Foolishness of the 4% rule

Sea_Shell

Deleted_User said:

I think that “low annuity rates”  are a red herring.  The past does not matter. We dont know the future. Lots of great and highly competitive rates are available today. 

Agree that combining a “guarantee” with market exposure is the best solution for retirees. Which is readily available to DC pension holders. 

Is there an industry minimum amount required to buy an annuity?  

Diplodicus

Thrugelmir said:

Linton said:

Deleted_User said:

michaels said:

Any strategy where you change the mix between cash and equities depending on some perception of whether markets are 'high' or 'low' is 'timing the market'.  Most of the literature suggests that trying to time the market is as likely to lead to underperformance as overperformance - may be more so as it involves extra trades.

It does not matter what you call it.  The problem with “timing the market” is that humans were not designed for it and normal human emotions  lead to bad investment timing.  This fundamental problem could at least hypothetically  be mitigated by having a strict algorithm make decisions for you.  And using the cash wedge during market downturns does not result in extra trades.  

The main problem is that its hard to execute this strategy.  When the sky is falling and your cash is the only thing holding value, will you really be able to deplete this one resource that is working for you? I think its much easier if you have sufficient DB income to cover the bucket of your basic needs and the cash bucket is only there for contingencies. 

The problem with predicting the market is deeper than humans not being designed to do it.  There cannot be an algorithm that could make optimal investment decisions for you no matter what the economic circumstances for the reason that Michaels gives - the use of any such algorithm will invalidate its own prediction.

Whether the market is random is difficult to prove. It probably isnt completely so in the short term as there seem to be momentum effects. However the best approach is in my view to assume that it is and so dont worry about it - treat it like the UK weather.  You need an asset allocation that you can live with no matter what the circumstances and keep to it through the good times and bad. In dealing with the weather you have appropriate clothing in your wardrobe that can deal with most things.  Just like the situation with the weather you have to accept that your wardrobe will not be able to protect you from the real extremes.

Even the weather has probabilities. It's not completely random. Weather doesn't materialise from nowhere. Rain although forecast isn't always a certainty. Sensible people will take an umbrella with them as insurance though. Those that don't keep up with events, or are unprepared by nature, are more than likely going to get a good soaking at some point of time. Luck only lasts so long. 

The rain it raineth on the just
And also on the unjust fella;
But chiefly on the just, because
The unjust hath the just’s umbrella.”

Linton

Deleted_User said:

I think that “low annuity rates”  are a red herring.  The past does not matter. We dont know the future. Lots of great and highly competitive rates are available today. 

Agree that combining a “guarantee” with market exposure is the best solution for retirees. Which is readily available to DC pension holders. 

Really? What rates available in the UK do you consider "great"? What are they competitive with?

[Deleted User]

MK62 said:

Deleted_User said:

I think that “low annuity rates”  are a red herring.  The past does not matter. We dont know the future. Lots of great and highly competitive rates are available today. 

That rather depends on your definition of "great" and "highly competitive"....

You can analyze rates offered by comparing them to various other investments.  This analysis has been done for us and is quite persuasive. E.g. “safety-first retirement planning”, “retirement income for life”, etc.  Not all types of annuities provide good value but many do. 

[Deleted User]

Sea_Shell said:

Deleted_User said:

I think that “low annuity rates”  are a red herring.  The past does not matter. We dont know the future. Lots of great and highly competitive rates are available today. 

Agree that combining a “guarantee” with market exposure is the best solution for retirees. Which is readily available to DC pension holders. 

Is there an industry minimum amount required to buy an annuity?  

Product specific.  Typically low, like 5k or 10k. 

[Deleted User]

Linton said:

Deleted_User said:

I think that “low annuity rates”  are a red herring.  The past does not matter. We dont know the future. Lots of great and highly competitive rates are available today. 

Agree that combining a “guarantee” with market exposure is the best solution for retirees. Which is readily available to DC pension holders. 

Really? What rates available in the UK do you consider "great"? What are they competitive with?

They are extremely competitive when pitched against other fixed income instruments.  Do you want a steady guaranteed income for some of your portfolio?  And, given the title of this thread, they are very competitive with SWR (which isnt even guaranteed). 

Linton

Deleted_User said:

Linton said:

Deleted_User said:

I think that “low annuity rates”  are a red herring.  The past does not matter. We dont know the future. Lots of great and highly competitive rates are available today. 

Agree that combining a “guarantee” with market exposure is the best solution for retirees. Which is readily available to DC pension holders. 

Really? What rates available in the UK do you consider "great"? What are they competitive with?

They are extremely competitive when pitched against other fixed income instruments.  Do you want a steady guaranteed income for some of your portfolio?  And, given the title of this thread, they are very competitive with SWR (which isnt even guaranteed). 

Annuities are not competitive with an SWR.  An SWR is based on taking an inflation adjusrted income from a fixed pot.  SWRs normally used here are 3.5%.  An RPI inflation adjusted annuity at 65 in the UK is about 2.7%.  That rate is for a single person, so nothing left for a grieving spouse whereas one would expect an SWR to provide cover.  

Sea_Shell

Deleted_User said:

Sea_Shell said:

Deleted_User said:

I think that “low annuity rates”  are a red herring.  The past does not matter. We dont know the future. Lots of great and highly competitive rates are available today. 

Agree that combining a “guarantee” with market exposure is the best solution for retirees. Which is readily available to DC pension holders. 

Is there an industry minimum amount required to buy an annuity?  

Product specific.  Typically low, like 5k or 10k. 

Wow, that's a low start point.  I can't believe it's financially viable to offer a product for that...or do they charge fixed fees?

£5000 annuity...what's that, a bag of crisps a week, for life!! 😲

bostonerimus

Deleted_User said:

Linton said:

Deleted_User said:

I think that “low annuity rates”  are a red herring.  The past does not matter. We dont know the future. Lots of great and highly competitive rates are available today. 

Agree that combining a “guarantee” with market exposure is the best solution for retirees. Which is readily available to DC pension holders. 

Really? What rates available in the UK do you consider "great"? What are they competitive with?

They are extremely competitive when pitched against other fixed income instruments.  Do you want a steady guaranteed income for some of your portfolio?  And, given the title of this thread, they are very competitive with SWR (which isnt even guaranteed). 

When you compare !!!!!! with !!!!!! then that will be true. You are basically just buying longevity insurance with an annuity today. You will lock in very low income and most people will be better off with the flexibility of a savings bond ladder. A 60 year old male can get a flat lifetime payout rate of 4.9% today which equates to an annual return of about 2% over the 25 years of their expected average lifespan of 85. No wonder annuities are not that popular.

DarwinBoy

Vanguard (in Canada) have an Retirement Income ETF that pays approx 4% pa. ETF Symbol (VRIF), 3rd party assessment of the fund in this youtube (just google youtube vanguard VRIF).  Fund pays monthly. I believe a similar fund maybe coming to the UK soon.