≡ Menu

Weekend reading: What strategy is best for retirement portfolios?

Weekend reading

Good reads from around the Web.

Last week’s Weekend Reading was about fund fees, but the comments became a – um – spirited discussion about currency risk in post-retirement portfolios.

It was an argument caused by different perspectives as much as about the facts.

A similar thing often happens when we talk about investing risk.

Often when people say one investment is less or more risky than another, what they’re really describing is transforming risk from kind into another.

In the currency debate, I noted the shortened time horizons of a retired person and the need to spend your pot in your domestic currency to meet your day-to-day living costs made currency risk more important at 65, say, than when you’re saving into a pension at 30 and can take a sanguine long-term view.

I suggested a greater allocation (note: not 100% or anything like it) to your home stock market might therefore make sense, as might hedging a portion of your overseas exposure (again, not all, just a portion to dampen the swings).

The other side bridled at the consequent higher costs – even if those costs were just a hypothetical 0.25% extra annual charge applied to just a bit of the portfolio.

The 0.25% cost was a nailed-on expense to be paid every year of retirement, they pointed out, whereas the impact of currency risk was unknown. Better to risk a bigger hit to your retirement income from currency swings than to guarantee a modest hit by paying that charge every year.

For richer or poorer

How often do we get into similar disagreements when debating finances?

(Okay, not very often if you’re a normal person into football or Facebook – I mean us personal finance nerds!)

Paying down your mortgage versus investing, whether or not you should buy an annuity in retirement or to stay in shares and bonds – they’re not really arguments with the “right” answer, because they depend so much on your risk tolerance, your circumstances, even your philosophy of life.

Sticking with the retirement theme, retirement researcher Wade Pfau posed one of these eternal questions directly this week in his article: Which is better for retirement, insurance or investments?

Pfau wrote:

There are two fundamentally different philosophies for retirement income planning, which I call probability-based and safety-first.

Those philosophies diverge on the critical issue of where an individual is best served to place their trust: in the risk/reward trade-offs of an equity portfolio, or on the contractual guarantee of insurance products.

The fundamental question is about the type of strategy that can best meet the retirement income challenge for how to combine retirement income tools to meet goals and manage risks.

Those favoring investments rely on the notion that the market will eventually provide favorable returns for most retirees […] There is also a general unease about relying on the long-term prospects of insurance companies or bond issuers to meet contractual obligations.

Perhaps not fully understanding the implications of how sequence-of-returns risk differs from market risk, the belief is that in the rare event that the performance for the equity portfolio does not materialize, it would imply an economic catastrophe that would sink insurance companies as well.

Meanwhile, those favoring insurance believe that contractual guarantees are reliable and that an over-reliance on the assumption that favorable market returns will eventually arrive is emotionally overwhelming and dangerous for retirees […]

Even if there is a low probability of portfolio depletion, each retiree gets only one opportunity for a successful retirement.

This is the annuity versus income-portfolio-in-drawdown debate taken back to first principles.

At different times one approach might have an edge – when annuity rates are low, say, or stock markets scarily high.

But ultimately it’s a matter of philosophy and risk.

For better or worse

Coincidentally, Michael Kitces also published a really huge article comparing a whole bunch of different retirement strategies.

Again the same issue comes up:

What seems like a relatively simple question – which retirement income strategy is the best – is actually remarkably difficult to determine.

Because as it turns out, which is “best” depends heavily on how you measure what “best” really means in the first place.

This is a really in-depth article with some excellent graphs, and while it’s written from a US perspective there’s a lot to think about wherever you’re retiring.

Kitces also produced a table showing how the various strategies perform very differently across a range of outcomes:

One retiree's pleasure is another's poison.

One retiree’s pleasure is another’s poison.

Now, if you’re having a debate with someone who is most interested in (potentially) maximizing their final wealth, putting forward a strategy where at least some modest success is the top priority will cause some friction – unless maybe you both take a look at this table before you start your argument!

Retirement solved – and sold

You can also see from the table how the financial industry is able to spin the same problem into half-a-dozen different products for sale.

And that’s fine, if they’re providing different solutions for different needs.

But it can also be a misleading spin that says their favoured solution gets rid of the Worst outcome of some other hateful strategy – without pointing out the downsides of their own approach.

Remember, there are no free lunches in investing. Especially when you’re paying!

