Pensioners should have 100% of their retirement funds in equities

[Sarenco]

If that’s your objective you need an annuity and can presumably live with the lower returns in return for the consistent income.

I would certainly consider annuitising at least a proportion of my ARF later in retirement but not initially - too darn expensive.

Again, my objective is to maximise the likelihood that my portfolio will fund a certain lifestyle throughout my retirement. I am comfortable that there are no guarantees in this regard.

 

[SquirrelChaser]

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

While (as discussed in a different thread with no need to rehash our different perspectives) i disagree with regarding your principal residence as an asset in this context, this is an excellent way of putting it. We're all invested in annuities via our prsi contributions.

 

[Duke of Marmalade]

While (as discussed in a different thread with no need to rehash our different perspectives) i disagree with regarding your principal residence as an asset in this context, this is an excellent way of putting it. We're all invested in annuities via our prsi contributions.

Yes, I too have difficulties with treating the home as an investment. Does someone who has inherited a life residency but no ownership have an investment. Their financial position is the same as someone who owns their home.
Having free accommodation absolutely impacts on your pension needs but IMHO should not be considered as part of an investment portfolio.

 

[Marc]

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.

Complete 100% insurance against longevity risk.

Perfect solution for someone with no dependents.

QED

 

[ArthurMcB]

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 of 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.

And that'd be poor advice in my opinion. Yes its a more conservative option but he potentially foregoing a lot of growth.

If he sauntered up to me id tell him - based on the profile laid out above - go 100% into equities. For all the reasons outlined above not least that he will have a far better return on average and in all probability. And, he has plenty of capacity to take on the risk for the reward. Simples.

That'd take 5 mins of a chat would be free of charge and i wouldnt try sell him anything.

 

[Sarenco]

If he sauntered up to me id tell him - based on the profile laid out above - go 100% into equities.

And if he is totally broke in his early 80’s as a direct result of your “advice”, you’re ok with that?

Seriously?!

 

[DK123]

I dont think that people in their sixties, seventies,eighties, etc.should be 100% invested in equities because they have worked hard for fifty years for their money and peace of mind and zero stress for them should be top priority,because if there is a 30 or 40% crash and it takes say 10 years to to recover they could have passed on in the meantime .Perhaps say 10 or 15% in equities for a hobby if they are so inclined.In my humble opinion of course.

 

[SquirrelChaser]

You made no attempt to justify the cost of advice.

You defaulted to DIY investing and execution only with no attempt to assist the poster to understand why one might pay for advice.

That is the bias of this site.

To be fair, you charge fees for such advice. You're not exactly a neutral observer.

And as someone who's selling the advice, surely justifying its cost is a core part of that?

It would be good advice in the opinion of the regulator, the professional indemnity insurers, the client, the adviser, and society at large but you cling to your minority opinion.

I'm not quite when you got nominated for the role of spokesman for society at large either to be honest.

Also, telling a homeowner with COAP they should sacrifice their €400k pension fund for a €20k annuity to make sure they don't have to rely on the COAP alone in their 80s is pretty nuts in my opinion. Even bonds at 3% would leave them able to spend significantly more enjoining life for the first 15 years.

This obsessive fear of the risk of homeowning 85 year olds having to survive on the OAP is getting even more ridiculous. I've a number of relatives and neighbours who've lived into their 80s and they weren't exactly burning through cash at thatstage. I'd say that universally what determined their quality of life was the people around them rather than their bank balances.

 

[Dr Strangelove]

It would be good advice in the opinion regulators (see FCA position on capacity for loss), the professional indemnity insurers, the client, the adviser, and society at large (less risk of claiming benefits)

I am not trying to disrespect your honourable profession.

But everything you write above hints at a low-risk bias that may not be optimal for the client.

 

[Marc]

I am not trying to disrespect your honourable profession.

But everything you write above hints at a low-risk bias that may not be optimal for the client.

