Inflation and retirement plans

BritishInvestor

SouthCoastBoy said:

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?

What's the issue if bonds are "expensive", given their primary role is not to provide returns but instead dampening down overall portfolio volatility?

Linton

BritishInvestor said:

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. 

You may be correct that bucketing is financially suboptimal in the very long term and it meets a human rather than an investment problem.  From that point of view 100% equity is the only way to invest.

However as a retiree my primary concern is not the long term, I dont have a lot of it to worry about and I only have one life so averages dont mean much,  Provided one has sufficient wealth to sustain what one considers a comfortable lifestyle the human problems are more important than the investment ones.  Dying rich is not a primary ambition for most people as opposed to having a long and healthy retirement made more likely by minimal stress.

That is where defensive investments may help.  Particularly in the medium term they could enable holding a higher % equity than one might otherwise choose.

SouthCoastBoy

BritishInvestor said:

SouthCoastBoy said:

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?

What's the issue if bonds are "expensive", given their primary role is not to provide returns but instead dampening down overall portfolio volatility?

Personally I think cash is better positioned to do this at the moment. Having said that as inflation is running away, especially when considered against savings rates neither are great at the moment, hence my original post.

zagfles

Linton said:

BritishInvestor said:

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. 

You may be correct that bucketing is financially suboptimal in the very long term and it meets a human rather than an investment problem.  From that point of view 100% equity is the only way to invest.

Only to those who only think about fixed asset allocation and fixed withdrawals and think anything below 100% equities is nothing more than a comfort blanket. There are plenty of strategies involving dynamic asset allocation and dynamic withdrawal eg "prime harvesting" where asset allocation can vary significantly, up to 100% equities in some circumstances, but usually substantially lower. But probably beyond the pay grade of most IFAs and "financial planners".

Linton

BritishInvestor said:

SouthCoastBoy said:

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?

What's the issue if bonds are "expensive", given their primary role is not to provide returns but instead dampening down overall portfolio volatility?

Historically bonds both dampened down volatility and in doing so also provided a useful and sustainable return.  Broadly they were a better investment than cash whilst providing much the same safety.

Now they continue to dampen volatility but on the downside they provide very little return.  Furthermore they are significantly riskier than cash in that they can lose value in £ terms. Over the past 40 years we have had continuous and unsustainable enhancement of capital value of existing bonds caused by reductions in interest rates.  Interest rates are now at a level they cannot drop much further.  A rise in iterest rates will lead to a loss of capital value matching the previous rises.

The risk to capital value could be removed by buying bonds that meet investment timescales so you can always sell at ,or close to, maturity.  However this is difficult for small investors in the UK whose only real option is to buy bond funds with a wide range of maturity dates.

So it is difficult to see any reason for the small investor to buy safe bonds in preference to holding cash.

Audaxer

SouthCoastBoy said:

BritishInvestor said:

SouthCoastBoy said:

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?

What's the issue if bonds are "expensive", given their primary role is not to provide returns but instead dampening down overall portfolio volatility?

Personally I think cash is better positioned to do this at the moment. Having said that as inflation is running away, especially when considered against savings rates neither are great at the moment, hence my original post.

Cash is not great with high inflation, but I don't necessarily think 40% cash is too much for all circumstances. It really depends on your own circumstances. If for example you are lucky enough to already have a large enough portfolio in equity and bonds to give you a very safe withdrawal rate to meet your needs, I don't see much wrong with holding a large amount of cash. I know some would invest more in these circumstances, but some would see no need to invest more.

BritishInvestor

Linton said:

BritishInvestor said:

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. 

You may be correct that bucketing is financially suboptimal in the very long term and it meets a human rather than an investment problem.  From that point of view 100% equity is the only way to invest.

However as a retiree my primary concern is not the long term, I dont have a lot of it to worry about and I only have one life so averages dont mean much,  Provided one has sufficient wealth to sustain what one considers a comfortable lifestyle the human problems are more important than the investment ones.  Dying rich is not a primary ambition for most people as opposed to having a long and healthy retirement made more likely by minimal stress.

That is where defensive investments may help.  Particularly in the medium term they could enable holding a higher % equity than one might otherwise choose.

"However as a retiree my primary concern is not the long term, I dont have a lot of it to worry about and I only have one life so averages dont mean much"

I'm not sure of your personal situation, but given that most don't know the exact date they are going to die, then surely the longer term has to be a priority, given that running out of money is a suboptimal outcome (if you live longer than expected)? 

Prism

Audaxer said:

SouthCoastBoy said:

BritishInvestor said:

SouthCoastBoy said:

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?

What's the issue if bonds are "expensive", given their primary role is not to provide returns but instead dampening down overall portfolio volatility?

Personally I think cash is better positioned to do this at the moment. Having said that as inflation is running away, especially when considered against savings rates neither are great at the moment, hence my original post.

Cash is not great with high inflation, but I don't necessarily think 40% cash is too much for all circumstances. It really depends on your own circumstances. If for example you are lucky enough to already have a large enough portfolio in equity and bonds to give you a very safe withdrawal rate to meet your needs, I don't see much wrong with holding a large amount of cash. I know some would invest more in these circumstances, but some would see no need to invest more.

Its not great but it could be the least worst.. 40% seems high though

SouthCoastBoy

Not an expert on the 1970s economy but I assume interest rates were closer to inflation rates than they are now? i.e. CPI is around 5000% higher than the current base rate

Linton

BritishInvestor said:

Linton said:

BritishInvestor said:

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. 

You may be correct that bucketing is financially suboptimal in the very long term and it meets a human rather than an investment problem.  From that point of view 100% equity is the only way to invest.

However as a retiree my primary concern is not the long term, I dont have a lot of it to worry about and I only have one life so averages dont mean much,  Provided one has sufficient wealth to sustain what one considers a comfortable lifestyle the human problems are more important than the investment ones.  Dying rich is not a primary ambition for most people as opposed to having a long and healthy retirement made more likely by minimal stress.

That is where defensive investments may help.  Particularly in the medium term they could enable holding a higher % equity than one might otherwise choose.

"However as a retiree my primary concern is not the long term, I dont have a lot of it to worry about and I only have one life so averages dont mean much"

I'm not sure of your personal situation, but given that most don't know the exact date they are going to die, then surely the longer term has to be a priority, given that running out of money is a suboptimal outcome (if you live longer than expected)? 

You dont need to make provision for the possibility that you may live to 120. If you are in a position whereby alternative non-perverse investment decisions make the difference between running out of money at 90 vs running out of money at 100 then you really are in any case at serious risk from normal short term economic events.  You should have reduced your expenditure requirements well before reaching that stage.

If you dont believe you are at risk of running out of money before death whilst maintaining your desired lifestyle then why add to your stress levels and/or jeopardise that life-style in the short term to get even richer?  You may be in a position whereby you are more concerned about passing the largest inheritance you can achieve to your then 65 year old child than your own well being in the say 25 years you have left. In that case your approach could make sense.  However I guess that most people in retirement wont have that as their top priority.