At what age do you grab your life savings and head for cover?

agent69

OldScientist said:

agent69 said:

I'm late 60's and took early retirement about 6 years ago. I currently have state and DB pensions that I could just about live off of if disaster struck. I also have savings split between SIPP (£260k), investment accounts (£170k) and 'cash' (£60k mostly premium bonds).

One potential way forward is to build on the floor that your state and DB pensions provide by buying a lifetime annuity with RPI protection with some of your investments. For example, a single life RPI annuity bought with £100k (i.e. roughly your current bond holdings) would currently (https://www.williamburrows.com/calculators/annuity-tables/ ) provide between £4.8k (at 65yo) and £5.7k (at 70yo) income per year for life. A joint life annuity would provide less.

This would a) allow you to live more comfortably in very poor market conditions and b) might allow you to take variable withdrawals from your portfolio (there are a large number of different strategies out there), i.e. more when times are good and less when times are bad. It will also mean that the asset allocation, and volatility, in your portfolio becomes less critical to your overall income.

The trouble with annuities is that you pay income tax on them.

MEM62

boingy said:

Five years in cash seems a bit excessive to me. There is such a thing as being too cautious. One or two years cash should be enough for all but the most extreme of scenarios.

Normally it would be for me too.  However, I am retiring at the start of next year and, last year, when rates were better, I stuck my first five years of retirement income into cash at 6%.  By the time that is exhausted my wife and I will have two small DB pensions in payment plus my state pension, which will cover all our living costs.  That puts us in a position where we can leave the rest of my DC pot, or our fun money as I refer to it, 100% in equities.   

OldScientist

agent69 said:

OldScientist said:

agent69 said:

I'm late 60's and took early retirement about 6 years ago. I currently have state and DB pensions that I could just about live off of if disaster struck. I also have savings split between SIPP (£260k), investment accounts (£170k) and 'cash' (£60k mostly premium bonds).

One potential way forward is to build on the floor that your state and DB pensions provide by buying a lifetime annuity with RPI protection with some of your investments. For example, a single life RPI annuity bought with £100k (i.e. roughly your current bond holdings) would currently (https://www.williamburrows.com/calculators/annuity-tables/ ) provide between £4.8k (at 65yo) and £5.7k (at 70yo) income per year for life. A joint life annuity would provide less.

This would a) allow you to live more comfortably in very poor market conditions and b) might allow you to take variable withdrawals from your portfolio (there are a large number of different strategies out there), i.e. more when times are good and less when times are bad. It will also mean that the asset allocation, and volatility, in your portfolio becomes less critical to your overall income.

The trouble with annuities is that you pay income tax on them.

Largely true, but my understanding is that the tax is paid at the same rate as withdrawals from the taxable element of a SIPP. An alternative in providing guaranteed* inflation protected income is the construction of an inflation linked gilt ladder where the tax paid would be dependent on where you built it, i.e., tax free in an ISA and, depending on coupons, relatively low tax rates in a GIA.

There are no completely 'safe' assets
1) Equities can suffer from lengthy periods of negative or low positive real returns. For example, the worst historical case for UK equities over 20 year periods was an annualised real return of -1.3% and 0.9% for a 50/50 mix of UK and US equities (held in the UK). In addition, the large, fast declines that people more commonly worry about can also occur (i.e., the 50% drop you've mentioned - the largest UK drop was about 70% in nominal terms - e.g., see https://monevator.com/the-uks-worst-stock-market-crash-1972-1974/ and https://monevator.com/bear-markets/ for a wider discussion).
2) Bonds, as we have seen recently, can have sudden drops in value when yields rise quickly (the magnitude of the price drop depends on the duration and the magnitude of the rise in yields) and can also suffer from inflation (for the UK, the worst annualised returns over 20 year periods was -4.7%)
3) Cash can also suffer badly from inflation. For the UK, the worst annualised real return over 20 years was -4.0%.

So de-risking against sudden drops (by reducing the percentage of equities held and increasing bonds and/or cash), leaves your portfolio more open to other, longer-term, risks. In essence, your question is how to balance these various risks and the consequences they have for your income. One way to answer this then revolves around your tolerance to portfolio income variation. If you have no tolerance to variation (i.e., you are using an SWR for withdrawals) then provided you hold more than about 40% equities, historically, the asset allocation didn't make a lot of difference (SWRs of 2.2%, 3.1%, 3.3%, and 3.6% for equity allocations of 20%, 40%, 60%, and 80%, respectively, for 30 year retirements), while if you are tolerant of income volatility (and use a percentage of portfolio withdrawal approach) then an equity allocation (in the region of 40% to 80%) made little difference to the worst cases, although higher equities led to better average cases.

