What caught my eye this week.
I am a couple of weeks late to this. But I can’t be the only investing nerd who hadn’t heard – and was surprised to learn – that Bill Bengen has broken his own 4% rule.
For those new to these parts, a short summary.
In the early 1990s Bengen interrogated the historical return data for US shares and bonds. He determined that a 4% withdrawal rate from a retirement pot – increased with inflation after the first year – would nearly always see you through a 30-year retirement without you running out of money.
For more detail read our articles on sustainable withdrawal rates.
I’m not delving into the specifics today. What’s fascinating to me is the man made famous for partially solving the retirement problem / neatly branding a nifty bit of data-mining (pick your poison) has bailed on it in his 70th year.
Alas the primary source for the Bengen revelation lies behind a Wall Street Journal paywall (though a reader letter in response is viewable). I picked up the news on a recent Animal Spirits podcast.
In the podcast retirement demigod Wade Pfau says he hopes the news that Bengen was now 70% in cash will make people realize there’s no one-size-fits-all approach to income after work.
Indeed Pfau estimates that only about a third of the population have the right mindset for an equity-heavy total return drawdown strategy in retirement.
If that’s right then it means most people should be doing something different!
There’s not one rule to rule them all
Too often discussions of alternative approaches to retirement income (such as our old contributor The Greybeard’s equity income trust preference) get talked down as irrational or atavistic.
But in my view the only investing that ever works long-term is the style that works for you.
And as I’ve said many times before, in retirement a different set of problems may mean you’re best off turning to a different solution.
Of course if people making unfounded claims – that dividend income gives you a free lunch, or that an annuity is the only sensible way to invest your retirement pot, or that buy-to-let properties guarantee superior results, or that you need active managers to get you through a bear market (Merryn Somerset-Webb’s latest in the FT ) – then such specifics can be challenged.
My point is simply that there are trade-offs and advantages to all the approaches.
And that includes the ‘4% of a total return’ route – which might still, equally, be exactly right for you.
For once though you don’t have to take my word for it. Just look at the lived reality of Bill Bengen.
The man who wrote the rule on retirement investing is breaking that rule in spectacular fashion, because it turned out not to work for him. I commend him for sharing this so (sort-of) publicly.
Have a great weekend!
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When inflation is high, says Warren Buffett, the best investment is yourself – CNBC
Ominous predictions – Humble Dollar
Why workers are choosing pay packets over flexibility – BBC
Sell in May and go away? – Albert Bridge Capital
When the stock market makes you cry – Banker on FIRE
Morgan Housel on how to invest like an optimist [Podcast] – via Apple
Surveying the sell-off mini-special
Attitude adjustment – The Reformed Broker
Good news and bad news about the [US but relevant] market – A.W.O.C.S.
Nobody wants to tell you this – Tony Isola
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Have growth stocks bottomed? – Morningstar
Evaluating the current arguments in the value vs. growth debate – Validea
European value could top US growth for a decade – MarketWatch
Kindle book bargains
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Elon Musk: How the Billionaire CEO is Shaping Our Future by Ashlee Vance – £1.99 on Kindle
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London’s lost ringways – Works in Progress
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Quartermass: the sci-fi series that terrified a generation – BBC
Escape to Zoom island – GQ
Hacking Russia was off-limits. The war has made it a free-for-all – WSJ
As good as it gets [On death, cancer] – Get Rich Slowly
Everything’s a WeWork now – Wired
The machine learning job market in 2022 [Very curious piece] – Eric Jang
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No plan survives contact with the enemy – Helmuth von Moltke 1871
or the Mike Tyson alternative –
Everyone has a plan until they get punched in the mouth
I recall Somerset-Webb, admittedly about 8+ years ago, suggesting readers should invest in Russia. I wonder how that worked out?
A recession will be cathartic after the insanity of the last 2 years. What’ll be next? Crypto? More stocks?
I admire Bill Bengen-he was one among many American financial authors writing good financial advice books -sadly lacking in the U.K. in those far off days when I was trying to educate my financial self
The 4% rule was an interesting and worthwhile contribution to the retirement debate
However going to 70% cash at 70 years old and presumably well into retirement is …………..!
