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Investing for 100-year olds

Old age catches up with everyone. And it lasts longer now, too.

Every day you live, your life expectancy increases by six hours. Incredible, eh?

That statistic comes courtesy of Duke University. The academics got it from playing around with nearly two centuries of life expectancy data.

According to Professor James Vaupel:

“If young people realize they might live past 100 and be in good shape to 90 or 95, it might make more sense to mix education, work and child-rearing across more years of life instead of devoting the first two decades exclusively to education, the next three or four decades to career and parenting, and the last four solely to leisure.”

(Nobody tell him about the FIRE movement! He’ll have an early heart attack.)

Vaupel also contributed to a study published in The Lancet in late 2009 that found that on then-current trends, more than 50 per cent of babies born after the year 2000 in the developed world would see their 100th birthday.

Great news for little Jimmy. But what does it mean for us investors?

Well, it’s one thing to eat well in order to get to old age with most of your teeth intact and a liver that’s fit for purpose.

But what will you be doing for spending money?

Stronger, faster, more productive

In my experience most people radically underestimate the lifespan that – touch wood – lies ahead of them.

I’m the gloomiest person I know. I pretty much assume the environment is going to be trashed, and that the male genes on my father’s side doom my own longevity.1

This is on top of knowing it will rain on bank holidays, that sequels to my favourite K-Dramas will be disappointing, and that I won’t win the lottery.

Yet despite this innate pessimism, I instinctively think long-term.

  • I keep fit because I want to be in reasonable shape in my 60s and 70s. As opposed to super-buff next week.
  • It’s also why I’ve found it easy to save. And probably why I tend to cope well with bear markets.

Thinking long-term is rarely the easy option. It would have been more fun to spend more on holidays in my 20s, for example, instead of saving quite so much.

I also think I’ve hurt some people in my life by weighting tomorrow so heavily. Particularly girlfriends, who despaired at my reluctance to settle down.

The thing is, marrying one person for life seems a stretch to me at any age. But at 25, when you might live until 100?

That seems – ahem – imprudent. If lifespan has doubled in the past two centuries, then surely our milestones should change, too?

Few people think this way. Especially not when we’re young. Indeed since the first go at this article in 2010 we’ve had the emergence of a lifestyle and acronym – FOMO – that’s pulling even more people in the opposite direction.

Yet if the proverbial bus was actually hitting people at the rate implied by the ‘tomorrow may never come’ brigade, then you wouldn’t be able to cross the street without getting whacked by flying bodies.

Agreed, you don’t want to be a tightwad. Nor make cast-iron plans to meet Miss or Master Right when you’re 60.

But life is increasingly long for most of us. Surely we should live – and invest – accordingly?

Age ain’t nothing but a number

Given the magic of compound interest, the reason we have a ‘pensions crisis’ as opposed to a ‘pensioner bonanza’ is because our existing State pension system is a Ponzi-scheme. It’s built on yesteryear’s maths of an expanding workforce and a small population of old folk who didn’t have the impudence to hang around for too long.

This is not a UK-only problem. Most of the developed world – even many emerging countries like China – face a similar game of demographic snakes and ladders.

Just consider the unrest in France recently. And they’re only attempting to hike the official retirement age from 62 to 64.

Solving this thorny problem is above our pay grades (and the pay grades of those we pay to have a crack, it seems.)

Rather, as the sort of self-reliant types who read Monevator, we need to take charge of our lives. To think about asset allocation and what our lengthening lives means for our retirement spending for ourselves.

To my mind that means owning more risky assets for longer than the old rules-of-thumb suggest.

Investing for 100-year olds: asset allocation

Let’s quickly get back to basics.

There are two main asset classes – equities and bonds. (Well, and cash, but that’s not a good long-term investment).

Through this reductive lens everything else is a short-term diversifier, redundant, or some variation of these two main classes. (E.g. a property REIT is a hybrid equity/bond and gold is almost a crappy growth stock.)

Equities versus bonds boils down to volatile and uncertain growth from shares, versus the (usually) steady and low but knowable return from bonds.

And we typically shift our holdings of these assets over time.

When we’re young, we can handle more volatility. That’s because we’ve plenty of time to bounce back, and we’re not drawing money out of our portfolio. Hence we can own a lot more equities since we don’t face a threat to our living standards from an unlucky sequence of returns. (Basically, the danger of the markets crashing and you having to sell too much to live on before they recover.)

On the other hand, when you’re old you have a shorter time horizon. Long-term growth is a fairy story you tell the grandchildren. You might never recover from a bear market crash with too much in equities.

For the elderly it’s mostly all about security of capital and income.

Old enough to know better

The difficulty – perhaps the hardest in investing – is the years in-between ‘young’ and ‘old’. The broad ‘middle-age’ that doesn’t just make you wonder if you should still be wearing skinny jeans in your mid-40s, but also whether you should start to take bonds more seriously.

Especially when, as I’ve said, that broad middle-age is expanding like the average Briton’s waistline.

Conventional wisdom is that you should vary your exposure to the two main assets according to your age, where:

100 – your age = your equity allocation

For instance, if you’re 60, you should have 40% of your assets in equities (100-60) and the rest in bonds.2

But does this ratio still make sense in a world where many pre-schoolers are innocently toddling towards the 22nd Century?

There’s obviously no definitive answer. But here’s a few things to think about.

Inflation is your enemy

This is the big one. People retiring on fixed payment annuities at 60 who live to 100 could live to see their fixed incomes ravaged as badly by inflation as arthritis does for their joints.

Inflation at just 3% will halve the purchasing power of your money in 23 years.

This is bad enough if you’re a single man, though some spending (though not care costs) might be expected to fall as you age.

But if you’re a 60-year old man with a 55-year old wife, she could really suffer if she outlives you by two decades.

Then again, the opposite could happen. Anything could happen! So we have to try to cover off what we can, while accepting some uncertainty.

Higher risk equals higher returns

All things being equal, if  you’re going to live until 100 then for most of it you’d prefer to be mostly in equities rather than cash or bonds.

(The main exception being if you’re so rich that you don’t care if your money grows nowhere. In which case own a lot of inflation-protected bonds and short-term cash and have zero worries, at the cost of leaving a smaller legacy for your heirs.)

