Should retirees be 100% invested in equities?

Marc said:

I have no issues with you speculating with your pension in any way you see fit

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Choice of words here. Suddenly investing in equities is speculating. So anyone that has their pension in equities is speculating?

If someones confident in their conviction re a bunch of stocks, theyre familiar with the company and, importantly, they have the financial bandwith to choose stocks they want to invest in rather than in an index tracker then good luck to them. Why not. As you say, its their own money and it may very well pay off.

Marc said:

a 100% equity approach for an ARF is objectively an extremely high risk due to the very real threat of poor returns in the early years

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But there are mitigating measures that can be taken and nobody, not least Colm, is suggesting that this approach is for everyone.

Marc said:

Your approach whilst it might have worked for you is imprudent and you are reckless to post on a public forum as it might encourage others to take the same approach and they might not be as lucky.

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I strongly disagree with the tone and content of this. Colm, based on my read, is posting his own experience. Nothing wrong with that. I dont believe its reckless. He isnt saying people should follow him. I think your response here discredits you to an extent.

Sarenco said:

He’s worked long and hard to get to this position and is not interested in cutting his expenditure over vague fears that the market might be “overvalued”.

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I took the point about being cautious, if perception is that markets are overvalued, as sensible advice. Wont suit everyone but if you have the means to reduce your withdrawal rate, during a downturn, then, to me that makes sense. I feel that this point is being misrepresented.

JimmyB99 said:

It's funny how the successful ARF bet gets rolled out incessantly but it's all gone quiet regarding the Tesla bet for some reason

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This smacks of sour grapes to me.

jim said:

Choice of words here. Suddenly investing in equities is speculating. So anyone that has their pension in equities is speculating?

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No, buying single stocks is speculation.
Buying an index fund is investing

Personally I do enjoy Colm's posts but recognise that he is a retired actuary and past president of the actuary assocation of Ireland. So he's been in the investment/pensions and risk business for over 40 years. He is far better placed than me or the average punter to build a portfolio. I personally won't being going 100% into individually picked stocks in my ARF as I don't have the time or experience to read through individual company reports/ statements in order to establish whether their finances and business case warrant my investment. I'll be sticking to passively managed global index funds. I expect my equity allocation on retirement to be 60-70% in global passively manged indexed funds, 20% in euro government bonds and the rest in alternatives (Property/REITs, Commodities, Gold, Cash). I think I'll gradually increase my exposure to equities in the first 10 years of retirement to get to 85-90% equity holding in my early to mid seventies. This approach sounds prudent to me. I expect to have a DC fund of close to the SFT on retirement and also the comfort of €28K per year in various state and DB pensions.

Flybytheseat said:

he is a retired actuary and past president of the actuary

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This is the crux of my point. He has credibility.

His position on his ARF is analogous to the Chief Medical Officer in Ireland coming out and saying they are opposed to vaccines. It’s a tad controversial and attention should be drawn to that point.

As a much too late arrival in the pension world, I enjoyed the different views. My take on the equity in retirement route is that a 15 to 20 % drop at that stage would be a retirement altering shock with little chance of recovery unless more funds are pumped in whilst at the same time supposedly drawing down funds to live on . I've 15 to 20 years to go and will have the chance to invest during the dips that will inevitably arise. , I don't think a retiree would have that chance

Interesting analogy @Marc.........you wouldn't want the good Dr. Tony to turn into a rabid anti-vaxxer down the line alright.

I like the way @JimmyB99 put it when he said that there's a risk that people may be influenced and seduced by Colm's approach. I agree with him also when he says that whilst Colm can probably withstand a major stock market decline, others may not be so lucky due to having less room to manoeuvre.

Of course, Colm has a right to make his comments. I just disagree with them and think that they may cause problems for some of those who decide to follow his approach. The fact that those negatively affected will have no recourse to Colm should things go south doesn't diminish the potential financial and emotional hurt that would be caused. Managing a normal size pool of DC assets in drawdown, particularly if such money represents the lion's share of one's retirement assets, is tricky enough with a sensible strategy. Tricky from a financial as well as from an emotional perspective. Setting out on this journey with a strategy that will require (for most people) a lot of luck in running doesn't seem, at all, smart to me. The all-equity approach is probably ok in limited circumstances but, unless you really know your scallions, please DON'T TRY THIS AT HOME!

