Ready made portfolios for generating an income in retirement

Hoenir

NedS said:

OldScientist said:

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

Really? I have no idea how many people have access to a DB pension, nor it's average size, but I would guess that most people do not, thus leaving them with only a SP as guaranteed income which certainly does not cover essential expenditure, especially for those with substantial housing costs (considering around 2/3rd of people over 65 do not own their own home, and these are also most likely to be the people without additional DB (or any) pension provision).

Totally agree. DB schemes haven't been available to many private sector workers for a very long time. 

Bostonerimus1

OldScientist said:

Bostonerimus1 said:

OldScientist said:

Triumph13 said:

I'm very lucky to both have more money than I planned (thanks to my one day a week job) and kids that I like and trust.  I can therefore afford to plan to end up with them inheriting large amounts and not see that as a failure.  I plan to stick with my 3.5% fixed percentage from near 100% global equity funds and would hope that that would beat inflation over the long term.  If I didn't have kids then I might be looking at a rising percentage as we aged, but I'm not sure it would be worth it for the stress of worrying if my life expectancy assumptions were accurate.

You are spot on that having the basics covered by DB and SP makes this kind of approach much easier - I would strongly suggest that most people at least consider annuitisation to get to that point as it takes a lot of the pressure off, whatever drawdown approach you take.  It also greatly decreases volatility - to the extent that I don't really worry about the volatility any more.  Certainly not as much as I would worry about SORR.  The use of a cash buffer to further smooth volatility is more about short term planning horizons - I want to know what holidays I can afford next year in time to book them

I fully agree with the approach you outline. Securing 'essential' (or 'core') spending (however that is defined by the individual) with guaranteed income sources (SP, DB pension, RPI annuity, and inflation linked gilt ladder), is the key to then allowing dynamic withdrawals (constant percentage, VPW, 1/N, natural yield* etc.) from the equity and bond portfolio because the variability in portfolio income becomes less critical. Compared to SWR, the 'success' of such withdrawal strategies will be much less dependent on the initial withdrawal and, therefore, much less worrisome in the longer term. As a bonus, a percentage of portfolio approach (whether fixed or rising) is about as simple as one can get.

FWIW, we have accidentally followed (i.e., with no real planning until a few years before retirement) the strategy of building a floor of guaranteed income (DB pension and SP pension in due course) that covers all of our essential spending and most of our discretionary. Our portfolio withdrawals follow a modified version of bogleheads VPW.

* To stay vaguely on topic, I think the OP was possibly after a natural yield all in one portfolio. Apart from 'inc' versions of the usual suspects (e.g., Vanguard lifestrategy funds), I'm not sure that any exist. A two passive fund equivalent with a global high dividend fund (e.g., VHYL) and an investment grade bond fund might do the job.

For a long time annuities have been forgotten, obviously because of low interest rates and hence low payout rates. In the US, the home of the DC pension, there is ample positive retirement income research that includes annuities along with Social Security (the equivalent of UK SP) as an income foundation. However, through the market gains of the last 50 years there has always been a bias towards a Total Return stock and bond approach. That saw some revision after 2008, but annuities still aren't popular in the US. I put that down to the relatively generous US social security payments many people get, a perception that annuities are complicated, having to use a large amount of your savings and dominant brokerage companies like Vanguard, Fidelity etc being in the business of getting fees from the funds they sell rather than annuities. There are some hold outs for annuities like MetLife and one of the biggest is the Teachers Insurance and Annuity Association (TIAA), but they are quite niche and not many individuals pursue them.

Another source of income that requires some forward planning is the purchase of an income property. Once the mortgage is paid off the rent becomes an income source largely decoupled from the markets and if your own mortgage is also paid off then the need for income is greatly reduced, taking pressure off your invested portfolio and maybe making it possible to generate income from a combination of rental, annuity, state pensions, dividends and interest and leaving the portfolio to compound it's capital gains.

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

2) Retirees whose overall income requirements would mean that their portfolio withdrawals would be a small fraction of their portfolio (less than, say, 2% - the exact figure can be argued over). This is probably a relatively small number of retirees (either very rich or very frugal).

Only those remaining could be in the market for an annuity. According to data at https://www.fca.org.uk/data/retirement-income-market-data-2022-23 , only about 8% of pension pots accessed for the first time were used to purchase an annuity.

Since we are veering rather OT, I'll probably leave it there!