(Note: If you want to debate currency risk, could you please add your comments to last week’s thread. Obviously general comments on retirement strategies – or overall investing philosophy – are very welcome here).

From the blogs

Making good use of the things that we find…

Passive investing

Active investing

Other articles

Product of the week: The Telegraph reckons the savings you can make from switching your energy provider are the highest they’ve ever been. There are various tools embedded in the article to help you find the best deal.

Mainstream media money

Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber of that site.1

Passive investing

  • Bond investors turn passive aggressive [Search result]FT
  • Swedroe: Passive investing without indexes [Technical]ETF.com

Active investing

A word from a broker

Other stuff worth reading

  • What would Brexit mean for me and my money? [Search result]FT
  • What retirees wish they’d known beforehand – ThisIsMoney
  • Can these celebrities afford to retire? – Telegraph
  • Merryn: Tax the living, and end IHT madness [Search result]FT
  • Will you pay extra stamp duty for the granny flat? – Guardian
  • Graduates from richer families earn more… – Bloomberg
  • …also, where the poor live longest [US but interesting]NY Times

Book of the week: Tech site The Verge describes Amazon’s new Kindle Oasis as “a cork in a desert of screw caps”, saying “consider that the whole reason for dedicated Kindle e-readers to exist is to recreate the reading experience with digital convenience for book lovers, and the Oasis starts to make a lot more sense.”

Like these links? Subscribe to get them every week!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []
{ 66 comments… add one }
  • 1 FI Warrior April 16, 2016, 11:14 am

    Yup, agreed, it’s quite tricky.

    I suspect that another issue muddying the waters with people’s perceptions of the ‘right’ strategy is whether they even want to run down their pension capital in retirement at all. If they want and are able to gift their progeny for example the ability to out-compete their own generation from birth, then that could make the strategy they pick look very different.

    Overall though, I think that as most people are amateurs, they should probably hedge their bets by dividing their pension total into several parts and using a different strategy for each, commensurate with their aims and risk tolerance.

    I think I’ll do that when the time comes, on the basis that a non-perfect solution is better than doing nothing out of fear. that would be similar to the reasoning for investing in a passive index fund vs leaving your savings to devalue in a bank savings account while you dither. 🙂

  • 2 ermine April 16, 2016, 12:29 pm

    > they even want to run down their pension capital in retirement at all.

    I don’t have children, so I would classically want to ground my pension savings most likely on the death of my wife (I am older than her).

    But running down your pension capital is really, really, hard to do in practice – well I found it so. Maybe if you are a brain on a stick, but even analytically knowing I should have been spending more I found it hard to bring myself to do it. And I find it really hard to live the 4% SWR assumption, to the extent that I shifted myself from the investment option to a proxy of the annuity option as soon as Osborne gave me the opportunity.

    But maybe I am unusually fearful of the statistic nature of the SWR and/or my investing acumen.

  • 3 Neverland April 16, 2016, 12:56 pm

    I just think the best defence against adversity is simply having more wealth

    The simplest way to have more wealth is have a higher sustainable annual increase in wealth each year. For most people this is mainly job earnings or business profits

    Once you retire that avenue is largely closed, in fact it’s likely that your wealth will decrease each year in real terms

    Then your primary weapon for minimising how much your wealth decreases each year must be cost control

    If you are living off capital in retirement you have three roughly equal baskets of costs to control:

    – investment costs
    – taxes
    – living expenses

    The lower your wealth level the more of your costs will be concentrated on living expenses

    On the other hand if you are lucky enough to have millions and a lot of it is invested with a private client wealth Manager charging 2%+ annually for managing your money your largest single annual cost could well be investment costs

  • 4 Neverland April 16, 2016, 1:08 pm

    I imagine it is very difficult to switch from the mindset of my wealth will go up each year through conscious effort to my wealth will go down each year

    From the anecdotal evidence of the many personal finance blogs most people in this little community have been confirmed savers since their young childhoods

  • 5 dearieme April 16, 2016, 3:45 pm

    For all except the seriously rich, and the dole-bludging classes, a major worry in retirement is how to fund “care”. The big deal, at least for us, will be how to fund care for the first of us to need it; after all the second one can sell the house to pay. So, suppose I have a stroke and need care; my wife still needs a house to live in. What then? The obvious answer is to buy insurance, but I’ve read that the various firms that tried selling such insurance couldn’t make a living from it.

    All suggestions welcome.

