Should I switch some of my pension fund to cash as I approach retirement?

Gordon Gekko said:
If I invest the €60k, my returns will be subject to CGT and marginal rate income tax.

Assuming their CAT thresholds will be used up, my kids will pay 33% CAT if they inherit the €60k.
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Hi Gordon. It was at this point I came unstuck the last time someone tried to persuade me of the reasonableness of what you're proposing.
Firstly, I'm not investing the €60k. I'm spending it! Secondly, even if I don't spend it all, I can always give some of it to the children and grandchildren. As I recall, between the other half and myself, we can gift each of them €6k a year tax-free - not that I would want to claim to be that generous with them! That immediately eliminates any problems of CAT and CGT!
 
When I first read this I really had to scratch my head. How could 30% loss eased in over 5 years be worse than 30% loss day 1? Colm has already challenged the comparison. The way I see it now is as follows. The unstressed assumption is for a steady 5% p.a. return. Colm's initial stress was for an immediate 30% hit which remains in place throughout. The "30% over 5 years" stress in the above post is in fact a stress which peaks at 45% after 5 years!

There is indeed sleight of hand at work here and it initially threw me. NoRegrets, I am not accusing you of a deliberate misrep as I find your posts very good in general. Perhaps you "sleighted" yourself as you did me and possibly @Marc was also "sleighted" but I am sure he can speak for himself.
 
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@NoRegretsCoyote. I too believe that you weren't trying to pull a fast one with your post. I also agree with the Duke on the quality of your posts. I am sorry if I gave the wrong impression with my initial reply. To be honest, I was more put out by the 'like' from @Marc . It would be nice if he could engage with me on the questions I asked him on some of his posts, e.g. his learned references to lognormal distributions, volatility drag, arithmetic versus geometric means, etc.
 
Thanks @Colm Fagan I greatly enjoy your posts and I think everyone is arguing in good faith. I'm on holidays and don't have hours to run scenarios in any case.

Maybe my assumption of a 30% cumulative loss of the first five years is unrealistic. Historically, you tend to get double-digit annual declines followed by more gradual growth. I think I still have a point that relatively small but sustained losses in the early years can leave you without enough remaining to grow yourself out of trouble.

Duke of Marmalade said:
The "30% over 5 years" stress in the above post is in fact a stress which peaks at 45% after 5 years!
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You won't find this in the US experience, but you will find periods as bad in other equity markets. For example Japan.

 
@NoRegretsCoyote
I am not saying that 45% fall from ATH is outlandish. It was just that the initial read of your post had me thinking that you were making a "timing" or, in the jargon, a "sequencing" point.
In reality your "30% over 5 years" versus Colm's 30% day 1 is fundamentally a stiffer stress, not related to sequencing or timing. If you had said that a 45% fall after 5 years is worse than a 30% fall day 1 it would have elicited a "so what" from me.
 
I looked at returns going back to 1995 and picked different investment periods. I assumed an ARF of €1m invested in the MSCI World Index with 4% annual withdrawal and another with a €40,000 annual withdrawal. In the different time periods I looked at there was no bomb out of funds with the exception of one.

If you invested before the crash in 2000 and made no adjustment to your withdrawal amount, continuing to take €40k a year, you would have run out of money...last year.

If you had taken 4% of the fund, it would have fallen to €305,000 at its lowest point and your income would have been €12,200 but you would still have a pot.

I am not advocating investing in 100% equities in retirement but taking income as a percentage instead a fixed amount will help you preserve the value of the ARF. Whether €12,200 is enough for you to live on is another issue.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)


*I would have stuck up graphs but the Insert Image icon asks for a url, which I don't have so if someone can tell me what to do instead, I'll put them up.
 
Steven Barrett said:
*I would have stuck up graphs but the Insert Image icon asks for a url, which I don't have so if someone can tell me what to do instead, I'll put them up.
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I presume the graphs are in Excel. Either of two methods.
Attach the file. This method is less immediate to the reader.
Copy Picture the graph and Paste into your post. (Copy Picture works slightly differently for different versions of Excel, you may have to Google it.)
Actually I can't get Copy and Paste to work in this thread, it works in other threads.
 
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I was trying to copy and paste and it wouldn't work for me either. I don't see where the attached file is gone to either.
 