I think this discussion is very relevant to the OP's question as it really shows that there is no ready made income portfolio for retirement. You might point someone to a multi-asset fund with a high percentage of bonds or an income biased investment trust, but would that be appropriate? So much depends on circumstances. This is an area where advice does become very important for the less knowledgeable potential retirees.

An annuity will certainly be more useful for some people, but the reduction in the number of DB pensions and the low level of UK SP should make them far more popular in the UK than they are - this is the well known "annuity puzzle". I see the resistance to annuities as part of the same drift away from pooled risk that is inherent in the fall in numbers  of DB pensions. The neoliberal zeitgeist of the last part of the 20th century and the desire of employers to shift risk onto their employees saw the growth of DC plans at the expense of DB plans and the "freedom, choice and large pension pots" that was used to sell DC plans also made annuities seem like a very bad deal. I admit that the expense and complexity of many annuities and the dubious practices of some insurance companies have done little to help the case for annuities.

Bostonerimus1

NedS said:

OldScientist said:

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

Really? I have no idea how many people have access to a DB pension, nor it's average size, but I would guess that most people do not, thus leaving them with only a SP as guaranteed income which certainly does not cover essential expenditure, especially for those with substantial housing costs (considering around 2/3rd of people over 65 do not own their own home, and these are also most likely to be the people without additional DB (or any) pension provision).

The pressure that housing costs put on retirement income is a reason that I advocate paying off a mortgage if possible. I know that many people will only every be able to rent, but if people with a mortgage make a long term plan to pay it off before retirement they will find that their pension savings go a lot further without the large monthly mortgage cost. It's a balancing act between pension investments and extra mortgage payments, but if you get it right it really does contribute to financial freedom.

Linton

NedS said:

OldScientist said:

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

Really? I have no idea how many people have access to a DB pension, nor it's average size, but I would guess that most people do not, thus leaving them with only a SP as guaranteed income which certainly does not cover essential expenditure, especially for those with substantial housing costs (considering around 2/3rd of people over 65 do not own their own home, and these are also most likely to be the people without additional DB (or any) pension provision).

err no: 74% people aged over 65 do own their own home out-right with a further 5% owning their home with a mortgage: See https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/ageing/articles/livinglonger/changesinhousingtenureovertime

NedS

Linton said:

NedS said:

OldScientist said:

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

Really? I have no idea how many people have access to a DB pension, nor it's average size, but I would guess that most people do not, thus leaving them with only a SP as guaranteed income which certainly does not cover essential expenditure, especially for those with substantial housing costs (considering around 2/3rd of people over 65 do not own their own home, and these are also most likely to be the people without additional DB (or any) pension provision).

err no: 74% people aged over 65 do own their own home out-right with a further 5% owning their home with a mortgage: See https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/ageing/articles/livinglonger/changesinhousingtenureovertime

Your source is more authoritative than the source google found for me

OldScientist

NedS said:

OldScientist said:

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

Really? I have no idea how many people have access to a DB pension, nor it's average size, but I would guess that most people do not, thus leaving them with only a SP as guaranteed income which certainly does not cover essential expenditure, especially for those with substantial housing costs (considering around 2/3rd of people over 65 do not own their own home, and these are also most likely to be the people without additional DB (or any) pension provision).

I know someone else has dealt with home ownership of over 65s (i.e., about 75% in 2017 - I can't find anything more recent).

Please note that I said "whose essential expenditure is largely or wholly covered by existing guaranteed income" would be most people not that most people had DB pensions (which I agree with you is not the case). A search for the size of the average UK pension pot reveals a variety of estimates - I went by the FCA data, but recognise that some people will not have a DC pension at all, but others will have more than one (the ONS also have data in this area).

I stand by what I wrote since according to the retirement living standards (https://www.retirementlivingstandards.org.uk/ ) the minimum standards excluding housing costs are £14.4k for a single retiree and £22.4k for a couple and these include some items which could be considered discretionary. As such, a full SP of £11.5k covers about 80% of the PLSA minimum standard for a single retiree and just over 100% for a couple. There is also evidence of these boards that people can live well on less than these amounts.
 

MK62

OldScientist said:

NedS said:

OldScientist said:

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

Really? I have no idea how many people have access to a DB pension, nor it's average size, but I would guess that most people do not, thus leaving them with only a SP as guaranteed income which certainly does not cover essential expenditure, especially for those with substantial housing costs (considering around 2/3rd of people over 65 do not own their own home, and these are also most likely to be the people without additional DB (or any) pension provision).