It would argue that he got his Asset Allocation wrong in a serious way,hadn’t saved enough or is living beyond his means
Downturns as occurring at present are a feature of investing-retirees should have it factored in to their Investment Plan
Perhaps he is just another Active investor who got it wrong
A bit sad -having to reinvest a 70 % cash position for a retiree who is 70 years old is a nightmare of market timing I would be very glad to avoid
… Still life keeps me busy, but not too busy to spot an unforgivable sci-fi typo 🙂 “Quatermass” !!!
Bill Bengen was on the Afford Anything podcast (Paula Pant) last month so recommend people listen to that.
I’m concerned that with all the buzz out there on crypto, this at infernal apology for a Ponzi scheme os being granted an aura of legitimacy it does not deserve and should not have.
It has no intrinsic value, it’s fully reliant on the greater fool principle, it’s environmentally disastrous, it funds and enables criminals, and due to the high intermediary costs ultimately it’a a worse deal than the actual (so-called) investment scheme that Charles Ponzi ran. And as far as currencies go it’s way too volatile to be of any use as means of payment.
Of the above, I think it’s the millennial hypocrisy that annoys me the most — people who’ll give you dirty looks for falling below their standard for diligence in recycling and who’ll happily preach at you for eating meat will in the same breath proudly detail their crypto portfolios and their harebrained strategies for generating above average returns on it. At least I ate the friggin cow I allegedly killed, and I got one good use from the plastic bottle that I’m now throwing in the street litter bin because I can’t be fucked carrying for 5 miles along the beach till I may or may not find a plastic recycling bin somewhere, and yeah, I forgot my reusable water bottle at home again — but what’s their excuse for supporting crypto, other than the good old fashioned stupidity and greed?
I have just been through the process of transferring a small (but > £30K) final salary pension. I was unable to find an advisor that would not manage the ongoing investments. If they don’t provide ongoing advice then they can’t get PI insurance. The question then is to ask about the cancellation conditions for the on going advice :-).
In some ways I feel like we need a proper recession. There is a lot of dead wood out there which we propped up during Covid. Time to clear it away and let the new growth come through.
The BBC article about pay is followed by one about encouraging staff to return to the office and the costs associated with doing so.
One of the people interviewed is a lecturer who reads like a straw man from an early Mr Money Mustache blog post. Umus, a London based university lecturer thinks that seven miles is too far to cycle in a day and that planning packed lunches is too difficult.
It made me feel quite nostalgic for the days when I was ‘odd’ for want of another word for doing both those things.
I do question why FIRE types seem so focussed on maximizing total returns. Surely, your asset allocation exists to hedge your future liability stream. It may be that, to hedge your future liabilities, you might need to maximize total returns with 100% equities. For many though that isn’t a necessary risk. Even 60/40 isn’t necessarily the right portfolio for your liabilities.
The second question is why do people focus so much on the cash weighting? It’s irrelevant. It’s how much risk you run (value at risk average shortfall etc). Cash at 70% with 30% in the S&P would still be fairly risky. You could take a 10-15% nominal drawdown and 30% over a few years in real terms if it doesn’t bounce back. Some, in later life especially, with a larger pot may simply not need to risk that scenario.
Right now, I’m 20% in cash, 35% in hedge funds and 7% property (this hedges kid’s shelter risk so I don’t care if it goes up or down). That leaves me 24% in equities, 4% in bonds and 10% in commodities. That’s 38% of my portfolio still vulnerable to large scale drawdowns. Seems more than enough to handle.
@prometheus has Somerset-Webb ever been right? While I agreed with her thoughts on the housing market bitd, I’m glad I never acted in line with it.
One thing to add: surely your age also matters; especially if you have little or no legacy ambitions. Does it not become harder to ride out a down-turn as you approach the end of your life?
I agree in what you say about no one investment approach being perfect. The only way to ensure your retirement income is as “safe” as possible (IMO) is to have a truly diversified overall asset portfolio. By this I don’t just mean an equity/bond portfolio but a mix of diversified approaches. You’ve already alluded to this in your article. My investments now include a portfolio of:- an annuity, an equity/bond SIPP, IT income SIPP, buy-to-let and cash. Currently my equity/bond SIPP is hurting – 10% down (the IT income SIPP less so – 3% down – bring back the Grey Beard). Everything else is fine.
> I do question why FIRE types seem so focussed on maximizing total returns.
The difference between 7% and 5% compounded over 30 years of monthly investing is having >30% less in your final pot, having to contribute almost 50% more monthly, or having to work 6 years longer with the same monthly contributions.