  • 6 dearieme April 16, 2016, 4:00 pm

    “I would stick with the view of increasing bond weighting as getting closer to retirement though.” Even at present when bond yields are so desperately low?

  • 7 ermine April 16, 2016, 6:20 pm

    @dearieme other people seem to have made insurance work for them. I guess if there’s a big age gap perhaps this isn’t so good? And of course there is an inherent dilemma for people wanting to featherbed their kids.

    Me, I’m hoping that the rules on assisted dying get sorted by that time for me. When you gotta go you gotta go, there’s no point in tying up resources needlessly for a rotten quality of life. Sheltered housing yes, care home not so much. But I appreciate different people feel otherwise. I may too when/if the time comes.

  • 8 gadgetmind April 16, 2016, 7:07 pm

    My plans don’t involve preserving capital as daughter has been given a good start (mainly via education and skillful/lucky management of her investments) but now it’s over to her.

    However, the thought of the tax man getting yet more of it for HMG to squander is rather unpleasant, so maybe my views will change as I hit 60s, 70s, 80s …

  • 9 Neverland April 16, 2016, 7:23 pm
  • 10 dearieme April 16, 2016, 7:56 pm

    Thanks, stoat, v handy. I’ll have to enquire whether any of the three named insurers offers the insurance I’d really want, namely to cover the first of us to need “care” and to expire unused if the first instead ups and dies without need for care. Again, my logic is that the second can just use the value of the house.

    This insurance ought, I’d think, to be much cheaper than a policy that covers both of us in a conventional way.

  • 11 John B April 16, 2016, 8:26 pm

    When considering monte carlo predictions, people often forget the likely outcome is the combination of investment return at a certain age and the chance you get there (and indeed whether, because of Alzheimers, you can even consider it to be ‘you’ then)

    A plan that has a 20% chance of running out of money at 90, but with a 10% chance of living to that age, will only occur 2% of the time.

    Also, is the utility of money equal at all ages? Are the memories of £1000 spent on a cruise at 60 worth more than a week’s nursing care at 90? £500 upgrading a flight to business class can pay half a years heating bill. As generally the luxury bought by money is not a linear scale, cutting back as a investment scenario plays out is probably easier to do in practice than the numbers suggest.

  • 12 ermine April 16, 2016, 11:44 pm

    @Neverland hopefully the future onshored equivalent of Dignitas would do, a sentient being should be able to choose their time and place 😉

    @dearieme the impression I got was that the insurers were only prepared to offer the insurance/care annuity at the point of entering care, presumably when they had the clearest viewpoint on the risk profile. They don’t insure against the generalised risk that you may need to enter a care home

    That should still manage/quantify the first care requirement, although the fellow from S London took out a care annuity for both because they both entered the care home at the same time.

    The percentage in care seems low – even at the 85+ it is less than one in five of the age cohort

  • 13 dearieme April 17, 2016, 1:01 am

    “the insurers were only prepared to offer the insurance/care annuity at the point of entering care”: ah, so that’s what I know as an “immediate needs annuity”. No, what I’d want (and what I gather is available in the US) is insurance taken out in advance. Maybe my source, whatever it was, was right: attempts to sell such insurance in the UK have flopped.

  • 14 ermine April 17, 2016, 9:32 am

    The ABI seems to indicate pre-funded care plans are no longer available. The Society of Later Life Advisers may be of interest at some point. There seem to be some specialist products aimed at this market which aren’t part of the normal investing/pension discourse.

  • 15 Neverland April 17, 2016, 10:22 am


    I’m sympathetic with your overall point but if you build in a severe market crash in years 1-3 in your plan most retirements based on equity returns are knackered and it’s off to the co-op stacking shelves for you and the misses

    The uk market is a slightly bum steer but it was 7000 at the end of 1999 and us 6300 now

    Sequence of returns risk is a real thing for DC pension holders

  • 16 The Investor April 17, 2016, 12:19 pm

    The uk market is a slightly bum steer but it was 7000 at the end of 1999 and is 6300 now.

    Sequence of returns risk is a real thing for DC pension holders.

    I agree sequence of returns risk is real, but that’s why one does something to mitigate it in advance.

    Sensibly diversified near-retirees in 1999 should have had at least 50% of their portfolios in UK government bonds (yielding about 6%) and cash (yielding about the same).

    Yet again, an argument is being had about a situation (all-in equities) that sensible investors shouldn’t find themselves in.

