Inflation and retirement plans

SouthCoastBoy

So inflation (CPI > 5% and RPI > 7%) has really taken grip and could have an impact on both DB pensions that have a CPI cap and also DC where money is in bonds/cash. As I have posted on here before I have 40% cash as close to retirement, but have now started to reduce that moving into some "defensive equities" (e.g. food producers, energy companies etc.) To me this is taking more risk than I wish to but feel I have no choice with the BoE appearing to have no intention to raise interest rates by a significant amount in the short term. 

I would be interested in other opinions, is anybody else concerned by the latest inflation figures and if so are they doing anything about it?

BritishInvestor

SouthCoastBoy said:

So inflation (CPI > 5% and RPI > 7%) has really taken grip and could have an impact on both DB pensions that have a CPI cap and also DC where money is in bonds/cash. As I have posted on here before I have 40% cash as close to retirement, but have now started to reduce that moving into some "defensive equities" (e.g. food producers, energy companies etc.) To me this is taking more risk than I wish to but feel I have no choice with the BoE appearing to have no intention to raise interest rates by a significant amount in the short term. 

I would be interested in other opinions, is anybody else concerned by the latest inflation figures and if so are they doing anything about it?

What hits retirement plans hardest is persistently high inflation and falling markets. The 1970s had this, and this is the period that has historically put retirement plans under most stress. 

Given current moderate inflation and relatively benign markets, I'm not sure there is any reason to make adjustments to retirement plans just yet. 

I'm not sure what "defensive equities" are nor how they will contribute towards a successful retirement outcome.

Prism

I have always tried to select more defensive equity funds regardless of inflation if only to attempt to reduce the effects of crashes and bear markets. In my non SIPP portfolio I have around a 20% allocation to property and infrastructure alongside those equites, plus a good chunk of cash and short term bonds and savings.

SouthCoastBoy

BritishInvestor said:

I'm not sure what "defensive equities" are nor how they will contribute towards a successful retirement outcome.

Here is a definition of defensive stocks, https://www.investopedia.com/terms/d/defensivestock.asp

wrt inflation being short term, only a couple of months ago BoE was saying inflation only to end of year, that perspective has now changed, personally I think due to the large QE it could be longer than 6 to12 months, and currently in real terms getting around -4.5% growth on cash in real terms, as I hold around 600k cash that would cost me about 25k a year.

westv

RPI linked annuities now look ever so very slightly less expensive now. 

Linton

BritishInvestor said:

SouthCoastBoy said:

So inflation (CPI > 5% and RPI > 7%) has really taken grip and could have an impact on both DB pensions that have a CPI cap and also DC where money is in bonds/cash. As I have posted on here before I have 40% cash as close to retirement, but have now started to reduce that moving into some "defensive equities" (e.g. food producers, energy companies etc.) To me this is taking more risk than I wish to but feel I have no choice with the BoE appearing to have no intention to raise interest rates by a significant amount in the short term. 

I would be interested in other opinions, is anybody else concerned by the latest inflation figures and if so are they doing anything about it?

What hits retirement plans hardest is persistently high inflation and falling markets. The 1970s had this, and this is the period that has historically put retirement plans under most stress. 

Given current moderate inflation and relatively benign markets, I'm not sure there is any reason to make adjustments to retirement plans just yet. 

I'm not sure what "defensive equities" are nor how they will contribute towards a successful retirement outcome.

I am not concerned about current inflation fears and therefore not doing anything about them. My retirement portfolio was designed taking into account that inflation is always a risk.  The way to protect against inflation is to hold equity and therefore the portfolio needs to included a significant amount.  Equity should beat inflation over the long term - if it did not there would be little reason for people to make the effort to set up and invest in businesses.

However equity has the problem of volatility.  Therefore if one wants to support steady expenditure less volatile investments are required for the short term.

The main question then is what % allocations one should use.  In my view the % of  non equity should be as little as is required to meet ones expenditire requirements in the short to medium term with zero worry.  In the long term equity will do the work. The second question is what is this non-equity?   But that can be left to another posting.

One could regard short term as 5 years, medium term as 5-12 years and long term anything beyond that.  Cash is only suitable for the short term.  For safety one could decide to hold sufficient to cover required non-guaranteed income with say 5% annual inflation over that period.  This should be nowhere near 40% of total assets.  For the medium term a cautious portfolio including some equity  would be reasonable.

With that viewpoint I find it difficult to see how holding 40% cash when one is starting retirement could possibly be justified.  A much lower % could be held without any concerns about "reasonable" levels of inflation.

Answeringf British Investor's question - Defensive Equities are shares in companies whose sales/profits should be little affected by problems with the economy.  These could include utilities, household cleaning proiducts, basic foodstuffs etc.  The benefits to meeting one's retirement needs are pretty obvious.  Though there is the downside that returns tend to be lower than for more exciting investments.

[Deleted User]

1. Thats an awful lot of cash.  

2. You need to diversify your fixed income rather than buy a lot more stocks than you are comfortable with.

hugheskevi

I'm concerned by inflation figures, but also the generally uncertainty and unpredictability that seems likely to be around for a long time to come. I think any asset market has a large degree of unpredictability now. Whilst there is always uncertainty, this appears to be particularly the case at the current time. There is also a higher than usual risk of policy change in times such as these, as governments become more likely to make hasty and significant policy changes.

