What caught my eye this week.
A friend of mine – someone in the investment business no less – was surprised when I mentioned I was looking into index-linked gilts for my latest Moguls membership article.
“Nobody normal knows about them anymore I agree – but nobody wants to either,” he laughed. “You should write about Apple. It’ll be $3 trillion again by Friday!”
My friend was right about Apple. But I think he is wrong about linkers.
Of course returns on these UK government bonds have been diabolical recently.
But for a would-be core asset class, that’s all the more reason to dig in now.
Index-linked gilt gore
Blowing off the mental cobwebs with linkers is necessary because it’s been a long time since they were attractively priced for anyone who actually had a choice about where to invest their money.
True, real yields were positive for a blink and you missed it moment amidst the Mini Budget chaos.
But linker yields were low or negative for a decade before that.
And of course it’s true that to bring us today’s more attractive opportunities, those already holding linkers suffered mightily.
Look at this five-year share price graph of the iShares index-linked gilt ETF (Ticker: INXG) – preferably from behind a sofa:
From nearly £23 in December 2021, this long duration basket of UK linkers has fallen 40% to under £13.50.
That the crash occurred during a bout of heady inflation must be particularly galling. (Even if you understand the reasons why.)
For those who heard bonds were ‘safe’ and didn’t read the small print, it’s been a rough ride.
No wonder many now seem to hate the asset class.
Here’s gains we made earlier
Realise though that the seeds for 2022’s losses were planted by many years of bountiful harvest, in which linkers delivered far more than was expected of them.
The low interest rate era was a windfall. Cop a load of INXG’s run-up to its gruesome swan dive:
An allegedly boring asset beloved of pension funds for liability-matching, doubling in a decade?
Nice returns if you can get them.
Linkers climbed even as alarm bells rang – not least for my co-blogger – and their yields went negative, causing a million economics textbooks to be earmarked for pulping.
If you liked linkers at -3%, you should love them now
Even when they were guaranteed to lose money in real terms, institutions (apparently) thought it worth buying linkers (presumably) for their known, inflation-protected cashflows.In November 2021 the UK actually managed to sell a brand new 50-year linker on a negative yield of -2.4%. What were the buyers thinking?
As John Kay put it recently:
‘That is none of my business’, replied Pooh Bah. ‘My job is to ensure that everyone is certain to get the pension they have been promised, even 50 years from now.’
That seems to confuse security with certainty, mused the Emperor.
Like Kay, I don’t think regulators pushing pensions into negative-yielding bonds made much sense. Protection from inflation is valuable. But negative yields mean savers had to shrink their retirement pots to pay for it – or else take on some other risk to make up the difference. (Leverage, say.)
With that said, we must beware hindsight bias.
Maybe in some other reality, governments and central banks didn’t deliver the massive support during the pandemic lockdowns that they’re now being derided for, and we slid into a depression.
In that no-growth other world, perhaps INXG went on to touch £30?
Perhaps – but it’s moot. Because in our world, interest rates did go up again.
Incredibly quickly, in fact. And linker prices duly crashed.
Linker inkling
As a direct result of last year’s rout, you can now get a small but real positive return when buying into index-linked gilts – even while protecting your money from inflation.That’s a huge change. And it’s why I wrote 6,000 words on index-linked gilts for Moguls, despite my friend’s objections.
As I’ve said before, if 2022 taught you that bonds are bad then you learned the wrong lesson.
Recent bond returns have been ugly for the ages. But at today’s prices they haven’t look so attractive for a decade.
Have a great weekend!