To me it seems obvious why you’d want to maximize total returns over multi-decade time horizons
I cannot get through to the WSJ article, but it seems that Bengen is 20% equities, 10% bonds, 70% cash. For a 70 year old nervous about stock market investments that might be fine, but it depends on the SWR. With an SWR below 3% and a 30 year retirement horizon there is very little difference in running out of money (as far as back tests are concerned) whether the equity allocation is 20% or 100%. However, once the SWR starts going much above 3% the risk of running out of money increases with such a low equity allocation. The day to day, month to month, year to year volatility is of course much lower and less stressful with a low equity/high cash allocation, but a portfolio like that is more vulnerable to inflation.
Our SWR is now below 2% and our horizon is “indefinite”, but we could get by over 40 years without a problem on 20% equity, probably even 0% equity, but we have chosen to go with 90%, with the rest in cash. Historically that has been fine as well. We do own 2 properties though, so we have a backup should an off the historical record problem hit equities.
With a sufficiently low SWR, the risk of running out of money disipates and the choice of equity allocation then becomes a tradeoff between expected long term returns and what can be stomached with resepect to volatility. The higher the equity allocation, the higher the expected long term return, but the tradeoff is high equity drawdowns and/or prolonged bear markets become more stressful.
Easy enough to view the article on WSJ; download something like the Pressreader app, get a free library card from your local council, most offer an online version, and then using the app read the WSJ for free online. The app offers a lot of newspapers and magazines for free, similar to the way you can go in to a library and read them for free.
@Andrew. In my view, you misunderstand the problem if you think it’s about maximizing the terminal return over the horizon period.
The basic problem is that you have a forward liability profile L going out T years (cashflows going out). To hedge that, you have an income and asset profile A (cashflows coming in and compounding up). To be solvent, you need A+L to be positive at all times. So you are essentially short a long-dated knockout option struck at A+L=0.
The option is path dependent (SoR in FIRE terms), and success is not a function of the terminal value of A+L. At no point are you trying to maximize A+L; you are trying to minimize the probability of A+L <=0. If you never touch it, you won. If you touch that barrier over the horizon period T, you lost. End of.
For someone who is young, with low liabilities and good income potential, the best way to minimize the probability of being knocked out is probably to go heavy stocks. It depends though on the specifics. For someone with large outgoings (parents' care home costs, school fees) or trying to grow a house deposit while also protecting it's capital value, then it may be sub-optimal due to path dependence.
For those that are older (Bengen is 70) and already have a large asset pool and modest liabilities, it may be completely logical to be 70% in cash. Yes, value may erode in real terms, but the chance of being knocked out may be essentially zero.
Many FIRE blogs focus on terminal values because a) they want to get to FIRE asap and maximizing risk allows that b) they are frugal and have small future liabilities and c) because asset prices have gone up for almost 15 years in a straight line so they have a big dose of recency bias. That, in my view, is simply not the correct way to think about it.
The Animal Spirits podcast also linked is IMO a good listen at a touch over half an hour long.
IMO, that is an excellent description of the “retirement problem” – thanks.
Well, 4% may have been OK in the US historically, but in the UK you’d have to have been lucky.
I’m planning on 3% (well, 3.08% :-)) and am nervous about that. I’m 45% globally diversified equities, and that suits me fine. Cash, gold, nominal bonds and inflation-linked bonds make up the rest and that should nearly be enough (nominally!) for 25 years until my wife retires and we’ve state and DB pension for all out needs.
Every time I model a path above 60% equities (using the excellent portfoliocharts.com), I get a nosebleed looking at the historical/potential drawdowns and quickly scuttle back into my comfort zone. The possible upside isn’t attractive enough for me. The role of equities is to keep my whole portfolio above inflation and maybe allow some hedonistic adjustments.
So i guess I’m in ZX’s camp.
Interesting intro (and comments) this week – as others have mentioned, the idea of any individual’s plan lasting for decades unchanged feels unlikely, because even if I have exactly the same investing universe to choose from in twenty years I’m likely to have changed a lot in terms of both financial circumstances and personality in ways that are very difficult to predict in advance.
I was listening to an interview with Dan Gilbert recently who mentioned what he called the “end of history illusion” – in a nutshell he’s claiming the evidence suggests that we tend to consistently underestimate how much we will change as people over the next ten years relative to how much we changed over the previous ten years. He acknowledged that we do typically change more slowly as we get older, but the point is that it doesn’t slow down as much as we think and it never stops.