Marc said:

Looking at data on the daily index movements of the Dow Jones Industrial Average from 1916 to 2003, orthodox theory predicts there should be 58 days when the Dow moved more than 3.4% over that period; in fact there were 1,001. Theory suggests just six days of index moves beyond 4.5%; in fact there were 366. Index swings of more than 7% should occur once every 300,000 years; in fact, the 20th century saw 48 such days.

Consider the stock market collapse during the Russian bond default of August 1998. On 4 August the Dow fell 3.5% and, three weeks later, as the news worsened, stock fell again, by 4.4%, and then again, on the 31 August, by 6.8%. Theory would estimate the odds of
that final 31 August collapse at one in 20 million – an event which, were you to trade daily for almost 100,000 years, you would not expect to see even once. The odds of getting three such declines in the same month were about one in 500 billion.

A year earlier, the Dow had fallen 7.7% in one day (probability: one in 50 billion). In July, 2002, the index recorded three steep falls within seven trading days (probability: one in four trillion). And on 19 October 1987, the worst day of trading in at least a century, the index fell 29.2%. The probability of that happening, according to orthodox financial theory, was less than one in 10 to the 50, odds so small they have no meaning, and are beyond the scale of nature.

You could search for powers of ten from the smallest sub-atomic particle to the breadth of the observable universe and still never meet such a number.

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And now for something completely different - some Rocket Science.
By orthodox theory I presume you mean the Normal distribution. A common pitfall, the Normal distribution is not a universal benchmark. Its predominance in nature arises from the Central Limit Theorem. This states that no matter how bizarre an individual distribution, the sum of repeated instances of it converges toward the Normal. There is no case at all for benchmarking daily or very short term stock movements with the Normal. But over longer timeframes a (log) Normal distribution has been found to be close but indeed arguably needing tinkering such as variance compression.
I am sure clients are bowled over by thoughts of the size of the universe

Duke of Marmalade said:

And now for something completely different - some Rocket Science.
By orthodox theory I presume you mean the Normal distribution. A common pitfall, the Normal distribution is not a universal benchmark. Its predominance in nature arises from the Central Limit Theorem. This states that no matter how bizarre an individual distribution, the sum of repeated instances of it converges toward the Normal. There is no case at all for benchmarking daily or very short term stock movements with the Normal. But over longer timeframes a (log) Normal distribution has been found to be close but indeed arguably needing tinkering such as variance compression.
I am sure clients are bowled over by thoughts of the size of the universe

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Indeed but whilst the log stable fits the longer term returns it’s the short term that causes the issue in sequence of returns risk and the expected size of the left tail is the issue here.

“We agree that Mandelbrot is right. As we can see when looking at the daily market returns, the distribution is fat-tailed relative to the normal distribution. In other words, extreme returns occur much more often than would be expected if returns were normal. “

Eugene F Fama

Marc said:

And this is actually another aspect of your approach which compels me to address the wholly imprudent nature of what you are doing.

Again, I have no issues with you speculating with your pension in any way you see fit. It is after all your money.

The issue is that you frequently post your approach in a public forum and there is a risk, despite your protests that you are not encouraging others to follow your approach and that you are “not an adviser”, that others, who may have ordinarily sought sound counsel, decide instead to follow your approach which is flawed because:

A) You are picking stocks. That is objectively imprudent because one can invest in index funds for very low cost. As the late Nobel prize winner Merton Miller used to say” diversification is your buddy”

Markets do not reward idiosyncratic or stock specific risks because you can diversify them away and just be left with market or systemic risk

B) Markets are prone to wild short term fluctuations as I have noted above and therefore a 100% equity approach for an ARF is objectively an extremely high risk due to the very real threat of poor returns in the early years.

That is not to say an ARF should be held in cash either that is equally reckless but for different reasons.

Your approach would not pass regulatory; suitability or appropriateness tests for all but the most wealthy investors or judicial scrutiny by say the prudent investment rule 1992 in the USA or the trustee investment act 2000 in the U.K.

Your approach whilst it might have worked for you is imprudent and you are reckless to post on a public forum as it might encourage others to take the same approach and they might not be as lucky.

They will have no recourse, insurance or compensation.

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That attack is way over the top Marc.

Colm has always been clear on his strategy and his winners and losers in investing over the years. And yes, of course you can invest in individual stocks, to say only investing in an index is ridiculous.

He is a personal investor, so he doesn't need to meet any regulatory standards, especially ones in other jurisdictions. Just like I, as a regulated advisor in Ireland, don't have to meet regulatory standards in the US or UK either.

I have no interest in getting into an argument over this thread which has been nothing but argumentative since the start (on the previous thread). I just wanted to state that your post was out of order.

