Value of pension is freaking me out

Sunnylifeover50plan

and the said clock needs to be broken and analogue.

SouthCoastBoy

Kim1965 said:

dB pensions, take the stress out of retirement.

They certainly do, if there is a serious correction in the next few years it will be interesting to see how the public react as the more and more private sector employees move to DC pots for retirement.

I think there is definitely a two tier retirement, those with DB and those without.

zagfles

Audaxer said:

Deleted_User said:

NedS said:

Deleted_User said:

NedS said:

Deleted_User said:

1) why is the fact you are retiring in 3/4 years an issue? - if you are buying an annuity, then it certainly is but if you are going into drawdown, its not.

Because 5 years before and after retirement is the period of vulnerability to sequence of return risk.  Withdrawing from a pot temporarily reduced by the market (aka “drawdown”) can be devastating.  Basics. 

True, but if the outcome is 'devastating', the Safe Withdraw Rate for drawdown wasn't very safe, was it?

Quite right. There is no “safe” constant withdrawal rate from a highly variable pot subject to market whims.  Its a misnomer. 

Erm, well clearly there is - the problem is that you will only know with hindsight in 30 years time that it was safe. Pretty sure 1% would be a SWR for a well diversified portfolio regardless of sequence of returns.

None of it is “safe” and “pretty sure” isn’t good enough to say “safe”.  Safe is a deterministic claim. The future is probabilistic rather than deterministic. And unknown in advance, hence we call it “future”. 

There will always be a non zero probability of failure as long as you are invested in a market.  SWR was developed based on (I think) a 90 year dataset in the US.  Saying next 30 years (one third of the interval!)  will be like sampling from that dataset is a statistical fallacy. 

Putting stats aside, the basic mathematical point is that you can’t have a guaranteed constant withdrawal rate from a highly variable function. 

If you don't think even a 1% withdrawal rate is safe there is little point in being invested, because you could take 1% per year rising with inflation from a savings account, and it would still last throughout a 30 year retirement. 

How do you know? Try that with 10% inflation and 1% interest rates. Which isn't massively far off what we have today.

NannaH

The good old days!
I doubt that very many had even a £50k pot in 1990 though.  
I know my FiL got around 7% on £120k 15 years ago.  

“In 1990, a man aged 65 could have obtained an annuity rate of 15.5 per cent compared with 8.75 per cent today. This has come about because annuity rates are based on the yield on gilts and these have plummeted from 12 per cent in 1990 to 4.5 per cent - 26 Feb 1999’

What would have to change,  economy-wise,  for gilt yields to get up to that level again?  Or has the financial landscape changed so much that it’s just not possible?  

Audaxer

zagfles said:

Audaxer said:

Deleted_User said:

NedS said:

Deleted_User said:

NedS said:

Deleted_User said:

1) why is the fact you are retiring in 3/4 years an issue? - if you are buying an annuity, then it certainly is but if you are going into drawdown, its not.

Because 5 years before and after retirement is the period of vulnerability to sequence of return risk.  Withdrawing from a pot temporarily reduced by the market (aka “drawdown”) can be devastating.  Basics. 

True, but if the outcome is 'devastating', the Safe Withdraw Rate for drawdown wasn't very safe, was it?

Quite right. There is no “safe” constant withdrawal rate from a highly variable pot subject to market whims.  Its a misnomer. 

Erm, well clearly there is - the problem is that you will only know with hindsight in 30 years time that it was safe. Pretty sure 1% would be a SWR for a well diversified portfolio regardless of sequence of returns.

None of it is “safe” and “pretty sure” isn’t good enough to say “safe”.  Safe is a deterministic claim. The future is probabilistic rather than deterministic. And unknown in advance, hence we call it “future”. 

There will always be a non zero probability of failure as long as you are invested in a market.  SWR was developed based on (I think) a 90 year dataset in the US.  Saying next 30 years (one third of the interval!)  will be like sampling from that dataset is a statistical fallacy. 

Putting stats aside, the basic mathematical point is that you can’t have a guaranteed constant withdrawal rate from a highly variable function. 

If you don't think even a 1% withdrawal rate is safe there is little point in being invested, because you could take 1% per year rising with inflation from a savings account, and it would still last throughout a 30 year retirement. 

How do you know? Try that with 10% inflation and 1% interest rates. Which isn't massively far off what we have today.

Okay, just tried it on a spreadsheet. £100k savings with no interest and withdrawing £1,000 per year increasing by 10% each year. It would still last 25 years which is not bad considering it is very unlikely that we could have 10% inflation every year for 25 years. The point I was trying to make is that there would be no point in investing if a 1% withdrawal rate wasn't thought to be safe.

kuratowski

Audaxer said:
The point I was trying to make is that there would be no point in investing if a 1% withdrawal rate wasn't thought to be safe.

I think we're all in agreement that 'SWR' is not absolutely 'S' (safe), just probabilistically safe.  I actually think the takeaway is not to stop investing, but rather to be prepared to have a flexible withdrawal strategy in the event that things go pear-shaped.  So if you experience a toxic sequence of negative returns + high inflation, especially early in the decumulation stage, be prepared to cut spending (or find another source of income).

[Deleted User]

Audaxer said:

Deleted_User said:

NedS said:

Deleted_User said:

NedS said:

Deleted_User said:

1) why is the fact you are retiring in 3/4 years an issue? - if you are buying an annuity, then it certainly is but if you are going into drawdown, its not.

Because 5 years before and after retirement is the period of vulnerability to sequence of return risk.  Withdrawing from a pot temporarily reduced by the market (aka “drawdown”) can be devastating.  Basics. 

True, but if the outcome is 'devastating', the Safe Withdraw Rate for drawdown wasn't very safe, was it?

Quite right. There is no “safe” constant withdrawal rate from a highly variable pot subject to market whims.  Its a misnomer. 

Erm, well clearly there is - the problem is that you will only know with hindsight in 30 years time that it was safe. Pretty sure 1% would be a SWR for a well diversified portfolio regardless of sequence of returns.

None of it is “safe” and “pretty sure” isn’t good enough to say “safe”.  Safe is a deterministic claim. The future is probabilistic rather than deterministic. And unknown in advance, hence we call it “future”. 

There will always be a non zero probability of failure as long as you are invested in a market.  SWR was developed based on (I think) a 90 year dataset in the US.  Saying next 30 years (one third of the interval!)  will be like sampling from that dataset is a statistical fallacy. 

Putting stats aside, the basic mathematical point is that you can’t have a guaranteed constant withdrawal rate from a highly variable function. 

If you don't think even a 1% withdrawal rate is safe there is little point in being invested, because you could take 1% per year rising with inflation from a savings account, and it would still last throughout a 30 year retirement. 

1. I invest with open eyes knowing its an inherently risky endeavour and try to manage risks
2. SWR is unsafe because its a constant rate of withdrawal from a highly variable market. One does not have to use a constant rate approach of withdrawal 

penners324

DB retirement plans are in essence Ponzi schemes. Any large fluctuations in the value have to be covered by the employer. It is tricky if the employer then goes bust...

[Deleted User]

penners324 said:

DB retirement plans are in essence Ponzi schemes. Any large fluctuations in the value have to be covered by the employer. It is tricky if the employer then goes bust...

Rather depends on specific pension plan and the asset mix they carry.

Alexland

Kim1965 said:

dB pensions, take the stress out of retirement.

Many have annual increase capping which can erode their spending power over the long term as inflation isn't linear. That might be an acceptable problem for those retiring at a later age but retiring early is taking a risk whatever pensions you have.