Once you've "won the game"

bostonerimus

jamesd 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.

The US SWR historically is a hair over 4% using 50:50 equities:government bonds. UK is 0.3% lower. Both before all costs, including costs incurred inside investments; costs reduce SWR by about a third of costs. Using 4% rule for a 30 year plan for this paragraph.

True, but the hit that fees have is loaded to the front end of a classical 4% strategy. 1% in fees is 25% of 4%. As you spend down the pot and your withdrawal rate increases fees become less of a factor. Of course, once you have "won" such things are meaningless.

bostonerimus

Thrugelmir said:

MK62 said:

jamesd said:

billy2shots said:

...
The only job of money invested is to keep pace with inflation (if that's not the only job then you haven't truly won the game). 

You can invest all of it in so called 'lower risk holdings' but let's face it, that risk may still be too high to someone who doesn't need to take further risk. 

The alternative.
 50% cash gaining as much interest as possible whilst the capital remains totally safe. No need to go into detail here but regular savers, PBs etc where the government guarantees it safety, spread across accounts where needed. 

The other 50% is invested. If we take 3% as the average rate of inflation then we have to make an average return of 6% on that money (only 50% invested remember so it has to yield twice the return of inflation). ...
For any normal year you would withdraw half your annual income from your cash and the other half from the invested pot. 
Stock market down years would see you only take from cash. Better returning years would see you take more from the investment side to rebalance the cash towards a 50/50 weighting once again. 
...
It's really simple so probably heavily flawed but sometimes reading on here and other investing forums, people try so hard to overcomplicate things. 

The heavy flaw is that there are already two "products" that deliver approximately 100% chance of inflation protected income with no investment risk: buying an inflation-linked annuity (100% FSCS protection) and state pension deferral. If the only job is inflation protecting income then you buy those and stick anything left over in a discretionary spending or inheritance pot.

It's true that an inflation linked annuity will protect the income it pays out from inflation......not in dispute.....but the rub is that the income it pays out is low......

Then save more, retire later.  When everybody starts adopting the investment strategy then any benefit gets nullified eventually. 

Yes, the idea of retiring at SPA is going to be a dream for many people now that good DB pensions with 30 or more years of contributions are so rare. I worked out that at today's rates a single man aged 65 and expecting 9k SP and needing 27.5k total index linked annual income would have to pay 662k to buy the necessary index linked annuity. Then add 50k cash for emergencies and that's over 700k

MK62

bostonerimus said:

Thrugelmir said:

MK62 said:

jamesd said:

billy2shots said:

...
The only job of money invested is to keep pace with inflation (if that's not the only job then you haven't truly won the game). 

You can invest all of it in so called 'lower risk holdings' but let's face it, that risk may still be too high to someone who doesn't need to take further risk. 

The alternative.
 50% cash gaining as much interest as possible whilst the capital remains totally safe. No need to go into detail here but regular savers, PBs etc where the government guarantees it safety, spread across accounts where needed. 

The other 50% is invested. If we take 3% as the average rate of inflation then we have to make an average return of 6% on that money (only 50% invested remember so it has to yield twice the return of inflation). ...
For any normal year you would withdraw half your annual income from your cash and the other half from the invested pot. 
Stock market down years would see you only take from cash. Better returning years would see you take more from the investment side to rebalance the cash towards a 50/50 weighting once again. 
...
It's really simple so probably heavily flawed but sometimes reading on here and other investing forums, people try so hard to overcomplicate things. 

The heavy flaw is that there are already two "products" that deliver approximately 100% chance of inflation protected income with no investment risk: buying an inflation-linked annuity (100% FSCS protection) and state pension deferral. If the only job is inflation protecting income then you buy those and stick anything left over in a discretionary spending or inheritance pot.

It's true that an inflation linked annuity will protect the income it pays out from inflation......not in dispute.....but the rub is that the income it pays out is low......

Then save more, retire later.  When everybody starts adopting the investment strategy then any benefit gets nullified eventually. 