I’m not saying you should take more risk than you’re comfortable with. Nor that you shouldn’t have some non-equity assets to buoy your portfolio through various bleak scenarios.

But whether you need to pay for care at 80 or leave more to your great grandchildren at 103, you’ll likely have more to play with if you take on more risk – that is hold more equities for longer – for most of the journey.

Personally I’d aspire to leave them to wrest a good chunk of shares from your literally cold dead hands.

Income is more stable than capital values

Without a job to pay the bills, people are typically more concerned with income in their later years. And I’d note that dividend income can be more stable than fluctuating capital values.

It’s heresy to the passive investing purist, but I think there’s a decent case for owning well-established income investment trusts in your later years.

The trust’s share prices will still go all over the place. But the dividends paid do tend to rise year after year.

Note: I’m not claiming a free lunch here. Your total return will probably be less than you’d have gotten from the passive index fund equivalent, if only due to the manager’s fees. There also tends to be a big UK-bias in the equity income trust sector. That can work for or against you, but it’s contrary to best diversification practices.

However like this you’d be explicitly trading some risks for others. In my view, you’re principally reducing the risk of an uncertain income in exchange for taking on the strong risk of under-performing a global tracker.

You might need managing

Mental acuity sadly tends to decline with age. Trusts with long-standing dividend records may be better-placed to generate an annual income than you in your 90s, trying to sell down a global tracker fund in a bear market on a ten-year old laptop in a care home.

Equity risk is related to time in the market, not your age

If you’re 50, you’re statistically likely to live for at least 35 years, and maybe much longer. That’s enough time to ride more ups and downs of stock market volatility.

Don’t bet the farm, but equally don’t automatically assume you can’t hold plenty of shares once you’re 65. You could have several decades more of investing ahead of you.

More equities may mean you can save less

I’m not suggesting you should save less if you can afford to save more. But if you’re 57, money is tight, and you’re thinking of shuffling your money into bonds ahead of retirement at 67, perhaps you should pause.

In the worst case you might work a couple of extra years – or even live on baked beans – should equities slump.

But in brighter scenarios, you’ve still ten years to go. Over most ten-year periods, equities will beat bonds, thus doing more heavy lifting for you.

The number one priority is not to run out of money before you die. You can adjust by saving more or spending less – or by adjusting your exposure to riskier assets.

Not so shy and retiring

This is just my impression, but I think the sort of people who over-save for their retirement and read Monevatorhigher-earning professionals – are generally much healthier in their mid-60s these days, compared to 30 years ago. (Certainly you’ll do yourself a big favour if you keep fit ahead of retirement.)

Meanwhile medical advances continue.

At the same time, younger people in their 20s and 30s are growing up assuming they’ll have multiple jobs, and perhaps even multiple careers. And our ageing population means that by the time they are the older workers, they will have less competition from young hotties.

There’s also the post-pandemic working from home shift. I think that plays in older workers’ favour, too.

All these factors mean the idea of earning at least some extra money in your old age – after officially retiring – could soon seem normal.

I’m a big fan of doing some paid work in retirement for myriad other financial, social, and emotional reasons too.

This all matters if you’re hoping to live for a century, because you can afford a riskier asset allocation if you’ve still got money coming in from elsewhere.

You can own more shares. And that – together with the benefit of earning extra spending money for longer – means you’re less likely to struggle for money if you do make it to 100.

Bound by bonds

Given amazing statistics such as half of today’s kids living to 100, it’s almost impossible to believe that the French are striking because their retirement age is rising to 64.3

It makes us Britons with our sky-high house prices and credit card addiction seem like hardheaded realists.

Yet we’re just as nutty. For decades our Government has compelled pension companies to hold more bonds and fewer equities. This, even as longevity moved ever further ahead.

I understand the logic and mathematics. Pensions are in the liability-matching business, the logic goes, not the wealth maximizing game.

But I also dispute it.

Pensions are also surely the ultimate long-term investment for most people, and most people are living longer.

As for regulators continuing to push this paradigm when bond yields spent nearly a decade on the floor, well, rather your portfolio than mine.

Bonds have a place in most portfolios, but people who live longer are optimists – and optimists should own shares.

Lottery stocks

Of course, if you’re an economic doomster type, all this talk of getting older and richer is academic. Equities will be made worthless by the coming collapse of civilization. Better gather ye rosebuds while ye may – before the Chinese buy them all, or the planet is cooked.

But the rest of us need to stretch our thinking by a couple of decades. Being old has some unavoidable drawbacks, but being old and poor compounds them.

Aim higher and who knows, maybe you’ll end up a rich old super-investor!

Finally, I should mention that life expectancy data has been getting cloudier in the past decade since that amazing statistic I opened with was first calculated.

Perhaps this is an artifact of the pandemic? Or maybe there’s something increasingly toxic about modern life.

However if I had to guess then I’d suggest the poor are living worse and dying younger, whereas the wealthy will continue to see longevity expand.

I don’t say that’s fair, obviously, and I vote accordingly. But I invest my money based on facts not feelings.

Still, nothing is guaranteed in this life. Your old age is not a fact – it’s an aspiration.

But so what if you’re one of the unlucky ones who gets hit by a bus, and you saved and invested for nothing? You either won’t know anyway – or you’ll have bigger things to think about.

In the meantime, you put yourself in the best possible position for the likeliest range of outcomes.

Still feeling FOMO because of the sacrifices you make? Perhaps focus on the greater security you feel from having a mini warchest at your back. A big stash can be a pleasure and a comfort in itself.

So no hard feelings if it was all for nowt. Money only buys so much happiness anyway.