And if the market tanks like it did in the 1930s the 1970s and 2000s and the client lives to 100 what do we tell them?

 

[Dr Strangelove]

And if the market tanks like it did in the 1930s the 1970s and 2000s and the client lives to 100 what do we tell them?

Well I'm not the professional but I imagine something like "Maybe you'd like to reallocate your assets defensively taking into account your life expectancy and needs".

Myself I'll take professional and amateur advice, do my own homework, make up my own mind, and won't have regrets.

 

[Sarenco]

"Maybe you'd like to reallocate your assets defensively taking into account your life expectancy and needs".

After the market has tanked? How does that make sense?

 

[Fortune]

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.

I'm not convinced this is true.

 

[Dr Strangelove]

How does that make sense?

So you don’t run out of money.

You can’t have an asset allocation strategy from the outset so perfect that it fully mitigates sequence of returns risk.

I thought a main point of a mixed equity/bond portfolio was to be able to shift between the two in response to negative market events.

 

[Dr Strangelove]

I'm not convinced this is true.

I agree. I’m cherrypicking but in the last 2.5 years euro area bonds have fallen by 25%-30% and cumulative HICP inflation has been 11%.

That’s a large fall in the value of a bond portfolio and materially bigger drawdowns are needed to maintain purchasing power.

 

[Sarenco]

I thought a main point of a mixed equity/bond portfolio was to be able to shift between the two in response to negative market events.

Eh, no.

What gave you that idea?

Cashing out your equities after a market drawdown is pretty much the worst thing you could do. You’re just locking in your losses.

 

[Dr Strangelove]

Eh, no.

So is there an optimal equity/bond mix you can choose at retirement that never needs readjustment no matter what the market throws at you?

You’re kind of hinting that there is and it would be useful to know.

 

[Wandering_Dazed]

As a complete ignoramus, both these threads have been fascinating, insightful and confusing at the same time!

Not sure this thread went as BB envisaged and sad to see it deteriorated into personal call outs and frustration. AMA is better than that!

From a 50yo layman's point of view, I can see both sides of the discussion.

• 100% equities has a big upside with also consequences if timing is wrong.
• Perhaps the statement 100% equities is incorrect if the retiree has significant other holdings in cash/property etc. (While I understand this point as you age how accessible are such keep you living in the manner you are accustomed to?)
• Playing safe with annuity is the other end of the spectrum and locks you out of any upside from equities.

Retirees are naturally risk adverse, in theory worked their life and want to enjoy stability in retirement to spend time with family, travel and not have day to day pressures etc.

I suppose in my simplistic view on this discussion, my question is....

From years of enjoying this forum, my takeaway on investment discussions are to always have a balanced investment portfolio don't go too deep into one or another. Dare I say similar to pension funds as you get closer to retirement! So why following retirement should someone go 100% one way or another unless you are an outlier? (Super risk adverse or zero risk adverse)

Feel free to ignore me and continue on the debate, just @ mention me whenever a consensus is made...which seems unlikely atm.

 

[Sarenco]

So is there an optimal equity/bond mix

Well, yes, but you will only know for sure with the benefit of hindsight.

In the absence of a crystal ball, I think a roughly balanced equity/bond portfolio, with a small equity bias, is roughly the right spot to land on for most folks.

It won’t be exactly right - but it certainly won’t be ruinously wrong.

 

[Fortune]

I agree. I’m cherrypicking but in the last 2.5 years euro area bonds have fallen by 25%-30% and cumulative HICP inflation has been 11%.

That’s a large fall in the value of a bond portfolio and materially bigger drawdowns are needed to maintain purchasing power.

If an investor buys and holds bonds to maturity, they can (ignoring risk of default) be confident of getting back the par value, with the coupon as their income. Investing, as most people will in their ARFs, in a bond fund will leave them open to daily fluctuations in value and an uncertain income that depends on that fluctuating value. I believe pension investors in the UK recently had a bit of an issue with the value of their bond funds dropping.