Foolishness of the 4% rule

MK62

Deleted_User said:

MK62 said:

Thrugelmir said:

MK62 said:

Deleted_User said:

Sure we are dealing with choices, estimates and gambles on factors that we cannot control.

Yes, everything is a choice. Treasury isn’t a gamble; not if you hold it to maturity. Annuity is not a gamble.  The risk is there but its extremely small.

Risk takes many forms.......and with an annuity you are ignoring the very high risk that you won't even get your capital back.

That's the "gamble" with annuities.......

Will the UK Government default. I'd say not. 

Those with global bond funds may be more exposed i.e. Evergrande. 

I didn't mean the risk of default.....I meant the risk of not getting out what you put in, as there is a high risk that you'll die before the break even point......as OldScientist said, that's a judgement call on the probabilities......and any judgement call on probabilities is the arguably the very definition of a gamble.....

PS....fair enough, I suppose this is of little concern to those with no partner,  dependants or heirs......

You can buy annuities which give your partner 100%,, 50% or 2/3 of the income. And even to guarantee inheritance, although thats a vanity project. You could also buy life insurance.

True, but now you are taking a knife to the already low annuity payout.....nothing of what you suggest is free.

In the end this is a circular argument......we have differing opinions, end of.

My opinion is that currently, in the UK, annuities offer relatively poor value......and tbh, to choose a level one with the intention of it covering your basic essentials, for life, would, imho, be unwise....these essentials are likely to rise at least in line with inflation.
Yes, you can get other forms of inflation protection, but they all cost, and you'd need to budget for that at the outset.

[Deleted User]

itwasntme001 said:

Deleted_User said:

itwasntme001 said:

Deleted_User said:

itwasntme001 said:

Deleted_User said:

you get the opportunity to reinvest, hopefully at a higher rate

That’s what they said 5 years ago. And 10. And 15. And 20. How is that working out?   Now compare to people who bought annuities at those points in time. See?

And the "loss" in waiting for annuity rates to rise is not as large as you may have thought.  Equities and bonds have risen considerably over the last 5 and 10 years.  Depending on how the money, that would have otherwise been annuitised, had been invested, the loss in not locking in a higher rate 5/10 years ago is fairly minimal.

If you want certainty then you hold your government bond to maturity.  Otherwise it's a bet.  Someone doing that and relying on a bond ladder would have seen his income substantially diminish as one rung comes to an end and another one has to be bought into. . 

Bond funds or bonds not held to maturity are a different game.  If you want risk and volatility for the totality of your portfolio - go ahead. 

I agree that annuities are still a good buy for someone wanting to assure a guaranteed income for the "basic necessities" bucket. 

Not really sure what point you are making?

You said that "bonds have risen considerably over the last 5 years".  That's true if you are selling a bond or a bond fund before maturity. That's not the scenario being discussed.   We are focusing on the portion of retirement income that needs to be covered by the guaranteed income.  Bond funds don't do that. 

And I was referring to your point on people having waited for annuity rates to rise and how that turned out for them.  In reality, there was hardly anything lost providing the capital was instead invest in an appropriate way.  Maybe you know this already, but just wanted to highlight that in case anyone thought from your comment that people lost out in any meaningful way from waiting for annuity rates to rise.

Look, anyone invested over the last 10 years has done wonderfully.  Bonds, shares, houses - any asset type.  That's really not the point.  The point is that markets go down as well as up.  Ten years ago or 20 years ago, a retiree had to make a decision how to deal with the volatility risks from bonds and shares.  You can pick a point in history when bond funds have done great or terribly (for multiple decades).  None of it deals with the question of what is an appropriate tool to protect your essential income from volatility while the rest of your money is invested. That's something only annuities or cash or government bonds held to maturity can achieve.  And someone who chose a 5-year bond ladder over annuities 10 or 5 years ago for this purpose has done badly because his income is depleted. 

bostonerimus

itwasntme001 said:

Deleted_User said:

you get the opportunity to reinvest, hopefully at a higher rate

That’s what they said 5 years ago. And 10. And 15. And 20. How is that working out?   Now compare to people who bought annuities at those points in time. See?

And the "loss" in waiting for annuity rates to rise is not as large as you may have thought.  Equities and bonds have risen considerably over the last 5 and 10 years.  Depending on how the money, that would have otherwise been annuitised, had been invested, the loss in not locking in a higher rate 5/10 years ago is fairly minimal.

I think it's unfair, or maybe apples and oranges, to bring up equities and bonds here as they are completely different products to annuities, although complementary.

