Value of pension is freaking me out

Thrugelmir

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.

Wages rise with productivity. Technology has dumbed down many roles. Anything administrative requires far less skill and knowledge level. 

michaels

MarkCarnage said:

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. 

Debt is much higher compared to GDP so a much smaller increase in interest rates would have as big an impact on demand and through that inflation as much larger increases had in the past.

[Deleted User]

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.

Rich people have desirable assets, like houses, which protect from inflation.  Workers are not poor but salaries dont tend to go up fast enough.  Benefits tend to run out. Governments  which overspend tend to run out of other peoples money.  And things that poor people spend the bulk of their money on tend to be more vulnerable to high inflation. 

[Deleted User]

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?  

We now know that in 1990 long term bonds were mis-priced.  Someone who knew the future would have put 100% into 30 year bonds. That made annuities very profitable for buyers.  Not happening again. 

westv

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...

Happened to my DB back in 2003. Rescued by PPF with restrictions.

zagfles

Thrugelmir said:

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.

Wages rise with productivity. Technology has dumbed down many roles. Anything administrative requires far less skill and knowledge level. 

1970s obviously saw massive improvements in productivity then!! Wage inflation got to nearly 30%

MarkCarnage

Deleted_User said:

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?  

We now know that in 1990 long term bonds were mis-priced.  Someone who knew the future would have put 100% into 30 year bonds. That made annuities very profitable for buyers.  Not happening again. 

Mis priced with 30 year hindsight maybe, but probably not with double digit inflation then. Also, don't forget money illusion....a level annuity might look great back then, and less so in real terms. Buyers don't tend to buy annuities to make profit, but to guarantee income. The level of income provided by an annuity back then, even allowing for inflation was good, so the market for them was quite big. The level of income now is much lower, so much less apparently  attractive and also a wider menu of alternatives such as drawdown. However, at some point the attractiveness gap may narrow. In any event, a deferred annuity may still be the answer for some if the market developed.

MarkCarnage

michaels said:

MarkCarnage said:

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. 

Debt is much higher compared to GDP so a much smaller increase in interest rates would have as big an impact on demand and through that inflation as much larger increases had in the past.

True compared to 1990 maybe for Government debt/GDP, but household debt/disposable income is lower now than it was in 2007, but not to several other points in time.....however the longer it is put off the more painful it will be. Clearly BoE and Gov are hoping that inflation does some of the heavy lifting. One problem is the continuing Government induced inflation of house prices, though bank mortgage lending is fair bit more prudent than in 07. 

QrizB

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’

Annuity rates are also based on life expectancy, which has improved considerably since 1990.

A man who was 65 in 1990 was born in 1925, had probably been smoking since he was at primary school (I exaggerate, I know) and could expect to live to 79 (if my quick Google was correct).

Thrugelmir

zagfles said:

Thrugelmir said:

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.

Wages rise with productivity. Technology has dumbed down many roles. Anything administrative requires far less skill and knowledge level. 

1970s obviously saw massive improvements in productivity then!! Wage inflation got to nearly 30%

People didn't spend their time at work browsing the internet, looking at their phones or other non productive activities. Work was an ethic for many. The generation was post war and brought up by parents who had experienced tough times themselves. It was still possible then to rise up through company ranks from the very bottom by graft.  There was much inefficiency though. The highly unionised industries being the obvious examples.