Pensioners should have 100% of their retirement funds in equities

Marc has raised the question here:


A few people have told me that they could not follow the thread so...

1) I will summarise the arguments from that thread
2) Explain why I believe that investing 100% of their retirement fund in equities is correct - assuming they have a house and the Old Age Pension
3) Go through a few case studies to illustrate it

I would welcome a case study to show an Irish case where it's not appropriate.

Where should a person invest their retirement funds?

So you have recently retired with €400k between your pension and savings in your own name. Where should you invest this to get the best return while trying to make sure that you don’t run out of money before you die?

By retirement funds, I mean the combination of money in your Approved Retirement Fund and any investments or cash directly held in your own name.

• Option 1 100% equities
• Option 2 100% bonds
• Option 3 Buy an annuity, which guarantees you a set income for as long as you live
• Option 4 Some combination of the above

Option 1 - The 100% equity approach

(Investing 100% in equities means buying a well diversified fund or funds. I am not suggesting that you pick a few shares because you think that these particular shares will do well.)

Over most long time periods, equities have outperformed bonds and it’s likely that they will continue to do so in the future.
At age 65, you have a 20 or 30 year investment horizon, so, most of the time, investing 100% in equities will result in the best outcome.
However, you could be unlucky and there is a risk that you invest at the top of the market, and your equities fall over the early years which is much more serious than a fall in later years. It will recover, but if the stockmarket falls and you are taking out 4% a year, there is a risk that you will run out of money before you die.

The following graph illustrates the outcome for a $1m dollar fund where all three had an average return of 5% a year and the owner withdrew The purple guy got good returns at the start and after 30 years, his pot had grown, whereas the turquoise guy had a bad start and ran out of money after 22 years.



Source: https://am.jpmorgan.com/us/en/asset...-insights/mitigating-sequence-of-return-risk/

Option 2 - The 100% bonds approach

(Investing in bonds means buying a fund which invests in government bonds rather than savings products which have the word "bonds" in their name.)

If you invest €400k in government bonds today, you will have the comfort of knowing that you will still have about €400k tomorrow. They won’t fall 10% overnight, in the same way that equities might. And you will have a good idea of what your income will be for the next 20 years or so.

But there are two huge drawbacks.
• It is very likely that the return will be much lower than you would get had you invested in equities
• There is a real risk that your investment and the return on it might be greatly reduced or even wiped out by inflation. While the return on a 100% equity portfolio might also be reduced by inflation, the return on equities tends to exceed inflation in the longer term.

Option 3: Buy an annuity
You can buy an annuity from a life insurance company. They will give you a fixed amount every year for as long as you live. So if you live until 110, you will probably be better off.

As of December 2024, €400k will buy a 66 year old about €17,000 a year for life. This will increase at 3% a year to cope with inflation.
The advantage is that you will have a guaranteed income for life – you will not run out of money if you live forever.

The big downside is that you lose access to the money you have in the annuity. This would only be a problem if you used your entire funds to buy an annuity. Even if you believe in annuities, you should keep some money to allow you access to cash for capital expenditure e.g. buying a new car.

If you die soon after you take it out, your estate gets nothing.

And although I have allowed for an increase of 3% a year, there is a risk that inflation will be higher than that and that the real value of your income will fall.

Option 4 – Some combination of the above.
People who are worried that the stockmarket might crash the day after you invest, suggest some sort of split e.g. 60% equities and 40% bonds.
This reduces the potential return but also reduces the risk.

My view

I would recommend that one invests their retirement funds 100% in equities.

Most of the time, this will produce not only a good outcome, but also the best outcome.

Of course, if you knew in advance that equities were going to decline for the next three years and then increase in value, you should switch to 100% bonds now and then switch to 100% equities just before they start recovering. But unfortunately, we simply can’t time the market.

When investing in 100% equities produces an outcome worse than the alternatives, that bad outcome is not actually as bad as people make out.
It is possible that investing in bonds or buying an annuity might be the right decision in a country where private home ownership is not allowed and where there is no Old Age Pension. If you run out of money, you would be destitute.

