Pension Funds and De-Risking

zagfles

bostonerimus said:

zagfles said:

Nebulous2 said:

zagfles said:

Notepad_Phil said:

Linton said:

I dont look at the cash and equity together and worry about the overall risk.  The cash, for these purposes, is considered risk free so no worries and the growth equity volatility can be completely ignored since those investments dont need to be touched for at least 10 years, by which time who knows what sort of world we will be living in.  So no worries there either.

But doesn't that mean that you are looking at both the cash and equity together?

You're happy to have ten years of cash or 'near' cash because you have the investments, and vice versa you're happy to have the growth equity because you've got the cash.

I'm similar to you in having many years of cash but only because I've got the backing of 100% equities in my investments that will hopefully take care of the longer term.

The other thing to remember is that cash is hardly "risk free", inflation is currently 6.2% (CPI) or 8.2% (RPI) and predicted to rise, while interest rates are under 2%. So cash is currently losing about 5%pa. There are fears that high inflation could lead to a wages/prices inflationary spiral meaning inflation could get even higher.

We've lived in a low inflation environment over the last few decades which may have caused people to forget about the risk of inflation, in the 1970's it peaked at over 25%, and one decade's inflation reduced the value of cash by 71%.  £1 in 1970 bought the same as £3.47 in 1980.  

Our local Facebook page has just flung up a bar price list from 1971. A pint of beer was 10p. A nip of whisky or vodka was 16p. I started drinking in late 1979 / early 1980 and a pint was 32p, with a nip at 25p. (I guess the tax must have dropped on the spirits) 

Wages rose dramatically however, and so did house prices. People who remained in work, with debt such as mortgages, did pretty well out of the 70s. People with cash and no mortgages didn't do so well, nor did people who lost their jobs with the deindustrialisation. 

And many people with pensions were screwed, people go on about how wonderful DB pensions were but they forget that there was no statutory inflation protection until the 90's IIRC. Some schemes provided inflation increases but many didn't, some companies used their pension scheme as "golden handcuffs" as the pension would become worthless if they moved jobs before retirement, as it wouldn't rise with inflation.

Even now, most DB pensions have inflation capped increases, eg at 3% or 5%, so with inflation at 8% their supposedly safe DB pension is going down by 3-5% a year.

If you don't have one, would you like a DB pension as part of your retirement portfolio?

I have one. But I don't live under the illusion it will maintain its value until I die, it almost certainly won't.

bostonerimus

zagfles said:

bostonerimus said:

zagfles said:

Nebulous2 said:

zagfles said:

Notepad_Phil said:

Linton said:

I dont look at the cash and equity together and worry about the overall risk.  The cash, for these purposes, is considered risk free so no worries and the growth equity volatility can be completely ignored since those investments dont need to be touched for at least 10 years, by which time who knows what sort of world we will be living in.  So no worries there either.

But doesn't that mean that you are looking at both the cash and equity together?

You're happy to have ten years of cash or 'near' cash because you have the investments, and vice versa you're happy to have the growth equity because you've got the cash.

I'm similar to you in having many years of cash but only because I've got the backing of 100% equities in my investments that will hopefully take care of the longer term.

The other thing to remember is that cash is hardly "risk free", inflation is currently 6.2% (CPI) or 8.2% (RPI) and predicted to rise, while interest rates are under 2%. So cash is currently losing about 5%pa. There are fears that high inflation could lead to a wages/prices inflationary spiral meaning inflation could get even higher.

We've lived in a low inflation environment over the last few decades which may have caused people to forget about the risk of inflation, in the 1970's it peaked at over 25%, and one decade's inflation reduced the value of cash by 71%.  £1 in 1970 bought the same as £3.47 in 1980.  

Our local Facebook page has just flung up a bar price list from 1971. A pint of beer was 10p. A nip of whisky or vodka was 16p. I started drinking in late 1979 / early 1980 and a pint was 32p, with a nip at 25p. (I guess the tax must have dropped on the spirits) 

Wages rose dramatically however, and so did house prices. People who remained in work, with debt such as mortgages, did pretty well out of the 70s. People with cash and no mortgages didn't do so well, nor did people who lost their jobs with the deindustrialisation. 

And many people with pensions were screwed, people go on about how wonderful DB pensions were but they forget that there was no statutory inflation protection until the 90's IIRC. Some schemes provided inflation increases but many didn't, some companies used their pension scheme as "golden handcuffs" as the pension would become worthless if they moved jobs before retirement, as it wouldn't rise with inflation.