    Also, as you allude with the bum steer comment, looking at the FTSE 100 alone is also silly/misleading (a) because of the very argument we had on the currency debate risk — that plenty of assets would be overseas (we were just debating how much in that one). The S&P 500 for example is up around 50% since 2000.

    And (b) dividends, which are meaningful, especially in the UK and over 15 years, and which aren’t reflected at all in the FTSE 100 price return.

  • 17 Gregory April 17, 2016, 2:10 pm

    I agree: “The Big Picture is now the most popular finance blog in the US; Monevator is top in the UK” http://www.evidenceinvestor.co.uk/why-do-we-bother/

  • 18 dearieme April 17, 2016, 3:37 pm

    Thanks again, ermine.

  • 19 magneto April 17, 2016, 4:23 pm

    If assets are to be drawn-down in retirement, then one of the better plans was stumbled across, in Frank Armstong’s book ‘The Informed Investor’.

    It is a beguilingly simple two bucket approach.
    Bucket 1 : 5 years (better 7 years) of income needs in cash and/or short term bonds.
    Bucket 2 : Global Stocks

    Designed to prevent selling stocks at distressed prices (£ cost ravaging) and maximising reasonable exposure to the long term outperformance of stocks.

    When stocks are hitting a rough patch the retiree draws from Bucket 1.
    When stocks are surging the retiree draws income from stocks and replenishes Bucket 1.

    Very few of the other retirement plans seem to offer as satisfactory a solution to the Sequence of Returns problem.

    This may be an over-simplification so do read the book, which is well worth reading on all aspects of portfolio construction, etc.

  • 20 coyrls April 17, 2016, 6:37 pm

    I’m living through this now as I retired just over a year ago at 59 with no DB pension. I think what a lot of these articles miss is that you don’t have to work with a single strategy from the start of retirement. In my case I have plan to adopt different strategies at different points in retirement and at each point I will adjust my proposed strategy based on where I am financially (both in terms of assets and requirements) at that point. Currently I am maximising tax savings by living off my tax free lump sum that I’ve put in a “ladder” of cash term accounts. I will take what I can tax free, out of my SIPP each year and put it my ISA. When this phase ends, I will take a view on what to do next but currently I plan to extend my tax savings by taking money from my ISA and postponing my state pension. At the end of this phase, I will take my (increased) state pension, take a view of what additional income I need and quite possibly take an annuity from part of my SIPP. What remains in my SIPP will then be used for “top ups” and to provide a legacy.

  • 21 ermine April 17, 2016, 11:42 pm


    > When stocks are hitting a rough patch

    Don’t get me wrong, I am a market timer, but doesn’t the rub lie in the definition of rough patch?

    10% down – pah – there’s another 20% to go

    30% down – oh shit

    60% down, well basically stick your head between your knees etc and kiss it goodbye etc

    It’s just not that easy, unless you have a time machine and are looking back to inform your younger self

  • 22 Comet April 18, 2016, 12:39 am

    My current thinking is for a combination of cash, investment trusts,
    index funds, and eventually an annuity purchase with
    one of my DC pensions.

    The only bonds I have are in my Lifestrategy funds, which
    I will lifestyle to increase the bond allocation as I get older.

  • 23 dearieme April 18, 2016, 12:54 am

    @coyrls: are you contributing £2880 p.a. to your SIPP? Are you using the loss-leader high interest rates on offer at some current accounts and monthly savers? I suspect that it’s wise to exploit such opportunities while they exist. Exploit enough of them and you will have conjured up useful amounts of profit at little risk.

  • 24 magneto April 18, 2016, 10:01 am


    Frank Armstrong is a financial planner with ongoing responsibliity for the financial wellbeing of his clients some of whom are in retirement. He is not happy with standard the say 60/40 or 40/60 type approach in retirement.
    Do read the book!

    Being a market timer ermine, you will probably be using valuations amongst your techniques, which is a valid approach. You would then have a good idea whether stocks were underpriced or overpriced (putting macro EMH to one side) and therefore be at an advantage.

    Perhaps an unsophisticated investor would sell stocks when only at all time highs? Just an idea!

    Note : It has been put forward that stocks spend one third of time at :-
    1. All Time Highs
    2. New Lows
    3. Recovering

    Difficult to accept for FTSE100, but more probable for Global.

