Pensioners should have 100% of their retirement funds in equities

Sarenco said:
was forced to live on the State pension alone
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But you would have several years’ warning and you could convert your residual ARF to fixed income or slow drawdowns!

Seriously, someone all in equities at retirement who makes basic adjustments in response to events will never actually run out of money.

Sequence of return risk is lower with bonds but not unknown either. Someone who put their ARF fully into ten-year German bonds two and a half years ago would be looking at a 25%-30% loss in value today. That’s not far off the crash in equities from 1 January 2000 to mid-2002 that did the damage to your unlucky retiree.
 
For reference, the CSO identifies the “at risk of poverty” threshold as 60% of the national median income, €16,558.

A full State contributory pension is materially below this figure.
 
That’s a straw man - I never suggested investing 100% of an ARF in bonds.

I have consistently argued that a retirement portfolio should be balanced, with an equity bias.

And, no, I don’t want to cut my expenses mid-retirement - I have a lifestyle I want to maintain.
 
Brendan Burgess said:
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.
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It sure does.........your forgetting the tax leakage, most especially at the marginal rate......in the scenario I laid out above.....it would be far superior to not have to withdraw from your ARF at all and crystalize an income tax liability while equites are in a bear market.......and just pivot to a home equity line of credit at say a 4% interest rate until the ARF equity value returned to its previous levels all within a tax sheltered ARF wrapper.

The alternative scenario you laid out and which I articulated too (take 5% ARF withdrawal and then immediately invest in the same ARF shares/index you were just forced to liquidate) has a double taxation problem.

If Apple's fair value is $100 a share.......but drops to $50 while your forced to withdraw it under the 5% ARF rules......you are then forced to pay say 40% income tax on it.......so you end up with $30 in after tax cash to buy back Apple in your taxable brokerage account.......Apple subsequently doubles back to $100 per share........so the $30 in Apple your brokerage account returns now to $60(fair value)).......and you sell it (again) to actually fund your retirement this time, well now you've got a 33% capital gain to pay on $30 of gains (to say nothing of the dividend income tax and transactions costs you've also had to pay already).......well now you end up with $50 in after-tax sale proceeds......if it was simply left in the ARF untouched during this bear market period....the value would be $60......the tax leakage is c.10%.......probably low teens when you add in transaction costs and tax on dividends.
 
The impact on your portfolio will be marginal.

You have to be paying marginal tax rates on the 5% and the shares must have fallen and after you buy them, they must rise dramatically again.

Paying tax and volatile markets are costs of investing. I don't think that it affects the overall strategy of having 100% of your investable funds in equities?

But maybe you are suggesting keeping 10% in cash so you don't have to sell shares during a downmarket. Personally, I don't see the need to as you would be missing out on the upturn. But 90% or 100% are both fine.
 
I'm not following the logic here.

You're borrowing at high interest rates— Spry Finance has minimum rate of 6.5% for a Green equity release mortgage for a 65 year old, which is equivalent to 10% returns before tax if subject to CGT, or 11% if in an ETF. And the purpose of this borrowing is to enable the reinvestment of money drawn down from your pensions into funds which could be expected to max out at 11% over the longer term (depending on where they're invested.

In theory this approach could work out better than just spending the money you draw down for its intended purpose (ie, your living expenses in retirement). But you'd need to be very lucky with your timing of the market. If you'd started 2002, ie years after the dot com crash you might have scraped a total return of 4% over 5 years and 3% over 10 years if invested in the S&P 500 for example. Even the numbers for investing in 2010 (which are much better at around 14.5% and 13.5% for 5 and 10 year annualised returns) don't in my opinion provide enough of a return to justify borrowing at 6.5% to fund the investment— especially when you don't know and can't know in year 2 of a bear market whether it's a re-run of 2008 or 2000.

