Once you've "won the game"

zagfles

MK62 said:

zagfles said:

MK62 said:

zagfles said:

itwasntme001 said:

zagfles said:

itwasntme001 said:

zagfles said:

uk1 said:

zagfles said:

uk1 said:

zagfles said:

You uk1 said:

zagfles said:

bostonerimus said:

zagfles said:

uk1 said:

michaels said:

Albermarle said:

uk1 said:

waveydavey48 said:

I've read the expression "once you've won the game why keep playing" in relation to investing and it seems to refer to the situation where someone has invested long and well enough to be in the position where they have enough money to achieve their objectives, and the advice is that they should now de-risk. In other words why keep exposing your money to the vagaries of the market when you don't need to.
What happens next?
Is there a way to ensure your money just keeps pace with inflation so that it doesn't decrease in real terms, or maybe increases by 1 or 2% per annum?   

I think a further option for a few that is rarely considered is that it you genuinely have enough and you believe using all reasonable assumptions that you will always have enough it does present the option to take all of your cash out of all speculative harbours and put them into purely safe havens that offer no stress at all. 

I believe that although few in number many might be in this situation without realising it.  A good early indicator of this is if you currently have all your cash in non-speculative places and simply keep an uncomplicated spreadsheet that shows that even with decent spending you have more cash at any point in the current year than you did last year and before then perhaps you can live a stress free life and forget fund management.There are of course loads of "ifs" and "buts" but not having to track and fret about investing might actually extend life.

Good analysis, but I guess plenty of the regulars on here would get stressed knowing they were losing out to inflation and missing potential stock market returns , even though they did not need the money . Old habits die hard and for many investing  is one of their hobbies.

Inflation will be 6% plus by early next year - a few years like that and you must have started with a very big pot it not to be a problem - 6% inflation = a 6% investment loss.  Personally I couldn't live with that level of risk.

But that might not be the right advice for someone who is older than you and wealthier than you.  The point is that one view isn't right for all and the place of advice is to offer thoughts for the widest.  Some mistankly believe that their view is the view that is right for everyone.

You're missing the point. It's not about "advice" or "views", it's about why play the "game" once you've won.

There is no "safe haven" that guarantees your pot will not reduce in value in real terms. So if the "game" is preserving the value of your pot, you have to keep playing. You either take investment risk or inflation risk, or both, whatever you do. Obviously, it may be sensible to reduce risk, people will have views and give advice on that, but you can't eliminate risk. 

If the "game" is getting a guaranteed income for life, you can "win" that with an index linked annuity.

We've got to agree on the rules of this game and whether it involves preserving the value of a pot to pass on. The rules I go by in my plan are to guarantee a comfortable income and simply not worry about any of the remaining "unused" pot and leave it invested aggressively.

How have you achieved that "guaranteed comfortable income"?

By making and storing more than enough cash and assets than you will ever need. 

And how do you guarantee that cash and those assets will hold their real value? Or not drop enough that your "comfortable" income is no longer "comfortable"?

You really aren’t understanding.  

You are obsessed with protecting or increasing the value of the total asset pool.  Some do not need to but haven’t realised it, 

No, you aren't understanding. I'm not "obsessed" with anything. I'm making the point that you can't guarantee to have "more than enough cash and assets than you will ever need" unless you've found some way to guarantee they'll hold their value, or at least not reduce in value by so much that you now no longer have "enough". 

You really are talking nonsense. 

There are no people in the world that have more than enough?

Not guaranteed. All assets and cash hold some sort of risk. OK that risk would be tiny for a billionaire not to have "enough", but that would apply whether they're invested in equities or cash, so it doesn't really matter.

But for those with more realistic pots, the risk is more substantial.

£1 in 1970 was worth under 15p in 1990. So a pot of £1million would be worth under £150k in 20 years time with similar inflation. Or a £20,000 pa non-index linked income would be just £2993.

Other countries are far worse. In just one decade like Turkey's in the 1990's, a £1million pot would be worth £4000. A non index linked £20,000 income would be just £80. That's just in a decade. Turkey isn't even the most extreme, look at Venezuela or Zimbabwe, or pre-war Germany.

Of course you may choose to believe we'll never get such rates of inflation. But that's a gamble, a risk. Just like investing in the stock market, houses, or other assets which can rise and fall in value. The level of risk may be different, but risk is still there. You're playing the "game" ie taking a risk even if you sit in cash.

So, tell us, how much do you reckon is "more than enough cash and assets than you will ever need", and what those assets are?