But in Ireland, where most people with retirement funds own their own home and qualify for the Contributory Old Age Pension, investing 100% in equities is right because even in the rare cases where you run out of money, you are still not destitute. ( The qualification criteria for the OAP might change in the future - if they do, the case for bonds would improve.)

I have tried to artificially engineer a set of circumstances where investing in bonds or an annuity would be correct in an Irish context, and I was unable to do so. Sarenco came up with an example of someone who retired at the peak of the stockmarket boom in 2000 and invested in equities. Even though a very artificial case, it was better than any I could come up with which might justify not investing 100% in equities.

You must look at a person’s entire financial circumstances before making a decision, and when you do, you will conclude that investing your retirement funds 100% equities is likely to lead to the best outcome and when it turns out in retrospect to have been incorrect, the outcome is not destitution.

In what circumstances would it be wrong to invest 100% of your retirement funds in equities?

If you reach retirement at 66 and you do not own your own home and you do not qualify for the Old Age Pension, then investing 100% of your assets in equities would be very wrong. If your fund bombed out after 20 years, you would be destitute.

You would be much better off investing in a 60% equities/40% bonds portfolio.

You will live a much poorer life throughout your life, but you probably won't ever be destitute.

But in this very unusual case, you would be better off buying a home somewhere and then you would qualify for the non-Contributory Old Age Pension.

Case Study 1 - A 66 year old single male who has a pension fund on retirement of €400,000 and a mortgage-free home worth €400k.

He is getting about €17k a year in the OAP. That is the equivalent of a lump sum of about €400k

Someone who focusses solely on the pension pot, will argue that there is a risk that if he is unlucky, and the stockmarket falls for a few years after he invests 100% in equities, he could run out of money after 20 years and will be destitute.

Nonsense!

He has total assets of about €1.2m when you put a capital value on the Old Age Pension. Putting the pension pot into equities, means that he has only 33% of his wealth in equities.

His Old Age Pension is a very valuable annuity. It will pay him about €17k a year which will rise in line with inflation.

And he owns his own home. So his accommodation costs are paid in advance.

Of course, there is a risk that he will be unlucky and that the stockmarket will go into decline for a few years after he invests. And there is a risk that he will have no cash left after 20 years.

But he will not be destitute. He will have an inflation-linked pension. And he will be able to earn another €14,000 a year tax-free through renting a room. And if he does not want to do that, but needs cash, he will be able to take out a life-loan.

And of course, if the stockmarket declines, he can cut back his expenditure to make his pension fund last longer.

For this person, investing any part of his €400k pension fund in a bond or an annuity is just wrong.

Case study 2 - A reasonably wealthy couple with 3 adult children

Both aged 66
Live in a mortgage-free house worth €1m
Have €2m in retirement funds.

If they both qualify for the Contributory OAP, they have an inflation linked annuity of about €32,000 a year while they are both still alive.

They are probably not going to spend an additional €100,000 a year so they won’t need to withdraw 5% a year. So if the stockmarket tanks, they won’t be as badly affected as they are not cashing out 5% a year.

Their investment horizon is not 25 years, it is actually the investment horizon of their children and grandchildren as they are going to leave a large amount of money behind them.

They have a high capacity to handle the risk of the stockmarket falling for a few years after retirement so they should invest 100% in equities.

Case Study 3 – Sarenco’s couple

Sarenco gave an example of a couple who were unlucky enough to retire at the peak of the market in 2000 and were invested 100% in equities. The profile starts here and more detail is gradually added here and in the following posts. He is now 90 and disaster has struck as he and his much younger wife have run out of money.

He was 65 in the year 2000
His much younger wife was 60 – so they have to make their money last much longer
Neither qualify for the Contributory Old Age Pension despite “working long and hard to accumulate €1m in his ARF
They still had a mortgage of about €300k when he retired.
He used the lump-sum on retirement to clear his mortgage
If he had invested 100% in equities, “it would have been disastrous”
But it would have worked out just fine had he invested 60% in equities and 40% in bonds.


