Foolishness of the 4% rule

bostonerimus

itwasntme001 said:

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.

Indexed linked annuities give very low starting incomes...2.5-3% as you say so all the old arguments about needing more income early on in retirement come into play. The SP is the best index linked annuity that anyone is going to get in the UK...and that's with the benefit being one of the worst in the developed world. 

bostonerimus

Thrugelmir said:

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. 

...and now we are back to Bengen and the 4% index linked withdrawal from a 60/40 portfolio.

Thrugelmir

Deleted_User said:

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.  

Complacency is the downfall of many an investor. When you finally think you've seen it all you realise you haven't. Still another chapter to be written. 

MK62

Thrugelmir said:

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. 

So, if you were say a 60yo retiree with a £500k pot, and a full state pension coming at 67, nothing else, what would you do to provide your retirement income?

bostonerimus

MK62 said:

Thrugelmir said:

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. 

So, if you were say a 60yo retiree with a £500k pot, and a full state pension coming at 67, nothing else, what would you do to provide your retirement income?

Are you in good health, how much income do you need and do you want to leave anything in your will?

MK62

It's a hypothetical, but assume good health, say £25k pa.......and as for leaving anything, ideally yes, but lets say that's not a necessity (as if it was it would exclude annuities)
PS....assume £12k essential income....

How would you do it if you were single, and then if you were married to a similar age partner?

bostonerimus

MK62 said:

It's a hypothetical, but assume good health, say £25k pa.......and as for leaving anything, ideally yes, but lets say that's not a necessity (as if it was it would exclude annuities)
PS....assume £12k essential income....

How would you do it if you were single, and then if you were married to a similar age partner?

I'd keep working if the goal is an inflation linked 25k pa starting at age 60 because of the 7 year gap to SP and the high initial withdrawal rate and sequence of returns risk. Assuming 50k in cash leaves 450k to invest and a high  initial withdrawal rate of about 5.5%. If you could reduce withdrawals to 12k then I think it's possible as that would require a withdrawal rate of ~2.7% and with 50k in cash you could avoid having to sell at a loss for a few years and if you combine that with natural yield you could probably make it to SP age through a 7 year down turn without having to sell anything. Then SP and natural yield covers your basic income. Better still would be to work for a few more years to increase the pension pot and decrease the number of years until SP. You could use something like VLS60.

I retired 3 years before my DB pension started. I knew that I would be ok on $25k pa and I had $15k pa coming in from rental income and so I put $40k in the bank to bridge the gap and give me some head room. I didn't want to have any stock or bond market risk involved with my bridging income. It was a simple approach, but I like to keep things simple. I don't take risk with the basic income I need to live and the primary focus of my retirement planning has been to remove stock and bond market risk form my income generation...so I like annuities, just not today.

itwasntme001

Deleted_User said:

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.  

Try telling that to someone who retired in 1970 at the age of 60, heavily invested in a 60/40 portfolio, and was about to start on a 10 year spending spree to enjoy retirement before they became less able.

Yes thought you would change your mind about "equities do normally protect from inflation".

itwasntme001

bostonerimus said:

itwasntme001 said:

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.

Indexed linked annuities give very low starting incomes...2.5-3% as you say so all the old arguments about needing more income early on in retirement come into play. The SP is the best index linked annuity that anyone is going to get in the UK...and that's with the benefit being one of the worst in the developed world. 

2.5% on a £500k retirement pot (which is a size not that uncommon given asset prices and what I have seen on these forums) can give you £12.5k annual inflation linked income.  Add that too a full state pension and you get around £22.5k of inflation protected income for life.  Assuming a paid off house, that's a pretty decent standard of living.  With none of the risks/hassles I mentioned before.

But its a choice, and that can only be a great thing (unless you are prone to making financial mistakes).

bostonerimus

itwasntme001 said:

Deleted_User said:

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.  

Try telling that to someone who retired in 1970 at the age of 60, heavily invested in a 60/40 portfolio, and was about to start on a 10 year spending spree to enjoy retirement before they became less able.

Yes thought you would change your mind about "equities do normally protect from inflation".

I think the the critical word here is "normally".