But keep in mind that savings interest rates generally tracked inflation rates such that, with the exception of a few years in the 70s, your cash earning interest generally kept up with inflation - in fact for much of the 80s, 90s and early 2000s you had savings accounts paying more interest than inflation.

Since 2008, we have had the reverse with inflation generally above interest rates but inflation has still been pretty low.  We have had great returns from other assets such as equities and property in order to easily beat inflation.  But there is no certainty that this will continue and we may be entering a long period where cash does better than most asset classes.

Yes it's the overall return that matters, clearly if inflation is 10% and you're getting 10% interest (after tax) then your cash is keeping up with inflation. But taxes on interest were quite high then I think,  with the investment income surcharge of 15% above normal income tax rates.

But now, there's talk of inflation going up to 6% or so with interest rates still sub 1% in general. So in some ways now is worse than the 70's for holding cash!

Property has lost real value since 2007.

I don't think London property has lost real value since 2007, but yes, much of the rest of UK probably has (although perhaps not any more given the rises over the last 1.5 years).

There seems to be a lot of fear about inflation but I still think it is transitory.  We had the same fears in 2010/2011 following the great recession as producers/retailers stock piled inventory to get ready for the demand (whilst supply chains were slow to get back to normal production).  Only the demand was quite timid.  There are a lot of similarities with what happened back then to what is happening now - although I suspect we could be in this transitory phase for longer with more sizeable inflation rates given how deep the 2020 recession was.

Plus Boris's recent pronouncements about weaning ourselves off cheap foreign labour and moving to a high wage economy, if that doesn't come with higher productivity then that's a recipe for high inflation. Which might be a good way for the govt to inflate away the massive covid debt...

But whatever you think about the direction of inflation, equities, bonds or property, none are risk free. So we all have to carry on playing the game. Except those who can afford an index linked annuity...

But then you are just swapping one "game" for another.......this time it's can you dodge the grim reaper long enough to get your money back.
Fair enough, some may not care about losing that game, and so this might be a viable option for them......for the rest, perhaps not so much...

Well quite. Clearly if you buy an annuity your "game" is an income for life, not "will I get my money back".

Anyone who invests money will always consider the potential returns on that investment........your annuity may return just a fraction of the original sum invested, or it may return more....you don't know and that's the risk.....you may not care, and that's fine, but others might........and if you don't get your money back, someone else will.
In the end there are risks in all your options at retirement, you just have to decide, on balance, which risks you are more comfortable with.

If you cared about getting your money back, you wouldn't buy an annuity. That's not what they're for, they're to swap a lump sum for an income for life. The same as buying insurance, do you care if you've paid more for insurance than you've claimed over your life? No, insurance is for peace of mind, safe in the knowledge that if you did need to claim you could. Same as annuities, basically insurance against running out of money due to eg bad returns or living longer than expected.

OldScientist

MK62 said:

OldScientist said:

MK62 said:

As well as the higher payout assumption (5.8%  vs 4.9%), what rate of inflation have they assumed for those projections?....

For inflation they used 1.4-1.5% depending on the time period concerned. In incorporating the results with an investment portfolio they are using a Monte Carlo model with returns based on historical US (and potentially non-US) stocks and bonds. 

Pretty much what I was getting at tbh.....if you start with a 20% higher income, which is then subjected to very low inflation (by UK standards) over a long period......then perhaps not surprising it all looks OK......I would be very wary of these numbers for a UK retiree though...... 

I agree, while US results can potentially provide food for thought for a UK retiree, the numbers will almost certainly be different (like the SWRs). When considering annuities, I think a comparison between the local SWR and the local payout rate for an index-linked annuity makes some sense. At 65, a current UK payout rate of 2.7% looks fairly marginal against the UK historical SWR~3.0-3.2%, while waiting to 70 to get a rate of 3.6% might be worthwhile (and a rate of 4.9% at 75 may be even more attractive).

However, you're still playing the game - albeit with slightly different rules - according to the Vanguard paper in the US "From 2008 to 2015, six small life insurance and annuity providers, in an industry made up of more than 800, entered into receivership".

In the UK, the FSCS may provide 100% protection in the event of the failure of an annuity provider (see https://www.fscs.org.uk/what-we-cover/pensions/ for details)

zagfles

MK62 said:

OldScientist said:

MK62 said:

As well as the higher payout assumption (5.8%  vs 4.9%), what rate of inflation have they assumed for those projections?....