NoRegretsCoyote said:
You won't find this in the US experience, but you will find periods as bad in other equity markets. For example Japan.
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Ah, Japan starting in 1990! It is the one that is always trotted out to prove that it's stupid to invest everything in equities! Changing the subject slightly, I chose Japan in the 30 years starting from 1990 as the "adverse scenario" for my proposed smoothed equity approach to auto-enrolment (in the paper I presented in January last - Section 8). The AE scheme I am proposing - with 100% in equities throughout - survived that simulated experience. However, I don't have to do the sums to confirm that my ARF wouldn't have survived it. It's not something that concerns me unduly, though.
I prepared a couple of slides on Japan for a presentation a few years ago. I can't copy them, but here is some of the text:
(a) Japan in the 1980’s: tulipmania on steroids
  • Imperial palace in Tokyo supposedly worth as much as the entire state of California
  • In 1990, total stock of property in Japan was four times the value of US property stock
  • Topix Index more than trebled between December 1984 and December 1989
  • Nippon Telephone and Telegraph floated in 1987 at a P/E of 250
  • At end 1991, despite the already steep falls in stock prices and a rising tide of bad loans, Tokyo’s banks’ shares traded at an average P/E of c60
(b) Japan in the 1990's: the bust and the long hangover
  • Index fell by over 70% from its peak in December 1989 to its nadir in March 2003
  • Hangover prolonged (for decades) by failure to deal with zombie banks and zombie corporates, which were kept on life support when it would have been far better to have let them die
As I wrote in the January paper, while a few stocks are in tulipmania territory at the moment, the market as a whole is far from where Japan was before the bust, so I think I'm OK.
 
Marc said:
Yes I noticed the new website made it impossible to cut and paste from the clip board.

I have created a landing page on my website where I drop image files

I then copy the image address into the insert image icon which only accepts a URL
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The weird thing is that some AAM threads do allow Attach File and Copy & Paste but not this thread.
 
Colm Fagan said:
Ah, Japan starting in 1990! It is the one that is always trotted out to prove that it's stupid to invest everything in equities!
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I don't make that claim. It's just a useful example of an equity market getting detached from fundamentals for a sustained period.

Anyway if I am guilty of cherrypicking a time and place with awful returns you are equally guilty of "just so" storytelling to explain away why it was obviously a bubble ex ante
 
Hi @NoRegretsCoyote. My remark wasn't aimed at you specifically. It's just that I've had Japan in the 1990's rammed down my throat by various people over the last three years, ever since I first suggested a smoothed 100% equity approach to pension investment. I took their challenge seriously and devoted an entire section (Section 8, pages 36 to 40) of my January paper to an exploration of how things would have worked out if the market were to suffer a Japan-style collapse just after the launch of auto-enrolment based on the smoothed equity approach I'm proposing. As I showed in the paper, it would have come through it very well. As I have also said, my ARF would not survive intact if that were to happen now. On the other hand, if we were now in a pre-Japanese-crash scenario, I would not be enjoying a secure dividend yield of 7% a year on the top holding in my ARF portfolio, so the possibility doesn't concern me. As far as cherry-picking is concerned, I have only one life and one ARF experience. That's what I recounted. I can't cherry-pick another life for myself.
 
Steven Barrett said:
If you invested before the crash in 2000 and made no adjustment to your withdrawal amount, continuing to take €40k a year, you would have run out of money...last year.
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Hi Steven

Deciding to start spending down an all equity portfolio from 2000 certainly turned out to be an unfortunate choice.

I wonder would it be possible to re-run the simulation based on a 60/40 portfolio of global equities and global bonds (euro hedged), ideally rebalanced annually?

I don't have the data to run that simulation myself but I suspect a balanced portfolio of that nature would have produced a materially better outcome.
 
I ran those figures based on 60/40 portfolio, rebalanced quarterly. If there was no adjustment of €40k annual income, you'd have €63,600 today and would be looking at bomb out. Reducing your withdrawals from the fund in severe downturns is key to surviving it. People who retired in 2000 were hit the hardest as they had two big recessions in one decade.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)
 
But there is the forced withdrawals needed to pay tax on the required distributions. So their is a minimum required withdrawal.
 
Sequence risk seems to be mostly problematic with falls in asset values occur at the start of drawdown.

If you retire into growth years, assuming you are spending less than observed growth your fund builds up a buffer, which protects against later falls.

Keeping this in mind things I have considered to protect against selling, especially during falls in the first 5 years.

Create a 'temporary' cash/bond buffer to cover some of the initial years spending. Spend that first. If times are good rest of fund grows. If times are bad you are not selling your falling equity (which increases bomb out risk/reduced future income). You do give up the expected equity returns of this buffer during the temporary period though.

Have another income source e.g. annuity, rent, job, state pension. We all need some minimal spending to not starve. The more of that which comes from another source, the more we can choose not to drawdown during falling markets. I think I include dividends here from shares that I would never sell, but I don't think either of ye clearly proved that. It's probably worth it's own thread.

Reduce lifestyle/withdraw less
 
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