    All Best

  • 25 Neverland April 18, 2016, 10:47 am


    At the risk of being blunt how much roughly in income producing assets (excluding your home) did you have at retirement?

    Other examples of retirement I’m looking at at the moment are:

    Gadgetmind: £1.7m at age 55

    Retirement Investing Today: £1m at age 44

  • 26 John B April 18, 2016, 11:51 am

    RITs £1m is based on renting, including house equity seems better.

    My models suggest £1.1m total is enough at 48, but I still carry on working!

  • 27 coyrls April 18, 2016, 12:23 pm

    @dearieme Thanks, yes I am doing the current accounts / monthly savers thing but I won’t be making pension contributions. The reason I crystallised the whole lot, rather than phasing it to give me a tax free sum each year, was to avoid LTA issues. I will be applying for FP 2016 to give myself more growth headroom to 75 and so won’t be able to take advantage of making further contributions.

  • 28 coyrls April 18, 2016, 12:28 pm

    @Neverland roughly £1M. (I hope I don’t regret giving numbers, my instinct is not to!).

  • 29 Neverland April 18, 2016, 4:55 pm

    @JohnB, Coyrls

    Thanks thats pretty interesting

    I’ve tended to calculate larger numbers myself but we’re probably quite cautious

  • 30 Naeclue April 18, 2016, 5:14 pm

    @magneto said

    “When stocks are hitting a rough patch the retiree draws from Bucket 1.
    When stocks are surging the retiree draws income from stocks and replenishes Bucket 1.”

    “Surging” strikes me as a little vague. Precisely what is the trigger for selling stocks?

  • 31 magneto April 18, 2016, 7:06 pm

    ““Surging” strikes me as a little vague. Precisely what is the trigger for selling stocks?”

    See response 24 above to ermine, which was an effort to answer these sort of questions.

    “Surging” my word. Without digging out the book and quoting para by para cannot give the author’s precise wording.

    Of the many complex calculations done by the academics to address the retirement investing problem with Monte Carlo simulations, etc, when of course the whole game changes for the investor; Armstrong who is on the front line protecting client’s assets day to day, seems to have adopted a way to sidestep the Sequence of Return Risk. He is of course not alone in using such simple bucket strategies in retirement!
    Suggest it is worthy of our consideration.

    If pushed to be allowed to hold only two shortish books on investing, at present (will change over time) my choices would be :-

    1. ‘The Informed Investor’ by Frank Armstrong.
    2. ‘A Wealth of Common Sense’ by Ben Carlson.

    Both then highly recommended as straightforward reading, although neither as I recall, address this investor’s favoured valuation driven methods. Very much with ermine on that one!

    All Best

  • 32 aspirin April 18, 2016, 8:40 pm


    55, 1.5m in my case, spookily close to the others. I think the point is that this is the area where one is anxious, but only very mildly anxious, as to whether enough is enough. Given another 10 years or another 1m I would be too confident of not outliving my assets to have done the sort of googling which led me to this blog in the first place.

    I occasionally comment here under another name but don’t want to disclose the above information under that name.

    Now you show us yours: what is your target age/fund size?

  • 33 Naeclue April 18, 2016, 11:18 pm

    @magneto, I currently run a 60/40 portfolio, rebalancing/drawing down annually. Following @TI’s comments pointing out short term currency risk and on reading the excellent Vanguard paper on their new target dated funds I have decided I will revisit this and quite possibly reduce my allocation to equities and/or apply some currency hedging.

    I am open minded on using some other rebalancing strategy than simple annual rebalancing, but whatever it is must have clear cut, simple rules and most importantly have some credible evidence to support its viability over basic annual rebalancing. I have seen many schemes down the years which often look great in back test but then collapse out of sample. From what I have read, value based triggers do not have a great track record, except in back testing!

    Anecdotaly, if I had paid any attention to p/e, p/b or CAPE 3 years ago I would have sold out of one of my best performing investments 3 years too early – US equities.

  • 34 Neverland April 19, 2016, 8:31 am


    My current working assumption is that c. £3m in today’s money plus a house in early 50s is a bullet proof amount for a couple to be sure of a comfortable retirement

    I’m very conscious of the effects of the fall in value of financial assets in the first five years of retirement, given current record low interest rates etc.

    People tend to retire in bull markets

    Obviously thats a big number, hence the interest in why other people’s numbers are lower

  • 35 John B April 19, 2016, 9:18 am

    £3m+house = what level of spending to be comfortable?