In terms of what that means for investing, perhaps it just means that we should ‘have a plan but hold it lightly’, recognising that our future risk tolerance, needs and priorities may be quite different from what they are now (or what we currently expect them to be). How we can strike the balance between allowing for the reality of change but avoiding constant unhelpful tinkering feels tricky – maybe sitting down every few years to almost start from first principles and check that your plan still aligns with your goals etc., and that the plan changing over time doesn’t mean it was wrong to begin with!
Meh, Bengen has form for changing his mind. In 2020, the four percent rule became the 5 per cent rule because … err… low inflation.
‘when the facts change, I change my mind. What do you do sir?’ John Maynard (sp?) Keynes
@Neverland (22) Thanks for the Bengen link. I recalled having read this in the not too distant past while reading in today’s article that he is now 70% in cash. I could not remember sufficient details or find the source to enable me to comment myself.
Perhaps I am more of a contrarian than I thought but the last few weeks and, in fact, this year so far hasn’t been too bad at all portfolio-wise.
As I mentioned earlier here I have been tracking my total portfolio every week for a bit longer than 5 years now. Last week I went above my previous peak and this week I am just down a bit short of 1% (0.97%). It still seems like everything is working according to the plan: total volatility of about 6% per year and an annualised total return of about 9% (from end of March 2021 to the end of March 2023, my largest and most cautious portfolio had a return of 9.56%). I expect my total return to decrease in the years ahead but it should be alright if I can at least make enough to roughly cover inflation.
As it has been mentioned already above by others, there shouldn’t be any need to change your plans if you only take the risk that you can afford to take instead of trying to optimise for the largest return you can get.
Not sure if I missed something (I can’t read the detail) but I am not sure in what way Bengen has abandoned 4% rule. Do you mean simply in terms of asset allocation?
I mean I wouldn’t be surprised if Bengen has low outgoings, some guaranteed income from social security and/or other pensions, and with a finite time horizon at age 70 he may have such a low withdrawal rate from his investments that really, he can do what he likes, he’s not going to run out. And maybe he prefers being in cash psychologically. It’s valid.
@Tom-Baker Dr Who:
How about: take no more risk than you can afford to take and no less risk than you need to take?
@ Al Cam (#26) – Indeed, you’ve got it clearer than me. You almost always need to take some risk for the plan to work at all.
Also we all know that nothing is ever risk free. By the way, one of the worst problems you can have is when you fail to spot some hidden risk until it hits you (e.g., when an investment is a black box hiding a lot of complexity with many intricate steps each of which can go wrong outside of your control).
Bengen sold 2 businesses and published books. He is seven figures USD rich maybe eight. It’s not like he has eke out the last few bps
@Bill #10 > Umus, a London based university lecturer thinks that seven miles is too far to cycle in a day and that planning packed lunches is too difficult.
Sort of with you and MMM on the packed lunches. Though I have a memory of doing just that, troughing a packed lunch made with breadmaker bread in the glittery atrium of a Canary Wharf skyscraper in 2012, all polished marble floor. Then as I left to go to the meeting looking back and seeing the crumbs picked up on the polished marble and feeling a little bit poor 😉
I am absolutely with him on the cycling. I used to cycle seven miles to work, but that was in Suffolk and a fair bit on cycle tracks. I used to cycle from White City to Hanger Lane and then Alperton in London, but that was the late eighties. I recently went to London by bus, and on the bus going up Kensington High Street I didn’t understand why the cyclists aren’t spread out in a thin paste on the road. Seven miles of that sort of streetfighting everyday is going to shorten his life to the extent he doesn’t need to worry about his pension!
@Hosimpon #7 top rant sir. I have some crypto, but not so much as if it goes titsup that it’s not a meh. No idea of if it’s tulip bulbs or the way of the future, but some of the folk that talk about it worry me for the future sanity of homo sapiens.
Re Bengen @70% at age 70 – surely it depends on his total amount? Once you have made your stash you can ease back on the risk appetite, at the very outside his time horizon is 30 years. If his cash will take him through for that, then where’s the beef?
The perspective is very different for FIRE aspirants who have won the war. By definition their time horizon is shorter, and they will be more focused on conservation of capital as opposed to hitting it out of the park.
