Strategies for protecting against pre-retirement stock market crash

Pat38493

[Deleted User] said:

L&G, and I'm planning to get an annuity.

Sorry my reply crossed with yours - if you are planning to get an Annuity then a lifestyle approach which is tailored for those purchasing annuity is not nearly as bad as it would be if you were planning drawdown.

I'm not sure how much research you have done into this topic already with 14 years still to run, but firstly as leosayer has pointed out, normally you would only use 75% of your pension to buy an annuity and the rest would be a tax free cash payout - it's often not cost effective to use your potential tax free money to buy an annuity as you will potentially end up getting taxed on it (there are always exceptions so without knowing all your detailed numbers we can't be sure).

Secondly, buying an annuity gives peace of mind, but statistically it is unlikely to give you the best long term sustainable income.  Have you considered taking financial advice, especially if you are a high earner?  Again this is personal opinion but I wouldn't want to commit to buying an annuity 14 years out - even if I was hoping to buy an annuity I would still stay heaving in equities and then decide nearer the time.  Also there were quite a few years up until about 2022 when annuities were terrible value and hardly anyone was getting them, so you might want to keep your options open.

Niv

I also have a L&G pension with a lifestyle plan. I prefer to keep 80/20 but really not sure which fund would be best from those offered. I am erring on switching to a different lifestyle fund that does not reduce equities until a significantly later date as the fund management fees are cheaper in these funds, and it would give a bit more security of value movements when into my dotage (if I make to to mid 80's).

[Deleted User]

Well I might change my mind about the annuity and my retirement date, but in all cases the last thing I want is a 2008 or 2000 style crash that's just a few years before I hope to retire, and wipes out half my pension forcing me to delay retirement.

kempiejon

[Deleted User] said:

Well I might change my mind about the annuity and my retirement date, but in all cases the last thing I want is a 2008 or 2000 style crash that's just a few years before I hope to retire, and wipes out half my pension forcing me to delay retirement.

I do understand your trepidation, investing is scary you might lose your money. But if you're planning on moving your money into bonds over 10 years so you're 100% bonds at retirement date that might have been the best 10 years to have been in the stock market, what if the last 2 years when you're 80% 100% cash the stock market doubles. Then when you're all bonds the bond market collapses like the Truss effect? There are no knowables in respect of investing.

I'm a bit more relaxed than you, I'm working to an assumption that following any non fatal collapse the market recovers to previous values within 4 years. I'm expecting a halving of income and capital so to get through that if I hold 3 years of spending as cash say 10% of my portfolio value when the market and my income from it halves I take half a year of money from my reserves, the next year the same then as the market recovers I need a bit less to top up for a couple of years and then we're back and ruining again. I need to top that cash 3 year holding up over the next few years, hopefully before another crash.

I have very details plans and recrds of my investing and spending history covering 15 odd years so I'm comfortable I have data to make those sorts of assumptions.

Of course there are the unknown unknowns and it might all be catastrophic, but ya know I might not even live that long or some other catastrophe occurs such my pension planning become irrelevant. I do have some premium bonds so who knows I might hit the mill.

JohnWinder

'I'm working to an assumption that following any non fatal collapse the market recovers to previous values within 4 years'

'As I understand it, there has never been any stock market crash that hasn't recovered within 7 years when you take dividend reinvestment into consideration, is this correct? '

Here's some data:  https://earlyretirementnow.com/2019/10/30/who-is-afraid-of-a-bear-market/

Pat38493

JohnWinder said:

'I'm working to an assumption that following any non fatal collapse the market recovers to previous values within 4 years'

'As I understand it, there has never been any stock market crash that hasn't recovered within 7 years when you take dividend reinvestment into consideration, is this correct? '

Here's some data:  https://earlyretirementnow.com/2019/10/30/who-is-afraid-of-a-bear-market/

Interesting document and I think I've read that before.  

On the one hand, it's pretty scary to see that the average time for markets to recover, if you defined recovery as "Back to the previous peak, plus CPI inflation, plus 5% growth per annum for the missed years", the mean time to recovery was nearly 14 years and we still dad still not recovered from the 2000 crash based on that definition at the time of this article in 2019 (although by now it has recovered per the comments below the article)!  Also - interesting food for thought on the often recommended 2 year cash bucket - based on the tables in this document, your 2 years cash bucket might become exhausted at the exact worst time to start drawing from equities again!

