Would like to know if anyone would be happy to share their experiences and observations after investing in an ARF, with a Life assurance company or using an independent advisor, I will be in a position to start an ARF in October, or may choose to leave my pension pot accumulate for a few more year , thanks in advance
People's experience of investing their ARF
- Thread starter Shelby219
- Start date
If you’re preparing for a retirement decision in then it’s important to have an income strategy and have plans in place to manage risk - especially in the context of what’s happening in the world right now. Of course, if you’re exposed to the markets now then your decision to postpone may already have been made for you.
If you’re making an ARF decision and want to do some research on the realties of investing in retirement, and the risks involved, then there is a great book called “How Much Can I Spend in Retirement” by Wade Pfau. (It’s written for an American audience but its premise still holds true here).
In it he talks about different financial tools that can be used to devise a consistent income strategy. One that satisfies your life goals and effectively manages your retirement risks. He calls these goals ’the 4 Ls’.
But it's not all plain sailing because he identifies 7 universal retiree risks that need to be managed which, when you opt to manage your own retirement assets via an ARF, become even more pronounced.
1. Reduced earnings capacity - Less flexibility to earn an income from work which can act as a cushion from the impact of a devalued portfolio and reduce the need for increased withdrawals from them.
2. Visible spending constraints - Pre-retirement is all about accumulating assets but retirees now have to turn assets into income and this acts as a very big restraint to their investment decisions.
3. Heightened investment risk - This is very relevant to an ARF holder because retirees are very vulnerable to market shocks such as the one occurring right now. Sequence of return risk can also dramatically reduce the long-term sustainable withdrawal rate from an ARF and, if a big devaluation occurs in year 1, it can take years off its expected lifetime.
4. Unknown longevity - Income planning would be a lot easier if the exact date of our demise was known in advance. As it’s not, it poses a challenge as to how long a portfolio needs to generate an income. My clients are no different to others in that there’s a very real fear that they’ll outlive their savings.
5. Spending shocks - Living off a portfolio income can greatly reduce the capacity to absorb unexpected expenses like home repairs, new car, divorce, children requiring financial assistance, long-term health and/or residential care. This is why it’s important to have an element of liquidity in a portfolio. For example, liquidating an ARF holding an investment property can be problematic and expensive if access to cash is urgent while liquidity from equities is more or less immediate.
6. Compounding inflation - Inflation may be low now but its presence dictates the need to take on investment risk for long-term sustainability. If we take a 20 year timeframe then a 1% rate of inflation would increase the cost of living by 22% while a 2% rate would increase it by 48%. The options to combat this are to gradually reduce spending or to take on more investment risk. The latter would cause more difficulty in a market like this and, generally speaking, the tolerance for taking on increased risk diminishes massively at this stage.
7. Declining cognition - This is the area that people most reluctant to discuss when I bring it up. Age related mental decline is an unfortunate part of the human condition but it’s one that should be planned for, particularly if the financial management of an ARF is undertaken by just one of the members of a married couple. Impaired decision making can result in mismanagement of assets and can cause an even bigger problem when the inexperienced spouse has to assume the responsibility if their spouse predeceases them. Many retirees are happy to manage their ARF themselves whilst others prefer to have an advisor to advise them. As usual, it comes down to individual preferences.
Annuities aren't popular at the moment as the rates are poor. That said, they can still play a part in your income strategy depending on the value of the assets you're retiring with.
Kevin
www.thepensionstore.ie
If you’re making an ARF decision and want to do some research on the realties of investing in retirement, and the risks involved, then there is a great book called “How Much Can I Spend in Retirement” by Wade Pfau. (It’s written for an American audience but its premise still holds true here).
In it he talks about different financial tools that can be used to devise a consistent income strategy. One that satisfies your life goals and effectively manages your retirement risks. He calls these goals ’the 4 Ls’.
- Lifestyle - maximising spending and purchasing power,
- Longevity - managing spending so that assets don’t deplete before their time,
- Liquidity - having access to resources for unexpected contingencies,
- Legacy - leaving assets behind for children, family and/or others.
But it's not all plain sailing because he identifies 7 universal retiree risks that need to be managed which, when you opt to manage your own retirement assets via an ARF, become even more pronounced.
1. Reduced earnings capacity - Less flexibility to earn an income from work which can act as a cushion from the impact of a devalued portfolio and reduce the need for increased withdrawals from them.
2. Visible spending constraints - Pre-retirement is all about accumulating assets but retirees now have to turn assets into income and this acts as a very big restraint to their investment decisions.
3. Heightened investment risk - This is very relevant to an ARF holder because retirees are very vulnerable to market shocks such as the one occurring right now. Sequence of return risk can also dramatically reduce the long-term sustainable withdrawal rate from an ARF and, if a big devaluation occurs in year 1, it can take years off its expected lifetime.
4. Unknown longevity - Income planning would be a lot easier if the exact date of our demise was known in advance. As it’s not, it poses a challenge as to how long a portfolio needs to generate an income. My clients are no different to others in that there’s a very real fear that they’ll outlive their savings.
5. Spending shocks - Living off a portfolio income can greatly reduce the capacity to absorb unexpected expenses like home repairs, new car, divorce, children requiring financial assistance, long-term health and/or residential care. This is why it’s important to have an element of liquidity in a portfolio. For example, liquidating an ARF holding an investment property can be problematic and expensive if access to cash is urgent while liquidity from equities is more or less immediate.
6. Compounding inflation - Inflation may be low now but its presence dictates the need to take on investment risk for long-term sustainability. If we take a 20 year timeframe then a 1% rate of inflation would increase the cost of living by 22% while a 2% rate would increase it by 48%. The options to combat this are to gradually reduce spending or to take on more investment risk. The latter would cause more difficulty in a market like this and, generally speaking, the tolerance for taking on increased risk diminishes massively at this stage.
7. Declining cognition - This is the area that people most reluctant to discuss when I bring it up. Age related mental decline is an unfortunate part of the human condition but it’s one that should be planned for, particularly if the financial management of an ARF is undertaken by just one of the members of a married couple. Impaired decision making can result in mismanagement of assets and can cause an even bigger problem when the inexperienced spouse has to assume the responsibility if their spouse predeceases them. Many retirees are happy to manage their ARF themselves whilst others prefer to have an advisor to advise them. As usual, it comes down to individual preferences.
Annuities aren't popular at the moment as the rates are poor. That said, they can still play a part in your income strategy depending on the value of the assets you're retiring with.
Kevin
www.thepensionstore.ie
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