  1. That said, both my dad and his father had bad diets. Also the women in the generation before my parents all made it into their late 80s. Maybe there’s something to play for? []
  2. True, sometimes you’ll see it as (120 – your age). This usually – and perhaps not coincidentally – happens whenever there’s a big bull stock market in play and everyone is keener on shares. []
  3. Curiously, in the previous version of this article published in 2010 they were striking because their retirement age was rising to 62! []
{ 61 comments… add one }
  • 1 ermine November 4, 2010, 1:52 pm

    I’ve learned a lot of things from this blog, but if I’d have to cite one thing that really made a difference to my retirement planning it is being introduced to this

    Income is more stable than capital values

    somewhere in your investment trust articles

    Once I got that I have switched my targets to realise the income that I need. It is liberating, for the reduction of stress from the rollercoaster ride Mr Market offers. If I can buy an asset that will give me an income with a decent track record then I do so. This is where ITs work for me much better than my previous ETF approach, and indeed I have targeted rent-seeking among my non-financial assets too. You seem to need about 20-25k capital for every 1k of annual income you buy at the moment. In theory equity-backed ITs (and presumably a DIY basket of stable high-yielding boring companies instead, for the well-heeled) would hedge some of the ravages of QE derived inflation. I’m not so sure they’ll hedge resource conflict inflation, but there’s not much that will.

  • 2 Salis Grano November 4, 2010, 10:23 pm

    My (workplace) pension company was busy selling equities all through 2008/9 into falling markets so that could lower their risk profile and now they intend to raise the contribution rate in order to keep solvent. Fortunately, I was buying all through that period.

    When I retire (early) next year, I intend to keep active in the markets. It makes life more interesting and, I agree, it’s a better bet for the long term than other investment classes.

  • 3 The Investor November 4, 2010, 10:53 pm

    @ermine – Comments like that make this whole blog worthwhile, so thanks for that. I know what you mean about your mindset shifting when you start to focus on income instead of capital. (Did you ever read my post about how the number most people should focus on in my view should be annual income, not capital?)

    Obviously as ever nothing is guaranteed… people with under-diversified directly held portfolios of blue-chip shares found first banks then BP slashing or halting income in the past couple of years. Indeed, one reason I’ve not really returned to my HYP series is my mindset has shifted about on direct shareholdings for income. I still think it is viable, and possibly even superior given there are no annual costs, but I think the savaging of blue chips in recent years shows it is more effort to monitor than it first appears, and also the outcomes are too distributed across different investors. For most people, a basket of high income ITs is a better solution IMHO, especially if you can grab them when they’re on a discount! 😉

  • 4 The Investor November 4, 2010, 10:56 pm

    @Salis – Thanks for sharing, that must have been so frustrating. I guess bonds did fairly well in 2008 at least, and 2010, too.

    I wouldn’t want people to come away from this post thinking I’m saying load up on equities whatever your age and sell everything else (not saying you’re saying that – just reflecting). I’m really saying that people in their 40s and 50s – or indeed any age – need to make sure they’re thinking with a sufficiently long time horizon when they make *any* decisions.

    Congratulations on your imminent retirement. Definitely agree with your aim of keeping busy. A big turnaround in my thinking in the past few years is that while I still aspire to be financially free to retire, I hope to at least do some work (even a couple of days a week consulting or angel/mentoring or similar). I’m not at all sure retiring 100% cold turkey is healthy.

  • 5 Mark November 5, 2010, 9:14 am

    Hey Monevator

    “I’ve never been in debt because I’ve known I’m only borrowing from my future self” – A friend of mine, justifying his spending and on the assumption he’s going to one day be rich, likes to propound that he’s just the “present value of his future self”!

    I agree with understanding the expanded time horizon, knowing which asset class is going to be doing the heavy lifting and shifting capital appropriately, but also important would be emotional preparation for the ride. For many people, a bumpy and fluctuating portfolio in their 50s may be difficult to swallow and stick with, and we don’t want them pulling their money out at the wrong time…

  • 6 The Investor November 6, 2010, 8:25 am

    @Mark – Thanks for your thoughts. True enough about the danger of a sudden withdrawal, and while you could say that about asset classes at any time it is clearly more potentially ruinous when your horizon for recovery has shrunk. Then again, part of my point is that 50, say, isn’t as old as it used to be.

    Definitely more of a discussion point then a set of precepts though.

  • 7 ravenser November 6, 2010, 4:45 pm

    Another excellent article.
    ‘…it might make more sense to mix education, work and child-rearing across more years of life…’ Exactly. Its clear that traditional retirement is dead, and our failure to recognise this lies at the heart of the pension crisis. Having a more flexible and adaptable attitude to life, in terms of work, career and career breaks is the solution, and is far more rewarding.

    As a side issue, why don’t we teach personal finance in schools ? How many graduates today could explain the difference between a share and a bond ? If people are to take responsibility for their future, we need to provide them with the knowledge to do so at a young age.

  • 8 The Investor November 7, 2010, 8:46 pm

    @ravenser – I’ve even met people who work in banks (I mean investment banks, not your local branch of Halifax) who don’t really know exactly what a share is. (They know it’s different to bonds etc, but they don’t really understand the underlying mechanisms, or valuation ratios such as P/Es etc).

  • 9 EcoMiser April 9, 2023, 12:12 pm

    Just followed a link back from 2023, and struck by how little has changed: pension funds having too much in bonds, French revolting over increase in pension age, dividend income much more stable than share prices.

    I was already retired when the article was written, though I probably didn’t discover it until a few years later. Nevertheless, it, and other ‘retirement’ articles here helped me set up an income portfolio for continuing retirement and aiming for the century. So far the capital hasn’t been touched.
    Thanks a lot for all the help in making my life simpler and more comfortable.

  • 10 The Investor June 15, 2023, 1:29 pm

    @EcoMiser — Cheers for stopping back. You’ve inspired me to update the article, which I’m about to re-post into the feed!

    Glad your retirement is working out well for you.

  • 11 ermine June 15, 2023, 3:33 pm

    Oh and another thing, revisiting this post from my 13-year older self relatie to the last mustelid comment

    > you keep fit ahead of retirement

    Bollocks to that. Getting rid of work give you the time to do that. I still haven’t darkened the doors of a gym since leaving school, but hillwalking is free and indeed walking a few miles a day with some height gain. I am probably fitter now than most of my working life, though I have the benefit of decent countryside and the ability to walk among trees for some of the height gain which helps in this heat. All without driving anywhere.

    So stick that down as another reason to retire early 😉

  • 12 The Investor June 15, 2023, 4:17 pm

    @ermine — I’m still earning money, and I do at least 15,000 steps a day. 🙂 (And — I discovered recently, comparing counts with a pal I spent the day traipsing about the foreign countryside with, my steps are longer than most).

    What’s more I swam yesterday and I did a sweaty 30 minutes on the elliptical at the gym today!

