Are we in the 1930s or 1970s?

Pat38493

I was taking a look at my pre-retirement situation and wondering what would happen if I stopped work right now.

Looking at historical simulations data for my retirement plan, using software that simulates my retirement based on each month since 1915, all of my failure start dates are either in the following periods:

1968 to 1973

1936-1937

1929

I was wondering whether such worst case scenarios are likely today.  

Looking at the 1970s, it seems like the biggest issue here was a period of 8 years of extremely high inflation.  It doesn’t seem like we will be facing this since although inflation was high for a couple of recent years, it never got anything close to 1970s levels and has now dropped back below average.

1929 was the great stock market crash I guess, followed by further recession in 1937-8 and great depression.

I am not too clear why 1936 and 1937 would be outliers for bad retirement years.  Any economists out there who could comment?  There was a recession in 1937-1938 but it’s not clear that this was worse than others.

Mark_d

Assuming you have a money purchase pension - as you get closer to retirement you can switch a greater proportion of your investment into index-linked bonds to give some protection against stock market crashes etc.  There are a number of things you can do

FIREDreamer

Pat38493 said:

I am not too clear why 1936 and 1937 would be outliers for bad retirement years.  Any economists out there who could comment?  There was a recession in 1937-1938 but it’s not clear that this was worse than others.

Recession followed by a world war probably didn’t help.

Was 1939 a much better start point?

leosayer

I can't answer the economics history question, but I think it is risky to assume that such a scenario won't happen again.

Having said that, if such a thing were to happen I would more than likely reduce discretionary spending to avoid longer term impact. That approach is fine for me but won't work for everybody.

dunstonh

I was wondering whether such worst case scenarios are likely today.  

If you referred to them as 1 in 100 year events, then your retirement period will be around 30 years.   Whilst statistically unlikely to occur again (or similar loss event), they will happen again.    Its whether they happen during your retirement window or not.

Take Gilt funds.  They had their worst losses over Nov 21 to Oct 23 in over 100 years.   So, people in retirement heavy in gilts over that period took a really heavy hit that may not be seen again for another 100 years.

Looking at the 1970s, it seems like the biggest issue here was a period of 8 years of extremely high inflation. 

As often is the case, its a combination of things but oil shock was a key driver.    The energy crisis of the 70s makes the recent one look mild by comparison.    As we transition away from oil, oil shocks will become less of an issue, but energy shocks could become worse as, currently, the world (and some countries in particular) are not positioned well for energy.     So, you could see an energy shock in the future.

At the end of the day, modelling on worst case scenario is probably overkill.  Going pessimistic between 10% percentile up to 30% percentile is probably a more realistic modelling point. i.e. 70-90% of periods are better

gm0

For drawdown planning - you are asking the right question.  Luck of cohort timing and sequence - what can it do to me - and what can I do about it.

It is no consolation to the individual that it happens to - wrong timing to start deaccumulation (because age - can't change that). Wrong portfolio for that time as it turns out (can change that).

You can trade potential growth as a contributor to income or heritable pot at the end of deaccumulation.  For greater certainty of sufficiency. 

At one extreme - indexed joint life annuities.  Then self annuitisation - linker bond ladders generating a cashflow curve held to term.  Then lower risk portfolios with some of that mixed in.  Liabiity matching in whole or in part for essential income with some coming from state pension and some from the way the DC drawdown is run in deaccumulation

Your choice.  Your answer.  Nobody else can tell you what is the "right" place to set the dial - for you - a priori

Pat38493

FIREDreamer said:

Pat38493 said:

I am not too clear why 1936 and 1937 would be outliers for bad retirement years.  Any economists out there who could comment?  There was a recession in 1937-1938 but it’s not clear that this was worse than others.

Recession followed by a world war probably didn’t help.

Was 1939 a much better start point?

Over the entire retirement timeframe, 1939 was pretty much in line with the median in terms of the end result.  However after the first 10 years it was significantly below median but within what they define as the "likely" outcomes.  I guess there was a recession in 1937-1938 so you would have avoided that at the start of retirement.

Pat38493

dunstonh said:

At the end of the day, modelling on worst case scenario is probably overkill.  Going pessimistic between 10% percentile up to 30% percentile is probably a more realistic modelling point. i.e. 70-90% of periods are better

This makes sense, although my plan calls for a bridging strategy where the majority of my pot is required for the first 11 years or so.  This means that when it fails, almost all of the failures are in the 7-10 years range.  In a sense this isn't a huge issue as after 67, most of our needs are covered by guaranteed sources, but I don't want to run out of money 3 years before SP kicks in!

Would your comment still apply in these situations i.e. if there are only 10% failures, but one or two of them happens after only 7 or 8 years?

leosayer said:

I can't answer the economics history question, but I think it is risky to assume that such a scenario won't happen again.

Having said that, if such a thing were to happen I would more than likely reduce discretionary spending to avoid longer term impact. That approach is fine for me but won't work for everybody.

I would certainly have mathematical scope to reduce luxury and leisure spending more than enough to weather these situations if needed - I guess the question for me is whether this would lead to a less (or more!) fulfilled or happy retirement in the long run.

The other question is how far in advance do you know that you need to reduce spending?  When I comb through the data, it looks like in the past you would have got about 4 years warning of need to reduce spending if you take the lower quartile boundary as the trigger.  However there are a fair few other times (maybe 15% or so) this was breached but the plan ended up working fine.  

Also I guess if WW3 starts, I doubt I will be spending much on holidays abroad!

Obviously this data is specific to me as I have programmed quite uneven spending for the first decade (higher in first few years).

Pat38493

Mark_d said:

Assuming you have a money purchase pension - as you get closer to retirement you can switch a greater proportion of your investment into index-linked bonds to give some protection against stock market crashes etc.  There are a number of things you can do

I have already rebalanced to roughly 60% equities, 25% cash, 15% bounds.  This flows out of calculating a 2-3 year cash buffer, and then having the rest 80/20 (higher spending first 3 years).

Sarahspangles

leosayer said:

I can't answer the economics history question, but I think it is risky to assume that such a scenario won't happen again.

Having said that, if such a thing were to happen I would more than likely reduce discretionary spending to avoid longer term impact. That approach is fine for me but won't work for everybody.

Though your post just happened twice (sorry, I’ll get me coat)

dunstonh

This makes sense, although my plan calls for a bridging strategy where the majority of my pot is required for the first 11 years or so.  This means that when it fails, almost all of the failures are in the 7-10 years range.

Bucket it  . i.e. break your portfolio into time periods and keep the first 7-10 years low risk.  Even consider cash or a fixed term annuity.    

If you don't want the risk of failure 3 years short of the "safe" point, then don't go looking for any more risk than you need to.     Pre-retirement you look to maximise returns.  Post-retirement, you tend to look more for security.    So, no harm in that first bucket being a mix of cash, fixed term deposits and or fixed term annuity.     That way you won't run out in that 7-10 year period but funds allocated for 11+ years can still be invested differently.