Yes, the idea of retiring at SPA is going to be a dream for many people now that good DB pensions with 30 or more years of contributions are so rare. I worked out that at today's rates a single man aged 65 and expecting 9k SP and needing 27.5k total index linked annual income would have to pay 662k to buy the necessary index linked annuity. Then add 50k cash for emergencies and that's over 700k

......and that's for a single man with no dependants.....do the maths for a married person, and the pot would need to be closer to £1.2M, and it'd still make no provision for anyone else outside that couple. I guess the "save more, retire later" advice is the only way forward for many then.

jamesd

OldScientist said:

jamesd said:

OldScientist said:

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.

The US SWR historically is a hair over 4% using 50:50 equities:government bonds. UK is 0.3% lower. Both before all costs, including costs incurred inside investments; costs reduce SWR by about a third of costs. Using 4% rule for a 30 year plan for this paragraph.

Sorry, I should have been clearer the figures I quoted were 'Safemax', i.e. withdrawals that produced no failures not those where there are 5-10% failure. I've finally got around to implementing non-US data in my own code (the JST data at https://www.macrohistory.net/database/) and found a safemax for the UK (with UK equities and UK bonds, no fees) of about 2.9%, although using 50/50 UK/US equities (using solely UK bonds rather than a mix) increases this to about 3.1%, while a broader mix of equities (UK, US, Australia, Germany, etc. - note I have yet to include some important countries, e.g. Japan since implementing equity series with gaps needs a bit of thought) increases it still further to 3.3% (how significant those differences are is a matter for interpretation).

The ones I gave were also safemax and since you're disagreeing with in the US case some very well known studies that causes me to wonder whether there's a glitch in how you're calculating. Though it might just be different date ranges.

At the moment you're getting results even lower than I expect for historical variances and random instead of historic sequences. Some other work which looked at substituting global equities found a reduction in SWR, not an increase, for the UK investor.

When time allows you might want to compare with say Bill Bengen's original paper and results to see whether your results using the same data range match his, as a bug checking tool. At the moment you're sufficiently out of step that I have to suspect a bug somewhere.

jamesd

MK62 said:

jamesd said:

billy2shots said:

...
The only job of money invested is to keep pace with inflation (if that's not the only job then you haven't truly won the game). 
...

The heavy flaw is that there are already two "products" that deliver approximately 100% chance of inflation protected income with no investment risk: buying an inflation-linked annuity (100% FSCS protection) and state pension deferral. If the only job is inflation protecting income then you buy those and stick anything left over in a discretionary spending or inheritance pot.

It's true that an inflation linked annuity will protect the income it pays out from inflation......not in dispute.....but the rub is that the income it pays out is low......

Taken to the extreme, if I offered to pay you an index linked income of £100pa for life, in exchange for £100k, it's true that the income would be protected from inflation for the rest of your life, with no investment risk, but the level is too low. That's the crux of it, at least imho.

The definition in the original post was you've already won the game so you have enough money to buy that annuity and leave the game, however much it costs.

Yes, annuities are expensive but that's the price for getting out of the game.

Of course for those who haven't yet won the game the price of annuities matters far more!

zagfles

MK62 said:

bostonerimus said:

Thrugelmir said:

MK62 said:

jamesd said:

billy2shots said:

...
The only job of money invested is to keep pace with inflation (if that's not the only job then you haven't truly won the game). 

You can invest all of it in so called 'lower risk holdings' but let's face it, that risk may still be too high to someone who doesn't need to take further risk. 

The alternative.
 50% cash gaining as much interest as possible whilst the capital remains totally safe. No need to go into detail here but regular savers, PBs etc where the government guarantees it safety, spread across accounts where needed. 

The other 50% is invested. If we take 3% as the average rate of inflation then we have to make an average return of 6% on that money (only 50% invested remember so it has to yield twice the return of inflation). ...
For any normal year you would withdraw half your annual income from your cash and the other half from the invested pot. 
Stock market down years would see you only take from cash. Better returning years would see you take more from the investment side to rebalance the cash towards a 50/50 weighting once again. 
...
It's really simple so probably heavily flawed but sometimes reading on here and other investing forums, people try so hard to overcomplicate things. 

The heavy flaw is that there are already two "products" that deliver approximately 100% chance of inflation protected income with no investment risk: buying an inflation-linked annuity (100% FSCS protection) and state pension deferral. If the only job is inflation protecting income then you buy those and stick anything left over in a discretionary spending or inheritance pot.

