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DC Asset mix (equities/bonds) with a DB/State Pension also available

michaels
Posts: 28,795 Forumite


So my understanding is that the SWR analysis suggests an equities/bonds mix (for example 60:40) as the bonds reduce volatility and are moderately inversely correlated with equities.
Almost everyone in the UK has a 'db' entitlement in terms of the state pension and some like me also have a DB on top of their DC pots.
Given this, how should we approach the 60:40 asset allocation decision?
One thought would be to value DB/state pension entitlement as the cost of producing the same payment stream by purchasing an index linked gilts bond ladder from retirement age to current life expectation age.
This value would then be considered to be the value of the 'bond' holding in the overall portfolio to be compared to the remaining DC pot value and this could then be split between equities and bonds to give the desired overall proportions.
For example lets suppose the real return on linkers is zero, 16 years (average life expectancy at 67) times state pension entitlement of 10k = 160k
DC pot of 840k plus 160k state pension 'value' gives a total pot of £1m. 40% times £1m = 400k less the £160k of bond equivalent already held suggests the DC should be held as 240k bonds and 600k equities.
How have other people addressed this?
Almost everyone in the UK has a 'db' entitlement in terms of the state pension and some like me also have a DB on top of their DC pots.
Given this, how should we approach the 60:40 asset allocation decision?
One thought would be to value DB/state pension entitlement as the cost of producing the same payment stream by purchasing an index linked gilts bond ladder from retirement age to current life expectation age.
This value would then be considered to be the value of the 'bond' holding in the overall portfolio to be compared to the remaining DC pot value and this could then be split between equities and bonds to give the desired overall proportions.
For example lets suppose the real return on linkers is zero, 16 years (average life expectancy at 67) times state pension entitlement of 10k = 160k
DC pot of 840k plus 160k state pension 'value' gives a total pot of £1m. 40% times £1m = 400k less the £160k of bond equivalent already held suggests the DC should be held as 240k bonds and 600k equities.
How have other people addressed this?
I think....
0
Comments
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Off the top of my head the following might work:
Subtract the state pension from your 'desired' income and then allocate enough assets to meet that reduced income using the 60:40 (or whatever ratio) and SWR you prefer. Any spare assets could then be allocated in whatever manner you prefer - e.g. cautious types may prefer to hold additional cash or bonds, more gung-ho types may prefer something like a 100% global equity fund.0 -
Converting the SP and DB income to the cost of an equivalent annuity is a valid way to see how much they are worth compared to your DC total. I've done that with my DB and rental income, but eventually just looked at how much of my income requirement they covered, and as they covered all of my needs I decided to let my equity percentage drift upwards as I could take the added volatility in my portfolio. If I look at invested assets I'm now 90/10 with 2 to 3 years of cash in easy access saving accounts. So if your DB and SP provide you with the income you need why not just go with a high equity percentage and not worry too much.And so we beat on, boats against the current, borne back ceaselessly into the past.1
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Will the State Pension and your Defined Benefit entitlement provide you with your desired level of secure guaranteed income every year?0
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AIUI- quite a large variation in equity/bond ratio does not give a significant different SWR outcome in the end, as long as the equity does not drop below about 30% . So maybe all a bit theoretical anyway.1
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Bostonerimus1 said:Converting the SP and DB income to the cost of an equivalent annuity is a valid way to see how much they are worth compared to your DC total. I've done that with my DB and rental income, but eventually just looked at how much of my income requirement they covered, and as they covered all of my needs I decided to let my equity percentage drift upwards as I could take the added volatility in my portfolio. If I look at invested assets I'm now 90/10 with 2 to 3 years of cash in easy access saving accounts. So if your DB and SP provide you with the income you need why not just go with a high equity percentage and not worry too much.
I guess it depends how you feel about maximising your average spend vs maximising your minimum spend - swr is probably mostly about the latter, your strategy is more along the lines of: I need a baseline and am willing to take a punt on the income above that level - for you the potential utility from higher average return outweighs the loss in utility resulting from the uncertainty.
Seems like a sensible approach - but also sounds like gambling where the odds are in your favour....I think....0
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