From Monevator
Commodities diversification: is it worthwhile? – Monevator
Opportunities in index-linked gilts [For Mogul members] – Monevator
From the archive-ator: A landlord is someone who borrows money on your behalf – Monevator
News
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Fractional shares in ISAs challenged by HMRC – This Is Money
UK house prices unexpectedly up 0.1% in June, but down 3.5% annually – Guardian
Water firms reportedly pushing for 40% price rises in England – Guardian
New rules to protect cash access and scam victims become law – Which
Harry Markowitz, father of modern portfolio theory, dies at 95 – P&I
The UK needs to match higher taxes with better taxes [PDF] – Resolution Foundation
Relentless pressure on fees has stymied the returns of fund managers – Morningstar
Products and services
Households urged to take meter readings as Ofgem price cap drops – Guardian
An FSCS-protected savings account paying 6%, fixed for four years – This Is Money
Lloyds launches Best Buy cash ISA deals paying up to 5.05% – This Is Money
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Pet insurance claims hit a record high – Which
Why doesn’t the UK have 25-year mortgages…? – This Is Money
…and should you go for a two-year or a five-year fix? – Which
Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
A primer on EIS tax relief – Crowdcube
Is it time to fix your energy tariff? – Be Clever With Your Cash
How to pay for private healthcare [Search result] – FT
Houses for sale for less than £500,000, in pictures – Guardian
Comment and opinion
How to spend more in retirement… – Of Dollars and Data
…although here’s another spending tip: don’t – Humble Dollar
How much should you save for retirement? [Podcast] – Which
The tragedy of constantly getting more – Money and Meaning
Retiring early with better things to do – Humble Dollar
Overdoing delayed gratification – Life After The Daily Grind
Are there any glimmers of light in the UK gloom? – David Smith
The end of the ‘vibecession’? [US but relevant] – Noahpinion
It’s not the rise in rates you fear, it’s negatively equity bringing up the rear – SLIS
Naughty corner: Active antics
Are funds making private investments ‘volatility laundering’? – Morningstar
Blackrock’s Midyear Outlook is buying the AI hype [PDF] – Blackrock
Graham and Dudsville – Brooklyn Investor
Intangible value: modernising the factor portfolio – Alpha Architect
Are you prepared for the grind? – Safal Niveshak
Choosing a school versus selecting a fund – Behavioural Investment
Source of return – Verdad
AI winners and losers and Nvidia – Musings on Markets
Kindle book bargains
The Ride of a Lifetime by Bob Iger – £0.99 on Kindle
How to Own the World by Andrew Craig – £0.99 on Kindle
Environmental factors
What a Chinese heat wave means for the world – Semafor
Humans’ fondness for the odd and rare makes us overwhelming predators – Hakai
For how much longer will the Thames Barrier protect London? – Guardian
Deforestation surges despite pledges – BBC
Bitcoin is back, again, mini-special
The ‘thing’ about crypto ownership [Search result] – FT
Why a bunch of US institutions are launching fresh Bitcoin ETF bids – RIA Biz
Speculation is BlackRock bitcoin ETF will get green light [Search result] – FT
Bitcoin nears a one-year high – Wealth Management
Robot overlord roundup
BloombergGPT: a large language model trained for finance – Alpha Architect
Two lawyers fined for submitting fake court citations from ChatGPT – Guardian
The AI Apocalypse: a scorecard – IEEE Spectrum
Content is crap mini-special
Junk sites full with AI-spouted text are here and making money – MIT Tech Review
AI is killing the old web, while the new struggles to be born – The Verge
Henry David Thoreau’s wise words on what to read – Art of Manliness
A case study in online content pollution – OM
Twitter is no longer a filter for the good stuff – Drezner’s World
Off our beat
How the UK fell back in love with the microwave – Guardian
Why would Mark Zuckerberg agree to fight Elon Musk? – Slate
If you can eat it then you can drink it – Eater
A guide to not washing your clothes – Guardian
Reasons to be optimistic about 2050 [Couple of weeks old] – Not Boring
And finally…
“Most of us prefer to believe we are the active subjects of our victories but only the passive objects of our defeats. We triumph, but it is not really we who fail – we are ruined by forces beyond our control.”
– Hernan Diaz, Trust
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Hindsight ,some perspective plus luck?
Now retired 20 years with a conservative portfolio of 30/70 -equities/bonds-same Asset Allocation still in place
The Global Bond Index fund (Hedged to pound)did 3.5% pa over last 12.5 years -was in a rolling 5 years duration U.K. gilt ladder before that
Bonds kept the portfolio volatility in check-till last year, preserved my wealth plus a little growth ie did the job for me
Equities then did the required heavy lifting
This bond arrangement was cheap,easy to manage and understandable
(Bonds are not an easy learn for the amateur investor)
I had obviously saved enough to sustain my retirement with this type of bond input-managed a 3.5-3.8% withdrawal rate
So far!
xxd09
We, rather unintelligenty, held an IL gilt in an ISA for many years. Not too smart as the gilt doesn’t suffer capital gains tax and paid a low coupon. This year we swopped it out into a straight share account switching to a 2032 IL gilt.
It was a bit of a fag as Halifax require you to do it over the phone and their software only shows clean prices which in this case looks like a 50% loss just about. Also, because of these mechanics,can’t reinvest automatically so set it to pay away.
Being in a risk off mood, also bought a straight gilt for the SIPP which being II was much more straightforward. No phone call needed.
Also bought GBPG, a short/intermediate gilt ETF.This featured in the Monevator low cost index fund list where I found it, figured short was too short but intermediate duration was too long and this looked right so thank you guys! Halifax even added it to their ETF list on my request, in two days, so good work all round.
Now we will see how my swerve to bonds plays out…..
I heard zuck was protesting with the referee prior to walking away with his medals
Does anyone know where you can find current real rates amd break evens for index linked gilts or index linked gilt funds? I was thinking of buying some but can’t find much data to help decide.
@jon b
The current index linked yield curve is:
1y 2.750
5y 0.879
10y 0.508
15y 0.856
20y 0.897
30y 0.939
50y 0.466
The very back end is distorted I’m guessing because of forced buyers that have to buy the maximum duration. The shorter end used to have lower yield because until 2030 the yield is based on RPI, and after that it switches to CPIH, so 15+ yr Gilts need higher yield to compensate for linking to a lower inflation measure.