It's true that an inflation linked annuity will protect the income it pays out from inflation......not in dispute.....but the rub is that the income it pays out is low......

Then save more, retire later.  When everybody starts adopting the investment strategy then any benefit gets nullified eventually. 

Yes, the idea of retiring at SPA is going to be a dream for many people now that good DB pensions with 30 or more years of contributions are so rare. I worked out that at today's rates a single man aged 65 and expecting 9k SP and needing 27.5k total index linked annual income would have to pay 662k to buy the necessary index linked annuity. Then add 50k cash for emergencies and that's over 700k

......and that's for a single man with no dependants.....do the maths for a married person, and the pot would need to be closer to £1.2M, and it'd still make no provision for anyone else outside that couple. I guess the "save more, retire later" advice is the only way forward for many then.

Or just keep playing the game. Plenty of people live on just the state pension, so you won't starve if you lose, but if you want a lot more you may have to take risk instead of buying an index linked annuity.

OldScientist

jamesd said:

OldScientist said:

jamesd said:

OldScientist said:

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.

The US SWR historically is a hair over 4% using 50:50 equities:government bonds. UK is 0.3% lower. Both before all costs, including costs incurred inside investments; costs reduce SWR by about a third of costs. Using 4% rule for a 30 year plan for this paragraph.

Sorry, I should have been clearer the figures I quoted were 'Safemax', i.e. withdrawals that produced no failures not those where there are 5-10% failure. I've finally got around to implementing non-US data in my own code (the JST data at https://www.macrohistory.net/database/) and found a safemax for the UK (with UK equities and UK bonds, no fees) of about 2.9%, although using 50/50 UK/US equities (using solely UK bonds rather than a mix) increases this to about 3.1%, while a broader mix of equities (UK, US, Australia, Germany, etc. - note I have yet to include some important countries, e.g. Japan since implementing equity series with gaps needs a bit of thought) increases it still further to 3.3% (how significant those differences are is a matter for interpretation).

The ones I gave were also safemax and since you're disagreeing with in the US case some very well known studies that causes me to wonder whether there's a glitch in how you're calculating. Though it might just be different date ranges.

At the moment you're getting results even lower than I expect for historical variances and random instead of historic sequences. Some other work which looked at substituting global equities found a reduction in SWR, not an increase, for the UK investor.

When time allows you might want to compare with say Bill Bengen's original paper and results to see whether your results using the same data range match his, as a bug checking tool. At the moment you're sufficiently out of step that I have to suspect a bug somewhere.

The figures I've given for the US (all for annual withdrawals and rebalancing and 60/40 portfolio and no fees) agree with cfiresim (Shiller data, MSWR=3.6%), McClung (in the latter the Shiller data that I've also used gives MSWR=3.7%, while the SBBI dataset gives 4.0%), and the ERN spreadsheet (Shiller data, MSWR~3.8%). The assumptions here are key - I note that Bengen assumed withdrawals would occur at the end of each year (see Appendix in his paper), whereas I (and I'm fairly certain Lauren at cfiresim, McClung, and ERN) assume withdrawal at the beginning of the year. I also note that Bengen's data stopped in 1992 and therefore the worst 30 year retirements in the US were not quite covered by his historical data (again the Appendix indicates the assumptions he made for later years). The 1998 Trinity study (which does cover the 1960s) used high-grade corporate bonds rather than intermediate government bonds, so again, has a slightly different set of results. There were some other work (off hand, I cannot remember the author) that found substituting short-term government bonds during the critical years in the 1960s helped portfolios to survive and increased the US MSWR). So, I'm fairly happy that the results from my code agree with other code that uses broadly similar assumptions - that there are differences probably arises because there are several ways to model the duration of bond returns/prices (e.g.  in one of models, I buy, hold for 1 month, then sell, so the duration is effectively 10 years (the treasury return calculator at https://dqydj.com/treasury-return-calculator/ calculates a 7 year duration from the same dataset; the US bond returns from the JST dataset that I'm also using are not the same as either 7 or 10 year data, and are drawn from a different source of raw data). 

The only reason I mentioned this is that it is probably important to broadly compare the cost of annuities with the local MSWR so see whether they are cheap or expensive (if considering an annuity route).