    Different strokes, different folks, but putting off health until you’re retired is a big mistake as far as I’m concerned.

    Thanks for adding another comment, 13 years on — pretty cool! 🙂

  • 13 Geoff June 15, 2023, 4:29 pm

    The drift of the article is that as you get older, you cannot afford to take as much risk, even up to age 100. However, once you are retired, the number of years that you have to fund yourself goes steadily down. If your investments prosper, and you do not spend much, you become richer and richer. Your capacity to absorb risk goes up and up. If you made your money by scrimping and saving, die with zero does not appeal. What is the objective? To optimize the minimum amount that you leave behind, or to optimize the most likely amount?

  • 14 The Investor June 15, 2023, 4:32 pm

    @Geoff — I think the objective is highly personal, which is why I have not introduced any prescriptions. I also think it’s likely to change over time.

    But I’d hope the main takeaway is you are likely to live longer than you think, which means your investing horizon is longer than you think, which means you can (and in many cases need) to take more risk.

    It’s quite good fun asking people to estimate their life expectancy based on their current age. I’ve never found anyone who didn’t under-estimate by at least five years, and more often ten or more. Perhaps superstition plays into that though, too.

  • 15 xxd09 June 15, 2023, 4:52 pm

    Great fun post as always
    I was always accused of being “old “ at young age but obviously I had the feeling that 100 was a possibility !
    In my mindset therefore from an early age decided a “Pension is a very serious business “ to paraphrase Jane Eyre
    Started saving hard combined with frugal living
    Qualified for good jobs(wife and I) ,married at 23 and still going strong at 77 but retired at 57
    Not really changing my 30/ 70 portfolio-now 33/62/5 -5% being cash
    I am gently increasing stock % but not in any rush
    23 years to go and there are two of us so two chances of getting there!

  • 16 BBBobbins June 15, 2023, 6:13 pm

    I’ve often thought in the days of DC pensions that the lifestyling profiling (i.e. switching progressively to bonds in 10 years to planned retirement) was just protecting for a future that didn’t exist (buying an immediate annuity) whereas if you believed you were going to have 30 years post retirement then you should keep invested in equities for the long term.

    Nothing about bond skittishness in the last year has reassured me but maybe I’m in denial.

  • 17 EcoMiser June 15, 2023, 6:23 pm

    @The Investor — Glad to give you a little inspiration.
    Re keeping fit. When I was working, my ‘commute’ was a half hour walk each way, much of it away from traffic. Since retirement, I’ve much less incentive to keep on walking, and I’ve slowed down, though I still manage a fair amount. Like Ermine, I’ve avoided ‘exercise’ since leaving school, but a gentle stroll isn’t exercise.

  • 18 ermine June 15, 2023, 7:05 pm

    @TI #12

    > What’s more I swam yesterday and I did a sweaty 30 minutes on the elliptical at the gym today!

    Haha, you will live longer than I, of course, particularly as I will render today’s exercise moot by sharing a bottle of wine with Mrs Ermine.

    But I will have spent my exercising outside in the trees, where you will have spent time in a sweaty gym. Each to their own, and may we all live long and prosper in our various ways 😉

  • 19 Al Cam June 15, 2023, 7:42 pm

    @EcoMiser (#9):

    Re: “So far the capital hasn’t been touched.”

    A quick question please: is your preserved capital measured in nominals or inflation adjusted for the last 13+ years?

  • 20 Marco June 15, 2023, 8:53 pm

    I see no difference between spending dividends and selling capital for income

  • 21 Brod June 15, 2023, 10:22 pm

    Hmm… yes, absolutely income is what matters.

    But ITs? At discount?

    If I’m going to tilt, and I do, why don’t I tilt to Income/Value/Quality factor ETFs? Cheaper, less concentration.

  • 22 The Investor June 16, 2023, 12:17 am

    @Brod @Marco — The logic is that you’re paying an active manager to increase your income (at least in nominal terms) year after year with an income trust. As I say in the article, likely at some cost to the total return. With ETFs your income will fluctuate more.

    As for spending dividends / selling capital, yes they are in theory the same. An investor notionally owns either a chunk of company’s cash on the balance sheet or in their own account, post-dividend payout. The company forgoes the ability to reinvest the cash it pays out as a dividend; the investor can reinvest it. (With costs/taxes along the way). With an Acc vs an Inc fund it’s even more straightforward.

    However behaviourally they are different activities. I’m pleased with this line in the article so I’ll repeat it here:

    Trusts with long-standing dividend records may be better-placed to generate an annual income than you in your 90s, trying to sell down a global tracker fund in a bear market on a ten-year old laptop in a care home.

    Still, it’s just something to think about, not a must-do by any means at all. Each to their own! But personally I think I’d be happier with a heavier equity portfolio in my 70s/80s, even if aspiring to live to 100, if a big chunk of it was in longstanding income investment trusts.

    We’ll see if I feel the same in 20-30 years time. 🙂

  • 23 Vic Mackey June 16, 2023, 7:58 am

    I have sympathy with Marco’s point here. Ultimately investment trusts aren’t alchemy. They are just holding a proportion in bonds and/or holding back income for leaner years, surely something you can do yourself without needing to pay for the investment manager’s big house in Surrey or Edinburgh.
    Great article btw.

  • 24 weenie June 16, 2023, 11:55 am

    @Vic Mackey

    “surely something you can do yourself without needing to pay for the investment manager’s big house in Surrey or Edinburgh.”

    Yes, of course this could be done yourself but as TI mentioned, mental acuity will decline with age. At some future point in my old age, I might even consider buying an annuity for even more ease.

  • 25 Al Cam June 16, 2023, 1:05 pm

    Some words/figures to try and illustrate the difference between nominals and inflation adjusted (or real if you prefer) figures.

    I pulled the plug some six and a half years ago with a Pot worth X. One year later the Pot had grown (in nominals) to 1.15X, albeit that this would only purchase 1.12X after inflation adjustment using CPIH. By the end of 2020 the respective figures were 1.20X nominal and 1.04X real. Last month the figures stood at just below 1.20X nominal and 0.96X real. That is, after six and a half years my Pot has nominally grown by around 20% but has somewhat less purchasing power than when I pulled the plug. Sure a loss of less than 1% of purchasing power per annum (so far) is no great shakes but it is a very different statistic to an average nominal increase of around 3% per annum. The difference being the rate of inflation over the period of c. 3.7%PA for CPIH.