* in the absence of UK debt default

masonic

OldScientist said:

So de-risking against sudden drops (by reducing the percentage of equities held and increasing bonds and/or cash), leaves your portfolio more open to other, longer-term, risks. In essence, your question is how to balance these various risks and the consequences they have for your income. One way to answer this then revolves around your tolerance to portfolio income variation. If you have no tolerance to variation (i.e., you are using an SWR for withdrawals) then provided you hold more than about 40% equities, historically, the asset allocation didn't make a lot of difference (SWRs of 2.2%, 3.1%, 3.3%, and 3.6% for equity allocations of 20%, 40%, 60%, and 80%, respectively, for 30 year retirements), while if you are tolerant of income volatility (and use a percentage of portfolio withdrawal approach) then an equity allocation (in the region of 40% to 80%) made little difference to the worst cases, although higher equities led to better average cases.

* in the absence of UK debt default

Those figures illustrate the bonds and cash tend to have mostly a dilutive effect. Whereas the holy grail is to reduce risk without reducing returns. Some asset classes have been quite good at reducing risk while having a much lesser drag on returns historically, although there are no guarantees they'll behave in future as they did in the past. Gold is the most popular of these, but also broader commodities (Monevator did a series on those), and REITs. I guess inflation-linked gilts could be a fourth, although I've not seen any back-testing data that included those.

Linton

agent69 said:

OldScientist said:

agent69 said:

I'm late 60's and took early retirement about 6 years ago. I currently have state and DB pensions that I could just about live off of if disaster struck. I also have savings split between SIPP (£260k), investment accounts (£170k) and 'cash' (£60k mostly premium bonds).

One potential way forward is to build on the floor that your state and DB pensions provide by buying a lifetime annuity with RPI protection with some of your investments. For example, a single life RPI annuity bought with £100k (i.e. roughly your current bond holdings) would currently (https://www.williamburrows.com/calculators/annuity-tables/ ) provide between £4.8k (at 65yo) and £5.7k (at 70yo) income per year for life. A joint life annuity would provide less.

This would a) allow you to live more comfortably in very poor market conditions and b) might allow you to take variable withdrawals from your portfolio (there are a large number of different strategies out there), i.e. more when times are good and less when times are bad. It will also mean that the asset allocation, and volatility, in your portfolio becomes less critical to your overall income.

The trouble with annuities is that you pay income tax on them.

No different to the tax you would pay if you took the same money in drawdown.  If you bought an annuity outside a pension the tax would be much lower since it is regarded as partly simply returning your initial investment, which of course is tax free.

masonic

Linton said:

agent69 said:

OldScientist said:

agent69 said:

I'm late 60's and took early retirement about 6 years ago. I currently have state and DB pensions that I could just about live off of if disaster struck. I also have savings split between SIPP (£260k), investment accounts (£170k) and 'cash' (£60k mostly premium bonds).

One potential way forward is to build on the floor that your state and DB pensions provide by buying a lifetime annuity with RPI protection with some of your investments. For example, a single life RPI annuity bought with £100k (i.e. roughly your current bond holdings) would currently (https://www.williamburrows.com/calculators/annuity-tables/ ) provide between £4.8k (at 65yo) and £5.7k (at 70yo) income per year for life. A joint life annuity would provide less.

This would a) allow you to live more comfortably in very poor market conditions and b) might allow you to take variable withdrawals from your portfolio (there are a large number of different strategies out there), i.e. more when times are good and less when times are bad. It will also mean that the asset allocation, and volatility, in your portfolio becomes less critical to your overall income.

The trouble with annuities is that you pay income tax on them.

No different to the tax you would pay if you took the same money in drawdown.  If you bought an annuity outside a pension the tax would be much lower since it is regarded as partly simply returning your initial investment, which of course is tax free.

That is something I did not know! I suppose it is far less common to do this, so perhaps not surprising that it isn't often mentioned.

OldScientist

masonic said:

Linton said:

agent69 said:

OldScientist said:

agent69 said:

I'm late 60's and took early retirement about 6 years ago. I currently have state and DB pensions that I could just about live off of if disaster struck. I also have savings split between SIPP (£260k), investment accounts (£170k) and 'cash' (£60k mostly premium bonds).

One potential way forward is to build on the floor that your state and DB pensions provide by buying a lifetime annuity with RPI protection with some of your investments. For example, a single life RPI annuity bought with £100k (i.e. roughly your current bond holdings) would currently (https://www.williamburrows.com/calculators/annuity-tables/ ) provide between £4.8k (at 65yo) and £5.7k (at 70yo) income per year for life. A joint life annuity would provide less.

This would a) allow you to live more comfortably in very poor market conditions and b) might allow you to take variable withdrawals from your portfolio (there are a large number of different strategies out there), i.e. more when times are good and less when times are bad. It will also mean that the asset allocation, and volatility, in your portfolio becomes less critical to your overall income.

