Final Salary Pension Transfer

Prism

RoadToRiches said:

Prism said:

RoadToRiches said:

arty688 said:

Out of interest if someone was to offer you £120k now or £2.5k per year in five years time going up with rpi what would you take?

£120K every time because

RPI is a unknown but lets Roll back the clock to 1991. if you had started out with £2,500 back then in real terms this would be worth £5,740 today - https://www.hl.co.uk/tools/calculators/inflation-calculator

Let's take the average = £4,120 x 30 years = £123,600 is what the pot is worth but does not take into account investment growth.

Now lets invest £120,000 in the S&P 500 which on average has returned 7% (Taking into account Crashes over this period - past performance does not equal the future) and a drawdown of £400 per month with RPI running at 2.5%

Your pot would still be worth £343,052 after drawing down £400 per month for 30 years - https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php

If only it were so simple.

How about another scenario then using real figures for the US stock market with £120,000, a 4% withdrawal and only 1.9% average inflation.

By year three the pot has dropped to less than half - £57k
By year fourteen its around a quarter - £34k
By year twenty its down to two years left in the pot - £15k and withdrawals are £7.1k per year by this point.

Now that is pretty poor timing I agree (1st April 2000) but still the point is that what could have been a stress free modest retirement has become a rather stressful worry about money.

If you are doing the 4% withdrawal thing, then may I suggest you need a pot of money to weather that storm, you hold back on taking funds out when the markets are falling like that. Yes I get markets can be unpredictable and can go down as well as up.  Overall since 1929 you'd have done well investing in the markets.  They usually do well over the longer term.

Thats the point though - its not so simple.

How big should that pot of money be? 2 years? 5 years? For reference this particular downturn took over 12 years to recover. So 12 years in cash?

Shouldn't there have been a chunk in government bonds since they have done better than equities for most of this century, assuming my sample starting point? And if so then does the same still apply today given QE and low interest rates?

How about if inflation isn't such a modest 1.9% but instead jumps up to 5% or more and stays there 1970's style? Shouldn't there be an allocation to property and/or BTLs to help protect against that?

These are rhetorical questions really but a simple answer might be a bit of all of those things.

I'm not saying that managing a retirement pot is doomed to fail - of course it isn't - but everyone needs to plan for a worst case scenario just in case. Trading in a DB pension for a DC one is never a no brainer even with high CETVs. Having both DC and DB is probably the most optimal.

Dale72

James sounds like a typical fund manager!! But just goes to show if you take control of your finances early enough, and don't get spooked by temporary market fluctuations, then there is good money to be made in the long run.

RoadToRiches

I think also you have to look at which stock market you are talking about as some markets have recovered well others have not. Hence the reasons for having a world view of the markets.

Prism

RoadToRiches said:

I think also you have to look at which stock market you are talking about as some markets have recovered well others have not. Hence the reasons for having a world view of the markets.

Well you mentioned the S&P 500 but the world market performance this century was almost as bad.

Prism

Dale72 said:

James sounds like a typical fund manager!! But just goes to show if you take control of your finances early enough, and don't get spooked by temporary market fluctuations, then there is good money to be made in the long run.

The difference is that James is a saver and contributing through his working life. He never sells. This discussion is about a retiree who is a forced seller regardless of the market and therefore James's story isn't that relevant.

Thrugelmir

Dale72 said:

Thrugelmir said:

Scenario's only become the hot topic of conversation after a period of stock market performance. The conversation soon dies when the weather changes. 

What 'period' are you referring to? Barring the odd blip the market has seen a steady and consistent rise for decades.

Which market are you refering too? There's many to chose from. 

Dale72

Prism said:

The difference is that James is a saver and contributing through his working life. He never sells. This discussion is about a retiree who is a forced seller regardless of the market and therefore James's story isn't that relevant.

I agree that people who leave it too late may be forced to deal with market fluctuations, all the more reason to take control of your finances as earlier as possible. Where I don't agree however, is your statement that everyone needs to plan for a worst case scenario just in case. No, they don't. Sure, plan for a reasonably bad scenario, but you can't go through life planning for the worst case, not without missing the best bits because your too busy planning for the worst. Anyway, state pension is there to cover the worst case scenario. In fact some people only have that and still don't seem too unhappy, maybe it's a mindset.

Thrugelmir

RoadToRiches said:

Meet James, James is the world’s worst market timer – he always buys at market peaks

James began his career in 1970 at age 22. He was a good saver and planner. His plan was to save $2,000/year during the 1970’s and increase it by $2,000 each decade until could retire by end of 2013 aged 65 (So $4,000/year in the 80’s, $6,000/year in the 90’s then $8,000/year until he retired).

He saved $2,000 a year and had $6,000 to invest by end of 1972

James only had the courage to invest in the market after a huge run up

So all of his money went into the S&P 500 Index fund at the end of 1972

The market dropped 50% in 1973/74. James had invested at the peak before the crash

BUT, once he was invested, he never sold his shares. He HELD on for dear life because he was too nervous about being wrong on both his sell decisions too

James didn’t feel comfortable investing again until August 1987 after another huge bull market. After 15 years of saving, he had $46,000 to put in an S&P 500 Index fund.

It was another peak, the market lost 30% right after James bought the index

Again, he stayed invested, terrified of selling at the wrong price

After the 1987 crash James was scared to invest again until the tech stocks lifted off end of 1999.  He invested $68,000 of savings just before a 50%+ downturn.

James decided to make one more big purchase with his savings before he retired

The final investment was made in October 2007.  He invested $64,000 he had been saving since 2000. Right before another 50%+ crash from the credit crunch.

After the financial crisis he continued to save his money (Another $40,000) but kept his stock investments in the market until he retired at the end of 2013

To recap, James was a terrible market timer with his only stock market purchases being made at the market peaks just before extreme losses. But he never sold a single share. He didn’t sell after the Bear market of 1973-74 or the Black Monday in 1987, or the technology bust in 2000 or the financial crisis of 2007-09

So How did James do?

James bought at the very top of the market but ended up with $1.1 million

He was extremely clever then. As the first index tracking investment for the S&P 500 was only created in 1976. When the fund was launched it was ridiculed. Raised just $11 on public offering. Rewriting history with hindsight sums up far too many investors. Who spend little to no time researching for themselves.  

Dale72

Thrugelmir said:

Which market are you refering too? There's many to chose from. 

The UK one obviously, there are others with good records but why go searching when the money tree is in your own yard?

Diplodicus

Well done Dale. 
AJ Bell were decent to keep the door ajar, you may wish to transfer your investments with Hargreaves Lansdown to them.
And don't worry for a minute about the choice you made - you'll be fine.