@ ermine (#29) – I’m with you and MM on packed lunches.
Unfortunately, cycling in London can be dangerous indeed. For a couple of years, I cycled from Surrey to the city through a route I downloaded from the TFL website that involved a fair bit along the A3 (not a motorway there, just a major trunk road where it’s incredibly legal to cycle). I’m glad I survived the experience but do not recommend to anyone. The bliss of ignorance (it must be safe if it’s recommended on the TFL website) kept me going until common sense returned to me after I read about the demise of an Australian cyclist in that stretch of the A3.
Later I found a much safer route through parks and side streets and kept cycling everyday to work for over a decade and a half until lockdown started. It was a terrific exercise: about 30 miles the round trip every day 🙂
@Ermine “Re Bengen @70% at age 70 – surely it depends on his total amount?”
No it depends on his SWR and his time horizon.
As the holding period increases the risk of inflation decimating the cash pot rises. Without the inflation risk a cash pile withdrawn at a 4% SWR would last 25 years, but that would be a very risky strategy to follow compared with say 50/50 equities cash. Holding equities isn’t done because investors want a higher return, it is done to REDUCE risk.
@Tom-Baker Dr Who, 30 miles is very impressive. The A3 total madness, there are lots of better routes as you found even if you increase the distance. I used to do about 14 miles, 7 each way, which was not a problem as the route was very flat. I stuck to London Cycle Routes which added distance but were far safer than the main roads.
@ Naeclue (#32) – Since a few years ago, there’s been a mini-holland cyclelane along the Thames from Parliament all the way to Cannon street and beyond. It’s absolutely fantastic! Completely segregated from the motor traffic. Only the final bit of my route to work though. The bits through side streets in Putney and Chelsea are usually quiet enough and mostly 20 miles per hour.
I started doing 7 miles a day as well each way back on my student days with my Brompton.
The investing style that works for me in drawdown is taking less than the natural dividend income yield from a portfolio of investment trusts. The 4% “safe withdrawal rate” is an interesting guideline, but I am able to keep my spending below 4% and my received income above 4% at the moment. I’m content to be 98% invested at present. Bill Bengen is aged 75, according to Wikipedia, and retired in 2013, but maybe his appetite for risk is lower than mine.
> No it depends on his SWR and his time horizon.
Well yes, but aren’t we talking about this because he’s already let the notion of SWR go? Maybe he feels he has enough for his ticket to ride
I have a 35 mile round trip commute for the time being, 50% paths, 50% road, fairly safe with just 2 junctions. Much prefer getting exercise on the commute to making time outside work. That’s definitely near the limits of non-electric bike commuting and not for most, but I’m still going to quietly sneer at someone taking the tube 3.5 miles and moaning about the cost.
Bengen sold his family soda bottling business at 40 and his USD 140m financial planning business at 60. Lets say he put usd 3m in the S&P on the first sale 30 years ago – that’s worth $40-50m now. The second sale in 2013 lets say he put $7m in the S&P up to 2021 that’s worth $25-30m now. Numbers could easily have been more. He doesn’t have to play the game any more.
@ Learner (#36) – These 35 miles of daily cycling are also an important investment in your health. I guess you have probably noticed that you hardly ever get ill compared to people who are taking the train, specially in the winter. Later in life, you will see the compounding effect of all this daily cycling: better than average cardiovascular and brain health.
I don’t want to start a millage bragging war here, but whenever summer came and with it the endless roadworks, I used to get lost in the detours. Then I would often do more than 30 miles. Perhaps 35 😉
Do you remember when that helicopter crashed into a crane almost 10 years ago? It fell onto Wandsworth Road a couple of hours after I had cycled past the same spot.
I think this was one of the days when I got lost getting back home and ended up cycling longer than usual.
I disagreed with Merryn on Russia (to be fair her Moneyweek partner John Stepek did too), but I’ve done very well out of her advice over the years. Her calls on gold in 17/8, Japan before covid, ‘buy anything’ during Covid and oil last year were all spot on. Like I say, I did very well from following her advice!
Sorry, that was supposed to be 2017/2018.
On the issue of finding an IFA, it’s not just transferring final salary pensions where it’s a problem.
If you are DIY, you might still need advice one day on a one off basis, to deal with something more complex. It’s very hard to get, and tedious trying to convince people that you don’t want to pay for ongoing help with the basics.
