Foolishness of the 4% rule

[Deleted User]

Audaxer said:

Deleted_User said:

There are 4 “buckets” that each retiree needs to think about:

1. Basic, routine needs.  Food. Shelter. Car if you need it. Books. Newspapers. Beer.  Those kinds of things.  This income is best secured by something actually safe. State pension. Other DB pension. Annuity. Government bond (sucks right now).   Stockmarket is highly variable and the future is unknown.  Stocks can’t do this job. Keep in mind that longevity  is a good thing but also a risk for someone who relies on highly volatile investments.  And if you are on a pension board then chances are you will live longer than an average Brit. 

Many retirees without DB pensions will unfortunately not have their basic income needs covered by State Pension(s) alone, and therefore they do also rely on income from stocks in their DC pot and/or S&S ISA for part of their routine income needs. I would say the aim is to have a big enough pot, including cash, to also cover Contingency and Discretionary Income.

In this thread I was advocating annuities to cover this gap. Not the only option; but in my opinion it needs to be a type of fixed income.  A government bond ladder could work, but based on todays situation it would need to be large to not run out early. 

michaels

Deleted_User said:

Audaxer said:

Deleted_User said:

There are 4 “buckets” that each retiree needs to think about:

1. Basic, routine needs.  Food. Shelter. Car if you need it. Books. Newspapers. Beer.  Those kinds of things.  This income is best secured by something actually safe. State pension. Other DB pension. Annuity. Government bond (sucks right now).   Stockmarket is highly variable and the future is unknown.  Stocks can’t do this job. Keep in mind that longevity  is a good thing but also a risk for someone who relies on highly volatile investments.  And if you are on a pension board then chances are you will live longer than an average Brit. 

Many retirees without DB pensions will unfortunately not have their basic income needs covered by State Pension(s) alone, and therefore they do also rely on income from stocks in their DC pot and/or S&S ISA for part of their routine income needs. I would say the aim is to have a big enough pot, including cash, to also cover Contingency and Discretionary Income.

In this thread I was advocating annuities to cover this gap. Not the only option; but in my opinion it needs to be a type of fixed income.  A government bond ladder could work, but based on todays situation it would need to be large to not run out early. 

I still don't think anything without full index linking would 'solve' the problem, bonds just replace volatility risk with inflation risk

[Deleted User]

michaels said:

Deleted_User said:

Audaxer said:

Deleted_User said:

There are 4 “buckets” that each retiree needs to think about:

1. Basic, routine needs.  Food. Shelter. Car if you need it. Books. Newspapers. Beer.  Those kinds of things.  This income is best secured by something actually safe. State pension. Other DB pension. Annuity. Government bond (sucks right now).   Stockmarket is highly variable and the future is unknown.  Stocks can’t do this job. Keep in mind that longevity  is a good thing but also a risk for someone who relies on highly volatile investments.  And if you are on a pension board then chances are you will live longer than an average Brit. 

Many retirees without DB pensions will unfortunately not have their basic income needs covered by State Pension(s) alone, and therefore they do also rely on income from stocks in their DC pot and/or S&S ISA for part of their routine income needs. I would say the aim is to have a big enough pot, including cash, to also cover Contingency and Discretionary Income.

In this thread I was advocating annuities to cover this gap. Not the only option; but in my opinion it needs to be a type of fixed income.  A government bond ladder could work, but based on todays situation it would need to be large to not run out early. 

I still don't think anything without full index linking would 'solve' the problem, bonds just replace volatility risk with inflation risk

In the 90s you could buy 30year inflation protected bonds with real return over 5%. Inflation risk could often be handled by state/DB assets and, if needed by inputs from a reasonably sized “discretionary” pot. If someone is set on infaltion-protecting annuities, I would use one with 2% escalation. 

Audaxer

Deleted_User said:

Audaxer said:

Deleted_User said:

There are 4 “buckets” that each retiree needs to think about:

1. Basic, routine needs.  Food. Shelter. Car if you need it. Books. Newspapers. Beer.  Those kinds of things.  This income is best secured by something actually safe. State pension. Other DB pension. Annuity. Government bond (sucks right now).   Stockmarket is highly variable and the future is unknown.  Stocks can’t do this job. Keep in mind that longevity  is a good thing but also a risk for someone who relies on highly volatile investments.  And if you are on a pension board then chances are you will live longer than an average Brit. 