What puzzles me is the 1yr. Particularly when the current inflation is elevated so I would even expect it to trade at negative yield (and that was the case back in the autumn when the long term linkers were trading at similar yields).
My guess is that this is because there is a very real chance of inflation having peaked, and you could actually have deflation for the next year, as the starting point is a local high. But I would appreciate if someone else has more colour on this.
@MP
There is a tracking lag for the index linking, meaning the last X months aren’t IL’d. From memory I thought it was 9 months (old actuarial exams) but I think it’s down to 3 months. I’m sure the boss will be along shortly with the definitive answer.
@Jon B, try
https://reports.tradeweb.com/closing-prices/gilts/
Re the delay for IL gilts, it varies.
‘All new index-linked gilts are issued with a three-month
indexation lag (as opposed to the eight-month lag used for
earlier issues). The three-month indexation lag design is in
line with international best practice. (see page 12). The first
index-linked gilts with a three-month indexation lag were
issued in 2005-06: Since then the number of three-month
indexation lag bonds in issue has increased to ten,
accounting for some 45% of the index-linked gilt portfolio
at end-March 20’
@Mr Optimistic, I think that quote is a little out of date. AIUI there are now only 3 of the old 8-month lag linkers left, see for example this page at the DMO, https://www.dmo.gov.uk/data/pdfdatareport?reportCode=D1D
They are the:
21⁄2% Index-linked Treasury Stock 2024
4 1/8% Index-linked Treasury Stock 2030
2% Index-linked Treasury Stock 2035
If you follow that Tradeweb link you posted and select Index-Linked, all the front page is the 3-month lag linkers, the 2nd page has the 3 remaining 8-month lags.
@boltt
So does this lag mean that if you buy say the march24 linker (ISIN GB00B85SFQ54) yielding close to 2.83%, you get that yield plus rpi change from march23 until march24, right? So given that comparable non-linkers yield about 5.27%, the breakeven inflation is a bit less than 2.5%, which seems a bit optimistic to me (ie I would expect inflation to drop from current levels but not reach this level by next March). What am I missing?
@MP. The issue in the front-end is a function of forward expectations for RPI. RPI is currently running about 3.5% over CPIH, higher than typical. It’s construction means that it’s front-loaded more inflation than CPI.
As those base effects unwind, RPI will mean revert rapidly lower. To achieve that, forward RPI, in year-on-year terms, will need to go below by CPIH in year-on-year terms. So the RPI linking over the next year or so will be somewhat below that of an equivalent CPIH linking. So the breakeven rate of 2.5% seems low but that’s a bit of a mirage.
So if index linked gilts are offering a decent real return why do all this complex diversification into commodities the site has been pushing for the last month?
Can anybody explain why INXG stopped paying a dividend from 14th May 2021?
I was considering investing but this put me off, as I don’t understand why this is the case. I am sure there is a reason.
@10ZXSpectrum48k
That makes sense. So would you say that for Mar24 expected YoY CPIH is 3.5% and RPI 2.5%?
can someone explain the differences between INXG and a more generic bond fund (IGLT/IGLS for instance)?
My hesitation with any RPI/CPI benchmark linked products is that you’re tying performance to an arbitrary (and in the case of inflation, heavily manipulated) statistic. Happy to be educated otherwise, I’ve made significant allocations to short duration bonds in the last 6mo and it’s been great, but I wonder if we’re fighting the last war with this one?
@mr_jetlag
Curious why you think uk inflation statistics are “highly manipulated”?
@MP. I don’t know the exact values. I see risks aswell that inflation is higher than priced. There will be a much tighter spread between CPI and RPI than current spot. In Oct, RPI yoy drops almost 3% while CPI it’s around 1.5% yoy. It’s not really about YoY though. It’s about the index ratio change between Sep 23 and the Mar 24 (which is really Dec vs Jul).
@Mr_Jetlag. I don’t really see why you think RPI or CPI are manipulated. RPI and CPI are somewhat different in their construction (RPI is arithmetic, CPI geometric, differences in what is included in the basket etc). RPI is very old fashioned. Built for a world where calculations were done on a slide rule and the economy had more manufacturing, less services. It’s not fit for purpose and had to be changed at some point.
I’m afraid it’s just another conspiracy theory to add to the rest. Probably the most disturbing thing I’ve read a recently is the KCL survey on conspiracy theories (https://www.kcl.ac.uk/policy-institute/assets/conspiracy-belief-among-the-uk-public.pdf). Basically, 33% of the UK population see the cost of living crisis as a govt plot to control the public. How did we get this stupid?
Perhaps Jetlag just perceives differences between his personal inflation rate and official quoted figures, as we all do. So not really a conspiracy as such and and indeed something that’s been written about often on this site.
FWIW, I totally agree with @ZX(#16) re inflation indices.
