ARF projections

Gordon Gekko

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The latest CSO life tables show life expectancy at 65 is just under 18 for men and just under 21 for women, or an average of about 19 years.

You can probably adjust up a year or two as someone with a typical pension fund will live longer, rich people generally do.

Your time horizon at 65 is not likely to be a quarter of a century though, particularly for men.



An Irish man with a 60-year life expectancy is currently aged 19.

I have a feeling very few of us posting here are that young :)
Those stats are slightly misleading. Life expectancy stats are from birth and take account of early death. The life expectancy of someone who has reached 65 is not the same as general life expectancy. And in the case of an ARF, we’re generally talking about the life expectancy of two people, one of whom is female. That’s the key point with an ARF. See the link below. There is a 51% chance that, at age 65, at least one spouse will live at least another 24 years.

 

NoRegretsCoyote

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Those stats are slightly misleading. Life expectancy stats are from birth and take account of early death. The life expectancy of someone who has reached 65 is not the same as general life expectancy.
I know. That's why I clearly referenced life expectancy at 65, not life expectancy at birth minus 65.


That’s the key point with an ARF. See the link below. There is a 51% chance that, at age 65, at least one spouse will live at least another 24 years.
That's a different argument. As you add member to a group, the probability that one member will have a long life increases. You clearly referenced a typical retiree (singular).
 

Sarenco

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A typical retiree at at 65 probably has a least a 25 year time horizon.
If you start drawing down your savings at 65 at a rate of, say, 4% per annum, adjusted for inflation, how much of the portfolio do you think will remain invested for anything like 25 years?
 

Gordon Gekko

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If you start drawing down your savings at 65 at a rate of, say, 4% per annum, adjusted for inflation, how much of the portfolio do you think will remain invested for anything like 25 years?
That depends how it’s invested and how returns look early on.

Take Colm...he reckons his will always be invested. i.e. may never dip below par
 

Gordon Gekko

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I know. That's why I clearly referenced life expectancy at 65, not life expectancy at birth minus 65.




That's a different argument. As you add member to a group, the probability that one member will have a long life increases. You clearly referenced a typical retiree (singular).
No I didn’t. You just missed the nuance around the fact that the typical retiree is married or in a relationship. With the ARF, your investment time horizon is not just your own life expectancy given its treatment on death; it’s one of the key aspects of an ARF and it’s why concepts such as ‘lifestyling’ or older people avoiding risk are somewhat redundant.
 

NoRegretsCoyote

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No I didn’t. You just missed the nuance around the fact that the typical retiree is married or in a relationship. With the ARF, your investment time horizon is not just your own life expectancy given its treatment on death; it’s one of the key aspects of an ARF and it’s why concepts such as ‘lifestyling’ or older people avoiding risk are somewhat redundant.
I didn't miss any nuance. You made the case for retiree (singular) and then implied that I didn't notice that life expectancy lengthens with age (I had).
 

cremeegg

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30 year German bonds at 0%. ... But if yields went any way back to "normal" levels capital losses of 50% or more can be expected.
No retail investor could possibly invest in bonds at these levels and that includes through the medium of PRIIPS.
Do you realise that government bonds have delivered good returns since 2000 for precisely the same reason that they'll deliver lousy returns in future? To explain to people not well-versed in finance, in 2000 the yield on a German 30-year bond was around 5.25%. A bond with a coupon of 5.25 a year would be priced at 100. Now, yields on 30-year bonds have fallen to zero, so you would now have to pay 257.50 (30*5.25+100) for a bond delivering a coupon of 5.25 for 30 years. Someone who invested 100 in a 30-year German government bond in 2000 would have got 5.25 every year, and could now sell the bond for 157.75 (11*5.25 +100).
Hi Guys

I have a pension fund partly invested in some "safe" assets. Its called a pension stability fund with Irish Life

Can anyone tell me if I am likely to be exposed to losses of this nature. The bumpf says "The Stability Fund invests mostly in bonds and cash with a small amount in shares."

If interest rates rise, will the value of the bond elements fall precipitously.

I understand the maths, but if rates go back to 5.25% how much of my pot is likely to fall in value from €157 to €100 (to use the above figures).

This was sold as a low risk investment, but is that just lazy thinking "bonds = low risk". Is it in fact very high risk.

Thanks
 
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NoRegretsCoyote

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If you start drawing down your savings at 65 at a rate of, say, 4% per annum, adjusted for inflation, how much of the portfolio do you think will remain invested for anything like 25 years?
To take a simple example where bad performance is frontloaded. Assume your fund loses 7% for five years, then grows at 2% for the remainder of the 25 years. Rounding a little, you are basically back to where you started if you take nothing out

The issue is that if your drawdown in the early years is too aggressive you won't have enough left in the fund to grow yourself back out of trouble.
 

moneymakeover

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I think the question being asked by creme egg,
Is if yields increase what will happen to the bond portion of pension?

Currently yields are dropping both Europe and USA

But if/when this turns around are bond holders exposed?
And to what extent
 

Duke of Marmalade

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Hi Guys

I have a pension fund partly invested in some "safe" assets. Its called a pension stability fund with Irish Life

Can anyone tell me if I am likely to be exposed to losses of this nature. The bumpf says "The Stability Fund invests mostly in bonds and cash with a small amount in shares."

If interest rates rise, will the value of the bond elements fall precipitously.

I understand the maths, but if rates go back to 5.25% how much of my pot is likely to fall in value from €157 to €100 (to use the above figures).

This was sold as a low risk investment, but is that just lazy thinking "bonds = low risk". Is it in fact very high risk.