    As everyone must have a different view of comfortable, perhaps a better intercomparison would be the multiplier you think you need. RIT was £1m to give £37k, so 27 or 3.7% (presumably not a SWR, as it includes capital drawdown). Mine might be £1.1m and 35k =31 or 3.2%

    What’s your multiplier?

  • 36 coyrls April 19, 2016, 9:22 am

    Well the other side of the equation is how much you need to live on. £3M over 40 years would give you an income of £75,000 a year if you just kept it all as cash. If you put it into investments to keep pace with inflation you would have an inflation protected £75,000 a year plus some state pension. I don’t think keeping pace with inflation would be a huge investment challenge and certainly wouldn’t require a high risk, volatile portfolio. I don’t need £75,000 a year for my life style.

  • 37 Neverland April 19, 2016, 1:36 pm

    @John B, Coyrls

    I am looking at a safe withdrawal rate of about 2% on that sum and assuming some tax will get deducted

    A lot of the reason for the size is that a simultaneous drop in value or income from bonds or equities in the early years of retirement is survivable

  • 38 coyrls April 19, 2016, 3:19 pm


    You probably won’t be surprised (given my funds) to learn that I think you are being over cautious. You need to factor in your PCLS which will be tax free, income you can take from an ISA, which will also be tax free (if you are targeting £3M it can’t all be in a pension fund) and the state pension. In addition there are many strategies other than a constant withdrawal rate that can help protect against sequence of returns risk. If you are very risk averse you could look at an annuity at least to cover your essential expenditure. Finally if it goes badly wrong you have a property that you could downsize.

    If you’re happy at work and have no desire to retire, then none of this really matters but you need to make sure that at some point you give yourself the opportunity to enjoy spending your money.

  • 39 FI Warrior April 19, 2016, 4:26 pm

    An acquaintance really shocked me a couple of years ago by retiring early at 50 on a really tight margin compared to what you guys are worrying about.

    He moved to rent in an awesome place in Portugal, living only off the ~£13K annual rental allowance from his (fully paid off 3-bed house) in a good part of SE England. That’s it. Seriously. No other significant investments or income streams !

    He’s in perfect health, lives in a villa with a pool now, has a nice vehicle, and lives an active life including entertainment costs, yet says he battles to spend over half of this amount because everything there’s just so cheap. He has no kids and says the government healthcare available to Brits in the Euro-med countries (he travels along the coast too) are often better than here.

    That would feel like chancing it way too fine for me as I’m more cautious, but it was fascinating to know how it would play out because his situation is a possible option for a lot of people in the UK.

    I can only assume there isn’t an an avalanche of people similarly going to retire early in Med countries because they don’t know the maths actually does works. Obviously others will have factors ruling it out though, like not having a fully paid off home bringing in enough rent, most have kids or parents to look after etc., etc. It’ll be interesting to see if Brexit wrecks his dream.

  • 40 Vanguardfan April 19, 2016, 7:05 pm

    I imagine that most people, if they think about it at all, decide on their target based on what is achievable for them.

    I agree that comparing target fund amounts isn’t meaningful unless you have some idea of the target income. % withdrawal rates are more helpful. But hanging out on the Bogleheads forums soon makes you realise that basically you can choose between uber cautious (2% withdrawal), rather cautious (3%) or probably ok (4%). Of course it depends how much you have, whether you can afford to be über cautious! TIs links (especially Kitces) are a reminder, from those who have experience of a sample size greater than one, that over caution can prevent people enjoying their retirement.

    Before I had a portfolio to worry about, my retirement ‘strategy’ consisted of paying as much as I could into my DB pension, in the vague hope that by the time I was done with work, or it was done with me, it would be ‘enough’ – and beyond that I didn’t worry about it. It seems the more you have the more anxious you become 🙂

  • 41 Vanguardfan April 19, 2016, 7:09 pm

    Btw if I had 3m in investable assets and no DB pensions, I’d annuitise maybe half of it and not worry too much about the rest. I’d have a low-ish allocation to equities – why take too much risk when you’ve won the game?

  • 42 John B April 19, 2016, 8:12 pm

    Rather than have one withdrawal rate, why not have 2, a ‘worried’ rate and a ‘smug’ one. I know I want to have lots of foreign travel when I retire, but there is also a world of books at the local library. Provided you have covered the former, then the excess can be enjoyed, with smoothing on the ‘7 fat years, 7 lean years’ principle. After all, the state will catch you provided you don’t appeared to have squandered your money (for care home costs they are on the lookout for that, but prosecutions seem very rare).

