Once you've "won the game"

bostonerimus

Dazza1902 said:

MK62 said:

Dazza1902 said:

uk1 said:

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.

Spot on Sir, you cannot take it with you

. I have children,but don't feel compelled to leave any savings in tact for them, it's for our retirement. The vast majority of couples do not need 1.2 million in retirement savings .

The decision about wanting to leave any savings for others is an entirely personal one.....my view is different to yours on this, and while I would like to do just that, if reasonably possible, I do not feel compelled, and I won't live in penury to do it either.
As for the vast majority of couples not needing 1.2 million, how much do you think they need?...😉

I think I read the average couples retirement income was 25 k.
With two full state pensions at 67 a couple is not that far from the average.
My personal position is two full sp and about 12 k dB at 60. I am quite happy to drawdown all but 50 k  of my DC by sp age to fund an earlier retirement. 
Not sure I feel like I've won tho 😀

For most people the SP is very important. While I like the egalitarian move to the new flat rate pension, for a lot of people the removal of some earnings related component has reduced the amount of SP they will get. I would be more sanguine about the new pension if it was larger. We've been asking what it means to have won this retirement thing and it's most basically in some sense having enough money to live happily until you die and SP, annuities and drawdown need to be arranged to do that best. Commercial annuities aren't very popular right now because of the low payout rates and people don't like giving up control of their pot. The best way to ensure you get a little more income in old age is to defer SP, but I wonder if we could also allow people to "buy" more SP rather than buying a commercial annuity. It could be an option offered in pension plans.

[Deleted User]

Not sure why one would want the government to step in and interfere in a market which is functioning perfectly well while loading more risk onto the taxpayer. 

jamesd

bostonerimus said:

The Bogleheads rooted out the 1.6% fees that were applied and Pfau posted about it on the Boglehead forum, but here is the whitepaper that he produced for a big insurance company

https://static.fmgsuite.com/media/documents/9b364d00-595a-4b3e-92e4-a531e608aa7c.pdf

Now 1.6% in advisor and fund fees is probably quite realistic for many people, but it's sure to annoy Bogleheads who will claim that it's an unnecessary 1.5% headwind for the investments/bond portfolio. They also point out that in many previous papers the fund fees were set at 0.2% or just excluded and no advisor fee was included. It should also be noted that he is American and using American payout rates. The principles will be the same in the UK, but not the numbers.

Many Bogleheads have a great deal of professional experience in this and many also bring analytical skills from science and engineering as well as economics. Pfau has good qualifications from excellent universities, but so do a lot of people and his papers and analysis is not really complicated, just laborious.

There is a general acceptance on Bogleheads of the usefulness of annuities in the right circumstances, but I think there is a great deal of skepticism when it comes to his whole life insurance work. Many Bogleheads will annuitize as time goes on and many also have accounts with the big teachers insurance and financial company TIAA-CREF and they give very good rates to long term members and have always advocated annuities as part of retirement income plans.

I don't think Pfau is an outright insurance salesman as I arrived at some similar conclusions about annuities a while ago, but he does do the circuit of retirement shows and events and now is big on insurance products and I'm cynical enough to believe that his parameters, models and conclusions might be influenced by who is paying for the research. Personally I tend to look at stuff coming out of Bogleheads and Boston College Retirement Center as it's a little more academic, although the get funding from TIAA etc for some work. Here's a paper on annuities that suggests being able to buy additional State Pension (US Social Security) as a retirement option to an annuity from an insurance company.

https://crr.bc.edu/wp-content/uploads/2019/10/wp_2019-13.pdf

Thanks, page 16 has this at the start:

"We also set mutual fund fees equal to the 0.84% average portfolio administration cost as determined by Morningstar in the same report. A financial advisory fee of 0.75% is also charged to these assets. Therefore, the total fees equal 1.59% on all retirement savings assets."

I'll have a read of that BCRC paper. As you've probably noticed, in current market conditions I think state pension deferral beats annuity purchase if individual circumstances fit. It's a shame that deferred annuities don't seem to be available in the UK market.

Even those who hate annuities might want to read Blanchett's work The Impact of Guaranteed Income and Dynamic Withdrawals on Safe Initial Withdrawal Rates (Internet Archive version) because it shows how you can increase your safe withdrawal rate income by reducing its success rate if you have suitable levels of income stability preference and guaranteed income. I compared some cases in this post. Might surprise some that he suggests around 28% success rate if there's lots of income flexibility and guaranteed income is 50% of wealth. That's way lower than ordinarily used! He uses an interesting combination of chance of being alive and consequences of failure of the no longer as truly safe as usual SWR for this.

bostonerimus

jamesd said:

bostonerimus said:

The Bogleheads rooted out the 1.6% fees that were applied and Pfau posted about it on the Boglehead forum, but here is the whitepaper that he produced for a big insurance company

https://static.fmgsuite.com/media/documents/9b364d00-595a-4b3e-92e4-a531e608aa7c.pdf

Now 1.6% in advisor and fund fees is probably quite realistic for many people, but it's sure to annoy Bogleheads who will claim that it's an unnecessary 1.5% headwind for the investments/bond portfolio. They also point out that in many previous papers the fund fees were set at 0.2% or just excluded and no advisor fee was included. It should also be noted that he is American and using American payout rates. The principles will be the same in the UK, but not the numbers.

