How Do You Invest in Retirement?

bfgun

I’m wondering how I will invest my pensions and ISA’s in retirement tax efficiently. 

Annuity’s don’t seem to offer great interest rates.
If the money is put into a global index fund, this could generate a 7-10% annual return on average, but could suffer if a black swan event occurs. 

What do people here do? 

QrizB

Annuities are currently better value than safe withdrawal rates are.

Global index funds might generate 7-10% gross, but again they might not. They're vulnerable to many common things that aren't even close to being "black swan" events.

bfgun said:

What do people here do? 

Read, learn, understand.

dunstonh

Annuity’s don’t seem to offer great interest rates.

I assume you mean annuity rate rather than interest rate.
Annuities are being sold like hotcakes at the moment.  The rates are the highest they have been since 2008.

Why don't you think they offer good value?

If the money is put into a global index fund, this could generate a 7-10% annual return on average, but could suffer if a black swan event occurs. 

You appear to be expecting returns higher than is sensible to plan on
Plus, not many retired people would go 100% equities.

Since 1915 (when reliable data first started), real returns on 100% global equities gives the following:
 
median 1 year return = 8%
median 5 year return = 7% annualised
median 10 year return = 7% annualised
median 20 year return = 6% annualised.

worst 1 year return = -39%
worst 5 year return = -11% annualised
worst 10 year return = -4% annualised
worst 20 year return = 1% annualised.

best 1 year return = 49%
best 5 year return = 24% annualised
best 10 year return = 17% annualised
best 20 year return = 12% annualised.

You are going to live 20-30 years, maybe?   
You are looking at returns that would be in the optimistic ballpark.
What would you do if you had that 20-year return of 1% per annum (Dec 1961 to Nov 1981)?

What do people here do? 

Whatever is appropriate for them, probably.     The objectives will differ.   Largely depending on other income sources (secure vs insecure), cash savings, savings levels, budget and spending needs and objectives.

Most probably use far more sensible figures in their projections.  i.e. plan for the worst but hope for the best.     Unlike your plan for the best and hope you get it.

Someone with several hundreds of pounds in cash and secure incomes covering 75% of their spending needs before they even look at their uncrystallised pension fund will have a different view to someone with £10k in the bank and secure income that only covers 25% of their spending needs

Marcon

bfgun said:

I’m wondering how I will invest my pensions and ISA’s in retirement tax efficiently. 

Annuity’s don’t seem to offer great interest rates.
If the money is put into a global index fund, this could generate a 7-10% annual return on average, but could suffer if a black swan event occurs. 

What do people here do? 

Hopefully take proper advice when they need it. Looking at your past questions, that might be your best course of action?

bfgun

QrizB said:

Annuities are currently better value than safe withdrawal rates are.

Global index funds might generate 7-10% gross, but again they might not. They're vulnerable to many common things that aren't even close to being "black swan" events.

bfgun said:

What do people here do? 

Read, learn, understand.

I appreciate one can never tell, and as we have seen with tariffs etc., the markets can swing violently.

bfgun

dunstonh said:

Annuity’s don’t seem to offer great interest rates.

I assume you mean annuity rate rather than interest rate.
Annuities are being sold like hotcakes at the moment.  The rates are the highest they have been since 2008.

Why don't you think they offer good value?

If the money is put into a global index fund, this could generate a 7-10% annual return on average, but could suffer if a black swan event occurs. 

You appear to be expecting returns higher than is sensible to plan on
Plus, not many retired people would go 100% equities.

Since 1915 (when reliable data first started), real returns on 100% global equities gives the following:
 
median 1 year return = 8%
median 5 year return = 7% annualised
median 10 year return = 7% annualised
median 20 year return = 6% annualised.

worst 1 year return = -39%
worst 5 year return = -11% annualised
worst 10 year return = -4% annualised
worst 20 year return = 1% annualised.

best 1 year return = 49%
best 5 year return = 24% annualised
best 10 year return = 17% annualised
best 20 year return = 12% annualised.

You are going to live 20-30 years, maybe?   
You are looking at returns that would be in the optimistic ballpark.
What would you do if you had that 20-year return of 1% per annum (Dec 1961 to Nov 1981)?

What do people here do? 

Whatever is appropriate for them, probably.     The objectives will differ.   Largely depending on other income sources (secure vs insecure), cash savings, savings levels, budget and spending needs and objectives.

Most probably use far more sensible figures in their projections.  i.e. plan for the worst but hope for the best.     Unlike your plan for the best and hope you get it.

Someone with several hundreds of pounds in cash and secure incomes covering 75% of their spending needs before they even look at their uncrystallised pension fund will have a different view to someone with £10k in the bank and secure income that only covers 25% of their spending needs

Yes, I did mean annuity rates, not interest. Thanks for pointing that out and for providing the overview of global index returns throughout that time period. It does put it into perspective.

Cobbler_tone

The vast majority of people don't want to be worrying about whether they need to be shopping at Waitrose one week and the food bank the next in retirement. For most it isn't about getting the biggest growth on your investments, it is about knowing what you have now and for the rest of your life, subject to changes in legislation and curve balls.
If your retirement hobby is financial planning and playing the various markets then maybe a different story, but I'd rather allocate £20 a month into a Paddy Power account. 
Regardless of how the current ups and downs maybe seen as totally 'normal', it must be a very uncertain time across most markets. You can normally get a sense by the price of gold.