Personally, I am keeping as many options open as possible. That means taking unpaid leave to go travelling rather than resigning. I'll also rent house out rather than the initial plan to sell house and keep money in savings accounts for a couple of years whilst travelling.

On investments, I hold mostly defensive equities and inflation linked securities, with a lot of US-TIPS. This hasn't changed recently, it is part of a long-term strategy. Most of our pension is fortunately DB with uncapped CPI indexation which makes things far easier. That means our ISA and DC pensions are focused on providing income for the next 24 years, until we reach State Pension age - although as we will have access to DC pension from age 57 and DB Normal Pension age from 60 (minimum pension age of 50, although unattractive to take it until at least age 55 due to way actuarial deduction is calculated), the key period is the next 13 years, until we are both 57 (hence why investments were already defensive).

When I retire, I hope to be able to do so with an offset mortgage ideally, which I will rapidly move to largely or entirely offset. That will provide a pool of capital in case of need.

I'll also look to derisk as much future expenditure as possible, things like cars, solar panels, house refurbishment, etc, whilst keeping options open.

BritishInvestor

SouthCoastBoy said:

BritishInvestor said:

I'm not sure what "defensive equities" are nor how they will contribute towards a successful retirement outcome.

Here is a definition of defensive stocks, https://www.investopedia.com/terms/d/defensivestock.asp

wrt inflation being short term, only a couple of months ago BoE was saying inflation only to end of year, that perspective has now changed, personally I think due to the large QE it could be longer than 6 to12 months, and currently in real terms getting around -4.5% growth on cash in real terms, as I hold around 600k cash that would cost me about 25k a year.

Effectively low volatility stocks?

https://en.wikipedia.org/wiki/Low-volatility_anomaly

I'd be wary of reducing diversification and deviating away from a total market approach. 

I'd also be wary of believing any equity is "defensive" - just had a quick look at Coca-cola share price circa 1998-2005

BritishInvestor

Linton said:

BritishInvestor said:

SouthCoastBoy said:

So inflation (CPI > 5% and RPI > 7%) has really taken grip and could have an impact on both DB pensions that have a CPI cap and also DC where money is in bonds/cash. As I have posted on here before I have 40% cash as close to retirement, but have now started to reduce that moving into some "defensive equities" (e.g. food producers, energy companies etc.) To me this is taking more risk than I wish to but feel I have no choice with the BoE appearing to have no intention to raise interest rates by a significant amount in the short term. 

I would be interested in other opinions, is anybody else concerned by the latest inflation figures and if so are they doing anything about it?

What hits retirement plans hardest is persistently high inflation and falling markets. The 1970s had this, and this is the period that has historically put retirement plans under most stress. 

Given current moderate inflation and relatively benign markets, I'm not sure there is any reason to make adjustments to retirement plans just yet. 

I'm not sure what "defensive equities" are nor how they will contribute towards a successful retirement outcome.

I am not concerned about current inflation fears and therefore not doing anything about them. My retirement portfolio was designed taking into account that inflation is always a risk.  The way to protect against inflation is to hold equity and therefore the portfolio needs to included a significant amount.  Equity should beat inflation over the long term - if it did not there would be little reason for people to make the effort to set up and invest in businesses.

However equity has the problem of volatility.  Therefore if one wants to support steady expenditure less volatile investments are required for the short term.

The main question then is what % allocations one should use.  In my view the % of  non equity should be as little as is required to meet ones expenditire requirements in the short to medium term with zero worry.  In the long term equity will do the work. The second question is what is this non-equity?   But that can be left to another posting.

One could regard short term as 5 years, medium term as 5-12 years and long term anything beyond that.  Cash is only suitable for the short term.  For safety one could decide to hold sufficient to cover required non-guaranteed income with say 5% annual inflation over that period.  This should be nowhere near 40% of total assets.  For the medium term a cautious portfolio including some equity  would be reasonable.

With that viewpoint I find it difficult to see how holding 40% cash when one is starting retirement could possibly be justified.  A much lower % could be held without any concerns about "reasonable" levels of inflation.

Answeringf British Investor's question - Defensive Equities are shares in companies whose sales/profits should be little affected by problems with the economy.  These could include utilities, household cleaning proiducts, basic foodstuffs etc.  The benefits to meeting one's retirement needs are pretty obvious.  Though there is the downside that returns tend to be lower than for more exciting investments.

"The way to protect against inflation is to hold equity and therefore the portfolio needs to included a significant amount."

Agreed

 "However equity has the problem of volatility"

That's a human problem, not a portfolio problem.

"Therefore if one wants to support steady expenditure less volatile investments are required for the short term."

But this can impact portfolio sustainability over the longer term, hence why bucketing tends to be sub-optimal from a non-emotional standpoint.

"The benefits to meeting one's retirement needs are pretty obvious."

I'm not sure I've seen the evidence TBH. 

SouthCoastBoy

Deleted_User said:

1. Thats an awful lot of cash.  

2. You need to diversify your fixed income rather than buy a lot more stocks than you are comfortable with.

When you say diversify my fixed income I'm not sure where to go, Bonds look expensive at the moment, cash has very low interest rates. What other options are there?