Admittedly, I was a bit sceptical in the past but one of the first things I did after I pulled the plug was a deep dive into UK inflation that, amongst other things, verified, and validated, some index calculations from raw published prices.
IMO, for various reasons, personal inflation (PI) is really a bit of a chimera! You can estimate PI (and indeed the ONS once again provides you with the tools to do this) but inflation is a macro attribute of the whole UK economy: nothing more, nothing less.
Hah… Not a conspiracist, despite what ZXSpectrum48 believes. My parents came from a developing nation where all government statistics were exercises in creativity, including the inflation rate. That undoubtedly colours my view. Whether you believe the weighting and selection of the basket of goods in CPI/RPI is entirely apolitical and free of bias is, I suppose, a function of your faith in the institutions you grew up with. Mine caused the IMF to bail us out.
Vic and Al Cam: very kind of you to say so. My personal inflation has certainly been worse than the statistics would indicate (at least here in Singapore, probably the most micromanaged economy on earth), though I’m fortunate to have the reserves to tough it out.
I may have worded it poorly, but my *actual* question was about the merits of linkers vs the relatively straightforward 0-5yr duration bonds and bond funds in this environment. Perhaps I need to be a Mogul and have read the longform article (another thing on my list to do sadly – my initial attempt using a UK card was stymied by my non UK address)?
@mr_jetlag
“Not a conspiracist, despite what ZXSpectrum48 believes. My parents came from a developing nation where all government statistics were exercises in creativity, including the inflation rate. That undoubtedly colours my view.”
Sorry it might be just me, but doesn’t this sounds like a conspiracy statement?
@mr_jet lag. IL Linkers behave somewhat differently to straightforward gilts, although both will suffer if interest rates go up. The funds you mentioned are an intermediate duration straight gilt fund, think duration is 8 years, the other was a long duration IL fund, duration 16 years.
There are lots of articles on Monevator about bonds and bond funds,including the recent foray into IL gilts.
To add to the fun I have just bought an IL gilt direct ( ie not a fund), ditto a gilt. However I am 70 years old and looking to run down my investments and spend my sipp.
Personally I have no need of long duration for the same reason I am not planting oak trees ( well actually I am but that spoils the analogy).
I reckon decide on objectives, consider risks, establish asset allocation and then take a view.
@ZX “Basically, 33% of the UK population see the cost of living crisis as a govt plot to control the public. How did we get this stupid?”
Because the education system doesn’t equip the masses for critical analysis. Government plot of course.
Thanks for all the great comments. Inflation rates are something people argue about and people do end up getting a little tribal about, especially in the US. I definitely don’t think there’s a conspiracy here or there. I do accept that governments will rarely choose measures that put them in a bad light if they can help it, but there’s a vast difference between that and suggesting inflation is ‘arbitrary’. But I don’t really want to argue the point, not least because others have fleshed out the case well here but also because I’d rather things didn’t get tetchy. 🙂
We have a backdoor out of the argument anyway in that, as has also been stated, we all agree there’s such a thing as a personal inflation rate. So you can easily use that in your own planning and wider macro-thinking. I accept deciding your personal inflation rate is 10% clearly doesn’t mean your holding of index-linked gilts plays along with you. But it does imply, for instance, that maybe you need to think more about a higher weighting to growth assets / working longer / saving harder / looking for other ways to de-risk your inflation exposure. (E.g. owning your own property so you enjoy imputed rent rather than having to fund your rental payments from portfolio returns).
@mr_jetlag — Thanks for the consideration, I don’t know why that wouldn’t work but it’s a Stripe thing not us anyway. The benefit of working with industry-standard Stripe is readers don’t have to trust our lil’ old website for payment security etc. The downside is I unfortunately have to say things like “could you please ask Stripe?” as there’s not anything I can do about it. But I haven’t heard of this issue before.
@Neverland — Commodities haven’t been ‘pushed’ by the site, you really do pick your words don’t you. Every article has had pros and cons outlined. I accept there’s been a rash of such articles; this is more an artifact of the research process and the fact that we need to spread the output over a few weeks. @TA has explained in the most recent comments (I think) that his interest was piqued by new research suggesting commodity returns have been superior than was previously supposed, mostly due to longer data sets. I think it’d be asinine to deny that 2022 has got a lot of people thinking about more diversification alternatives and again @TA has said as much for himself (https://monevator.com/diversified-portfolio/). But he wouldn’t be talking about commodities in such depth if he hadn’t found fresher research that at least warranted a second look.
MWN But 67% seem to have a modicum of sense. So logic dictates that something else must be going on with the other 33%. (I tend to agree with ZX’s conclusion).
p.s. Forgot to mention I was reading about the collapse of Thames Water on the train this weekend (railways surely next to go, I’m doing a Delay Repay compensation claim with every second trip these days 🙁 ) and it is a case in point that the difference between the inflation measure ‘technicalities’ (such as the change to linker inflation from RPI to CPI in 20230) can have real consequences.