Many Bogleheads have a great deal of professional experience in this and many also bring analytical skills from science and engineering as well as economics. Pfau has good qualifications from excellent universities, but so do a lot of people and his papers and analysis is not really complicated, just laborious.

There is a general acceptance on Bogleheads of the usefulness of annuities in the right circumstances, but I think there is a great deal of skepticism when it comes to his whole life insurance work. Many Bogleheads will annuitize as time goes on and many also have accounts with the big teachers insurance and financial company TIAA-CREF and they give very good rates to long term members and have always advocated annuities as part of retirement income plans.

I don't think Pfau is an outright insurance salesman as I arrived at some similar conclusions about annuities a while ago, but he does do the circuit of retirement shows and events and now is big on insurance products and I'm cynical enough to believe that his parameters, models and conclusions might be influenced by who is paying for the research. Personally I tend to look at stuff coming out of Bogleheads and Boston College Retirement Center as it's a little more academic, although the get funding from TIAA etc for some work. Here's a paper on annuities that suggests being able to buy additional State Pension (US Social Security) as a retirement option to an annuity from an insurance company.

https://crr.bc.edu/wp-content/uploads/2019/10/wp_2019-13.pdf

Thanks, page 16 has this at the start:

"We also set mutual fund fees equal to the 0.84% average portfolio administration cost as determined by Morningstar in the same report. A financial advisory fee of 0.75% is also charged to these assets. Therefore, the total fees equal 1.59% on all retirement savings assets."

I'll have a read of that BCRC paper. As you've probably noticed, in current market conditions I think state pension deferral beats annuity purchase if individual circumstances fit. It's a shame that deferred annuities don't seem to be available in the UK market.

Even those who hate annuities might want to read Blanchett's work The Impact of Guaranteed Income and Dynamic Withdrawals on Safe Initial Withdrawal Rates (Internet Archive version) because it shows how you can increase your safe withdrawal rate income by reducing its success rate if you have suitable levels of income stability preference and guaranteed income. I compared some cases in this post. Might surprise some that he suggests around 28% success rate if there's lots of income flexibility and guaranteed income is 50% of wealth. That's way lower than ordinarily used! He uses an interesting combination of chance of being alive and consequences of failure of the no longer as truly safe as usual SWR for this.

I took opportunities to buy annuity type products years before I retired and so  essentially deferred annuities are my foundation. 

I bought into the DB plan of my last employer with DC money. I deposited $280k which gave me a 20k/year index linked pension starting at 55. Those sort of numbers make an "annuity" a no brainer and it's easy to see how such a pension can be a retirement income foundation. Unfortunately the current cost of commercial UK index linked annuities makes them a hard sell, whatever their benefits.

My DB plan was great value, but my UK SP has been ridiculously good value: I got 3 free years while at college and have 32 years of voluntary Class 2 NICs. I estimate the total cost in contributions to be 6k GBP (not a typo) and using 9% annual return maybe those would be worth 40k GBP right now...anyway compare 40k GBP to buy a 9k index linked annuity starting a 67 with the ~230k GBP you'd have to stump up to a UK insurance company to buy the same thing today. FYI it's not just me that gets this deal, it's all the self employed. It's far too cheap IMO.

MK62

jamesd said:

Thanks, page 16 has this at the start:

"We also set mutual fund fees equal to the 0.84% average portfolio administration cost as determined by Morningstar in the same report. A financial advisory fee of 0.75% is also charged to these assets. Therefore, the total fees equal 1.59% on all retirement savings assets."

Is that level of fees truly representative though - I know some will be paying that, but is that not more representative of "worst case" rather than "typical".

jamesd said:

Even those who hate annuities might want to read Blanchett's work The Impact of Guaranteed Income and Dynamic Withdrawals on Safe Initial Withdrawal Rates (Internet Archive version) because it shows how you can increase your safe withdrawal rate income by reducing its success rate if you have suitable levels of income stability preference and guaranteed income. I compared some cases in this post. Might surprise some that he suggests around 28% success rate if there's lots of income flexibility and guaranteed income is 50% of wealth. That's way lower than ordinarily used! He uses an interesting combination of chance of being alive and consequences of failure of the no longer as truly safe as usual SWR for this.