On the other side though to reframe it a bit, all of the clever folks who wrote the books about this around safe withdrawal rates, and the software that is used by financial planners, already has all this data built in so the recommended fund requirements (including what we are discussing in this thread) are already taking all this into account.

dunstonh

based on the tables in this document, your 2 years cash bucket might become exhausted at the exact worst time to start drawing from equities again!

Yield goes into cash float.   If the yield is around 3% and the draw is around 3.5%, then the 2 year cash float takes longer to run out.   And during positive periods, you maintain the float.  You don't refloat it during negative periods.

No method is going to be perfect 100% of the time.  Markets do not act within expected volatility 100% of the time.    Most modelling shows 90% or 95% range of variables.   Ultimately, most people are looking for a solution that does what they want it to do with the least risk possible.     Some will unnecessarily push it up the risk scale, and they may get lucky or not.  

Linton

Pat38493 said:

JohnWinder said:

'I'm working to an assumption that following any non fatal collapse the market recovers to previous values within 4 years'

'As I understand it, there has never been any stock market crash that hasn't recovered within 7 years when you take dividend reinvestment into consideration, is this correct? '

Here's some data:  https://earlyretirementnow.com/2019/10/30/who-is-afraid-of-a-bear-market/

Interesting document and I think I've read that before.  

On the one hand, it's pretty scary to see that the average time for markets to recover, if you defined recovery as "Back to the previous peak, plus CPI inflation, plus 5% growth per annum for the missed years", the mean time to recovery was nearly 14 years and we still dad still not recovered from the 2000 crash based on that definition at the time of this article in 2019 (although by now it has recovered per the comments below the article)!  Also - interesting food for thought on the often recommended 2 year cash bucket - based on the tables in this document, your 2 years cash bucket might become exhausted at the exact worst time to start drawing from equities again!

On the other side though to reframe it a bit, all of the clever folks who wrote the books about this around safe withdrawal rates, and the software that is used by financial planners, already has all this data built in so the recommended fund requirements (including what we are discussing in this thread) are already taking all this into account.

The quoted document is based on US data.  Global data would be less scary.

The 5% lost growth being included in the recovery time seems just wrong since any average such as 5% already includes the difficult times.  Using recovery to previous peak is also questionable since it is usually at the point when a boom becones unsustainable.  If you erase the crash you should also erase the preceding boom.

Basing the analysis on the long term growth line would make much more sense and would I think remove the errors.

 But I agree that the commonly used 2 year buffer seems pretty inadequate.

One lesson to learn - dont take whatever you read on the internet about investment matters as definitive proof of anything.  Check the data and think the conclusions through for yourself.

kempiejon

JohnWinder said:

'I'm working to an assumption that following any non fatal collapse the market recovers to previous values within 4 years'

'As I understand it, there has never been any stock market crash that hasn't recovered within 7 years when you take dividend reinvestment into consideration, is this correct? '

Here's some data:  https://earlyretirementnow.com/2019/10/30/who-is-afraid-of-a-bear-market/

Handy and interesting reading. A bit of diversification in my portfolio protects from the specific S&P risk in the article but perhaps a bit more catastrophe planning would help, to be honest though generating a bit of surplus income and cutting back expenditure seems better than working longer for a bigger pot.

Albermarle

My employer has a default plan where 10 years before your retirement date half your fund is moved to bonds, then 5 years before the rest of it is moved (with similar adjustments to future contributions). This seems rather coarse to me, and these bonds funds have proven to be anything but safe these past years.

Bonds are generally more predictable than stock markets.

As has already been said the big drop in bonds/gilts a year or so ago, was a  one off event caused by a long period of unusually low interest rates coming to an end. Many in the financial world and on these forums ( not me particularly !), saw it coming, and reduced bond holdings drastically, but are now rebuilding them.

Unlike stock market crash predictions, which are usually wrong, the bond/gilt market crash was largely predictable. Therefore you can say with some confidence that a more normal performance of bonds can be expected for the foreseeable future.