I know that I'm very grateful for having a DB pension as my annuity component to my retirement plan. I was able to convert my DC plan to the state DB plan because of some union lobbying and I took a $280k DC balance and got a $19.5k inflation linked pension starting at 55, so it was a no brainer. So I'm pro annuity like pooled retirement vehicles, just not at the paltry levels on offer in the insurance market place today.

Terron

Cash is vulnerable to inflation. Index linked bonds and annuities would work. 
I remember the 1970s - four years of inflation over 15% with a peak of 24%.

bostonerimus

Deleted_User said:

itwasntme001 said:

Deleted_User said:

itwasntme001 said:

Deleted_User said:

itwasntme001 said:

Deleted_User said:

you get the opportunity to reinvest, hopefully at a higher rate

That’s what they said 5 years ago. And 10. And 15. And 20. How is that working out?   Now compare to people who bought annuities at those points in time. See?

And the "loss" in waiting for annuity rates to rise is not as large as you may have thought.  Equities and bonds have risen considerably over the last 5 and 10 years.  Depending on how the money, that would have otherwise been annuitised, had been invested, the loss in not locking in a higher rate 5/10 years ago is fairly minimal.

If you want certainty then you hold your government bond to maturity.  Otherwise it's a bet.  Someone doing that and relying on a bond ladder would have seen his income substantially diminish as one rung comes to an end and another one has to be bought into. . 

Bond funds or bonds not held to maturity are a different game.  If you want risk and volatility for the totality of your portfolio - go ahead. 

I agree that annuities are still a good buy for someone wanting to assure a guaranteed income for the "basic necessities" bucket. 

Not really sure what point you are making?

You said that "bonds have risen considerably over the last 5 years".  That's true if you are selling a bond or a bond fund before maturity. That's not the scenario being discussed.   We are focusing on the portion of retirement income that needs to be covered by the guaranteed income.  Bond funds don't do that. 

And I was referring to your point on people having waited for annuity rates to rise and how that turned out for them.  In reality, there was hardly anything lost providing the capital was instead invest in an appropriate way.  Maybe you know this already, but just wanted to highlight that in case anyone thought from your comment that people lost out in any meaningful way from waiting for annuity rates to rise.

Look, anyone invested over the last 10 years has done wonderfully.  Bonds, shares, houses - any asset type.  That's really not the point.  The point is that markets go down as well as up.  Ten years ago or 20 years ago, a retiree had to make a decision how to deal with the volatility risks from bonds and shares.  You can pick a point in history when bond funds have done great or terribly (for multiple decades).  None of it deals with the question of what is an appropriate tool to protect your essential income from volatility while the rest of your money is invested. That's something only annuities or cash or government bonds held to maturity can achieve.  And someone who chose a 5-year bond ladder over annuities 10 or 5 years ago for this purpose has done badly because his income is depleted. 

Yes an annuity was ok if you bought it 10 or 20 years ago and using a fixed saving ladder would not have done as well, but today annuity rates are so low that I think they have dropped below a sensible value threshold.

Thrugelmir

MK62 said:

Deleted_User said:

MK62 said:

Thrugelmir said:

MK62 said:

Deleted_User said:

Sure we are dealing with choices, estimates and gambles on factors that we cannot control.

Yes, everything is a choice. Treasury isn’t a gamble; not if you hold it to maturity. Annuity is not a gamble.  The risk is there but its extremely small.

Risk takes many forms.......and with an annuity you are ignoring the very high risk that you won't even get your capital back.

That's the "gamble" with annuities.......

Will the UK Government default. I'd say not. 

Those with global bond funds may be more exposed i.e. Evergrande. 

I didn't mean the risk of default.....I meant the risk of not getting out what you put in, as there is a high risk that you'll die before the break even point......as OldScientist said, that's a judgement call on the probabilities......and any judgement call on probabilities is the arguably the very definition of a gamble.....

PS....fair enough, I suppose this is of little concern to those with no partner,  dependants or heirs......

You can buy annuities which give your partner 100%,, 50% or 2/3 of the income. And even to guarantee inheritance, although thats a vanity project. You could also buy life insurance.

True, but now you are taking a knife to the already low annuity payout.....nothing of what you suggest is free.

In the end this is a circular argument......we have differing opinions, end of.

My opinion is that currently, in the UK, annuities offer relatively poor value......and tbh, to choose a level one with the intention of it covering your basic essentials, for life, would, imho, be unwise....these essentials are likely to rise at least in line with inflation.
Yes, you can get other forms of inflation protection, but they all cost, and you'd need to budget for that at the outset.