@Ermine, @Neverland By the sound of it Bengen may well have an SWR well under 1%. Or he may have bought an annuity. We don’t know what is on the other side though. Does he run a 100′ yacht? Does he have to make large divorce payments?
If he has vastly more money than he needs, why is he so concerned about the stock market? If he was 50/50 and the stock market was entirely wiped out, would that be a problem for him? The more I think about this, the less it makes sense. I think there must be more to it than stock market nervousness.
I think it’s kind of obvious why he’s so concerned about the stock market. Bengen is the guy who crunched 100 years of stock market data to make his four per cent rule. He can see the US market is more highly valued than its ever been before and he remembers the 70s crash when the nifty fifty crashed and burned. Then he decided he didn’t want to play the game.
You’ve taken the opposite bet.
Wir werden sehen like the Germans say when they are trying to act wise.
Yep, a few posters above have approached the issue sensibly. A 4% swr and its ‘success’ is meaningless when you get to a certain age. We don’t know, but he may already have had 100 times his expenses in equities and still may have many years in equities even after the changes. It makes perfect sense to view the optimisation problem as one of optimising the estate payments which probably does require avoiding the potential crash and bear markets, and best tax positioning. The process of settling your estate to be passed on is not something you really want happening amid huge market volatility. I would not be surprised if at that age, he was positioning his wealth in a way that minimised the risks of it being eroded over a freak event, and is as easy as possible to be settled.
We may be another decade or two from a real crash, or it could be tomorrow, but positioning so your financial affairs in later life (for the comfortably wealthy) so you are basically immune to volatility would not be unwise. Taken to the extreme, would anyone criticise a 90 year old successful lifetime investor pulling out of the stock market entirely right now if it could be done with no loss of tax advantages (especially at near all time highs)?
FIRE and managing retirement is like zx suggests, an optimisation problem, with different optimisations being relevant at different stages. He basically won at the game decades ago. The fact you technically never get to leave the game table with FIRE means his end/late game after victory now looks very different, but it doesn’t mean the way he got to victory has some terrible flaw. The pertinent question here is if he was 20-30 years old again would he be closer to his position 50 years ago or closer to his position now.
We also know nothing about Bengen’s state of health and fitness, whereas presumably he does.
@Neverland, so you think he may be attempting market timing? Plausible, especially in light of your previous link when he was advocating 5% SWRs.
My bet, as you put it, is based on what is likely to work in the long term and I don’t attempt market timing. I fully expect their will be periods when I will get clobbered with 50%+ drawdowns. Despite those periods I am expecting to get a better outcome than I would if I was 70% in cash.
We were 60/40 equity/bonds by the way until 2 years ago, so we are going the wrong way according to convention. The switch was based on long term planning. Market timing did not come into it, although I do confess to baulking at bond yields, which partially led me towards cash instead, but only partially. It was the realisation that in most dire historic periods cash held up better than bonds that was the clincher.
Well put, the idea is to simply live out your life and the ‘ideal’ investment would be index linked bonds or an annuity to cover your future expenditure.
For many people they simply do not have enough money and need more return or they can’t give up the game that got them to FIRE in the first place.
15 years ago I was to some extent in the first category and now I have more risk than I ‘need’, logically the answer is to have a low risk portfolio that covers your anticipated future needs and any surplus is ‘play money’.
Are there funds or ETFs which you can use to access anywhere near savings account rates for cash held in a pension or ISA?
Assuming not, what’s next in line moving up the risk ladder?
@Norman (48) I don’t know of any savings account equivalent funds or ETFs to hold in a tax shelter. The lowest risk investment I use is the iShares 0-5 Year Gilt ETF (IGLS). According to its 31 March factsheet it has a weighted average yield to maturity of 1.28%. TER is 0.07%. This compares well at the moment to the best easy-access savings accounts.
Yes I think he is taking a view on the market because he has like 70% short dated t-bills apparently. Also the 70s bear market happened during his formative years off the back of high inflation and oil embargoes. Many of the posters here harp on about the dotcomm bubble for the same reason
Not everyone has the same goals, even in retirement. For those wanting minimum risk an annuity is a good choice, provided it meets their income needs. Our SWR is about 1.5%, it would have been below 1% had we not given away money to our kids and to charities, and an annuity would be affordable for us. But we prefer to take on more risk and aim for a higher return. If that risk pays off (and it is likely to) we get to give more money away throughout retirement. If it does not, and there is a finite chance it will not, then we will suffer the consequences. Cut back on discretionary spending, sell our holiday home, etc.