The trouble with annuities is that you pay income tax on them.

No different to the tax you would pay if you took the same money in drawdown.  If you bought an annuity outside a pension the tax would be much lower since it is regarded as partly simply returning your initial investment, which of course is tax free.

That is something I did not know! I suppose it is far less common to do this, so perhaps not surprising that it isn't often mentioned.

Purchased life annuities (e.g., see https://www.mandg.com/wealth/adviser-services/tech-matters/investments-and-taxation/purchased-life-annuities/purchased-life-annuities ).

My understanding (which may be faulty) is that the payout rates are lower than for annuities bought within a pension (presumably because the mortality tables are different).

OldScientist

masonic said:

OldScientist said:

So de-risking against sudden drops (by reducing the percentage of equities held and increasing bonds and/or cash), leaves your portfolio more open to other, longer-term, risks. In essence, your question is how to balance these various risks and the consequences they have for your income. One way to answer this then revolves around your tolerance to portfolio income variation. If you have no tolerance to variation (i.e., you are using an SWR for withdrawals) then provided you hold more than about 40% equities, historically, the asset allocation didn't make a lot of difference (SWRs of 2.2%, 3.1%, 3.3%, and 3.6% for equity allocations of 20%, 40%, 60%, and 80%, respectively, for 30 year retirements), while if you are tolerant of income volatility (and use a percentage of portfolio withdrawal approach) then an equity allocation (in the region of 40% to 80%) made little difference to the worst cases, although higher equities led to better average cases.

* in the absence of UK debt default

Those figures illustrate the bonds and cash tend to have mostly a dilutive effect. Whereas the holy grail is to reduce risk without reducing returns. Some asset classes have been quite good at reducing risk while having a much lesser drag on returns historically, although there are no guarantees they'll behave in future as they did in the past. Gold is the most popular of these, but also broader commodities (Monevator did a series on those), and REITs. I guess inflation-linked gilts could be a fourth, although I've not seen any back-testing data that included those.

The problem with gold (speaking as someone who holds an allocation of just under 5%) is that most of the backtesting has been applied to the US where conditions were rather odd (e.g., it was illegal to hold gold as investments before the early 1970s and the price was not determined by the market) and the deregulation of gold coincided with a poor period for both US equities and bonds (their problematic retirement starting in 1965 or so). More ancient history, the UK (US, and other countries) coming off the gold standard also affected the price and is (presumably) a one-off event.

I think the strength of inflation linked gilts is in their ability to provide income flooring in retirement. Back testing is limited because they haven't existed for all that long (early 80s for the UK and late 90s for the US). There are a few sources of total returns going back to 1982 (Barclay's Equity Gilt study if you can find a copy) and from 1998 (IIRC) at the British Government Securities database at https://www.escoe.ac.uk/research/historical-data/fiscal-data/

You can try to push this further back in time by modelling implied inflation and then using nominal yields, but there are uncertainties in doing this.

Albermarle

OldScientist said:

masonic said:

Linton said:

agent69 said:

OldScientist said:

agent69 said:

I'm late 60's and took early retirement about 6 years ago. I currently have state and DB pensions that I could just about live off of if disaster struck. I also have savings split between SIPP (£260k), investment accounts (£170k) and 'cash' (£60k mostly premium bonds).

One potential way forward is to build on the floor that your state and DB pensions provide by buying a lifetime annuity with RPI protection with some of your investments. For example, a single life RPI annuity bought with £100k (i.e. roughly your current bond holdings) would currently (https://www.williamburrows.com/calculators/annuity-tables/ ) provide between £4.8k (at 65yo) and £5.7k (at 70yo) income per year for life. A joint life annuity would provide less.

This would a) allow you to live more comfortably in very poor market conditions and b) might allow you to take variable withdrawals from your portfolio (there are a large number of different strategies out there), i.e. more when times are good and less when times are bad. It will also mean that the asset allocation, and volatility, in your portfolio becomes less critical to your overall income.

The trouble with annuities is that you pay income tax on them.

No different to the tax you would pay if you took the same money in drawdown.  If you bought an annuity outside a pension the tax would be much lower since it is regarded as partly simply returning your initial investment, which of course is tax free.

That is something I did not know! I suppose it is far less common to do this, so perhaps not surprising that it isn't often mentioned.

Purchased life annuities (e.g., see https://www.mandg.com/wealth/adviser-services/tech-matters/investments-and-taxation/purchased-life-annuities/purchased-life-annuities ).

My understanding (which may be faulty) is that the payout rates are lower than for annuities bought within a pension (presumably because the mortality tables are different).

When these have been discussed in other threads, it has been said they are very much a niche market, being only a tiny fraction of the annuities market. This means the market for them is less competitive ( there are less providers) and this is one reason the payout rates are worse.