For inflation they used 1.4-1.5% depending on the time period concerned. In incorporating the results with an investment portfolio they are using a Monte Carlo model with returns based on historical US (and potentially non-US) stocks and bonds. 

Pretty much what I was getting at tbh.....if you start with a 20% higher income, which is then subjected to very low inflation (by UK standards) over a long period......then perhaps not surprising it all looks OK......I would be very wary of these numbers for a UK retiree though...... 

Indeed. I like the idea of the "deferred annuities", but they seem pretty pointless if not index linked. Annuities are supposed to be like insurance, as the paper points out, but insurance needs to insure against high inflation as well as other risks. Partcularly if they don't start paying for 20 years. Though I guess an index linked deferred annuity could be expensive given that returns on index linked gilts are negative, so they would need to incorporate 20 years of negative returns before payment starts.

MK62

Not sure about the insurance analogy.....you usually pay a relatively small premium to insure against having to pay a very large amount IF something happens......your house burns down, you total your car etc.
With annuities, you are paying a very high premium upfront for a relatively small income.....it only becomes insurance once the breakeven point is passed.......prior to that, it's really little more than a small  annual return of premium......they are really just giving you back your own money.
The breakeven point is unknown really......has to be estimated.......as is your longevity.......and therein lies the risk.....

[Deleted User]

MK62 said:

Not sure about the insurance analogy.....you usually pay a relatively small premium to insure against having to pay a very large amount IF something happens......your house burns down, you total your car etc.
With annuities, you are paying a very high premium upfront for a relatively small income.....it only becomes insurance once the breakeven point is passed.......prior to that, it's really little more than a small  annual return of premium......they are really just giving you back your own money.
The breakeven point is unknown really......has to be estimated.......as is your longevity.......and therein lies the risk.....

By definition annuity is an insurance contract. 

Regardless of what you want to call it, annuities are purchased to protect, eg against volatility in the market and longevity. 

Looking at it another way… Normally when you pay for insurance, the insurance company is betting that all will be well and you are betting that something will go wrong: your house will burn down, you will die early or your car has an accident. You “win” payments from insurance but lose in life. Annuity is the type of insurance where you are betting that all will be well and you get to live for a long time. Then you win financially and by living a long life.  But you don’t actually lose financially by dying early. In the right circumstances annuity permits you to spend more before death, even if you die early. 

Life insurance (which can cost a lot compared to the payout) protects someone else. Annuity protects you. 

bostonerimus

zagfles said:

bostonerimus said:

zagfles said:

bostonerimus said:

zagfles said:

bostonerimus said:

zagfles said:

bostonerimus said:

zagfles said:

bostonerimus said:

zagfles said:

uk1 said:

michaels said:

Albermarle said:

uk1 said:

waveydavey48 said:

I've read the expression "once you've won the game why keep playing" in relation to investing and it seems to refer to the situation where someone has invested long and well enough to be in the position where they have enough money to achieve their objectives, and the advice is that they should now de-risk. In other words why keep exposing your money to the vagaries of the market when you don't need to.
What happens next?
Is there a way to ensure your money just keeps pace with inflation so that it doesn't decrease in real terms, or maybe increases by 1 or 2% per annum?   

I think a further option for a few that is rarely considered is that it you genuinely have enough and you believe using all reasonable assumptions that you will always have enough it does present the option to take all of your cash out of all speculative harbours and put them into purely safe havens that offer no stress at all. 

I believe that although few in number many might be in this situation without realising it.  A good early indicator of this is if you currently have all your cash in non-speculative places and simply keep an uncomplicated spreadsheet that shows that even with decent spending you have more cash at any point in the current year than you did last year and before then perhaps you can live a stress free life and forget fund management.There are of course loads of "ifs" and "buts" but not having to track and fret about investing might actually extend life.

Good analysis, but I guess plenty of the regulars on here would get stressed knowing they were losing out to inflation and missing potential stock market returns , even though they did not need the money . Old habits die hard and for many investing  is one of their hobbies.

Inflation will be 6% plus by early next year - a few years like that and you must have started with a very big pot it not to be a problem - 6% inflation = a 6% investment loss.  Personally I couldn't live with that level of risk.

But that might not be the right advice for someone who is older than you and wealthier than you.  The point is that one view isn't right for all and the place of advice is to offer thoughts for the widest.  Some mistankly believe that their view is the view that is right for everyone.

You're missing the point. It's not about "advice" or "views", it's about why play the "game" once you've won.