    Inflation started to take off late (Q4) 2021 and remains high to date – so I expect this loss of purchasing power to continue for a while.

    Like most people, I track in nominals (as that is what is reported) but I do also try to keep an eye on what inflation is doing to purchasing power.

  • 26 The Investor June 16, 2023, 2:21 pm

    @Al Cam — That is interesting data, thanks for sharing. It’s really interesting to see inflation coming back to the fore like a drunken gatecrasher in all our conversations these days. It was pretty much forgotten about for decades, and almost something you could dismiss in an article with a footnote.

    Does tracking your declining purchasing power change your habits in any way, even if you remain confident in your overall SWR/strategy choices?

  • 27 Vic Mackey June 16, 2023, 2:30 pm


    Absolutely agree. But for many of us that day is at least 20 years away.

    On the point of longevity I think a lot of people labour under misconceptions. The average life expectancy may be in the early 80’s but the distribution around that age certainly isn’t normal. It drops off very substantially around that age and going much further is the exception. Further, whilst we all naturally assume we’ll make that, roughly only half of us do….that’s quite a lottery. In fact, the latest life tables tell us a 50 year old today has a 15% chance of dying before 65. And beyond the wise fitness recommendations and money for private medical treatment, there’s not much we can do there. Something to bear in mind whilst many of us try to calculate our SWR and agonize over our model telling us have a circa 5% chance of running out of money.

  • 28 ZXSpectrum48k June 16, 2023, 2:36 pm

    @Al Cam. I think you make an important point. People get very excited about their nominal net worth increasing but like to ignore the liability side and how that is also growing. If you are worth 250k more over 5 years but your recurring spending has gone up by 10k per annum, then you are really at best probably flat and more likely down in asset-liability terms.

    It would be an interesting environment for early retirees if we saw sustained medium-high CPI driven by medium-high earnings inflation. We haven’t seen that for a few decades really. Early retirees could find themselves squeezed badly between workers and pensioners unless asset prices kept up.

  • 29 Vroom June 16, 2023, 3:37 pm

    @ Al Cam, the obvious answer at the moment is a Linker ladder with some of your portfolio, similar to the Alan Roth TIPS ladder we talked about last autumn

    Even more so if you have some assets in taxed accounts (GIA, not ISAs etc), as the 0.125% coupon linkers are pretty much tax-free to boot. Currently priced at about RPI +0.7% to 0.9% across the curve, and that’s RPI not CPI until 2030. I’ve bought TR26, T28 and T29 and a drizzle of T36, still scared of the mark-to-market on the longer dated bonds as interest rates (nominal and real) continue to push up. Geeing myself up to make a proper ladder if real yields get back up to 2% or so…

  • 30 The Investor June 16, 2023, 3:43 pm

    @Vroom — I’ve been toying with doing an article on this, perhaps for Moguls, but I think I want somebody to sanity check whatever I come up with (maths and logic) since while I understand the basics I’ve never actually bought-to-hold-to-maturity an individual linker. Are you that expert I could run any such post by? 🙂

  • 31 Vroom June 16, 2023, 3:47 pm

    I think @ZX is the expert!
    But yes, very happy to sense check ahead of that potential next step..

  • 32 Al Cam June 16, 2023, 4:39 pm

    @TI (#26):
    No not really; but it is sobering to watch and it ain’t over yet either!
    I also agree with ZX (#28) that it is easy to focus on the “wrong” thing(s).

    What I did not mention above was that from the outset I had assumed inflation would be 3.5%PA and some of my assets would return 0% nominal. I did this to build in a fair degree of prudence; and I am still ahead of this plan – but the gap has closed at an enormous rate over the last 18 months (in spite of rising interest rates) courtesy of that “drunken gatecrasher”!

    @Vroom (#29):
    In theory this is OK if matching inflation is your objective, but not so easy in practice as there are not that many linkers available and there are gaps in the years available too.

  • 33 ZXSpectrum48k June 16, 2023, 4:42 pm

    @Vroom. Bonds yuck. Bonds are so … real. They are almost as bad as stocks. Like you have to pay for them and repo them and all that crap. I like to stick to OIS, FRAs, swaps, swaption etc. So much easier to understand and no cashflows at all as long as you never let them fix!

    I’ve been watching linkers (and RPI linked annuity rates) closely for months. While it’s great that we now have a 55-year old able to get a 3.5% RPI linked annuity, in some ways, it’s disappointing it’s not even better.

    Long-end real yields refuse to detonate. Nominals are all back at the highs but real yields are still below 1%. In forward terms, something like 10y, 5y is 1.35% vs 5y5y at 0.43% but most of that is the switch from RPI to CPI so it’s just a mirage. Beyond that it trails off with 15y, 15y at 1% but 30y,20y essentially at 0%.

    We need a nasty bear steepening of the real yield curve. Where is bloody Kamikwasi when you need him?

  • 34 Vic Mackey June 16, 2023, 6:30 pm

    I think the supply scarcity relative to demand for index linked assets will see real yields bounded, especially at the long end. The fact that there wasn’t a lot of issuance at even negative yields was instructive.

  • 35 Haphazard June 16, 2023, 6:55 pm

    On the French “retirement age”, we may not be comparing like with like. The French system is different.
    Firstly, the pension in question seems to be more significant than our state pension. It reflects income, effectively incorporating an occupational pension, and I think for most French people it’s all they have. So there’s no “…or 10 years earlier with my SIPP”.
    Secondly, it’s only 64 if you’ve built up enough contributions – not everybody has. So the more realistic comparison might be 67, which I think is the end date when you can go, even with a patchy contribution record.
    There are exceptions for people doing physically arduous jobs (roofers, etc.)