Colm Fagan is a superb, honest, and open poster whose contributions I really enjoy. If I were him, I wouldn’t lose any sleep over being ‘Sir Geoffrey Howe’d’, i.e. savaged by a dead sheep.

Nonetheless, I think it’s a bad idea to have all of one’s ARF in equities if the retiree is relying upon the ARF for his or her retirement income. Sarenco’s example is a valid one in that there have been scenarios in which one runs out of money pretty quickly.

Notwithstanding that I enjoy Colm’s posts and his openness, I think he’s simply been lucky with his ARF. It was born at one of the most opportune times in history and he’s done well with it, but not so much on a relative basis. It looks like he’s underperformed the market.

I have zero intention of managing my own ARF when I retire. Could I do it? Yes. But not as well as a diversified portfolio managed by professionals with the time and resources to construct a portfolio and review it constantly. Me spending time on it would be wasted time when I could be enjoying myself. As an aside, I might have my ARF 100% in equities.

Gordon Gekko said:

It was born at one of the most opportune times in history and he’s done well with it, but not so much on a relative basis. It looks like he’s underperformed the market.

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I retired around the same time as Colm. I had a DB pension but I maxed my contribution to a PRSA from post retirement nixers and then ARFed around 2011 into a Global Index Fund, itself considerably higher that the sum of the few years' contributions.. Small beer by comparison but it was very lucky timing and I too took my mandatory 4% distributions and my ARF is now well over its initial value. In an earlier AAM discussion I teased Colm by claiming I had got a better return than his DIY approach. He wasn't pleased and as it happens he demonstrated that I got my numbers wrong, I was including the PRSA performance. He had beaten me on his ARF!

Dr Strangelove said:

You made that post when interest rates were at their lowest in, well, the history of interest rates.

There was zero upside to holding bonds then. And I’m not saying that because risk-free bonds have fallen by approximately a quarter in value since then. I’d be saying that if rates were still as low.

Equities have basically unlimited upside. Bonds do not as there is an effective lower bound to rates.

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exactly the only reason bonds had an incredible run upto 2020 was negative interest rates, so interest rates effectively fell from the dot com crash to covid because of central bank buying of government bonds to hold down interest rates.

Sarenco said:

I’ve given you a concrete example of a 2000 retiree and why your 100% in equities forever approach would have been catastrophic.

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I took the return for the MSCI All-World Index and added on 100bp in fees.

I assume someone started on 31 December 1999. They took out an inflation-adjusted $40k every year. All in dollars with US CPI.

Scenario below shows that they would have run out of funds only after 22 years of retirement.

Is this "catastrophic"? For a 65 year old they got more than a life expectancy out of their ARF. On the other hand although they did start with $1m, adjusted for inflation, they only ever drew down 90% of it.

I did the same exercise below for the S&P500 which gave a slightly better return but the retiree would probably run out of money some time early in 2025.

I think the decision on the balance of stocks vs equity in retirement is personal. Risk appetite is a big part of it. And personal circumstances will partly determine risk appetite.

Between COAP and defined benefit I'll have around €20k a year on retirement. This isn't a fortune, but with a warm house & solar panels my heating bills will be low and my electricity bills near zero- those are worth another few grand a year. If that is all i have, I'll still be fine- my holidays will be less frequent and more budget but that's never bothered me before.

I reckon €35k a year will see me quite comfortable. I'm hoping for signifantly more and my basic assumptions and data suggest my pension will give it to me.

Taking advice from @Marc above somewhere, I stress tested my intended contributions against against performance I'm invested in, and if it has it's worst 20 year annualised performance over the course of 40 years (including the last 5) I'll be OK in terms of having a comfortable income, and I'll stay a little ahead of inflation.

If my pension fund evapourates completely, after 10 years, I'll still be OK but not so comfortable.

So basically my position is sufficiently secure that I can risk keeping it all in the index until I die. My worst case scenario is still OK for me.

If i just had the COAP and lived in an expensive house, it'd obviously be a lot different. Then I'd need some of the extra money and my risk appetite decreases. Throw in some big post-retirement expenses and a guaranteed 3.5% on bonds or maybe even an annuity could start looking pretty good.

Or maybe I've invested less into my pension over the years so I'm starting my retirement with a less resilient fund. That might make me more cautious as well.

So i can show all the data on why I'll be staying invested in an index on retirement and that's the right decision for me. But that doesn't mean it's the right decision for the guy beside me. And that's totally fine.