There is no "safe haven" that guarantees your pot will not reduce in value in real terms. So if the "game" is preserving the value of your pot, you have to keep playing. You either take investment risk or inflation risk, or both, whatever you do. Obviously, it may be sensible to reduce risk, people will have views and give advice on that, but you can't eliminate risk. 

If the "game" is getting a guaranteed income for life, you can "win" that with an index linked annuity.

We've got to agree on the rules of this game and whether it involves preserving the value of a pot to pass on. The rules I go by in my plan are to guarantee a comfortable income and simply not worry about any of the remaining "unused" pot and leave it invested aggressively.

How have you achieved that "guaranteed comfortable income"?

Lucky enough to have a DB pension and income from a rental property that produce $40k/year and I will get SP from the UK and US that combined will be another $40k...all go up with inflation, except the rent that I only increase when the tenant changes and that isn't often.

Rent is hardly "guaranteed". What if the tenant loses their job and can't pay the rent, or simply refuses to? Long and costly eviction process during which no rent and probably a trashed property. What if the area goes downhill eg a bail hostel opens nearby, drug gangs move in, areas can change over a few years. Property is definitely not risk free, and a single or even a handful are certainly risky. A diversified equity portfolio invested in hundreds of companies could be safer. And they won't phone you at 2am to say the toilet won't flush

There are risks in property which is why I don't rely on it entirely. I have the pensions and a substantial pot invested in stock and bonds that is a very large multiple of my annual spending. 

We went through a difficult 2020 and my tenant could not work for most of the summer so I cut her rent in half for 3 months. This was easy for me to do because I had the DB pension coming in. We are now back to normal. To make management of the property easy I live in a two family house and rent out the ground floor and live above. I bought in a nice neighbourhood close to the University and the house price has more than tripled in the last 20 years. There is risk everything to some extent and I bought the rental property to compliment my other investments and it has worked out well.

So, you're still playing the "game", ie taking a risk with your investments.

That's the point, which some people seem to be missing. Anyone who takes a risk is still playing the game. The level of the risk may be different, so they might be playing a less or more risky game, but they're still on the pitch. Even if 100% in cash.

I'm taking zero risk. The risk is entirely being taken by my heirs.

So you obviously have other guaranteed investments/income if your property income stopped. 

Yes, I have an inflation linked DB pension, US and UK SP starting in a few years, about 5 years spending in cash in a stable value account that is earning 2% right now and a TIAA Traditional annuity that is accumulating at 4.3% this year and can be cashed in if necessary to buy a single life annuity at 65 with a 6.5% payout rate. I have capital in the flat and my home that I can borrow against or just sell and if I need long term care I have an insurance policy with a lifetime max payout of $360k which is more than enough for the average length and cost of stay, although I can now self insure, but the policy is inexpensive because I bought it a while ago. So I don't worry about my retirement income and could be perfectly comfortable if my invested DC and general account pots went to zero.

Wow, 6.5% index linked annuity! I didn't know you could such great rates in the US. (if it's not index linked you've been whooshed)

That would be fantastic...but the 6.5% payout rate is for a level annuity taken at 65. It's about 0.5% better than the current US rates because I'm in a teacher's plan that gets better rates than the general public.

bostonerimus

OldScientist said:

bostonerimus said:

You should think of an annuity as insurance rather than an investment. If you live long enough to use that insurance then you might sit back in your Bath chair, smiling at your mortality credits and think that you made a good investment...of course that would have to be compared against stock returns etc, but the comparison is rather silly because they are such different financial tools. So just think of it as longevity insurance, expensive right now, but maybe a better deal when you are older.

Here is a recent paper from Vanguard about how fixed income annuities and deferred annuities can be used in providing retirement income. The longer you live the better the annuities do. However, the study uses a payout rate of 5.8% not the current 4.9% that a 65 year old male will get in the UK.
https://institutional.vanguard.com/iam/pdf/ISGGAR_042021.pdf?cbdForceDomain=true

Thanks for the link to the paper - the comparison between US and UK annuity rates also has to be considered in the context of the historical SWR for the two countries (i.e. approx 3.7% and 3.0%).

I note that the Vanguard paper uses level annuities at a single purchase age - historically results would have been better (e.g. more income) with phased purchases (i.e. at several ages) and with escalating annuities.

Yes, the results will depend on lots of assumptions that go into the models so it's important to understand those before making any conclusions. Also the US is NOT the UK so what works there might not work in the UK. 

I think the most interesting thing is how well the QLAC (again this is American so do look for it in the UK) works.  Buying one at 65 with $100k gives $27k when it starts at age 85, but obviously you have to live long enough to use it and paying the principal early in retirement will reduce initial income.