Over 20 years or more you pretty much can't lose with the (S&P 500 and Nasdaq 100) indexes based on historical data. But if you're borrowing at 6.5% to invest and paying 33% or more on your gains, then you lose most of the time. By my rough reckoning about two thirds of the time over both 10 year and 5 year periods.

  • Edit: in your very optimistic scenario of getting a reverse mortgage at a rate of 4% then you still need a minimum 6% return to justify the borrowing, which would give you more chance of benefitting from borrowing as compared to just spending the drawdown for living. Assuming your investments are liable for 41% tax and you'd have a bit better than even chance of beating this based on historical data. I base my planning on 90% of historical returns (80% if I'm feeling optimistic). The thought of putting that much money on a winning a 60-40 bet gives me the shivers.
 
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SquirrelChaser said:
I'm not following the logic here.
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I don't think he is recommending anyone to borrow from Spry to invest - I certainly amn't.

In planning your finances, you must remember that you have a valuable asset in your family home.

It prepays your accommodation costs.

It acts as a reserve if you are very unlucky with your equity investments.

Brendan
 
Brendan Burgess said:
But maybe you are suggesting keeping 10% in cash
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Well I'm basically suggesting that ones home equity is effectively cash like....and folks should think of it as such as part of a retirement strategy to maximize returns while reducing the risk of running out of funds ....so I'm agreeing in your 100% equity allocation perspective for a homeowner.......where pension destructive drawdowns in equity values don't need to be met by increased liquidations of your pension pot while values are depressed but rather a retiree should pivot to using their home equity as a cash equivalent and be happy to pay 3.5% interest on the loan amount taken to fund day to day expenses for a while such that they aren't effectively liquidating their pension excessively when prices are low.

Every doomday scenario I see laid out by pension advisors....has a 5% withdrawal rate to cover XYZ fixed expense.....that withdrawal rate jumps to 6.6% or 10% in a number of years due to bear markets.......the reality is a homeowner with an equity line of credit.....should never find themselves making excessive withdrawals against their equity holdings in a bear market....when alternative sources of funds to drawdown exist.....and so IMO lots of these "Mary & John run out of retirement funds in year 8" but in a 60/40 that wouldn't happen are kind of nonsense.....cause Mary & John would be insane to start pulling down 10% of their ARF in a 50% down year for the stock market......when they can pull down a home equity line of credit instead.......
 
Boss on the psychological/utility aspects which several have raised I think my own example stands out. Your logic from a purely spreadsheet point of view seem irrefutable but no way have you changed my risk verse approach and I have more than the OAP to fall back on.
 
Duke of Marmalade said:
Your logic from a purely spreadsheet point of view seem irrefutable
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Well, that depends.

If your objective is to maximise your terminal wealth for the benefits of your heirs, then, yes, I agree that Brendan’s 100% in equities at all times logic is irrefutable.

But if your objective is to draw down a consistent amount over a particular projected time frame, then, no, Brendan’s logic makes no sense.

All the talk about State pensions, cutting expenses, younger wifes and what constitutes destitution is a distraction.

An all equity portfolio does not have the greatest chance of surviving a consistent level of drawdown over a particular projected timeframe.

That’s a fact, not an opinion.
 
Sarenco said:
But if your objective is to draw down a consistent amount over a particular projected time frame
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If that’s your objective you need an annuity and can presumably live with the lower returns in return for the consistent income.
Sarenco said:
That’s a straw man - I never suggested investing 100% of an ARF in bonds.
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Fair enough. Sequence of returns risk still exists with fixed income products. If we have a decade of high inflation and high interest rates ahead of us (say both averaging above 5%) it would wipe out the bond part of any balanced portfolio started in July 2022.
 
Sarenco said:
An all equity portfolio does not have the greatest chance of surviving a consistent level of drawdown over a particular projected timeframe.
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Correct.

But so what?

A person who has their own home and the OAP can withstand their equity portfolio bombing out.

In exchange they get a much better return the majority of the time.