From the BBC:
https://www.bbc.co.uk/news/business-66051555
Optimistic: IGLS is a 0-5yr fund, effective duration around 2.3 years atm… you’re right about IGLT.
TI, no worries. Stripe has this occasional issue where they won’t trigger 3DSecure or the Visa/MC equivalent check if certain fields don’t validate (eg, address). I only tried once then forgot about it (starting a new gig so have been super busy including not commenting for a while, just catching up on a few weeks’ worth of reading)
Last one lest I get dinged for spamming. TI (#25) V interesting, I had forgotten that many infrastructure debt loans and bonds still use RPI instead of CPI for indexation. Much like the LIBOR/SOFR shift this debt is “stuck” on the old measure until it’s refinanced or amended by all parties.
Some of this debt, like gilts, runs for 25-50 years (think HS2, roadworks, and council debt). Probably a large reason why RPI still needs to be published despite all its flaws.
(btw LIBOR is a great example of a supposedly objective measure being manipulated for gain. other commenters will no doubt jump to accuse me of tinfoil hats again)
@ZXSpectrum48k #16: suggest caution about taking KCL studies as a sound basis to extrapolate belief prevalence across UK.
KCL surveys also find that a quarter of respondents said COVID-19, which has been the main or only cause of 227,000 deaths so far in the UK, was a hoax.
But, according to the ONS, in the UK by the end of August 2022, of those aged 12 and over: 93.6% received a first dose of a COVID vaccine, 88.2% received a second dose, and 70.2% received three or more doses.
It’s hard to see how the quarter figure is (or could be) correct for the UK as a whole, especially as only some portion of the 6.4% of who did not get at least one vaccine dose will have actively refused vaccination – bearing in mind that some persons were not eligible to be vaccinated due to health issues, some intended to get vaccinated but never got round to it (or just forgot), and some people wanted to get vaccinated but couldn’t stand the thought of needles etc.
It’s possible to get very different results in these surveys by asking the questions in a (sometimes only subtly) different way. So things may not be quite as bad as you fear.
@mr_jetlag (#27):
IIRC, RPI becomes CPIH as of 2030.
I think technically it has been stated that RPI will align with CPIH in 2030 – but, as I read it, that is just word play.
@TLI. It’s a fair point that these surveys ask questions that tend to trigger higher percentage responses. I’m very aware of that.
The danger though is that it is so easy to trigger such a response in such a large percentage of the population. We have plenty of bad actors that are aiming to turn the US, Europe and the UK into an “illberal democracy” (like Hungary under Fidesz). Neo-fascism renamed. These surveys show how easily a sizeable chunk of the population can be manipulated into agreeing with truly stupid ideas.
With a FPTP system, it only requires a sizeable minority to enact changes for the worse. We only have to look to the US to see that has already happened. About a quarter are evangelical sky-fairy believers. That small but concentrated powerbase has finally forced through the overturning of Wade vs Roe. Half of the population reduced to second class status because some people believe in souls. Secularism dead.
@alcam
“RPI becomes CPI as of 2030”
I’m pretty sure this is an incorrect statement
Last time I looked at this uk treasury blocked any alignment of cpi and rpi happening before 2030 because of index linked gilts and the need to sell a lot of them
First of all that isn’t the same as saying rpi becomes cpi in 2030
Secondly no government can bind its successors and we have at least two till 2030
I always find it laughable how hard reform seems to be in the uk
Had read that ‘how to spend more in retirement’ dollars and data article previously from the mad fientist side. With all this talk of inflation, maybe that needs to be part of its rules, not just market price? I do quite like the idea of a very simple dynamic spend approach, more from a psychological perspective rather than an economic one, i.e to feel like you’re ‘doing something’ if times are tough. Let’s be honest, McClung is good, but way too complicated, you need something you can remember and get on to a post it note if it’s going to catch on. I realise that me suggesting inflation needs to be considered isn’t really in the spirit of simplification though. Maybe you just subtract inflation from market price % movements and use that figure to determine if it’s time to tighten the old belt?
@investor
I think Thames waters problem is that it owes £16bn (you missed out some unsecured debt) and it has leaky old pipes discharging raw sewage into rivers and the sea rather than some esoteric inflation measure mismatch
@Rhino #32. It’s something I have been very loosely pondering as I contemplate how exactly I would manage drawdown. The best “easy” approach I’ve thought of so far is having targeted a SWR, maintain the £ amount for a couple of years without inflating and then every three years reset your draw amount. By lagging inflation in your drawdown you leave more invested to try to beat it. Obviously the price you pay may be tighter budgets in years 2 and 3.
Not quite sure what the reset calculation should look like to be appropriately conservative.
Then there’s the issue of whether in practice you live rigidly to the plan or flex by personal circumstances anyway. In my case I know I’d likely need “permission” to spend up to a certain amount by reference to some “rule” or else I might unnecessarily deprive myself to hedge against future uncertainty.