I stand by what I wrote since according to the retirement living standards (https://www.retirementlivingstandards.org.uk/ ) the minimum standards excluding housing costs are £14.4k for a single retiree and £22.4k for a couple and these include some items which could be considered discretionary. As such, a full SP of £11.5k covers about 80% of the PLSA minimum standard for a single retiree and just over 100% for a couple. There is also evidence of these boards that people can live well on less than these amounts.
 

....though this very much depends on each individual's interpretation of "living well"!

Bostonerimus1

MK62 said:

OldScientist said:

NedS said:

OldScientist said:

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

Really? I have no idea how many people have access to a DB pension, nor it's average size, but I would guess that most people do not, thus leaving them with only a SP as guaranteed income which certainly does not cover essential expenditure, especially for those with substantial housing costs (considering around 2/3rd of people over 65 do not own their own home, and these are also most likely to be the people without additional DB (or any) pension provision).

I stand by what I wrote since according to the retirement living standards (https://www.retirementlivingstandards.org.uk/ ) the minimum standards excluding housing costs are £14.4k for a single retiree and £22.4k for a couple and these include some items which could be considered discretionary. As such, a full SP of £11.5k covers about 80% of the PLSA minimum standard for a single retiree and just over 100% for a couple. There is also evidence of these boards that people can live well on less than these amounts.
 

....though this very much depends on each individual's interpretation of "living well"!

...and also where the retiree lives. Why exclude housing costs? I assume it's to remove part of the regional variation, but it's still something that has to be paid unless you have been paid enough and planned well enough to have paid off a mortgage.

Hoenir

Bostonerimus1 said:

MK62 said:

OldScientist said:

NedS said:

OldScientist said:

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

Really? I have no idea how many people have access to a DB pension, nor it's average size, but I would guess that most people do not, thus leaving them with only a SP as guaranteed income which certainly does not cover essential expenditure, especially for those with substantial housing costs (considering around 2/3rd of people over 65 do not own their own home, and these are also most likely to be the people without additional DB (or any) pension provision).

I stand by what I wrote since according to the retirement living standards (https://www.retirementlivingstandards.org.uk/ ) the minimum standards excluding housing costs are £14.4k for a single retiree and £22.4k for a couple and these include some items which could be considered discretionary. As such, a full SP of £11.5k covers about 80% of the PLSA minimum standard for a single retiree and just over 100% for a couple. There is also evidence of these boards that people can live well on less than these amounts.
 

....though this very much depends on each individual's interpretation of "living well"!

...and also where the retiree lives. Why exclude housing costs? I assume it's to remove part of the regional variation, but it's still something that has to be paid unless you have been paid enough and planned well enough to have paid off a mortgage.

Many people are heading into retirement years with mortgages to repay or rent to pay. 

Bostonerimus1

Hoenir said:

Bostonerimus1 said:

MK62 said:

OldScientist said:

NedS said:

OldScientist said:

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

Really? I have no idea how many people have access to a DB pension, nor it's average size, but I would guess that most people do not, thus leaving them with only a SP as guaranteed income which certainly does not cover essential expenditure, especially for those with substantial housing costs (considering around 2/3rd of people over 65 do not own their own home, and these are also most likely to be the people without additional DB (or any) pension provision).

I stand by what I wrote since according to the retirement living standards (https://www.retirementlivingstandards.org.uk/ ) the minimum standards excluding housing costs are £14.4k for a single retiree and £22.4k for a couple and these include some items which could be considered discretionary. As such, a full SP of £11.5k covers about 80% of the PLSA minimum standard for a single retiree and just over 100% for a couple. There is also evidence of these boards that people can live well on less than these amounts.
 

....though this very much depends on each individual's interpretation of "living well"!

...and also where the retiree lives. Why exclude housing costs? I assume it's to remove part of the regional variation, but it's still something that has to be paid unless you have been paid enough and planned well enough to have paid off a mortgage.

Many people are heading into retirement years with mortgages to repay or rent to pay. 

My point exactly. For me the main argument for paying off the mortgage is how it reduces the amount of income you need to generate in retirement so that guaranteed income sources can cover a larger fraction of your basic needs. Pension saving and investing should be prioritized, but a paid off mortgage can make retirement far less stressful. For those with rent then a guaranteed income floor becomes all the more important, or a good sized pot and a robust drawdown plan. I was actually encouraged by the statistics given above for the number of retirees who have paid off their mortgage.