So far not going for the annuity several years ago has worked out incredibly well with great returns on equities and bonds while we were 60/40. Being 90/10 equities/cash over the last 2 years has also worked out well, despite recent stock market falls and inflation taking off.
It is interesting how quickly sentiment can change. A few months into a falling stock market, rising inflation, worries over Russia, etc. and some people seem to want to run for the hills. For those not annuitising It is inevitable that there will be setbacks along the way. A setback does not mean you are doomed.
Great comments this week.
Recent market moves have left me reflecting that my allocation is pretty much matched to my risk appetite. Not enjoying the pullback but hasn’t crossed my mind to sell… been considering topping up but can’t bring myself to do it.
Im probably more heavy on equities than I “need” to be but I’m so far from retirement and have a chunky enough cash buffer for near term setbacks that I’m happy leaving things to play out
@DavidV – thanks for the reply (#49). For my own part I’m still struggling to convince myself that even short-dated bonds are better than cash in the current climate.
Your short dated bond bond fund contains various maturities , say 0 to 3 years, as the months go on and bonds mature then fresh 3 year bonds are bought to bring the fund back into the required portfolio range, if yields are rising you will be buying the new higher yielding bonds and retiring the lower yield bonds and coupons will be reinvested into higher yielding bonds. It adjusts to accommodate changes and if you holding period exceeds the duration of your bond fund you will profit from rising rates.
I know there are good reasons for holding such bonds but I see negative returns and have trouble convincing myself that cash isn’t better.
Looking at the performance of the ETF mentioned (link below) and I struggle to see past a cumulative negative return over the past 5 years:
@Dharmesh – thanks for tip on PressReader. A whole new world. Although I am yet to figure out how to access the article on it (for that matter, any WSJ article that is more than 2 day old).
The 0-5 yr gilts over the prior 5 years has had an underlying yield close to zero but now is circa 1%, , the 0-5 yr sterling investment grade etf IS15 has given a positive return over the last five years and now has a yield to maturity closer to 3%.
It is hard to argue against cash being ‘safer’ than bond funds which are losing value just now, with perfect hindsight.
Nothing is guaranteed I accept. I am still sticking to 50% bonds/50% equities in my pension funds and have no regrets despite my bond funds showing between -5% and -9% over the last period. With perfect hindsight, cash would have been better, but I hold bonds because of:
1) Benefits of volatility reduction i.e. shannon’s demon (a very recent monevator weekend reading linked to an article about this, again, I accept cash would sort of permit this benefit too). To benefit you need somewhat uncorrelated assets, and
2) At some point in my lifetime, equities will likely crash, possibly by as much as 50%. I can then rebalance into cheap-ish equities, but more importantly, my overall positioning is such I believe I could stomach the overall loss on paper without selling anything.
A more subtle point is what happens to a pension pot that you and your employer pay into along with taxable benefits. For simple explanatory purposes imagine a 21% taxpayer (+12% NI) paying in X% of salary via salary sacrifice that is matched by their employer. So, for every £200 added to the pot it only cost the person £67 of salary (they would have lost £33 in tax and NI, but instead £100 goes into pension and is matched to form £200). With a 50%/50% equities/bonds split a total collapse of both equities and bonds simultaneously of a magnitude close to the approx. worst in recent times (see vanguard research on returns of historical equity/bond portfolio splits) would be like -50% equities and -10% bonds over a year. The £200 ‘pot’ would decrease to (£90 bonds, £50 equities), so £140, still more than double what the individual would have seen if taking it as salary. This logic (combined with likely rebalancing gain after such an event) is why I use bonds, particularly in pensions.
The above won’t be suitable for many people, and as a professional analyst (giving intentionally vague job title here, but not working in investments I may add, I have zero/NONE financial/advising credentials, and I have never worked in funds or investment companies – I am as much of a casual investor as anyone) I accept there will be many more clever and evidence based approaches, many of which will have demonstratable higher expected returns, but as a VERY risk averse person with my own money, this is the logic I apply to my own funds. I am confident I could handle a near worst case scenario without selling to lock in losses. I understand that better approaches will exist, but sometimes you need to adopt a strategy that is simple and probably just ‘good enough’. This is where I settled, I do have a good amount of cash in rolling fixed term products that will be losing value due to inflation, but my nature means I need this safety too, so I am taking all the inflation losses – fine! If it was not for tax breaks and employer matches I could have seen myself never leaving 100% cash, which would have been very bad for me in hindsight.