As I have repeatedly pointed out, your fact would be important if the only asset and income were from this pot.

But someone with a €400k house, a COAP and €400k to invest, is investing 33% of their assets in equities.

Brendan
 
Is this man married? How old is their spouse or partner? What is their financial position?
What is his state of health? Does he smoke?
How many children does this man have? How old are they?
Does he own a car? How old is it?
How old is the house? What state of repair is it in? What energy rating is it? Does he have solar panels? Is it insulated properly? Double glazing etc? Does he have a boiler? What age is that?
What are his essential monthly household expenses? Food heating etc
What quality of life does he desire? Discretionary spending.
What is his desire leave a legacy relative to his own financial security?

My point is we know almost nothing of this man’s financial situation and therefore seeking to provide anything more than generic guidance is impossible. Based on what we know in the case study the only sound recommendation is that he seek professional advice.

To make a blanket statement that a person or indeed anyone of relatively modest means should gamble their future financial security on an extremely high risk investment approach is frankly absurd.
 
Marc said:
My point is we know almost nothing of this man’s financial situation and therefore seeking to provide anything more than generic guidance is impossible.
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Nonsense.

You are told that he is single which means not married.
He is 68 so add that to the fact that he is singe and you can assume that he does not have ten teenage children.
He owns his own house without a mortgage

So you absolutely know enough to tell him that investing 100% of his retirement funds, or 1/3rd of his total assets, in equities is the correct strategy for him.

You are adding additional risk to him by sending him to a financial advisor who should tell him that anyway, but might well sell him products which are in the advisor's interest and not his.
 

If you sent him to me I would advise him that he should buy an annuity. He would obtain a rate of at least 5% currently and have no risk of running out of money however long he lived.

An ARF would need to average more than 5%pa after costs just to match that guaranteed income. That’s a tall order if your first few years returns are negative.

He has no dependents and therefore no requirement to leave a legacy. He has no need for an ARF.

An ARF is less suitable for this man than an annuity and an ARF 100% invested in equites is most likely completely unsuitable.
 
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Brendan Burgess said:
But so what?
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Because I want to minimise (not eliminate) the risk that I would live out my days in relative poverty relying solely on the State pension.
Brendan Burgess said:
In exchange they get a much better return the majority of the time.
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Correct.

But so what?

My objective is not to maximise returns.

My objective is to maximise the likelihood that my portfolio will fund a consistent lifestyle throughout my retirement.
 
Marc said:
If you sent him to me I would advise him that he should buy an annuity. He would obtain a rate of at least 5% currently and have no risk of running out of money however long he lived.
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All funds to purchase an annuity with a fixed nominal value is crackers, sorry.

He loses all possible upside from equity markets.

He’s can’t speed up or slow down drawdown in response to life events.

He’s at the mercy of inflation too. Just 2% annual inflation reduces purchasing power by 18% over ten years, and 33% over 20 years.
 
Brendan Burgess said:
In exchange they get a much better return the majority of the time.
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There is a chance that the equity premium is due to some risk that is priced in by the market, but one that hasn't happened in 100 years. A long duration war, a pandemic without a vaccine, AI driven game changes etc. So betting on it not happening is a personal choice/bet.

Alternatively, the premium is just due to people not liking market fluctuations and buy and holders can buy fluctuating assets at a discount and hold them through turbulence earning a premium. In that case the risk is that the premium might disappear down the line if investing practice changes, we all start using 'MoneyGPT', or other financial innovations to smooth returns become popular.

History tends to repeat, but we live in very interesting times and I'm not sure anyone knows how AI and financial innovation is going to impact on market dynamics over the next 10 or 20 years. For me, it's risk driving that return and the risk is that you don't maintain your investment goal within the desired timeframe (to quote Keynes 'in the long run we are all dead'). Also, in the case of retirement you might not be dead but you also could have a lot less opportunities to spend money as time goes by, so the consumption is front loaded.
 
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