And equities offer good value no doubt.  Despite offering no protection against inflation. 

itwasntme001

Deleted_User said:

itwasntme001 said:

Deleted_User said:

itwasntme001 said:

Deleted_User said:

itwasntme001 said:

Deleted_User said:

you get the opportunity to reinvest, hopefully at a higher rate

That’s what they said 5 years ago. And 10. And 15. And 20. How is that working out?   Now compare to people who bought annuities at those points in time. See?

And the "loss" in waiting for annuity rates to rise is not as large as you may have thought.  Equities and bonds have risen considerably over the last 5 and 10 years.  Depending on how the money, that would have otherwise been annuitised, had been invested, the loss in not locking in a higher rate 5/10 years ago is fairly minimal.

If you want certainty then you hold your government bond to maturity.  Otherwise it's a bet.  Someone doing that and relying on a bond ladder would have seen his income substantially diminish as one rung comes to an end and another one has to be bought into. . 

Bond funds or bonds not held to maturity are a different game.  If you want risk and volatility for the totality of your portfolio - go ahead. 

I agree that annuities are still a good buy for someone wanting to assure a guaranteed income for the "basic necessities" bucket. 

Not really sure what point you are making?

You said that "bonds have risen considerably over the last 5 years".  That's true if you are selling a bond or a bond fund before maturity. That's not the scenario being discussed.   We are focusing on the portion of retirement income that needs to be covered by the guaranteed income.  Bond funds don't do that. 

And I was referring to your point on people having waited for annuity rates to rise and how that turned out for them.  In reality, there was hardly anything lost providing the capital was instead invest in an appropriate way.  Maybe you know this already, but just wanted to highlight that in case anyone thought from your comment that people lost out in any meaningful way from waiting for annuity rates to rise.

Look, anyone invested over the last 10 years has done wonderfully.  Bonds, shares, houses - any asset type.  That's really not the point.  The point is that markets go down as well as up.  Ten years ago or 20 years ago, a retiree had to make a decision how to deal with the volatility risks from bonds and shares.  You can pick a point in history when bond funds have done great or terribly (for multiple decades).  None of it deals with the question of what is an appropriate tool to protect your essential income from volatility while the rest of your money is invested. That's something only annuities or cash or government bonds held to maturity can achieve.  And someone who chose a 5-year bond ladder over annuities 10 or 5 years ago for this purpose has done badly because his income is depleted. 

And I don't disagree with pretty much all you say here.  I was merely pointing out that someone who wanted to wait for annuity rates to go higher 5 or 10 years ago, did not miss out on much, despite annuity rates even lower.  Your previous post seemed to suggest they did miss out, so was just clarifying that further.

itwasntme001

bostonerimus said:

itwasntme001 said:

Deleted_User said:

you get the opportunity to reinvest, hopefully at a higher rate

That’s what they said 5 years ago. And 10. And 15. And 20. How is that working out?   Now compare to people who bought annuities at those points in time. See?

And the "loss" in waiting for annuity rates to rise is not as large as you may have thought.  Equities and bonds have risen considerably over the last 5 and 10 years.  Depending on how the money, that would have otherwise been annuitised, had been invested, the loss in not locking in a higher rate 5/10 years ago is fairly minimal.

I think it's unfair, or maybe apples and oranges, to bring up equities and bonds here as they are completely different products to annuities, although complementary.

I know that I'm very grateful for having a DB pension as my annuity component to my retirement plan. I was able to convert my DC plan to the state DB plan because of some union lobbying and I took a $280k DC balance and got a $19.5k inflation linked pension starting at 55, so it was a no brainer. So I'm pro annuity like pooled retirement vehicles, just not at the paltry levels on offer in the insurance market place today.

See above.

itwasntme001

I think a healthy 65 year old with no heirs would probably do well to cash in some of their portfolio to buy an index linked annuity which is in the region of 2.5-3%.

You hedge longevity risk, inflation risk (equities ain't gonna protect you from inflation), selling in panic risk, mental energy, time to manage, possibly fees.  And most importantly you don't assume any market risk any longer.

Income tax should obviously be a consideration however.  But still, a basic rate taxpayer only shaves off potentially 20% off the annuity rate, still seems attractive vs all the risks I have outlined above.

[Deleted User]

Equities do normally protect from inflation.  Very well.  Over long term, as per usual.  In the short term they could fall as the inflation and interest rates go up.