Many retirees without DB pensions will unfortunately not have their basic income needs covered by State Pension(s) alone, and therefore they do also rely on income from stocks in their DC pot and/or S&S ISA for part of their routine income needs. I would say the aim is to have a big enough pot, including cash, to also cover Contingency and Discretionary Income.

In this thread I was advocating annuities to cover this gap. Not the only option; but in my opinion it needs to be a type of fixed income.  A government bond ladder could work, but based on todays situation it would need to be large to not run out early. 

Fair enough, but annuities are generally thought of as better value later in retirement. From what I've read on this forum, most retirees without enough in DB pensions to cover their income needs, are drawing down from a portfolio of equities and bonds early in retirement, rather than buying an annuity or drawing from fixed income funds alone.

Thrugelmir

michaels said:

Deleted_User said:

Audaxer said:

Deleted_User said:

There are 4 “buckets” that each retiree needs to think about:

1. Basic, routine needs.  Food. Shelter. Car if you need it. Books. Newspapers. Beer.  Those kinds of things.  This income is best secured by something actually safe. State pension. Other DB pension. Annuity. Government bond (sucks right now).   Stockmarket is highly variable and the future is unknown.  Stocks can’t do this job. Keep in mind that longevity  is a good thing but also a risk for someone who relies on highly volatile investments.  And if you are on a pension board then chances are you will live longer than an average Brit. 

Many retirees without DB pensions will unfortunately not have their basic income needs covered by State Pension(s) alone, and therefore they do also rely on income from stocks in their DC pot and/or S&S ISA for part of their routine income needs. I would say the aim is to have a big enough pot, including cash, to also cover Contingency and Discretionary Income.

In this thread I was advocating annuities to cover this gap. Not the only option; but in my opinion it needs to be a type of fixed income.  A government bond ladder could work, but based on todays situation it would need to be large to not run out early. 

I still don't think anything without full index linking would 'solve' the problem, bonds just replace volatility risk with inflation risk

Equities aren't immune from inflation either. 

[Deleted User]

Audaxer said:

Deleted_User said:

Audaxer said:

Deleted_User said:

There are 4 “buckets” that each retiree needs to think about:

1. Basic, routine needs.  Food. Shelter. Car if you need it. Books. Newspapers. Beer.  Those kinds of things.  This income is best secured by something actually safe. State pension. Other DB pension. Annuity. Government bond (sucks right now).   Stockmarket is highly variable and the future is unknown.  Stocks can’t do this job. Keep in mind that longevity  is a good thing but also a risk for someone who relies on highly volatile investments.  And if you are on a pension board then chances are you will live longer than an average Brit. 

Many retirees without DB pensions will unfortunately not have their basic income needs covered by State Pension(s) alone, and therefore they do also rely on income from stocks in their DC pot and/or S&S ISA for part of their routine income needs. I would say the aim is to have a big enough pot, including cash, to also cover Contingency and Discretionary Income.

In this thread I was advocating annuities to cover this gap. Not the only option; but in my opinion it needs to be a type of fixed income.  A government bond ladder could work, but based on todays situation it would need to be large to not run out early. 

Fair enough, but annuities are generally thought of as better value later in retirement. From what I've read on this forum, most retirees without enough in DB pensions to cover their income needs, are drawing down from a portfolio of equities and bonds early in retirement, rather than buying an annuity or drawing from fixed income funds alone.

I wouldn’t start an annuity before 65 but you can buy a deferred annuity at 55 to start later. You are right that annuities seem very unpopular on this forum. Not sure if anyone uses the “bucket” approach.

michaels

Deleted_User said:

michaels said:

Deleted_User said:

Audaxer said:

Deleted_User said:

There are 4 “buckets” that each retiree needs to think about:

1. Basic, routine needs.  Food. Shelter. Car if you need it. Books. Newspapers. Beer.  Those kinds of things.  This income is best secured by something actually safe. State pension. Other DB pension. Annuity. Government bond (sucks right now).   Stockmarket is highly variable and the future is unknown.  Stocks can’t do this job. Keep in mind that longevity  is a good thing but also a risk for someone who relies on highly volatile investments.  And if you are on a pension board then chances are you will live longer than an average Brit. 

Many retirees without DB pensions will unfortunately not have their basic income needs covered by State Pension(s) alone, and therefore they do also rely on income from stocks in their DC pot and/or S&S ISA for part of their routine income needs. I would say the aim is to have a big enough pot, including cash, to also cover Contingency and Discretionary Income.

