olds as well as someone in his 80s.  And then you can buy an annuity now which will start paying until after 80, benefiting from other annuitants dying, but also from investment returns between your current age and 80. 

Annuities tend to get bad rap here. Unfairly so. 

Yes the SP is enormously useful as an income floor.

Annuities are not evil, but they are complex and right now a waste of money IMO. Cash will lose value to inflation, but that can be mitigated with a ladder of saving accounts of varying durations. Index linking of annuities is expensive and if you buy a simple fixed annuity you will guarantee losing money to inflation. I looked at the rates for an annuity on the H&L site and 100k will buy a single life, level annuity for a 65 year old of 5k/year. If you put that 100k in a 5 year savings bond ladder and lets say rates stay at a pessimistic 1% then you can withdraw 5k for 22 years and the annuity will only win out at age 87...when the majority of people will be dead and won't get the full advantage of that mortality credit. Now if you emphasize safety and your family has a history of longevity you might go for the annuity, but personally I would defer SP first as insurance for longevity rather than looking at a deferred annuity and use the saving bond ladder at least until I was older and or rates are higher.  

Linton

bostonerimus said:

Deleted_User said:

bostonerimus said:

Many studies (admittedly US based) have shown that keeping a high percentage of relatively risky equity funds in a retirement portfolio leads to better income producing outcomes than annuities or portfolios with high percentages of bonds. Of course you don't get the guarantee of lifetime income that an annuity gives, but right now annuities are very bad value for money so a cash buffer and a Total Return strategy seems sensible. You could also insure against longevity risk by deferring state pension.

Here is a set of US studies, which shows that having a portion of your portfolio in annuities leads to a better set of outcomes, including the ability to spend more in the early years and potentially higher inheritance at the end. 

https://www.amazon.ca/Safety-First-Retirement-Planning-Integrated-Worry-Free-ebook/dp/B07X2TW623

Pfau receives some of his funding from the insurance industry...but I'm a big fan of the "safety first" approach where you guarantee a base level of income. That could come from DBs, SP or annuities. Right now locking in low interest rates with a lifetime annuity will be a losing proposition for most people over simply putting the money into a savings bond ladder where you can benefit from any increases in interest rates. I think the chance of rates increasing is higher than them decreasing. So only the irrational optimist who is convinced that they will live far longer than an average lifespan would buy one. Of course if you risk that capital in the markets you could lose a lot; but that isn't safety first. If you want to insure agains longevity risk the best option now is to defer SP.

I agree very much with the safety-first approach for basic expenditure though I would like to go rather further than "basic".  Being able to sleep at night is more important than the possibility of extra income beyond normal day to day needs.  However unless one has a good DB pension the necessary amount of guaranteed income may be difficult to achieve.

The best value option is as you say to defer SP.  However the gain from deferring for 5 years is only about £2.5K/year which may be useful, but it is far from life-changing.  The best approach I have found is to take income from dividends and bonds and keep 25-30% of my investments in cash and Wealth Preservation funds. These steps cover the gap between "basic" and "normal" to a degree sufficient to meet the sleep at night requirement.

Thrugelmir

Linton said:

Deleted_User said:

DairyQueen said:

Deleted_User said:

bostonerimus said:

Many studies (admittedly US based) have shown that keeping a high percentage of relatively risky equity funds in a retirement portfolio leads to better income producing outcomes than annuities or portfolios with high percentages of bonds. Of course you don't get the guarantee of lifetime income that an annuity gives, but right now annuities are very bad value for money so a cash buffer and a Total Return strategy seems sensible. You could also insure against longevity risk by deferring state pension.

Here is a set of US studies, which shows that having a portion of your portfolio in annuities leads to a better set of outcomes, including the ability to spend more in the early years and potentially higher inheritance at the end. 

https://www.amazon.ca/Safety-First-Retirement-Planning-Integrated-Worry-Free-ebook/dp/B07X2TW623

I suspect that when the next prolonged bear hits, and despite their perceived poor value, annuities will regain popularity.

Even if the prolonged bear does not come for a while, partial annuities still allow retirees to be far more comfortable and aggressive with the rest of their portfolio and to spend more.

There is a contradiction between people here saying “I can only safely spend 3% per year” and then saying that annuities are bad value. 

The current rate for an RPI linked single life annuity at 60 is about 2%, which could reasonably be considered bad value compared with an SWR of 3%.

An SWR is just a number. May work may not. The challenge being to construct a future proof portfolio that delivers the desired outcome.