@Neverland (#31):
see, for example: https://www.lexology.com/library/detail.aspx?g=fe4ca47d-7823-4157-b226-9040b21a7943
@Rhino (#32) & BBBobbins (#34)
For Big Ern’s take on this see: https://earlyretirementnow.com/2023/06/16/flexibility-swr-series-part-58/#more-74866
@AlCam. I find all this analysis over SWRs and glide paths etc by FIRE types all really silly.
Does anyone really think their SWR assumptions will survive contact with reality over a 40-50 year horizon (or even a 10-20 year one tbh)?
Over a 40-50 year horizon, you’ve should be highly sceptical that the CPI/RPI inflation is even the correct one to use. Standards of living could be miles better than implied by the cost of living adjustments. Your effective purchase power could half over that period with only a CPI adjustment.
It just seems the FIRE community is so desperate to push up SWRs that they willing to go through any contortions to do that. Just spend less or earn more.
While relying on a “S”WR is dangerous, it’s arguably way less dangerous now than 2 years ago. Or put it another way, the SWR should have moved up, in line with LT real rates.
Personally, I had a SWR of 1.5% in mind 2 years ago, and now I would think it’s closer to 3%.
@ZXSpectrum48K — I’m not a high priest in the temple of the SWR rate either (I have time for heresies like natural yield too) but I think the main reasons the FIRE types focus on SWR is (a) you need something to plan around and (b) it turns what for most people is the inchoate concept of many years of future unknown returns and spending into something tangible-ish.
These may sound similar, but the second is really a mental accounting trick / motivation.
For me, yes, deciding that because you’ve backtested a guardrail where spending drops 6.5% for three years if the market declines 10% and it’s a leap year is only really useful in a spreadsheet, not on the field of battle.
However I don’t believe such investigations are redundant, because by conducting them these guys and their readers are better mapping out the territory and the potential risks and rewards.
To someone who dreams in yield curves and tangents it surely all seems a bit baroque, but for the average punter I think the concept has stuck for a reason.
Totally agree with your summary in practice. (“Spend less”!)
@Neverland — Yes, blatantly obviously if it didn’t have the debt then the mismatch in the inflation rates between income and outgoings to pay that debt wouldn’t matter.
I really don’t know why I bother replying to your poor-faith trolling, might start deleting you again I think.
@investor
IMO Thames is heading for a government imposed debt for equity swap after the next election cf British Energy 20 years ago
Probably after next general election though
@ZXSpectrum48k, you seem to have a lot of assumptions doing the heavy lifting in post #37. I for one would be astounded if I actually get 40 to 50 years post my version of RE (which will be more in line with traditional early retirement ages than any sort of FIRE extreme).
And I’m not looking at a SWR in terms of how high can I push it, more like how conservative can I be and be confident my pot is enough, while trying to avoid the ongoing “one more year” trap. And in any event its only there as a guide in the first few years of drawdown. Obviously contact with the enemy will force reappraisal.
@MP. Totally agree. Valuations matter: real yields are key to that. Annuity rates have gone from 1.5% to 3-3.5%. So my SWR, if I used one, has also risen.
@BBBobbins. Well if you are aged 50, then you have a 1 in 4 chance of making to 93 (43 years), . So I don’t think 40-50 years is the wrong horizon for many in the FIRE community. In fact many FIRE bloggers FIREd at a younger age.
I am, and always have been, deeply sceptical of the SWR approach; principally because the so called safe withdrawal rate (SWR) is unknown and unknowable in advance!
Having said that, and to quote George Box: “All models are wrong, some are useful.”
Agreed, the SWR is useful to know your roughly in the right ball park and not a hopeless dreamer, knowledge of it also implies you’re probably more on top of your finances than most, which maybe is the important bit, cue another pithy quote,
In preparing for battle I have always found that plans are useless but planning is indispensable.
Dwight D. Eisenhower
But also totally concur with ZX that anything can and will happen in the future to render the best laid plans moot.
Mortality tables in the UK suggest that I and my partner currently have just under a 20% chance that one of us will make 100.
That ‘risk’ is more than enough to plan for such a longevity.
Such tail risks are conveniently forgotten by many proponents of fire mostly those flogging something under the guise of a simplistic SWR.
https://www.theguardian.com/news/datablog/2011/aug/04/live-to-100-likely
Planning for 55 years (me) is necessarily trending to growth assets and a low rate of withdrawal – or continuing to work for cash.
If a significant majority of the population doesn’t believe a halving of uk inflation rate means cost of living is increasing albeit at a slower rate, then understanding the details of a swr is a lost cause!
I think index linked gilts look ok value but they don’t look a complete bargain at the moment imho which is worth nothing.