1) It’s very hard to see how someone who worked long and hard to accumulate a pension fund of €1.3m does not have the Contributory Old Age Pension. (The rules were different back then but now, almost everyone qualifies for a COAP.)

2) They had a mortgage of €300k at retirement – so presumably they had a house worth about €1m. (While it’s quite common to have a mortgage on retirement in 2024, it was very unusual back then, but this is an unusual couple.)

3) He had €1.3m in his pension fund on retirement. Where did this come from and how did it get so large? He must have been invested 100% in equities for the previous 10 years. This is very relevant because if Sarenco had been advising him ten years before he retired, he would have told him to gradually switch from equities to bonds. So he would not have had €1.3m in his pension fund – he would probably have had half that. And now instead of clearing his mortgage with the lump sum, he and his much younger wife would still have a mortgage into retirement. If they had avoided equities, this couple would have been living in destitution throughout retirement and not just from age 90.

4) But he invested in equities and now his ARF has run out. So are they destitute? Not at all. Despite the fact that they are living in house which is probably worth about €2m now, they will get the full Non-contributory OAP. So they are getting about €25,000 a year. If this is not enough, they could trade down to a €1m house and still have €1m to fund their living expense. But they need to be careful, as they will lose their Non-Contributory OAPs if they have €1m. Of if they don’t want to trade down, they can take out a life loan from Spry Finance.

Conclusion.
If this couple had switched from equities to bonds on retirement in 2000 and then got back into equities at some later stage, they would be a lot better off now. But even though they were very unlucky to be 100% invested in equities at the peak of the market, they are not destitute.

Follow up questions

Brendan Burgess said:

If your fund bombed out after 20 years, you would be destitute.

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You actually wouldn’t because the non-con pension is 95% of the contributory one! Added to that there are household benefits packages that kick in after 70 as well as free GP visits and free public transport.

Pensioners are the group with the lowest poverty rates in Ireland due to state supports. Whether this is good or bad is for another thread. But this in my view allows the typical pensioner to tolerate more equity risk than would be the case if state supports were lower.

Hi Brendan,

Thanks for taking the time to put this together. In fairness, you make some points I agree with and others I can't. I take it that you're open to follow-up questions?

Just so I'm clear, Colm' 100-% strategy is for people to buy their own, relatively concentrated portfolio of stocks. Are you advocating this as well? Do you think this is a good idea and why?

Well Boss that is an interesting perspective, to regard your OAP as a €400k part of your "portfolio". You argue that places "ordinary" folk in the same position as the "fat cats" - 100% equities for sure. I'm having difficulty in finding the fault in this rather startling conclusion. I will leave that to @Sarenco

Louisval said:

Just so I'm clear, Colm' 100-% strategy is for people to buy their own, relatively concentrated portfolio of stocks. Are you advocating this as well?

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I have amended the relevant post as follows:

(Investing 100% in equities means buying a well diversified fund or funds. I am not suggesting that you pick a few shares because you think tha they will do well.)

Click to expand...

Brendan Burgess said:

Conclusion.
If this couple had switched from equities to bonds on retirement in 2000 and then got back into equities at some later stage, they would be a lot better off now. But even though they were very unlucky to be 100% invested in equities at the peak of the market, they are not destitute.

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Is there any merit in a gradual reintroduction to equities, say over a 3 year period? 100% cash/bonds at retirement and then switch a percentage, say quarterly, to build back up to 60%.

This was allow time for review of global economies/markets, inflation, spending patterns etc.

Hmmm! Now a personal history diametrically at variance with @Colm Fagan 's.
Boss, you refer to a retiree with an OAP and his own home. I am that soldier. I also have a DB pension.
But except for that small ARF having a punt on the World Index, my investible assets since retirement have been totally in Government Bonds and/or State Savings.
With hindsight, and probably with foresight, not a very smart move at all, but I have no regrets. I would just find the rollercoaster of the stockmarket unbearable, sneaking a glance at my iPhone every hour or so.
Maybe @Marc is right, financial advice is really about counselling.