I read that report, and while I wouldn't disagree with it's findings on the basis of it's analysis, it seems to me that the basis isn't really representative. Unless I'm reading it wrong, it seems to take a "pot", and then allocate varying percentages of guaranteed fixed income as a part of that pot (using a formula of each £1pa of guaranteed income being worth c£24.23 in pot value). The problem I see with that, with the exception of state pension, is that most retirees would need to generate the guaranteed fixed income from the pot itself, by buying an annuity - it won't exist separately, apart from maybe those with sizeable DB pensions.

So, for instance, using a £1M pot as an example, it seems to compare a bare £1M pot with 0% fixed income to one with 95% fixed income, where the 95% pot is made up from guaranteed fixed income of £39192pa plus £50000 in drawdown assets. (where £950000 of the pot value is made up from £39192 * 24.23).

To me, it's no surprise that this "pot" might give rise to a higher SWR than the former.....even total failure of the £50k drawdown pot within a few years would not derail this retiree by that much........but, and here's my issue, if this retiree had to generate that £39192pa of guaranteed fixed income from the original £1M pot, as would commonly be the case for UK retirees with DC pensions, the results would look quite different.

For a single man of 65yo in the UK, to generate £39192 of guaranteed (ie index linked) fixed income, it would require a pot of around £1.4M. Put another way, in guaranteed fixed income, 950k would buy £26543pa for a 65yo - way short of £39192. Under those conditions, the retiree trying to withdraw even the same £39192 pa would result in plan failure within 4 years.

PS - I used £ rather than $, but it's the numbers that matter.

I doubt many would argue that, at 65yo, £39192pa in guaranteed fixed income, plus £50k in drawdown assets, isn't a safer overall proposition, for the majority, than £1M in drawdown assets......all I'm saying is that for those with the latter, the former can't be achieved at today's rates.

MK62

bostonerimus said:

For most people the SP is very important. While I like the egalitarian move to the new flat rate pension, for a lot of people the removal of some earnings related component has reduced the amount of SP they will get. I would be more sanguine about the new pension if it was larger. We've been asking what it means to have won this retirement thing and it's most basically in some sense having enough money to live happily until you die and SP, annuities and drawdown need to be arranged to do that best. Commercial annuities aren't very popular right now because of the low payout rates and people don't like giving up control of their pot. The best way to ensure you get a little more income in old age is to defer SP, but I wonder if we could also allow people to "buy" more SP rather than buying a commercial annuity. It could be an option offered in pension plans.

We tried the "more" SP thing with SERPS and then S2P.......for a variety of reasons they didn't really work, and were finally abandoned some years ago now.

More "base" SP would probably be a good idea imho, but worthwhile amounts would have to be paid for by large increases in NI, and politically, in the UK, that's a hard sell to the electorate at the moment (and tbh, the forseeable future imo). There has been some suggestions by various commentators in the press about making the state pension means tested at some point in the future, and while it might happen (you just never know), I think that would be a big mistake......more likely I think is the gradual push higher on state pension age, though even with that, there comes a point where it'd be counter productive to push it any higher (not that this would necessarily prevent a future govt from doing it).

Your idea about state run annuities might have some social merit (within limits)- it would remove the profit slice taken from payouts, but I very much doubt the pension industry would be keen on this, not only would it take some/much of their remaining annuity business, it might (if not limited) also start to compete with other pension offerings, and like it or not, the pension industry does employ a lot of people and generates a lot of taxable profits......

OldScientist

bostonerimus said:

j

My DB plan was great value, but my UK SP has been ridiculously good value: I got 3 free years while at college and have 32 years of voluntary Class 2 NICs. I estimate the total cost in contributions to be 6k GBP (not a typo) and using 9% annual return maybe those would be worth 40k GBP right now...anyway compare 40k GBP to buy a 9k index linked annuity starting a 67 with the ~230k GBP you'd have to stump up to a UK insurance company to buy the same thing today. FYI it's not just me that gets this deal, it's all the self employed. It's far too cheap IMO.

Without wanting to derail the thread, you certainly got a good deal compared to me - with 9% growth my NI contributions would be worth just over 300k (I'm also rather glad/relieved that it is not just me that calculates these sorts of things!).

GunJack

Interesting thread, but does seem biased towards the wealthier end of folks who seem to think their "pot" is there to provide inheritance.... surely you've more than "won" if you've got £several tens of k's left by the time you both (assuming a couple) die??  The other thing that comes out is that having DBs probably mean that you've "won" - however this goes against the view of leaving inheritance as when both of you die so do the DBs with no further inheritance..... you can't have it both ways, surely???

So, as I've got one deferred and one current DB (both CPI-linked), plus full SP entitlement, Mrs. G-J will have full SP with 50% spouse provision on my DBs with in all likelyhood ongoing Attendance Allowance, does this mean we've "won", or not as the inheritance we leave will probably only be in the £10s or just over k's?????