OldScientist

bfgun said:

I’m wondering how I will invest my pensions and ISA’s in retirement tax efficiently. 

Annuity’s don’t seem to offer great interest rates.
If the money is put into a global index fund, this could generate a 7-10% annual return on average, but could suffer if a black swan event occurs. 

What do people here do? 

Investing is one tool amongst many to provide income in retirement (as a first goal) and legacy (as a second goal).

Inflation protected income streams (e.g., State pension, DB pensions, and annuities) form a guaranteed* floor to income

Income from a portfolio can, in real terms, either be variable (e.g., withdrawing a constant percentage of the amount in the portfolio) and last a lifetime (but income might be small in some years) or fixed (e.g., the constant dollar or 'safe' withdrawal rate approach) where it is constant with time but might fall to zero before death (or some combination of the two approaches).

To some extent, the investment approach (e.g., the balance between equities and fixed income in the portfolio) then follows from this.

FWIW, most of our retirement income is derived from guaranteed sources (SP and DB pension) and therefore in the longer-term our investment portfolio will be fairly equity heavy (80% in a world index fund) in order to, hopefully, provide a larger legacy.



* Guaranteed except in the event of some extreme events, e.g., UK government debt default.

leosayer

My wife and I are invested 80% in global equity index funds and 20% in short-term gilt funds.

However our basic spending (food, utilities, council tax, insurance etc) is covered by guaranteed income from defined benefit pensions and a gilt ladder. I'm not sure how relevant that is for you - you really need to find your own solution based on your own circumstances and skills.

I disagree with what you say about annuities - rates are higher than they have been for well over a decade and they offer a great no-effort security blanket.

You may decide that exchanging half your investment pot for an annuity gives you the best of both worlds. You could then further split your annuities between fixed and index-linked depending on your expected spending profile during retirement.

Strummer22

dunstonh said:

Annuity’s don’t seem to offer great interest rates.

I assume you mean annuity rate rather than interest rate.
Annuities are being sold like hotcakes at the moment.  The rates are the highest they have been since 2008.

Why don't you think they offer good value?

If the money is put into a global index fund, this could generate a 7-10% annual return on average, but could suffer if a black swan event occurs. 

You appear to be expecting returns higher than is sensible to plan on
Plus, not many retired people would go 100% equities.

Since 1915 (when reliable data first started), real returns on 100% global equities gives the following:
 
median 1 year return = 8%
median 5 year return = 7% annualised
median 10 year return = 7% annualised
median 20 year return = 6% annualised.

worst 1 year return = -39%
worst 5 year return = -11% annualised
worst 10 year return = -4% annualised
worst 20 year return = 1% annualised.

best 1 year return = 49%
best 5 year return = 24% annualised
best 10 year return = 17% annualised
best 20 year return = 12% annualised.

You are going to live 20-30 years, maybe?   
You are looking at returns that would be in the optimistic ballpark.
What would you do if you had that 20-year return of 1% per annum (Dec 1961 to Nov 1981)?

What do people here do? 

Whatever is appropriate for them, probably.     The objectives will differ.   Largely depending on other income sources (secure vs insecure), cash savings, savings levels, budget and spending needs and objectives.

Most probably use far more sensible figures in their projections.  i.e. plan for the worst but hope for the best.     Unlike your plan for the best and hope you get it.

Someone with several hundreds of pounds in cash and secure incomes covering 75% of their spending needs before they even look at their uncrystallised pension fund will have a different view to someone with £10k in the bank and secure income that only covers 25% of their spending needs

Do these returns include dividend reinvestment? 

dunstonh

Strummer22 said:

dunstonh said:

Annuity’s don’t seem to offer great interest rates.

I assume you mean annuity rate rather than interest rate.
Annuities are being sold like hotcakes at the moment.  The rates are the highest they have been since 2008.

Why don't you think they offer good value?

If the money is put into a global index fund, this could generate a 7-10% annual return on average, but could suffer if a black swan event occurs. 

You appear to be expecting returns higher than is sensible to plan on
Plus, not many retired people would go 100% equities.

Since 1915 (when reliable data first started), real returns on 100% global equities gives the following:
 
median 1 year return = 8%
median 5 year return = 7% annualised
median 10 year return = 7% annualised
median 20 year return = 6% annualised.

worst 1 year return = -39%
worst 5 year return = -11% annualised
worst 10 year return = -4% annualised
worst 20 year return = 1% annualised.

best 1 year return = 49%
best 5 year return = 24% annualised
best 10 year return = 17% annualised
best 20 year return = 12% annualised.

You are going to live 20-30 years, maybe?   
You are looking at returns that would be in the optimistic ballpark.
What would you do if you had that 20-year return of 1% per annum (Dec 1961 to Nov 1981)?

What do people here do? 

Whatever is appropriate for them, probably.     The objectives will differ.   Largely depending on other income sources (secure vs insecure), cash savings, savings levels, budget and spending needs and objectives.

Most probably use far more sensible figures in their projections.  i.e. plan for the worst but hope for the best.     Unlike your plan for the best and hope you get it.

Someone with several hundreds of pounds in cash and secure incomes covering 75% of their spending needs before they even look at their uncrystallised pension fund will have a different view to someone with £10k in the bank and secure income that only covers 25% of their spending needs

Do these returns include dividend reinvestment? 

yes they do.  they are total return before charges.