Are we in the 1930s or 1970s?

michaels

Pat38493 said:

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.

Actually we could equally easily see a worse case scenario than any thing that has already happened - you would need 10s of thousands of comparable historic periods to have a realistic 'monte carlo' simulation.

Also note that cohorts covering the period of the dotcom boom and the GFC may well also end up being failure scenarios....

Pat38493

michaels said:

Pat38493 said:

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.

Actually we could equally easily see a worse case scenario than any thing that has already happened - you would need 10s of thousands of comparable historic periods to have a realistic 'monte carlo' simulation.

Also note that cohorts covering the period of the dotcom boom and the GFC may well also end up being failure scenarios....

I have tested this in the past by artificially shortening my life span (!) so that those years are taken into account - I didn't find that the noughties gave any additional early failures that wouldn't have failed in the above discussed scenario (at least in my case) which I was a bit surprised about.

Pat38493

dunstonh said:

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.

Interesting about the annuity.  I am already going to be pretty cash heavy at the start due to my first few year spending plans. 

I have tried to model taking an fixed term annuity using about £200K for 10 years ,using quotes from the web a few times but it didn't seem to help much - I got very similar results, although I suppose the required spending reduction if I ran out of money at 65 would be a lot less than before.

It's also quite hard to model taking an annuity with Timeline because it dosn't give the option to buy an annuity using your pension wrapper (at least not that I have found), so you have to try to fudge the numbers.

MK62

The front loading of your withdrawal plan up to your SP kicking in makes your portfolio highly vulnerable to sequence risk.......as suggested, a fixed term annuity is one approach to reduce/remove that risk, but if you want to maintain more control and flexibility, then a gilt ladder is an ideal solution.