The thing that stops people using annuities is they have to part with a lot of cash and the benefits are then spread out over many years and they have to live longer than average to make them worthwhile in purely financial terms ie not until the mortality credits kick in does the payout from an annuity beat what you could get from a saving account. But the annuity is insurance for you living longer than average.

[Deleted User]

Not accurate. You get mortality credits from get go.  That’s because a proportion of people dies in any given age. Its cumulative and the number grows faster and faster. Don’t need to live longer than average for mortality credits to kick in. 

Put it another way… If you are alive 1 year after buying an annuity then you probability weighted return has gone up. 

MK62

Deleted_User said:

MK62 said:

Not sure about the insurance analogy.....you usually pay a relatively small premium to insure against having to pay a very large amount IF something happens......your house burns down, you total your car etc.
With annuities, you are paying a very high premium upfront for a relatively small income.....it only becomes insurance once the breakeven point is passed.......prior to that, it's really little more than a small  annual return of premium......they are really just giving you back your own money.
The breakeven point is unknown really......has to be estimated.......as is your longevity.......and therein lies the risk.....

By definition annuity is an insurance contract. 

Regardless of what you want to call it, annuities are purchased to protect, eg against volatility in the market and longevity. 

Looking at it another way… Normally when you pay for insurance, the insurance company is betting that all will be well and you are betting that something will go wrong: your house will burn down, you will die early or your car has an accident. You “win” payments from insurance but lose in life. Annuity is the type of insurance where you are betting that all will be well and you get to live for a long time. Then you win financially and by living a long life.  But you don’t actually lose financially by dying early. In the right circumstances annuity permits you to spend more before death, even if you die early. 

Life insurance (which can cost a lot compared to the payout) protects someone else. Annuity protects you. 

I didn't say annuities are not a type of insurance....
I said I wasn't sure about zagfles insurance analogy......which contended that as you don't count the cost of all your other insurance premiums together (car, house etc) over your life to see if you get your money back (a fair analysis), then you should not do the same with an annuity......I disagree. The basic premise is different.
At the end of the day, if you are happy that the risks of an annuity do not apply to you in your situation, then go for that option........in my situation, they do apply (and my situation is not uncommon)...........married, younger partner (with much smaller private pension provision due to not working for many years while parenting), kids in early 20s.......at the current rates on offer (and this is key) an annuity doesn't fit, for us.....we have to accept the risks of that choice, and that's fair enough.

michaels

bostonerimus said:

OldScientist said:

bostonerimus said:

You should think of an annuity as insurance rather than an investment. If you live long enough to use that insurance then you might sit back in your Bath chair, smiling at your mortality credits and think that you made a good investment...of course that would have to be compared against stock returns etc, but the comparison is rather silly because they are such different financial tools. So just think of it as longevity insurance, expensive right now, but maybe a better deal when you are older.

Here is a recent paper from Vanguard about how fixed income annuities and deferred annuities can be used in providing retirement income. The longer you live the better the annuities do. However, the study uses a payout rate of 5.8% not the current 4.9% that a 65 year old male will get in the UK.
https://institutional.vanguard.com/iam/pdf/ISGGAR_042021.pdf?cbdForceDomain=true

Thanks for the link to the paper - the comparison between US and UK annuity rates also has to be considered in the context of the historical SWR for the two countries (i.e. approx 3.7% and 3.0%).

I note that the Vanguard paper uses level annuities at a single purchase age - historically results would have been better (e.g. more income) with phased purchases (i.e. at several ages) and with escalating annuities.

Yes, the results will depend on lots of assumptions that go into the models so it's important to understand those before making any conclusions. Also the US is NOT the UK so what works there might not work in the UK. 

I think the most interesting thing is how well the QLAC (again this is American so do look for it in the UK) works.  Buying one at 65 with $100k gives $27k when it starts at age 85, but obviously you have to live long enough to use it and paying the principal early in retirement will reduce initial income.

The thing that stops people using annuities is they have to part with a lot of cash and the benefits are then spread out over many years and they have to live longer than average to make them worthwhile in purely financial terms ie not until the mortality credits kick in does the payout from an annuity beat what you could get from a saving account. But the annuity is insurance for you living longer than average.

Lets assume you want certainty of real income for life. 

By buying an annuity you pool longevity risk so can actually spend more per year than the only alternative product that gives that certainty: govt inflation linked bonds, as for these to get surety you have to basically assume the initial pot has to buy you an income for the maximum possible lifetime.