  • 36 Vroom June 16, 2023, 7:14 pm

    @ Al Cam, ‘matching inflation’ sounds a tad harsh. It’s RPI + 0.8%, so CPI + about 1.8% until 2030 and it’s basically tax free. Good luck guaranteeing that in any other way outside of a tax shelter! If you’re marking your pot ‘real’ as well as ‘nominal’ there must be a place for some linkers at those prices as ballast? Yes the year gaps make it messier than the US version, but not less effective imho. The biggest/most annoying gap is between 2029 and 2036 and there’s an okayish (1.25% coupon) 2032 option to partly roll into once the 2029’s expire should you so wish (you can just run lots of 28 and 29s and a few 36s until then?).

    @ Vic Mackey, Long linkers seem to ‘detonate’ (to borrow the @ZX parlance) when the excrement heads for the ventilation (credit crunch, Kwasi-nomics etc). They’re then basically “no bid” – the price just drops and drops and then… drops some more. Textbook example of a market that seems to have liquidity right up to the point that that liquidity is really needed. But potentially a great opportunity if you have dry powder at the next scare..

    @ZX, long-end yields do seem to have been surprisingly well behaved since Kwasi-time. Triggers for the next blow out? Reckless (Labour?) spending? Obstinate core inflation pushing 10y nominal yields up above say 5.5%? A Rumsfeld unknown unknown? Or – worse – none of the above and they trickle back down to -2% and we all can’t believe we didn’t fill our boots in the halcyon days of summer 2023!?

  • 37 The Investor June 16, 2023, 7:42 pm

    @Vroom — Cheers, will drop you a line on email if I progress the idea!

  • 38 Al Cam June 16, 2023, 7:53 pm

    Is there not a ‘phantom income’ issue too and costs & faff with buying, managing, etc them?
    To me eyes, it could work out easier/better with a linked (or fixed rate escalating) annuity or, if you have one, an inflation linked DB pension.
    2030 is really just around the corner in terms of the probable timescales we are talking about and IIRC RPI then becomes CPIH not CPI.

  • 39 Seeking Fire June 16, 2023, 8:20 pm

    Have been watching long dates linkers for a while but not convinced they are bargain territory but as Vroom says give the large duration, if the wheels fall off then they are worth a punt. At the moment the ones expiring in the 60’s I think are giving a real yield of just under a per cent. From memory in the early noughties you could get four per cent real, which means the price would need to collapse from near 80’s to the teens’s / twenties. I am guessing (could be wrong) that the reason equities have held up well is long dated index linked bonds are still showing a not very attractive real yield. Still the collapse since they were guaranteeing you a loss of negative 3 per cent. slightly under two years ago is quite something to behold for a UK government bond. Just an amateur here. Think linkers at these prices can be a part of your retirement portfolio.

  • 40 SemiPassive June 16, 2023, 9:23 pm

    I have had little need for a GIA, as too poor to be concerned with complicating things outside of a SIPP/pension and ISAs.
    But if I manage to downsize home this summer (who says you can’t time the housing market? 😉 there will still be enough left over once the mortgage is paid off to take a few years to stuff into a Stocks and Shares ISA.
    So the idea of using a GIA to hold a ladder of near zero coupon gilts that offer guaranteed capital gains, with exemption for taxation purposes, is very appealing.
    I had a look at various gilts on Hargreaves Lansdown, and all the index linked ones are not tradeable online, so you have to ring up.
    But I’m interested in buying individual conventional gilts also. Over 5% on the 1 year, and 4.9% on the 2 and 4 year also. Anyone else tempted?
    My hands are tied until at least September, but that could work well if we hit peak gilt yields from there towards the end of the year.

    I’ve already observed things like infrastructure investment trusts taking a bit of a knock as gilts offer ever increasing yields. And I will be adding IG corporate bonds also (6.67% Weighted Average YTM on iShares IS15 as an example) .
    It is quite possible now to build a 50/50 or 60/40 portfolio of equity income trusts & dividend ETFs / bonds & bond ETFs that throws off a pretty stable natural yield of 5+%, which would require little management into your 70s and beyond.

  • 41 Vroom June 17, 2023, 8:19 am

    @ Al Cam, no issues with buying and holding Linkers for me so far. The only thing I’d flag is the bid-offer is wider than with conventional Gilts, so not a good position to be trading in and out of. I’ve been buying mainly the TR26, T28 and T29 linkers as quasi NS&I ‘granny’ bonds, to buy and hold to maturity (the risk obviously being that when they mature the market has gone back to RPI -2% and you can’t roll them at a price you’d like).

    You apparently used to be able to buy them online like conventional Gilts at ii and HL. But currently you have to phone, then get through to the ‘Dealing team’ who get you the best price from ‘Market-makers’. These seem to be intermediaries like Peel Hunt and Winterflood rather than the bank trading desks themselves. A bit of a faff, but you only get charged the web dealing commission (£5 with iWeb and £5.99 with ii). No other costs to hold/manage etc them with ii or iWeb.

    The screen at all providers (ii, HL etc) shows a wide price around what seems to be the correct mid. As an example the last time I bought TR26 the screen said ‘Sell: 96.68, Buy: 99.18’. So a Clean Price mid of 97.93. I was filled at 98.20, which was a pretty good fill from my limited experience (sometimes the market makers show better bids or offers etc). The dealer then gives you the full details (notably the Dirty Price including the inflation linking to date) and books it for you. Their systems can’t cope with Dirty Price so you show a huge ‘loss’ as it’s marked at the Clean Price, going forwards you have to check yourself e.g. at Tradeweb what the CP-DP difference is.

    Phantom Income is the coupons also growing with the inflation linking. With these bonds they start as 0.125% coupons, so even if RPI say doubles you’re looking at 0.25%/year interest (taxed as Income, like savings at a bank). Dwarfed by the doubling in the price you paid which is all tax free.

    RPI Annuities a great option, priced similarly (but with a cut for the insurer obviously). More permanent, you can’t resize the position or move into other assets 5 years down the line or etc. But if you’re at the right starting age and you like the RPI level (projected real yield) a great option.

  • 42 G June 17, 2023, 9:27 am

    Exercise should be a life long investment, don’t wait until you retire. The key is finding something you enjoy exercising wise, and keep at it regularly. Haven’t found something you enjoy yet? Keep trying, while recognising it might take a while to enjoy it (give it at least 3 goes, and ideally 3 months before throwing in the towel).

    As far as I understand it, there are three things to focus on:

    Keeping/building muscle mass. This is what helps avoid falls etc, which have a high rate of being terminal from mid 60s onwards.