The Trinity study that suggested a 4% withdrawal rate based on many years data still seems “touchstone “ to many SWR pundits
It was a help to me many years ago as some sort of rational thought and guide to my incipient retirement as opposed to just jumping off the deep end and hoping for the best
In the end 3.3-3.8 % withdrawal rate worked for me but this masterly piece of work remains a tried and tested base to work from
xxd09
@SF:
I think the Guardian data is somewhat stale. Try:
https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/articles/whatareyourchancesoflivingto100/2016-01-14#:~:text=One%20in%20three%20of%20today%27s,birthday%2C%20according%20to%20latest%20estimates.
And note that (at my age at least) life expectancy has reversed since 2011!
Thanks, Indeed, old, directionally correct but understated. According to that there’s about a 27% chance of I or my partner making 100 years old. Planning for the median life expectancy for most people, particularly those reading this blog is about as simplistic as the 4% rule! Hopefully I’ll be gone long before than…:)
@TI. I’m not smashing SWRs totally. We all know they make no formal mathematical sense. What I’m railing against is too much focus on things like guard-rails, variable withdrawals, and other algorithms. Something like McClung is the worst offender.
Compared to that, there is no focus on basic assumptions used in the SWR analysis. No consideration given to the correct deflator. Which version of inflation? Why inflation rather than wage growth? Try doing a US SWR calc with US wage growth replacing CPI. Evidence suggest most people care more about relative standards of living than absolute standards, so wage growth may well be a better deflator assumption. People often seem to think CPI underestimates real inflation but that’s because they confuse cost of living adjustments with standards of living.
Similarly, no analysis of the survival biases inherent in choosing successful markets over those that failed. Why assume US or UK, rather than Japan or Austria? People like Cederburg have done this sort of analysis. Lean FIRE types ignore it because it doesn’t say what they want to hear. It’s all about data mining to skew numbers higher.
@ZXSpectrum48K — Thanks for the clarification. 🙂 I guess a cynic might say one reason many people don’t look at wage inflation is because the SWRs required would be too high?!
I think unfortunately getting old is sooner or later for most people a series of diminishments across the spectrum (health, looks, mental, social engagement) and no doubt you’re right that falling behind the general population with respect to living standards is another. Sadly, probably inevitable for a large cohort of even prepared retirees such as those who read Monevator but can’t afford to belt-and-brace for a very long and unlucky retirement.
But equally, as I imply lots else going on to worry about at 85, say. (More of an issue if you retire at 35…)
To be fair to us, @TA did point out some of the problems of the SWR in his series:
https://monevator.com/why-the-4-rule-doesnt-work/
Top-level sure but it covers most of the issues. Don’t think it mentions keeping up with wage growth though; perhaps something we should indeed add in a future update. 🙂
(I appreciate @TA goes on to McClung his own SWR, which you’re not in favour of yourself.)
All this talk of SWRs being of limited use is all well and good but they guide people on the biggest and most committing decision they will ever make.
Do I have enough money to quit a career and rely on the saved money or a far lower paying job if needed in the future? Vs spending yet another OMR wasting the best of your physical and mental health that you will have ever again.
It’s very easy in the abstract, when you are not staring at that decision because it’s a decade away, or now a decade in the past, when you have the relative safety of a chunk of DB or when you have so much money in the bank that it’s irrelevant. Less so when you on the edge of the decision.
A bit more money that will allow you to have a more extravagant lifestyle, a bit more protection against the risks that we all know exist.
Against an expected life calculator that is predicting expected life of 84 and experience of parents health declines in their early 70s. Pull the plug or stay a while…
And what will you do, as a 100 year old, with the natural decline of your entire being, less the grey matter, hopefully. The NHS already impose an age limit to routine investigations. Saving for FIRE should run parallel with high, long term body maintenance. Don’t be fooled by the exceptional few, or the amazing Captain Tom Moore.
While I can grasp the point that maybe we should be focused on wage inflation and extremely long lives, I think all that does is push the idea of (early) retirement back to only the very wealthiest. Yep maybe when all the working neighbours have a robot valet/housekeeper/cook and a self driving carcopter, retirees will be missing out because they haven’t provided to match all that wage inflation that delivers those things. On the other hand they’ll be retired and arguably less pressed for time and less in need of travel solutions.
I think it’s all valid challenge but I’m not sure anyone can fully futureproof. What if gene therapy means it is possible to live many more years but costs many £ms? Should we all keep earning to build that arbitrary massive pot for that eventuality? And what if the therapy actually costs £Bns and we miss out anyway.
Interesting chatter re SWR’s etc.
But guys, it is just a model.
In the real world, other factors may well take over. By way of an example, one important tacit assumption in the chatter above seems to be that the choice is yours to make – this may well not be the case!
@TI. Think what I really need to do is find something better to do than comment on blogs. Got another 6 months of this …
@AlCam. Exactly it’s just a toy model and not even a very good one. My own feeling is that it’s just all too long term.
@BBBobins. ” I think all that does is push the idea of (early) retirement back to only the very wealthiest. ”
Early retirement is something for the wealthiest. Or to be more precise, for those where spending is <<< assets/income. It isn't for the average person. Who exactly picks up the tab for those leanFIRE types who decide that a 5-6% SWR is fine but it fails after 20 years? They probably didn't pay in enough tax to justify being supported by the state for the next 30 years.