    With £3m I’d be well into smug…

  • 43 Vanguardfan April 20, 2016, 7:55 am

    Btw, the subscriptions facility isn’t working for me – no email alerts for new comments on the last few posts…anyone else with this problem?

  • 44 coyrls April 20, 2016, 12:27 pm

    Yes, I have the same problem (not getting email alerts).

  • 45 The Investor April 20, 2016, 1:42 pm

    RE: Email comments, hmm, I’ve had various email problems over the past few weeks but this is a new one (except on broker’s table comments, where it’s a known issue).

    To clarify, when you say last few “posts” do you mean you’ve not had emails about comments on *this* post (which is what we bloggers call articles), or do you mean on this article, and you’ve not had emails for the last few *comments*.


  • 46 Vanguardfan April 20, 2016, 2:00 pm

    Hi TI, I mean I’ve ‘subscribed’ to the last three blogposts but not received ANY email alerts for new comments. Took a while to notice…
    (I’d still like to be able to subscribe for comments without having to make a comment, but I’ll settle for fixing this).

  • 47 Vanguardfan April 20, 2016, 2:02 pm

    Blogpost = article 🙂

  • 48 The Investor April 20, 2016, 2:15 pm

    @Vanguardfan — Okay, thanks — I’m not sure what’s happened sadly, but that information might help me find out.

  • 49 Edward April 20, 2016, 4:42 pm

    I don’t understand why some people exclude their house value from these retirement portfolio estimations, while other people specifically state they have that asset. Surely it makes a MASSIVE difference. If I am 60 and might live for 30 years and own my own home, that’s 30 years of rent I don’t need to pay. However if I am a renter, I will need say another £300,000 at least (maybe more depending on where I live??!) to generate an income to pay my rent.

    Is there a standard rule of thumb about this? 🙂

  • 50 dearieme April 21, 2016, 12:05 am

    @Edward: bonkers, isn’t it? Perhaps if a radical Chancellor were to restore the old Schedule A tax on imputed rent, people would be more alert to the value of their house. Hang on; it’s probably impossible that Britons could be any more alert to house prices.

  • 51 The Investor April 21, 2016, 9:37 am

    @Edward — I couldn’t agree more. However for reasons I’ve never understood, for some people the words “a house is a home” is a magic incantation that means it becomes immune to the normal rules and considerations of other assets/liabilities — even ones that will consume a huge amount of their annual income and in many cases eventually be the most valuable thing they own.

    This article might be of interest to you as a fellow traveler (though not particularly relevant to the subject at hand I concede!)


  • 52 John B April 21, 2016, 10:08 am

    Where property is relevant to retirement portfolios is how to make use of such a huge illiquid asset. My retirement model has 2 sales planned, from house with big garden (mmmm, plants) to flat to nursing home, as that’s the rational approach. But in reality the elderly stay in their houses well beyond the time they can maintain them, by which time the trauma of moving is too offputting, so their relations wait until the the nursing bills mount before trying to sell off a dilapidated house.

    How do you value a property that will be worth a lot at 70 when you can do DIY, but a burden at 85 when you can’t face getting tradesmen in for repairs.

    How do you exploit this asset? Equity release schemes are still an expensive niche market, and build up debt just as the property is falling in value, and you are beholden to market timing when you finally need to sell. Fire v London has used margin loans to allow him to use house equity in the markets, but he is an extremely sophisticated investor. Converting a wreck into a rental is expensive both in money and stress, and the returns are poor for anyone who’s age means that capital growth is of little use.

    Selling early and renting yourself would give more control, except who wants 6 month tenancies in their 80s.

    So, what do readers plan to do when they are 85 and house rich but cash poor?

  • 53 The Investor April 21, 2016, 10:12 am

    @John B — Can I ask, did you get an email alerting you to my recent comment (as I notice you’ve replied quickly) because you’ve subscribed to comments? As you’ll notice above, I’m trying to figure out if this system is broken or just glitching.

    Regarding the property issue, the point is — with respect to @Edward’s comment — as a homeowner you are exploiting the asset by living in it and not paying rent! If you weren’t, you’d have to find the money for rent, which for many would be substantial.