Even now, most DB pensions have inflation capped increases, eg at 3% or 5%, so with inflation at 8% their supposedly safe DB pension is going down by 3-5% a year.

If you don't have one, would you like a DB pension as part of your retirement portfolio?

I have one. But I don't live under the illusion it will maintain its value until I die, it almost certainly won't.

The "value" of the DB pension is going to depend on it's index linking and overall inflation. There is no perfect solution to retirement income planning, just a set of compromises and best attempts given your circumstances. A component like SP and a DB pension could be useful in many people's portfolios as it might guide them away from risky retirement allocations and provide a safe minimum income.

DT2001

Thrugelmir said:

DT2001 said:

If time in the market is correct then having cash must be detrimental?

Nothing on the horizon concerns you? 

Lots.
My funds are higher than pre Covid when ‘people’ were saying they were over valued so how do know when to cash in or how much?

bostonerimus

DT2001 said:

Thrugelmir said:

DT2001 said:

If time in the market is correct then having cash must be detrimental?

Nothing on the horizon concerns you? 

Lots.
My funds are higher than pre Covid when ‘people’ were saying they were over valued so how do know when to cash in or how much?

The "time in the market" truism is usually quoted for the accumulation phase. When you start to spend your pot it gets more complicated.

You never "cash in". A pension pot should generate income for the rest of your life. You need an asset allocation and a plan. Mine was essentially a rental property, a DB pension and eventually SP for income, 2 years's cash and global equity index tracker for the rest. I won't ever "cash in".

Linton

Notepad_Phil said:

Linton said:

I dont look at the cash and equity together and worry about the overall risk.  The cash, for these purposes, is considered risk free so no worries and the growth equity volatility can be completely ignored since those investments dont need to be touched for at least 10 years, by which time who knows what sort of world we will be living in.  So no worries there either.

But doesn't that mean that you are looking at both the cash and equity together?

You're happy to have ten years of cash or 'near' cash because you have the investments, and vice versa you're happy to have the growth equity because you've got the cash.

I'm similar to you in having many years of cash but only because I've got the backing of 100% equities in my investments that will hopefully take care of the longer term.

I am looking at both the cash and the growth equity together as both contribute to solving the retirement financing problem. I am not looking at them together from an overall asset allocation point of view. For example my Wealth Preservation funds include some equity. This is not added to the growth equity to manage on an overall equity allocation basis.

Each portfolio’s allocations are assigned separately and independently in line with their objectives. The overall allocations are then simply what they happen to be.

k6chris

My finacial aims in retirement are to provide an income that meets our needs whilst being able to sleep at night. This forum is really useful for identifying things which are both helpful and harmful to those objectives.  A 2-3 year cash buffer may or may not optimise investment returns, but it helps me sleep and does not appear to be in the 'harmful' catagory.  Thanks all for your insight and discussion. 

jim8888

The way this thread has progressed underlines to me that I can model the future to the cows come home and still not have the answer I'm looking for. The psychological reality for me has been, however, that I just like having a cash buffer in place as the markets do what they do. On paper I suppose it can be historically  "proved" that this isn't an optimum approach, but it has given me peace of mind. 

Notepad_Phil

k6chris said:

My finacial aims in retirement are to provide an income that meets our needs whilst being able to sleep at night. This forum is really useful for identifying things which are both helpful and harmful to those objectives.  A 2-3 year cash buffer may or may not optimise investment returns, but it helps me sleep and does not appear to be in the 'harmful' catagory.  Thanks all for your insight and discussion. 

I think too much cash would only be harmful if it meant that you hadn't enough in investments so that you had to rely on too high a SWR from your investments through your retirement.

Thrugelmir

jim8888 said:

The way this thread has progressed underlines to me that I can model the future to the cows come home and still not have the answer I'm looking for. 

Though history does repeat itself. Which results in future events not being as unpredictable as they may seem. 

Linton

jim8888 said:

The way this thread has progressed underlines to me that I can model the future to the cows come home and still not have the answer I'm looking for. The psychological reality for me has been, however, that I just like having a cash buffer in place as the markets do what they do. On paper I suppose it can be historically  "proved" that this isn't an optimum approach, but it has given me peace of mind. 

Yes, from my experience of retirement it has become very clear that the objective of planning for it is not to attempt the impossible of  predicting the future but rather to give yourself the confidence to jump.  Once you have retired and events have moved on you are likely to find that the financials plans you made beforehand are increasingly irrelevent.

On whether a cash tranche  is an optimum approach, doesnt that rather depend on what you mean by "optimum"?  If your objective is peace of mind then substantial cash and/or low risk holdings may well be the optimum approach.