Duke of Marmalade said:

Hmmm! Now a personal history diametrically at variance with Colm's.
Boss, you refer to a retiree with an OAP and his own home. I am that soldier. I also have a DB pension.
But except for that small ARF having a punt on the World Index, my investible assets since retirement have been totally in Government Bonds and/or State Savings.
With hindsight not a very smart move at all, but I have no regrets. I would just find the rollercoaster of the stockmarket unbearable, sneaking a glance at my iPhone every hour or so.
Maybe @Marc is right, financial advice is really about counselling.

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Investing really isn’t about markets at all it’s about people.

When people ask me what I do for a living I say I’m a financial psychiatrist.

As Warren Buffets mentor Ben Graham said “ the investor’s chief problem, and even their worst enemy, is likely to be themselves “

TRS30 said:

This was allow time for review of global economies/markets, inflation, spending patterns etc.

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Analysis of spending patterns shouldn't be left to the early years of retirement. Ideally this is an exercise that everybody should be doing on a regular basis in order to understand their budgetary needs, identify where savings can be made, and to help to use any discretionary funds prudently. (I understand that life has a habit of getting in the way and this isn't everybody's idea of fun, especially if they happen to be living beyond their means *, so it maybe doesn't happen as often as it probably should). With more and more of our expenditure done electronically it's easier than ever to do this. E.g. download a year's worth of debit and credit card statements, plug them into a spreadsheet, and categorise them to identify the annual and monthly totals for all relevant essential and non-essential categories of expenditure.

* And, of course, the state itself living so far beyond its means doesn't exactly set a good example for its citizens...

Brendan Burgess said:

But in Ireland, where most people with retirement funds own their own home

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I think this is key.........IMO one should think of their home equity as something akin to a cash reserve/bond allocation inside of their wider retirement asset pool allowing IMO a much higher allocation to equities in your ARF than is typically recommended >

95% equities /5% treasuries would be what I'd go for......

In sustained bear markets one would expect that monetary authorities will have reduced interest rates.....which provides a kind of counter-cyclical opportunity to access a home equity line of credit (reverse mortgage) at a relatively low interest rate which allows for continued equity market participation.

Now Ireland forces retirees to withdraw 5% a year from their ARF.....which complicates matters...the 5% treasury allocation in my portfolio above allows for a kind of painless & uncomplicated withdrawal without touching your equities in Year One of a bear market (say in a 2022 scenario)....however given the compulsory 5% withdrawal rate in Year Two of said bear market you've got a problem cause you've exhausted your bond bucket in year one...lets call this a multi-year GFC type event...so the strategy above would advocate for a retiree to take those forced equity withdrawals in Year Two from their ARF and immediately investing the net proceeds back into a taxable brokerage account that mirrors the forced withdrawal that just occured from the ARF index funds....funding of your day to day living expenses would now switch in this period to the proceeds from your home equity line of credit......and this would continue until the equity market recovers to baseline.

It's a strategy by which the damage of drawdowns & Ireland's forced 5% ARF withdrawal is mitigated.....but it requires discipline.

So, in summary, retirees should be invested 100% in equities because it will probably work out fine.

Sure, there’s always a risk that it won’t and you will run out of money before you run out of life but don’t worry there’s always the State pension, food banks, etc.

Sorry but I think that is a plainly ridiculous argument.

Why would somebody who has amassed significant assets at retirement risk living out their days in relative poverty?

letitroll said:

Now Ireland forces retirees to withdraw 5% a year from their ARF.....which complicates matters..

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It doesn't complicate matters at all.

You have to take it out of the ARF but you are not forced to spend it.

Many people take the 5% from the ARF and buy shares directly.

Sarenco said:

Why would somebody who has amassed significant assets at retirement risk living out their days in relative poverty?

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I would be delighted if you could show me a scenario where this happens? The closest was your friend who was married to a much younger woman and that fails the destitution test as well.


If you were barred from buying a house and were going to be never entitled to social welfare, your argument would be correct.

You should not be trying to maximise your income, you should be settling for an acceptable level of income and expenditure.

But in Ireland, most people with pension funds own their own homes and have a great inflation protected annuity, so they are not 100% in equities anyway.