In this thread I was advocating annuities to cover this gap. Not the only option; but in my opinion it needs to be a type of fixed income.  A government bond ladder could work, but based on todays situation it would need to be large to not run out early. 

I still don't think anything without full index linking would 'solve' the problem, bonds just replace volatility risk with inflation risk

In the 90s you could buy 30year inflation protected bonds with real return over 5%. Inflation risk could often be handled by state/DB assets and, if needed by inputs from a reasonably sized “discretionary” pot. If someone is set on infaltion-protecting annuities, I would use one with 2% escalation. 

Inflation will hit 5-6% by the end of this year or early next so that 2% annuity is worth 4% less next year and thereafter.

[Deleted User]

michaels said:

Deleted_User said:

michaels said:

Deleted_User said:

Audaxer said:

Deleted_User said:

There are 4 “buckets” that each retiree needs to think about:

1. Basic, routine needs.  Food. Shelter. Car if you need it. Books. Newspapers. Beer.  Those kinds of things.  This income is best secured by something actually safe. State pension. Other DB pension. Annuity. Government bond (sucks right now).   Stockmarket is highly variable and the future is unknown.  Stocks can’t do this job. Keep in mind that longevity  is a good thing but also a risk for someone who relies on highly volatile investments.  And if you are on a pension board then chances are you will live longer than an average Brit. 

Many retirees without DB pensions will unfortunately not have their basic income needs covered by State Pension(s) alone, and therefore they do also rely on income from stocks in their DC pot and/or S&S ISA for part of their routine income needs. I would say the aim is to have a big enough pot, including cash, to also cover Contingency and Discretionary Income.

In this thread I was advocating annuities to cover this gap. Not the only option; but in my opinion it needs to be a type of fixed income.  A government bond ladder could work, but based on todays situation it would need to be large to not run out early. 

I still don't think anything without full index linking would 'solve' the problem, bonds just replace volatility risk with inflation risk

In the 90s you could buy 30year inflation protected bonds with real return over 5%. Inflation risk could often be handled by state/DB assets and, if needed by inputs from a reasonably sized “discretionary” pot. If someone is set on infaltion-protecting annuities, I would use one with 2% escalation. 

Inflation will hit 5-6% by the end of this year or early next so that 2% annuity is worth 4% less next year and thereafter.

For years we had inflation under 2%.  And the market is predicting same going forward. Could be wrong but thats the best info we have.  “Thereafter” is unknown. 

OldScientist

Deleted_User said:

michaels said:

In the 90s you could buy 30year inflation protected bonds with real return over 5%. Inflation risk could often be handled by state/DB assets and, if needed by inputs from a reasonably sized “discretionary” pot. If someone is set on infaltion-protecting annuities, I would use one with 2% escalation. 

Inflation will hit 5-6% by the end of this year or early next so that 2% annuity is worth 4% less next year and thereafter.

For years we had inflation under 2%.  And the market is predicting same going forward. Could be wrong but thats the best info we have.  “Thereafter” is unknown. 

I don't know what inflation will do in the future, but historically, annualised RPI over 30 year periods in the UK (ending year 1930 to date) had a median of 4.3%, a lower decile of 1.9% and an upper decile of 7.8% (raw data from https://inflation.iamkate.com). While a 2 or 3% annuity would have been fine for the US (where inflation has tended to be lower than the UK over the last century - the equivalent median and decile values of US CPI are 2.9%, 1.4%, and 5.1%, respectively - raw data from http://www.econ.yale.edu/~shiller/data.htm) a 4% annuity might be better for the UK (currently, RPI protected annuities appear to be priced for RPI~5% - note that there are a lot of assumptions in that statement) with the resultant reduction in initial income.

[Deleted User]

Anything that happened decades ago isn’t relevant,  There were fundamental changes to the system since the Bank of England was given an inflation target of 2% and declared independent.   

One can argue that historic inflation isn’t relevant in the US at all because the Feds have recently changed their objective to “average inflation targeting”. It is, however, a minor change compared to much more fundamental changes that happened at the end of 1970s. 

I do not believe that inflation would be allowed to run above the objective for long periods of time. Neither does Mr Market. Could be wrong but by a large margin?  The chances are very low.  You deal with low probability scenarios by staying diversified. 

Also, please keep in mind that RPI, CPI and all the other official measures of inflation will not reflect your exact inflation any more than 2% will.  For example they account for mortgages and the cost of rent. Will you have either when you retire?