Retirement Investing - Less Risky Bets

Linton

JohnWinder said:

Sadly there is no safe inflation matching investment.

'Index-linked gilts differ from conventional gilts in that coupon and principal payments are adjusted in line with movements in inflation.'   https://www.bankofengland.co.uk/statistics/articles/2018/index-linked-gilts

Of course, some might agree that the UK Treasury is not a safe body to lend your money to.

Unfortunately UK inflation linked bonds will not match inflation.  Buy one today at its current price and at maturity it could well lose money in £ terms, never mind match inflation.

Thrugelmir

Linton said:

JohnWinder said:

Sadly there is no safe inflation matching investment.

'Index-linked gilts differ from conventional gilts in that coupon and principal payments are adjusted in line with movements in inflation.'   https://www.bankofengland.co.uk/statistics/articles/2018/index-linked-gilts

Of course, some might agree that the UK Treasury is not a safe body to lend your money to.

Unfortunately UK inflation linked bonds will not match inflation.  Buy one today at its current price and at maturity it could well lose money in £ terms, never mind match inflation.

Inflation linked bonds get snapped up by the institutions with demand far exceeding supply. Hence the price they trade at. 

Alexland

It's worth remembering that even during a prolonged crash diversified investments should still be producing some dividend income and while it might be missing a trick not reinvesting while prices are low it might mean you only need to hold around 4 years cash to sail through a 6 year recovery.
Another option might be to hold the equities and bonds in separate funds such that even if you did need to sell while your investment account is low you can choose to sell the bonds first as they will likely have dropped less (or may even have gone up) which gives the equities more time to recover.
Finally consider holding your cash in an offset mortgage account depending on how you feel about borrowing against the value of your house while your investments are down...

Linton

Thrugelmir said:

Linton said:

JohnWinder said:

Sadly there is no safe inflation matching investment.

'Index-linked gilts differ from conventional gilts in that coupon and principal payments are adjusted in line with movements in inflation.'   https://www.bankofengland.co.uk/statistics/articles/2018/index-linked-gilts

Of course, some might agree that the UK Treasury is not a safe body to lend your money to.

Unfortunately UK inflation linked bonds will not match inflation.  Buy one today at its current price and at maturity it could well lose money in £ terms, never mind match inflation.

Inflation linked bonds get snapped up by the institutions with demand far exceeding supply. Hence the price they trade at. 

Indeed, but by the time they reach maturity reality wins,

Linton

Alexland said:

It's worth remembering that even during a prolonged crash diversified investments should still be producing some dividend income and while it might be missing a trick not reinvesting while prices are low it might mean you only need to hold around 4 years cash to sail through a 6 year recovery.
Another option might be to hold the equities and bonds in separate funds such that even if you did need to sell while your investment account is low you can choose to sell the bonds first as they will likely have dropped less (or may even have gone up) which gives the equities more time to recover.
Finally consider holding your cash in an offset mortgage account depending on how you feel about borrowing against the value of your house while your investments are down...

A cash buffer is also useful for emergencies and major one-off expenditure.  It means one can take a relatively expensive holiday or buy a new car without having to worry about rebalancing and whether it would jeopardise the retirement plan.   So adding that to the buffer of 4-5 years cover for crashes could give a total of 5-10 years expenditure.

I agree that it makes very good sense to hold non-equity and equity in separate funds or even separate portfolios since their role during retirement is very different.

Also an offset mortgage could be a useful addition/alternative.  Though once you are well into retirement that would really mean a lifetime mortgage/equity release. LV have such a product, or something quite similar.

Thrugelmir

Alexland said:

It's worth remembering that even during a prolonged crash diversified investments should still be producing some dividend income and while it might be missing a trick not reinvesting while prices are low it might mean you only need to hold around 4 years cash to sail through a 6 year recovery.

The banks and other financial institutions, in particular, which had driven markets prior to 2007 , slashed/cancelled their dividends and bond payments. Markets respond to wider economic conditions and events.  Bottom line is that companies need to be profitable and most importantly generating cash. There's no free lunch.  