Of course, all of the above is grossly simplified and can be picked apart depending on circumstances and with valid special cases and situations, including bonds taking a savaging beyond what we have ever seen etc. The key issue is to determine each of our own circumstances and progress appropriately.
Apologies for the long post, I think my point is that we won’t find a holy grail that suits everyone, and I personally would never criticise anyone who at least understands what they are doing and the risks involved.
@Tom Baker Dr Who on the Vauxhall helicopter crash. Not investment related at all this reply but remember that day so clearly, lived in Wimbledon at the time and worked in the building next to the MI6 building in Vauxhall. I’ll never forget the smell and sight of heavy smoke and flames as my train into work passed the crash site, must have just been minutes after the crash. Mad to think how much worse it could have been, for a sake of a few foot either way, other than the two fatalities. RIP to them.
Re: “… we get to give more money away throughout retirement.”
Picky point, which you may well choose to leave unanswered. Anyway here goes. I am struggling to reconcile the “we get to …” clause with your earlier statement that your horizon is “indeterminate” as a literal interpretation of the former would mean your horizon would be determined by you (or your wives) lifespan. Or, is your goal to both gift whilst alive and leave a legacy too?
In any case, I understand why you have chosen to take “the opposite bet”.
Hi Al Cam, by indeterminate, what I mean is that in the expectation that we die with approximately the same SWR, if we started at that point, to the one we have today, so yes leaving a legacy. We cap the amount of investment assets at 60 years spending. When we exceed that the excess is sold and held as cash and if we have more than 6 years cash the excess is given away. So when we die we would have up to 60 years still invested in equities. If I look at the historical data, the proportion of 50 year periods such a strategy would have been successful is above 99%.
This is the plan for now and we consider it a prudent plan which we will review in due course, maybe around 10 years time as we think that is when we might consider downsizing. We find it very difficult to project what might or might not happen with much certainty beyond 10 years (assuming we get there!) as so much could happen. We might continue as we are, maybe with a lower cap as we will have fewer years to go, but I would not be surprised if we did something radically different either. In other words, I do not expect our drawdown strategy to remain unchanged.
If one of us is still here in 40 years time I would fully expect to have a different plan to the one we have now. For one thing I would expect most of the investments outside our SIPPs to be gone as we plan to draw our SIPPs last for IHT efficiency.
Clearly how much we give away over the next 10 years will depend on our investment returns. It could turn out to be nothing. The way this year is going with inflation and the stock markets, it does not look as though we will be taking profits in January, but who knows?
@Norman, you can avoid nominal losses on bonds by buying and holding to maturity instead of investing in a bond fund. For example, UK Treasury (TR23) 0.125% 31/01/23. I just got a quote in my Hargreaves Lansdown SIPP for £5,o22 nominal of that for £4,999.97 inclusive of charges and accrued interest. That works out at a rate of return of about 0.7%. Not great compared to inflation or cash deposit rates available outside the SIPP, but better than nothing.
I will probably start investing in gilts again soon in our SIPPs, up to 1 year ahead each time. eg Treasury 0.75% 22/07/23 (TG23) currently gives a rate of return of about 0.8%.
An alternative for cash in an ISA is to transfer the cash out to a cash ISA. The returns on those are improving and starting to look worthwhile. Another option is to transfer out to a flexible cash ISA, take the money out and put it on a higher rate deposit. Provided you put the money back into the ISA before the end of the financial year the ISA status is preserved. You may of course have to pay tax on that interest, so that would need to be factored in to your return.
Thanks for the detailed reply.
I was trying to understand if you were currently aiming [at one extreme] for something akin to an on-going endowment; or [at the other extreme] the fabled die with zero (DWZ) approach; or something in between.
FWIW, there are some papers on the mathematics associated with permanent endowments, but I know of no good rulesets for DWZ.
And, as you say, things will almost certainly evolve anyway.
@Naeclue – thanks for the suggestions(#62). I had considered the cash ISA option and still keeping my eye on rates. Re the SIPP, I’m with Fidelity and doesn’t look like I can buy individual gilt issues unfortunately.
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