    Steady stead movement ie the long slow pace walks some have described here.

    Shorter duration, but high intensity movement that gets the heart rate going.

    and as a bonus, dynamic movement that keeps flexibility and power – could be walking/jumping from rock to rock on a mountain or seashore etc. Do what your 8 year old self used to do for fun.

    Eat in moderation, and mostly plants.

    Essentially, apply the same data and research based approach to staying healthy as you did to accumulating your loot so you can enjoy it!

  • 43 Brod June 17, 2023, 9:45 am

    Fascinating discussion.

    Personally, I’ve got the state pension and near equal amount of Civil Service DB pension that’ll provide long term inflation proofing of our core needs. SIPP and ISA provide the cream and bridging to 67.

    Pre-Covid, I went from 100% equities to 60/40 and built what back-testing (ha!) says should be a relatively stable portfolio, with growth potential, that should see me through. Lots of moving parts (aka “over-optimisation to back testing”.) I suspect far too many once my facilities are declining. And my wife’s not interested. So once the pension streams are online, I’ll begin to consolidate to 80% one global equity tracker and 20% global short inflation linked bond tracker. Should stop me tinkering…

    Or maybe 70/30?

  • 44 Brod June 17, 2023, 9:53 am

    +1 to @G!

    A couple of 8k runs with the dog, a couple of gym sessions (BORING!!!) and a couple of hour long dog walks in our vast local park in South London each week is the target. Great for the endorphin hit too!

    Reality is 2 or 3 of these get squeezed out each week by work, family or other life stuff. But doing something at 57 is helping the present and future me.

    And also +1 to @Ermine to sharing the bottle of wine in the evening with your wife. My wife doesn’t drink so have to be extra vigilant there.

  • 45 ZXSpectrum48k June 17, 2023, 10:19 am

    @Al Cam. You don’t need to actually buy the linker ladder itself. No one really buys a linker ladder in reality.

    Let’s say you decide you want to invest for the next 30 years into linkers to generate an inflation-linked £50k (in today’s money) per annum. You don’t actually need to buy 1 linker per year for the next 30 years. You can’t since they don’t exist.

    What you might do is buy lets say the Mar 24 and Mar26 and the Aug-28 (all 0.125% coupon) to help nail down the bulk of the cashflows for the next 5 years or so. The residual 25 years could then be handled by duration and convexity matching the portfolio with a small number of linkers (say 2 or 3). So really the portfolio never needs more than about 5-6 linkers.

    Right now whether you buy a linker ladder or annuity depends on that time horizon. The linkers clearly offer better value for short periods (no fees) but can’t compete with annuities over longer periods. The annuity provider has a big advantage in being able to pool longevity risk. Plus they are not really hedging that very long term risk with solely bonds. Their portfolios are typically more like 80% bonds and 20% equities. The equities provide both an “infinite duration” element but also (hopefully) a higher real yield. So while they are still the main buyers of linkers such as the 2068 and 2073, they offset that very low forward real yield of those with assumed equity real returns. Clearly you can do the same but you’ll always be left with the lack of longevity pooling.

  • 46 Mr Optimistic June 17, 2023, 10:38 am

    From what I can see the cohort life tables reckon

    ‘An estimated 13.6% of boys and 19.0% of girls born in the UK in 2020 are expected to live to at least 100 years of age, projected to increase to 20.9% of boys and 27.0% of girls born in 2045.’

    Period life tables seem to show 1% getting to 100.

    I am inclined to say…serves them right :).

    Now I am approaching 70 I decided to have a bit of an investment spring clean ostensibly to bring things into line with my previous view that inflation plus 1% would be good ! Well yeah that was from a few years ago….
    Psychologically I am finding it difficult to switch into bonds in the teeth of high inflation. I think in the past 50% bonds would have been about right but now, hmm.
    I agree about an income focus, and the need to avoid being overweight UK equity income but one obstacle is that many bond etfs are non-distributing. Yep, I know I can just sell chunks but I am trying to leave things such that my widow (aka ‘relict’ !) could just sit back and party.

  • 47 The Investor June 17, 2023, 11:02 am

    @ZXSpectrum48K — You write:

    What you might do is buy lets say the Mar 24 and Mar26 and the Aug-28 (all 0.125% coupon) to help nail down the bulk of the cashflows for the next 5 years or so. The residual 25 years could then be handled by duration and convexity matching the portfolio with a small number of linkers (say 2 or 3). So really the portfolio never needs more than about 5-6 linkers.

    Interesting and I get the gist of what you’re saying. Basically reflect the shape of the curve with a few longer-dated purchases. I have two follow-ups.

    1) Any idea for a non-works-as-a-quant rule of thumb for weighting the allocations? I am presuming 20% into 1/3/5/10/30 tranches — while arguably reflecting cashflow and duration risks — is too crude even for non-government work. (On the other hand if real yields are positive along the curve and you’re in drawdown, does it matter too much for an individual’s purposes?)

    2) I’ve always understood a benefit of a bond ladder to be that you can roll expiring short-term issues into your longest dated issues. While I can see how a 5-6 linker portfolio is easy to set up, wouldn’t it get more cumbersome to manage over time as those long-dated issues shorten? (Or else you’d incur big trading costs churning?)

    I’ve never bought an individual linker so it’s all learning for me. 🙂

  • 48 ZXSpectrum48k June 17, 2023, 12:09 pm

    @TI. T

  • 49 ZXSpectrum48k June 17, 2023, 12:10 pm

    The problem with being logged in as a Mogul or a Maven is that if you hit submit by accident it’s all too late!

  • 50 Al Cam June 17, 2023, 12:55 pm

    @TI, @ZX, @Vroom
    Guys, fascinating discussion with lots of useful hints & tips.
    I look forward to seeing how it develops.

    For info:
    a) I recently commenced my index linked (albeit effectively capped) DB pension
    b) I did previously look at linkers to help bridge the gap to my DB start but finally settled on a combo of approximately laddered savings bonds (or CD’s as our US cousin’s like to call them) and I have some ILSC’s too
    c) One idea I played with that has not been mentioned so far is US TIPS

    The most notable learning point from transiting the gap to DB commencement was that it turned out that we needed less than I had forecast; so reversibility, etc was also quite useful too!
    I am far from the first person to ‘discover’ that enough may well be less than you think. While I knew from the outset that this was a possibility, it would be an entirely different thing to live with an under-estimate if you get it wrong from the off!