Thanks
cremeegg This is the make up of the Stability Fund as of July. 60% bonds, 25% cash and 15% equities A key missing statistic is the duration of the bonds. I think anything over 5 years has a very asymmetrical capital outlook - no upside left but considerable downside potential. Any sovereign bonds under 5 years are on negative yields. I note that only 17% are AAA and there is exposure to BBB etc. So there might be some pick up in yield there but that is compensation for risk. The theory goes that you cannot diversify this risk away. I really can’t see any justification for individual investors being exposed to bonds. Ok, they may be scared of equities, but then I’m afraid the refuge is cash.
 

Sunny

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You don't get any idea of how the bonds are being managed from a interest rate perspective. It is unlikely that the fund is fully exposed to rising and falling interest rates and the managers have taken steps to manage the duration of the portfolio. Remember we are talking duration here, not maturity date of the bonds.
 

Sarenco

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That depends how it’s invested and how returns look early on.
Exactly.

And the best way to mitigate against a devestating stock market crash early on in the drawdown phase is to hold an allocation of fixed income instruments within the portfolio.
 

moneymakeover

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In relation to bonds

And people are saying with yields so low bonds are a bad idea

But it only matters what direction yields go

So long as yields drop, the value of the bonds will increase

I would think
 

Conan

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In relation to bonds

And people are saying with yields so low bonds are a bad idea

But it only matters what direction yields go

So long as yields drop, the value of the bonds will increase

I would think
But how much lower can yield go? Whilst yields are probably not likely to increase in the near term (some prospect of “negative yields”) over the long term (if an ARF investor is taking a longer term view) it is perhaps more likely to expect yields to increase.
So with a drawdown rate of say 4% p.a. (plus management fees), Bonds don’t currently look attractive for ARF investors.
 

NoRegretsCoyote

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There is a theoretical upper limit to bond prices. If interest rates hit -3% I think people would just consume more or put money into fixed assets. Interest rates can still fall a bit more from where they are now, but there has to be a lower bound.

Equity prices are different as they are ultimately a function of corporate profitability. And there there is no upper limit to equity prices in the same way that there is for bond prices.
 

Colm Fagan

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My name has been mentioned a few times in dispatches, so it's probably best to clarify where I stand on the various issues:
Take Colm...he reckons his will always be invested. i.e. may never dip below par
Not quite right, Gordon. My ambition is to spend every cent that's in the ARF by the time my other half and myself say our final goodbyes. I have set up a spreadsheet specially for that purpose. It allows for future investment returns (at what I hope is a reasonably conservative rate) and future outgoings, so that there is zero left at the end.

This brings me to the next question: when is the end?
And in the case of an ARF, we’re generally talking about the life expectancy of two people, one of whom is female. That’s the key point with an ARF. See the link below. There is a 51% chance that, at age 65, at least one spouse will live at least another 24 years.
Life expectancy is meaningless when it comes to an ARF. There won't be 51% of either me or my other half alive in 24 years. Either one, both, or none of us will be alive. My little spreadsheet, discussed above, assumes that we will both live into our nineties. If we croak before then, there will be something for the next generation(s) to squabble over; if we live beyond 95 or so, I'm hoping that one of our children, grandchildren or great-grandchildren will look after us for our few remaining years. In reality, I try to add a couple of months of possible future existence to the spreadsheet every year.

To take a simple example where bad performance is frontloaded. Assume your fund loses 7% for five years, then grows at 2% for the remainder of the 25 years. Rounding a little, you are basically back to where you started if you take nothing out

The issue is that if your drawdown in the early years is too aggressive you won't have enough left in the fund to grow yourself back out of trouble.
This is a re-run of the "sequence of returns" risk that's been discussed ad nauseam on this forum. People know my views by now. For what it's worth, I looked back at the early experience of my ARF. I took it out in December 2010. At the end of 2011, it was down 13% from what I invested a year earlier (that's after withdrawing 5% in 2011). At this remove, it's all ancient history. There has been plenty of time since then to recover from that initial fall. The ARF is now worth considerably more than the initial contribution, despite the fall in the first year. It would be a very different story if I had invested a significant proportion of my savings in bonds, or kept them in cash, at the start.

If interest rates rise, will the value of the bond elements fall precipitously.

I understand the maths, but if rates go back to 5.25% how much of my pot is likely to fall in value from €157 to €100 (to use the above figures).
As @Duke of Marmalade says, the key issue is the duration of the bonds. You're right that the value of the bond elements falls from 157 to 100 if interest rates increase from 0 to 5.25% - if the duration of the bonds is 11 years, as in the example I used earlier.

Interest rates are currently at zero (more or less). That makes the maths simple. My guess at a reasonable "worst case" scenario is for interest rates to increase to (say) 3%, with an average bond duration of 7 years. Suppose you hold a 3% coupon bond. Its value at 0% interest is 7*3+100 = 121. Its value at 3% interest is 100, so the fall in market value of the bond element of the portfolio in that "worst case" scenario is 17.3%. (1-100/121).
 

NoRegretsCoyote

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, I looked back at the early experience of my ARF. I took it out in December 2010. At the end of 2011, it was down 13% from what I invested a year earlier (that's after withdrawing 5% in 2011). At this remove, it's all ancient history. There has been plenty of time since then to recover from that initial fall. The ARF is now worth considerably more than the initial contribution, despite the fall in the first year. It would be a very different story if I had invested a significant proportion of my savings in bonds, or kept them in cash, at the start.
So over a nine-year horizon you've done really well with equites. Good for you!

I bought a house with a 90% mortgage in 2013 and have seen my equity stake increase by a factor of six.

Neither of these events proves that we are exceptionally good investors. We've been quite lucky, and our (narrow) experience shouldn't be used to draw wide conclusions.
 
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