Value of pension is freaking me out

Audaxer

Alexland said:

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.

I think even with a capped increase, a DB pension is preferable option to a DC pension.

Audaxer

Deleted_User 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. 

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 

I think SWR is only really a guide showing what rate of withdrawal has been safe in the vast majority of retirement periods historically. I agree that you don't have to use a constant rate of withdrawal from investments, but if you also hold a decent cash buffer you should be able to have a constant and hopefully growing level of income.

michaels

Good news is that some of the SWR tools show a higher rate if you only consider periods where the S&P is at least 10% below its peak at the start of the withdrawal period....so the lower the S&P goes the higher the SWR percentage (although of course it does not increase enough to compensate for the smaller initial pot!)

zagfles

Audaxer said:

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.

Inflation averaged 10% between 1970 and 1990. In other countries inflation has been far higher over decades, and not just in obvious basket cases like Venezuela or Zimbabwe, but in countries like Turkey where inflation currently 36% and has been that sort of level for decades. 

zagfles

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...

No they aren't. They have a fund which is supposed to cover their liabilities. Most private sector schemes have closed to further accrual so how come they haven't gone bust if they're Ponzi schemes?

Thrugelmir

michaels said:

Good news is that some of the SWR tools show a higher rate if you only consider periods where the S&P is at least 10% below its peak at the start of the withdrawal period....so the lower the S&P goes the higher the SWR percentage (although of course it does not increase enough to compensate for the smaller initial pot!)

Someone invested fully in the SP500 would need to take currency exchange into account. The inherent danger with the constant referencing to US websites and data. The £ $ rate has moved considerably in both directions over the years. 

[Deleted User]

zagfles said:

Audaxer said:

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.

Inflation averaged 10% between 1970 and 1990. In other countries inflation has been far higher over decades, and not just in obvious basket cases like Venezuela or Zimbabwe, but in countries like Turkey where inflation currently 36% and has been that sort of level for decades. 

Turkey is an interesting case. Inflation has been under 10% between 2004 and 2017. It went nuts in 2021.  

President Erdogan has a novel theory: the lower central bank’s interest rate, the lower inflation.  And he enforced this approach by terrorizing his bankers. Unfortunately for consumers he could not terrorize the market or lira. So Erdogan blamed “international financiers” (aka the joos) as usual. 

We’ve seen elements of this approach in democratic countries since 2020 but nothing quite as crazy.  Anything is possible but I still don’t believe its likely here. Inflation hurts poorer people the most. It gets into newspapers and our governments cant just throw journalists in prisons to stop it. 

zagfles

Deleted_User said:

zagfles said:

Audaxer said:

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.

Inflation averaged 10% between 1970 and 1990. In other countries inflation has been far higher over decades, and not just in obvious basket cases like Venezuela or Zimbabwe, but in countries like Turkey where inflation currently 36% and has been that sort of level for decades. 

Turkey is an interesting case. Inflation has been under 10% between 2004 and 2017. It went nuts in 2021.  

President Erdogan has a novel theory: the lower central bank’s interest rate, the lower inflation.  And he enforced this approach by terrorizing his bankers. Unfortunately for consumers he could not terrorize the market or lira. So Erdogan blamed “international financiers” (aka the joos) as usual. 

We’ve seen elements of this approach in democratic countries since 2020 but nothing quite as crazy.  Anything is possible but I still don’t believe its likely here. Inflation hurts poorer people the most. It gets into newspapers and our governments cant just throw journalists in prisons to stop it. 

I'd have thought inflation would hurt richer people the most. Wages tend to rise faster than inflation, even or especially in high inflation times, as that was the main causein the 1970s! Benefits tend to rise with inflation, mortgages and other loans reduce in real value, as do savings, so those with loans are better off and those with savings are worse off.

MarkCarnage

zagfles said:

Deleted_User said:

zagfles said:

Audaxer said:

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.

Inflation averaged 10% between 1970 and 1990. In other countries inflation has been far higher over decades, and not just in obvious basket cases like Venezuela or Zimbabwe, but in countries like Turkey where inflation currently 36% and has been that sort of level for decades. 

Turkey is an interesting case. Inflation has been under 10% between 2004 and 2017. It went nuts in 2021.  

President Erdogan has a novel theory: the lower central bank’s interest rate, the lower inflation.  And he enforced this approach by terrorizing his bankers. Unfortunately for consumers he could not terrorize the market or lira. So Erdogan blamed “international financiers” (aka the joos) as usual. 

We’ve seen elements of this approach in democratic countries since 2020 but nothing quite as crazy.  Anything is possible but I still don’t believe its likely here. Inflation hurts poorer people the most. It gets into newspapers and our governments cant just throw journalists in prisons to stop it. 

I'd have thought inflation would hurt richer people the most. Wages tend to rise faster than inflation, even or especially in high inflation times, as that was the main causein the 1970s! Benefits tend to rise with inflation, mortgages and other loans reduce in real value, as do savings, so those with loans are better off and those with savings are worse off.

Inflation hurts most for those on fixed incomes, or those who don't have as much labour market power. For richer people, it probably depends where they are invested. 

MarkCarnage

NannaH said:

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?  

What would have to change is:

Inflation becoming a bigger problem

The BoE ceasing to ignore it in relation to short term rates

A cessation in the policy of yield curve suppression by the BoE buying gilts.