MK62

zagfles said:

MK62 said:

bostonerimus said:

Thrugelmir said:

MK62 said:

jamesd said:

billy2shots said:

...
The only job of money invested is to keep pace with inflation (if that's not the only job then you haven't truly won the game). 

You can invest all of it in so called 'lower risk holdings' but let's face it, that risk may still be too high to someone who doesn't need to take further risk. 

The alternative.
 50% cash gaining as much interest as possible whilst the capital remains totally safe. No need to go into detail here but regular savers, PBs etc where the government guarantees it safety, spread across accounts where needed. 

The other 50% is invested. If we take 3% as the average rate of inflation then we have to make an average return of 6% on that money (only 50% invested remember so it has to yield twice the return of inflation). ...
For any normal year you would withdraw half your annual income from your cash and the other half from the invested pot. 
Stock market down years would see you only take from cash. Better returning years would see you take more from the investment side to rebalance the cash towards a 50/50 weighting once again. 
...
It's really simple so probably heavily flawed but sometimes reading on here and other investing forums, people try so hard to overcomplicate things. 

The heavy flaw is that there are already two "products" that deliver approximately 100% chance of inflation protected income with no investment risk: buying an inflation-linked annuity (100% FSCS protection) and state pension deferral. If the only job is inflation protecting income then you buy those and stick anything left over in a discretionary spending or inheritance pot.

It's true that an inflation linked annuity will protect the income it pays out from inflation......not in dispute.....but the rub is that the income it pays out is low......

Then save more, retire later.  When everybody starts adopting the investment strategy then any benefit gets nullified eventually. 

Yes, the idea of retiring at SPA is going to be a dream for many people now that good DB pensions with 30 or more years of contributions are so rare. I worked out that at today's rates a single man aged 65 and expecting 9k SP and needing 27.5k total index linked annual income would have to pay 662k to buy the necessary index linked annuity. Then add 50k cash for emergencies and that's over 700k

......and that's for a single man with no dependants.....do the maths for a married person, and the pot would need to be closer to £1.2M, and it'd still make no provision for anyone else outside that couple. I guess the "save more, retire later" advice is the only way forward for many then.

Or just keep playing the game. Plenty of people live on just the state pension, so you won't starve if you lose, but if you want a lot more you may have to take risk instead of buying an index linked annuity.

Yes....I think I got that part...😉

Terron

itwasntme001 said:

zagfles said:

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.

When I started buying property around here (North West) was still below the 2007 peak and not moving. It passed 2007 levels in 2018 and has shot up since. 

Meanwhile, rents outside London have pretty much matched wage inflation since 2005.

Comparisions between property and shares as an investment usually compare apples to oranges. Dividends are normally assumed to be reinvested whilst rents are ignored.

uk1

Much of the comment on this and all threads is predicated on the notion that the key thing (and some seem to feel the only thing)  is to ensure that your capital and pot grows in sync or ahead of your spending once you have retired.  In other words your total value is always protected and must never drop.  That's why there is such a high-level focus by many on annuities.  This basic idea is true if you wish it to be that way.  But too many fall into the trap of not considering what many will say is a terribly risky option. 

I happen not to see it that way.  There is another option to consider and that is to treat all of your combined pots when you reach retirement as a sinking fund and that given all the clever caveats and doom assertions, your aim with your sinking fund spreadsheet is to have a zero balance when you and all those you care for given reasonable and sensible assumptions are taken care of at some point you decide will be zero observing of course a reasonable safety margin.  I know many will disagree but it is an option that when thought through might not be that daft.  The idea of ensuring that given reasonable presumptions that when you and your spouse pop your cloggs that there is enough to take care of who you want to with whatever you decide and ensure that little is left to tax is an approach that requires you to exert some clarity over what you actually want to be the outcome.  Some may actually shokingly find that they are not spending as quickly as they need in retirement to achieve the closing balance they plan if you get my drift.

When taking this approach a very few number of fortunate people may find that their challenge isn't as large as they think it is when taken from the sucked-in viewpoint that you must always have a growing fund.  And for the sake of clarity to repeat myself.  Very fall fall into this group, my point being that some are in this fortuante position without knowing so and it just makes sense to consider all strategy and tactical options.