Alexland

Thrugelmir said:

The banks and other financial institutions, in particular, which had driven markets prior to 2007 , slashed/cancelled their dividends and bond payments.

Yes that's why I said 'diversified' and 'some' and of course depends on the types of equities being held.

Thrugelmir

Alexland said:

Thrugelmir said:

The banks and other financial institutions, in particular, which had driven markets prior to 2007 , slashed/cancelled their dividends and bond payments.

Yes that's why I said 'diversified' and 'some' and of course depends on the types of equities being held.

Retail investors naturally gravitate towards that are perceived towards those offering the best returns.  Indirectly I held Northern Rock for example, there was never any suggestion that the business would end up being nationalised. Very easy to gloss over historic events and simply view them with hindsight as mere blips. Whereas in the moment you are faced with making investment decisions. 

Prism

Whenever people refer to a cash buffer of more than 1 year I assume they are using fixed term savings accounts and if so then although they are not keeping up with current inflation, they are paying over 1%. This likely makes gives them a better return than most government bond funds.

I tend to lump my instant access cash (and premium bonds), fixed savings accounts and bond funds into one pool to work out how roughly long they would last should there be an extensive equity crash and slow recovery. Aiming for something like 25% of the total. Very difficult to say how many years that would last, especially given unknown inflation and also that I can play with the withdrawal rate.

cfw1994

Albermarle said:

Normally the advice is to keep the cash as a buffer for the future .
So whilst markets remain relatively strong ( or flattish anyway ) take money from the investments /recent growth .
When the markets slump and your pot shrinks significantly , then stop withdrawing from the pot and start to use up the cash pile . This should give time for your investments to recover . The idea is not to sell investments if possible when their value is depressed.

Assuming that your current cash savings are low , I can see some sense in taking the tax free cash and putting it into savings accounts . However I would keep it in reserve rather than start using it straightaway.

I'd agree with this. 

We have our PBs reasonably filled to give us funds we could get at very rapidly: if markets collapsed, I'd 'turn off' the drawdown pension pot I have and consider starting to take PB cash as needed....at the same time, maybe we would curb non-essential expenditure, which is perhaps 60-75% of our "normal" spend.
"Turning that off" is possible for my Aviva scheme within a month.

I personally feel 5 years in cash is too much - I believe 2 would suffice - but that is for everyone to make their own call on, no perfect answer!

Langtang said:

jim8888 said:

You said there's a reason for taking the TFLS. Do you want to extend on why?

To be honest, I just want to have a totally tax free income for the next five years and stop worrying about the damn stock market potential ups and downs! 
My intention would be to have that expenditure available in "cash" (or less risky investments), and top it up annually by selling a part of equities in my SIPP.   
Of all the strategies about withdrawing and managing pension withdrawals that I've read, this one appeals to me most. I feel I have a lot of money sitting in the global stock markets and it's served me well so far, but now I'm in retirement I want to stop fretting about a thirty or forty percent collapse in the market. I reckon that having five years to recover from any such (or bigger) plunge when I can live off mostly cash is a good approach. If it's longer than five years then I think we'l have much bigger issues to worry about!

This is looking like our plan, also. Although the IFA we are speaking to may have other ideas.

What makes you think your IFA would have different ideas to yours?   Is that something you have 'clashed' about in the past?

Prism said:

Whenever people refer to a cash buffer of more than 1 year I assume they are using fixed term savings accounts and if so then although they are not keeping up with current inflation, they are paying over 1%. This likely makes gives them a better return than most government bond funds.

I tend to lump my instant access cash (and premium bonds), fixed savings accounts and bond funds into one pool to work out how roughly long they would last should there be an extensive equity crash and slow recovery. Aiming for something like 25% of the total. Very difficult to say how many years that would last, especially given unknown inflation and also that I can play with the withdrawal rate.

Our PBs have tended to return around 1% in recent years....but appreciate they lowered the returns this year: YMMV!

Savings rates suck!