  • 51 ZXSpectrum48k June 17, 2023, 1:13 pm

    @TI. 1) To hedge a portfolio for duration risk with 2 bonds, with a cash constraint, the equations are C1+C2 = C(P) and D1C1+D2C2 = D(P)C(P)
    Where P is the portfolio, 1 and 2 are the hedging bonds, C is the cash and D is the duration. You solve this for C1 and C2.

    Approximating the duration isn’t the problem. Most of the linkers have low coupons. Basically 17 have 0.125% and another 8 or so between 0.25% and 0.75%. Given the duration of a zero is it’s maturity, we can make the approximation that the real duration is equal to the residual maturity. For example, the 0.625% 22Mar40 has a real duration of 15.8 while it’s residual maturity is 16.8, a 6% error. For the 22Mar2073, the real duration is 47.8 but the residual maturity is 49.8, an error of 4%. Knock 5% off the residual maturity and you’ve got a decent idea of the duration.

    The issue is really the cash amount. That’s a function of the index ratio for each bond. Those ratios don’t really fit any rule of thumb since they are a function of how long inflation has been accruing on that specific bond. For some it’s close to 1 and others it might be over 2. So you do really need to know these.

    2) You are going to need to rebalance. The principal/coupons you get from short-dated bonds redeeming is used to provide income. It’s excess coupons from the other longer bonds that you will need to reinvest. This is actually why I prefer to just run a 2 or 3 bond portfolio rather than an actual ladder. I really don’t want 30 linkers with 60 cashflows per year to reinvest. I’d much prefer 4 or 6 lumpier ones.

  • 52 The Investor June 17, 2023, 1:15 pm

    @ZX — Hmm, I didn’t realise there was a difference if logged in (as for various reasons we have no edit button..)

    I’m going to have to investigate a time limited edit solution I think.

  • 53 DavidV June 17, 2023, 2:29 pm

    Many years ago Wade Pfau wrote a paper giving practical advice on building a TIPS ladder. I’m afraid I don’t have the reference to hand. Obviously a TIPS ladder is a lot easier than with Gilt linkers as they have far more issues in the US. I recall that the illustration was for a 30-year ladder, i.e. probably enough for a conventional retirement duration. There was no rolling over of bonds involved. Instead the ladder was constructed so that the coupon income thrown off the whole ladder and the value of a maturing bond in any year provided the desired real income for that year. There were a few gaps in his 30-year ladder, which had to be covered by planning for excess income in the preceding year. Because of the smaller range of linker maturities in the UK, I don’t think his method is really transferable to here, but it does show the US thinking on this matter.

  • 54 DavidV June 17, 2023, 2:38 pm

    Following on from my comment above (53) here is a link to the Wade Pfau paper
    It is slightly more recent than I remembered.
    I guess a further point to be made is that this was clearly a means of providing inflation-protected income rather than inflation-protecting a capital sum.

  • 55 DavidV June 17, 2023, 2:38 pm

    Following on from my comment above (53) here is a link to the Wade Pfau paper
    It is slightly more recent than I remembered.
    I guess a further point to be made is that this was clearly a means of providing inflation-protected income rather than inflation-protecting a capital sum.

  • 56 ZXSpectrum48k June 17, 2023, 3:47 pm

    @DavidV. You’ve got 25 linkers up to 30 years in the UK so it’s actually not that different. The biggest gap is less than two years. So it’s perfectly feasible to build a linker ladder with almost one bond per year. You match the cashflows required precisely by reverse bootstrapping but you end up with some 18-month or so gaps in the cashflows.

    Practically though this means holding a large portfolio of small bond positions. The initial setup costs of that are higher (while fewer bonds will have more rebalancing costs later). Some of those linkers may not be ideal from a tax perspective, those with a 2-4% coupon as an example.

    Plus there is still that longevity risk. If you have that linker ladder for 30 years and you live to 31+ you are stuffed. So you need to hold something against that scenario.

  • 57 LadsDad June 18, 2023, 8:36 am

    Great article, it helped reinforce my thinking around potentially pivoting to IT’s when older.

    Whilst the discussion is on Longevity, the best writing / podcasts on this I have come across are by Peter Attia. His work references many studies on extending your quality of life through diet, exercise, preventing cancer / Alzheimer’s etc.

    Almost all of his material is free to access, newsletter, podcasts etc so well worth checking out. His book also gets very high reviews


  • 58 EcoMiser June 18, 2023, 11:22 am

    @Al Cam 19
    It’s not measured at all. When I said “So far the capital hasn’t been touched.” I meant I haven’t withdrawn any of it from the ISA. I’ve the natural income, my State Pension and a small annuity deriving from works pensions, and that’s been more than sufficient for my needs, or even wants.

    Actually, I had forgotten about the largish amount of cash I had at the time of my retirement, the spending of which, combined with my natural frugality kept me going until the pensions came in. It worked for me, it probably wouldn’t work for the massively early retirement FIRE suggests.

  • 59 EcoMiser June 18, 2023, 11:42 am

    @Marco 20 et al.
    I do. Dividends just magically appear in my current account, but selling capital requires action: Decide what to sell and how much, log in to the broker, select the stock, click sell, accept (or reject) the offer, wait until the transaction completes, log in again and withdraw the cash. That would be difficult for me now, especially if I wanted to generate a monthly income; never mind if the dementia had really taken hold.
    Selling capital may work for early retirees, but it’s too much for the 100 year olds who are the nominal subject of this article.

  • 60 Al Cam June 18, 2023, 4:54 pm

    Thanks for the additional information and thoughts.

  • 61 The Investor June 20, 2023, 9:52 am

    @all — Brilliant discussion, thanks for all the contributions.

    Special thanks to @ZXSpectrum48K for the further technical detail. (I got distracted discussing edit functionality with my techie guy and forgot to reply).

    Would like to flag this linker discussion up to the far wider ‘above the comments’ Monevator community with a post, but right now it’d be the blind-ish leading the blind so I need to have a bit more of a think, I think… 😉

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