We have a massive issue with demograhics in this country. The Old Age dependency ratio is going to rocket between 2027 and 2042. Pensions cost in the last 20 years have risen from £80bn to £180bn and will rise to £500bn over the next 40 years. Medical costs, social care all rocketing. Plus the little stuff like defence. Not sure we can afford to have people retiring in their 40s and 50s.
We’re v. fortunate to have your input @ZXSpectrum48k (#55), & the 6 months of your non-compete period is our gain. I won’t pretend to understand all of the details (yet), especially the finer points of the maths, but led by @TI and @TA, and with the wider Monevator community, you’re helping to fill a gap in UK FIRE resources around index-linked products.
I’m feeling with ILGs that we’re maybe a little bit more than halfway along the “Too late to sell but still too early to buy” phase. If base rates have gone over 6% by early next year, and if 6.5% (or even 7%, not likely, but still quite possible) looms, then it could be getting into attractive territory.
@ZX I appreciate the pushback. And maybe you are right that FIRE as a generality isn’t sustainable, certainly not in the Lean versions that depend heavily on the state safety net or bobbing and weaving around side gigs which may disappear or devalue over time.
The difficulty is saying to an individual that they shouldn’t aspire to retirement in their 50s* when their public sector peers are doing the same on the same state ponzi scheme that underpins their safety net#. If they can make it through to state pension age self funding and assuming the NHS remains somewhat functional why should they sacrifice more healthy years in the workplace rather than benefitting from a change of pace.
Obviously it’s the same problem Sunak/Hunt face with people self selecting out of the workforce/tax base. Bad for the collective, hard to argue with for the individual.
*I chose the age carefully because it isn’t that of the extreme end of the movement and it seems to be an age when people are less likely to “retire” into a portfolio of alternate income generating gigs i.e. not really retire.
#the issue of safety net applies to all. We all know that the stats show that very few people are reaching 50 financially independent and that many DC pensioners fall far short of amounts that will enable them to retire significantly before state pension age. Yet from the perspective of someone who has saved to provide for retirement rather than enjoyed immediate fruits like luxury holidays, fancy cars, bigger homes it would be somewhat galling to fail to enjoy that different lifestyle choice, even if one can’t be 100% hedged against every eventuality.
@Seeking Fire. 20 % risk of one of you reaching 100 ? Guess that’s from the cohort tables which embody extrapolation. You can’t cover all bases and personally I would accept that risk and base my plan on something less onerous.
Having read all about SWRs, McClung, guard rails and the rest I concluded it was a bit of typical US over analytics ( see any US based Website for any hobbyist equipment) and I suspect it’s a rather forlorn attempt to attain certainty in an inherently uncertain existence. Better than nothing I suppose but know when to draw the line.
@Mr. Optimistic. ONS indicates probability is 27%. That’s just by asking the question if you are male / female & age. Filter in other questions and that probability could rise (or lower) a touch. That’s a high enough probability for me. Were I to pull the plug now that’s therefore a 57 year period of time, which is long enough for me to think SWR’s are pretty meaningless. I’m more inclined to withdraw the natural yield from a portfolio of assets tilted towards equities whilst noting that such natural yield will incur substantial fluctuations.
@various
My apologies, but AFAICT the latest version of the ONS LE is at:
https://www.ons.gov.uk/peoplepopulationandcommunity/healthandsocialcare/healthandlifeexpectancies/articles/lifeexpectancycalculator/2019-06-07
@SF:
Re: “I’m more inclined to withdraw the …”
Do you see yourself using that approach any time soon? I ask as I thought you may have been exploring pastures new.
@SF. Interesting. Using this link
https://www.ons.gov.uk/peoplepopulationandcommunity/birthsdeathsandmarriages/lifeexpectancies/bulletins/pastandprojecteddatafromtheperiodandcohortlifetables/2020baseduk1981to2070
I can’t see a number greater than 5.5% for males in the tables yet the blurb mutters about 13.6%.
I have adjusted my wife’s ISA on a similar natural yield basis. It will do for now but there are a couple of obvious issues, aside from the total return argument.
First, our spending will be front loaded, we will get better opportunities to enjoy the savings in the next 10 years, less so after that.
Second, the savings are there to be spent. That’s why we saved. Effectively splitting the portfolio into capital and interest elements ( ie spend the yield but don’t touch the principal) means there will be significant amounts left when the lights go out, which could have been spent for a more comfortable retirement.
Klement on Investing gives a take today on why he thinks that long run rates may be low in the future in developed markets even if inflation might not be. My own take is if he’s right then low long term rates with negative real rates could favour long dated linkers, at least in international DM inflation linked bonds, if not in UK ILGs. But who knows…? Link below:
https://klementoninvesting.substack.com/?utm_source=substack&utm_medium=web&utm_campaign=substack_profile