I would certainly consider annuitising at least a proportion of my ARF later in retirement but not initially - too darn expensive.If that’s your objective you need an annuity and can presumably live with the lower returns in return for the consistent income.
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.But someone with a €400k house, a COAP and €400k to invest, is investing 33% of their assets in equities.
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.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.
Complete 100% insurance against longevity risk.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.
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 if he is totally broke in his early 80’s as a direct result of your “advice”, you’re ok with that?If he sauntered up to me id tell him - based on the profile laid out above - go 100% into equities.
To be fair, you charge fees for such advice. You're not exactly a neutral observer.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.
I'm not quite when you got nominated for the role of spokesman for society at large either to be honest.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 am not trying to disrespect your honourable profession.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)
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?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.
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".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?
After the market has tanked? How does that make sense?"Maybe you'd like to reallocate your assets defensively taking into account your life expectancy and needs".
I'm not convinced this is true.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.
So you don’t run out of money.How does that make sense?
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%.I'm not convinced this is true.
Eh, no.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.
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?Eh, no.
Well, yes, but you will only know for sure with the benefit of hindsight.So is there an optimal equity/bond mix
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.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.
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