Edit- I'm sure some people will think €20k a year guaranteed in retirement is a fortune, and others will be horrified by €35k being described as comfortable. That's fine too!

SquirrelChaser said:

I think the decision on the balance of stocks vs equity in retirement is personal. Risk appetite is a big part of it. And personal circumstances will partly determine risk appetite.

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This is 100% the whole issue.

One’s capacity for loss or objectively their ability to ride out a catastrophic market collapse is the most important consideration here.

As I said at the top of the thread if you are fortunate to have a defined benefit pension and a state pension and land and property and a huge pile of cash in the bank and your pension is an AVC that you took out because of the tax break but it’s really just another line of inheritance for your family then sure you have a high capacity for loss. If the market tanks it’s not going to have a material impact on your ability to feed yourself. High equity approach is objectively fine.

BUT, this has nothing to do with risk tolerance or desire or willingness to take investment risk. That’s a personal preference issue and different from the objective measure of one’s ability to take on the risk in the first place.

So fortunate people who may be in the top 10% of society by wealth shouldn’t extrapolate their lucky experience to society in general. It’s not appropriate. That’s my point.

Again, contrast this with someone as I did at the top of the thread who is at the other extreme.

No DB pension, small DC pot, mortgage debt on their house which they need the lump sum from their pension to clear. Lots of people in Ireland today are like this and some of whom will come onto this site seeking guidance on what to do.

Objectively these people simply don’t have the capacity to bear high risk of capital loss as it would have a material impact on their income and their ability to meet essential bills.

They objectively probably shouldn’t have an ARF at all and should be buying an annuity irrespective of their willingness to take out an ARF and invest in high risk equities.

And that’s the tricky part of the puzzle for most people. Most people will be somewhere in the middle of these two extremes. A decent sized pension fund but maybe not at the €2m SFT some savings but maybe 2 or 3 children at college and needing help onto the housing market. Lots of complexity and challenges so a one size fits all “just lash it into equities because it worked for me” probably isn’t the right answer for everyone. It’s maybe more nuanced than that.


So yes it’s all about the circumstances of the individual and nothing to do with investment theory or the fact that over the next 50 years the equity market will most likely provide the highest expected return if an individual investor has starved to death in the meantime because their pension collapsed the year they retired and they HAD to keep taking withdrawals.

That’s it. That’s the point

PS

I met an very successful businessman a while ago and he was at the point of taking his retirement benefits.

I asked the question if he’d had a long career in the civil service would he be worrying about what to do with his defined contribution pension fund. Of course not.

I then asked do you think the Civil Servant is doing flips and twists trying to get their guaranteed DB pension into an ARF. No of course not.

He bought an annuity.

Email from him yesterday

“Marc, thanks for the advice to go for the annuity pension option. I would now say it’s a no-brainer, at that rate.”

Advice about your retirement options is very personal.

Dr Strangelove said:

I took the return for the MSCI All-World Index and added on 100bp in fees.

I assume someone started on 31 December 1999. They out an inflation-adjusted $40k out every year. All in dollars with US CPI.

Scenario below shows that they would have run out of funds only after 22 years of retirement.

Is this "catastrophic"? For a 65 year old they got more than a life expectancy out of their ARF. On the other hand although they did start with $1m an, adjusted for inflation, they only ever drew down 90% of it.

Year-end	Annual return	Fee	Net return	UC CPI	Drawdown adjusted for CPI	Fund
1999​			​	166.6	​	1,000,000
2000​	-12.9​	1.0​	-13.9​	172.2​	40,000​	820,800​
2001​	-16.5​	1.0​	-17.5​	177.1​	41,138​	635,858​
2002​	-19.5​	1.0​	-20.5​	179.9​	41,961​	463,355​
2003​	29.8​	1.0​	28.8​	184.0​	42,800​	553,769​
2004​	14.6​	1.0​	13.6​	188.9​	43,656​	585,537​
2005​	9.2​	1.0​	8.2​	195.3​	44,529​	589,256​
2006​	20.3​	1.0​	19.3​	201.6​	45,420​	657,267​
2007​	10.8​	1.0​	9.8​	207.3​	46,328​	675,351​
2008​	-40.7​	1.0​	-41.7​	215.3​	47,255​	346,407​
2009​	30.8​	1.0​	29.8​	214.5​	48,200​	401,402​
2010​	12.3​	1.0​	11.3​	218.1​	49,164​	397,757​
2011​	-5.0​	1.0​	-6.0​	224.9​	50,147​	323,665​
2012​	16.5​	1.0​	15.5​	229.6​	51,150​	322,812​
2013​	27.4​	1.0​	26.4​	233.0​	52,173​	355,765​
2014​	5.5​	1.0​	4.5​	236.7​	53,217​	318,557​
2015​	-0.3​	1.0​	-1.3​	237.0​	54,281​	260,071​
2016​	8.2​	1.0​	7.2​	240.0​	55,367​	223,300​
2017​	23.1​	1.0​	22.1​	245.1​	56,474​	216,108​
2018​	-8.2​	1.0​	-9.2​	251.1​	57,603​	138,623​
2019​	28.4​	1.0​	27.4​	255.7​	58,755​	117,850​
2020​	16.5​	1.0​	15.5​	258.8​	59,931​	76,186​
2021​	22.4​	1.0​	21.4​	271.0​	61,129​	31,323​
2022​	-17.7​	1.0​	-18.7​	292.7​	62,352​	-36,896​
2023​	24.4​	1.0​	23.4​	304.7​	63,599​	-109,136​