  • 54 coyrls April 21, 2016, 11:41 am

    The way I see it is that there are two critical numbers: a) the income you want to receive in retirement and b) the size of the “pot” that you think you need to provide a). Housing is going to affect both numbers. The effect on a) is pretty obvious, if you own a house outright then you only have to factor in maintenance but if you are renting, you will need to include rental costs in a).

    But your housing situation will also affect b). You can see from the discussion above that people have different views on how big b) needs to be in order to generate a given income. Factors that need to be taken into account with b) include the level of contingency that needs to be included in the total. I would say that your housing situation will affect this level of contingency. If you own your house outright you may well consider that the option of downsizing will reduce the contingency requirement that needs to be included in b), as your house already provides some contingency. If you are renting you may decide that you need a greater contingency in b) to cover, for example, rent increasing faster than inflation.

    So, while there may not be a “standard rule of thumb”, your housing situation should be feeding into your calculations both of the income that you require in retirement and the size of the “pot” that you need to provide that income.

  • 55 coyrls April 21, 2016, 11:44 am

    BTW I’m still not getting notification of comments even though above the “Submit” button it says: “You are subscribed to this entry.”

  • 56 The Investor April 21, 2016, 11:54 am

    @coryls — Thanks for the update. Working on it and indeed might just have solved it. (Please let me know if you get this one on email, if you have a moment! 🙂 )

  • 57 coyrls April 21, 2016, 11:57 am

    Yes, got the email!

  • 58 John B April 21, 2016, 12:10 pm

    The saved rental cost of house ownership is like SWR, OK for the long term, but of little use planning the last 5 years of life. One approach, favoured by the Tories IHT changes, is to plan to leave your house as a tax free inheritance and just spend cash and equity, but its much harder if you wish to die with nothing, as with house prices are 10*local wages, thats 15*local expenditure. At least the equity market, if flawed, gives you a feel for the capital drawdown rate for a pot, I suppose it could be applied to house equity and compared with equity release rates, but I worry you are just comparing high cost schemes with each other, as companies don’t take on risk without a hefty premium

    (didn’t ask for emails BTW)

  • 59 coyrls April 21, 2016, 12:15 pm

    How are you going to know whan you’ve reached “the last 5 years of life”?

  • 60 vanguardfan April 21, 2016, 12:55 pm

    Yes service has been resumed – thanks

  • 61 vanguardfan April 21, 2016, 1:02 pm

    Yes its all too full of unknowns, in some respects the easy bit is planning for income replacement for a fit and healthy lifestyle just after leaving work. The hard bit is exactly that ‘last 5 years of life’ which you can’t plan in either its timing or nature. Will you require years of expensive care and support, at home or in residential care? Or will the end come swiftly?
    Dealing with downsizing is difficult too. In my family no one has successfully downsized – while you can, you don’t want to, and when you need to, you can’t.

  • 62 gadgetmind April 21, 2016, 1:27 pm

    I’m trying to achieve £5k pcm after tax in retirement. My spreadsheet (which fully models for tax) suggests this will be a 4.3% drawdown from the total pot between retirement and state pension, and 3.3% afterwards. I’m not too happy with those percentages, but we can always cut back or downsize.

    BTW, my £1.7m is now looking closer to £1.6m plus a Tesla Model S P90D. 🙂

  • 63 John B April 21, 2016, 2:22 pm

    I just added a %wealth change column to my model, and have -0.8 to -1.3% annual changes to absolute wealth until 85, when I double the spending for care fees and the figure rises from -5 to -13% p/a. Thats with a 3% SWR covering most of the income early on.

  • 64 The Investor April 21, 2016, 2:42 pm

    Great — thanks for flagging up the glitch!

  • 65 The Rhino April 21, 2016, 3:09 pm

    @ GM – jesus! you could choke a dozen donkies on that, what do you do when your not funding pension pots, gadget, finance revolutions?

  • 66 gadgetmind April 21, 2016, 3:23 pm

    Well, I did start my first PEP at age 24 (same age was when bought first house) so I’ve been at it for a wee while now. After nearly three decades, dividends, diversity, rebalancing, and such like do all do their thing. I must admit that for about five years I have sometimes looked at the numbers in my spreadsheets and wondered where it all came from!

    Of course, a couple with middle of the road jobs but with final salary pensions could match our income (all from DC) fairly easily.

Leave a Comment