...or does it depend on who you ask?? 

OldScientist

MK62 said:

jamesd said:

Thanks, page 16 has this at the start:

"We also set mutual fund fees equal to the 0.84% average portfolio administration cost as determined by Morningstar in the same report. A financial advisory fee of 0.75% is also charged to these assets. Therefore, the total fees equal 1.59% on all retirement savings assets."

Is that level of fees truly representative though - I know some will be paying that, but is that not more representative of "worst case" rather than "typical".

jamesd said:

Even those who hate annuities might want to read Blanchett's work The Impact of Guaranteed Income and Dynamic Withdrawals on Safe Initial Withdrawal Rates (Internet Archive version) because it shows how you can increase your safe withdrawal rate income by reducing its success rate if you have suitable levels of income stability preference and guaranteed income. I compared some cases in this post. Might surprise some that he suggests around 28% success rate if there's lots of income flexibility and guaranteed income is 50% of wealth. That's way lower than ordinarily used! He uses an interesting combination of chance of being alive and consequences of failure of the no longer as truly safe as usual SWR for this.

I read that report, and while I wouldn't disagree with it's findings on the basis of it's analysis, it seems to me that the basis isn't really representative. Unless I'm reading it wrong, it seems to take a "pot", and then allocate varying percentages of guaranteed fixed income as a part of that pot (using a formula of each £1pa of guaranteed income being worth c£24.23 in pot value). The problem I see with that, with the exception of state pension, is that most retirees would need to generate the guaranteed fixed income from the pot itself, by buying an annuity - it won't exist separately, apart from maybe those with sizeable DB pensions.

So, for instance, using a £1M pot as an example, it seems to compare a bare £1M pot with 0% fixed income to one with 95% fixed income, where the 95% pot is made up from guaranteed fixed income of £39192pa plus £50000 in drawdown assets. (where £950000 of the pot value is made up from £39192 * 24.23).

To me, it's no surprise that this "pot" might give rise to a higher SWR than the former.....even total failure of the £50k drawdown pot within a few years would not derail this retiree by that much........but, and here's my issue, if this retiree had to generate that £39192pa of guaranteed fixed income from the original £1M pot, as would commonly be the case for UK retirees with DC pensions, the results would look quite different.

For a single man of 65yo in the UK, to generate £39192 of guaranteed (ie index linked) fixed income, it would require a pot of around £1.4M. Put another way, in guaranteed fixed income, 950k would buy £26543pa for a 65yo - way short of £39192. Under those conditions, the retiree trying to withdraw even the same £39192 pa would result in plan failure within 4 years.

PS - I used £ rather than $, but it's the numbers that matter.

I doubt many would argue that, at 65yo, £39192pa in guaranteed fixed income, plus £50k in drawdown assets, isn't a safer overall proposition, for the majority, than £1M in drawdown assets......all I'm saying is that for those with the latter, the former can't be achieved at today's rates.

This is a very useful analysis - essentially this is another way of saying if the annuity payout rate is below the local SWR (closer to 3% than 4% for the UK) then it is not good value from purely financial point of view.

If you add the SP to your analysis above (I know you excluded this) then guaranteed income would form 25% in this example which would make a difference to the initial withdrawal rate. For single retirees closer to the median (i.e. ~50k pension pot), then the SP would form about 80% of wealth (i.e. (9400*24)/(50000+9400*24)) - we should note that the 24.23 arises from the life expectancy of wealthy Americans and would, according to the paper, be about 3 years lower for a more general population (the UK value would be ~20 for a 65yo male and ~22 for a 65yo female) but this makes little difference to the % of wealth (78% for a UK 65yo male). Of course, including median house value (~250k) would make a much bigger change to % of wealth (you could argue that you should only include the surplus potentially generated by downsizing).

Dazza1902

GunJack said:

Interesting thread, but does seem biased towards the wealthier end of folks who seem to think their "pot" is there to provide inheritance.... surely you've more than "won" if you've got £several tens of k's left by the time you both (assuming a couple) die??  The other thing that comes out is that having DBs probably mean that you've "won" - however this goes against the view of leaving inheritance as when both of you die so do the DBs with no further inheritance..... you can't have it both ways, surely???

So, as I've got one deferred and one current DB (both CPI-linked), plus full SP entitlement, Mrs. G-J will have full SP with 50% spouse provision on my DBs with in all likelyhood ongoing Attendance Allowance, does this mean we've "won", or not as the inheritance we leave will probably only be in the £10s or just over k's?????

...or does it depend on who you ask?? 

In a nutshell it does depend on who you ask. I think having a mix of dB and DC is of benefit. The majority ( me included) wouldn't feel comfortable with purely DC pensions. A bird in the hand...