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Add in the guard rail strategy by Jonathan T. Guyton and William J. Klinger to the above and there will be no issue, i.e. seq of returns can be mitigated.

For my "required" annual expenses, I have a minimum core amount (to keep the lights on) and then the flexible spend amount which covers most discretional spending and a buffer for adhoc stuff. In any down year(s), I will simply cut my cloth and reduce some of the adhoc spend - i.e. it will be a local holiday instead of a Maldives holiday.

Dr Strangelove said:

I took the return for the MSCI All-World Index and added on 100bp in fees.

I assume someone started on 31 December 1999. They took out an inflation-adjusted $40k every year. All in dollars with US CPI.

Scenario below shows that they would have run out of funds only after 22 years of retirement.

Is this "catastrophic"? For a 65 year old they got more than a life expectancy out of their ARF. On the other hand although they did start with $1m, adjusted for inflation, they only ever drew down 90% of it.

Year-end	Annual return	Fee	Net return	UC CPI	Drawdown adjusted for CPI	Fund
1999​			​	166.6	​	1,000,000
2000​	-12.9​	1.0​	-13.9​	172.2​	40,000​	820,800​
2001​	-16.5​	1.0​	-17.5​	177.1​	41,138​	635,858​
2002​	-19.5​	1.0​	-20.5​	179.9​	41,961​	463,355​
2003​	29.8​	1.0​	28.8​	184.0​	42,800​	553,769​
2004​	14.6​	1.0​	13.6​	188.9​	43,656​	585,537​
2005​	9.2​	1.0​	8.2​	195.3​	44,529​	589,256​
2006​	20.3​	1.0​	19.3​	201.6​	45,420​	657,267​
2007​	10.8​	1.0​	9.8​	207.3​	46,328​	675,351​
2008​	-40.7​	1.0​	-41.7​	215.3​	47,255​	346,407​
2009​	30.8​	1.0​	29.8​	214.5​	48,200​	401,402​
2010​	12.3​	1.0​	11.3​	218.1​	49,164​	397,757​
2011​	-5.0​	1.0​	-6.0​	224.9​	50,147​	323,665​
2012​	16.5​	1.0​	15.5​	229.6​	51,150​	322,812​
2013​	27.4​	1.0​	26.4​	233.0​	52,173​	355,765​
2014​	5.5​	1.0​	4.5​	236.7​	53,217​	318,557​
2015​	-0.3​	1.0​	-1.3​	237.0​	54,281​	260,071​
2016​	8.2​	1.0​	7.2​	240.0​	55,367​	223,300​
2017​	23.1​	1.0​	22.1​	245.1​	56,474​	216,108​
2018​	-8.2​	1.0​	-9.2​	251.1​	57,603​	138,623​
2019​	28.4​	1.0​	27.4​	255.7​	58,755​	117,850​
2020​	16.5​	1.0​	15.5​	258.8​	59,931​	76,186​
2021​	22.4​	1.0​	21.4​	271.0​	61,129​	31,323​
2022​	-17.7​	1.0​	-18.7​	292.7​	62,352​	-36,896​
2023​	24.4​	1.0​	23.4​	304.7​	63,599​	​

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Not sure why you are using US figures given that we are in Ireland!

Also, you seem to have used gross return figures, which ignores the impact of dividend withholding taxes.

Regardless, my hypothetical 2000 retiree is still alive and well and expects to live another 6 years.

So, yes, having run out of money is pretty disastrous!

Marc said:

This is 100% the whole issue.

One’s capacity for loss or objectively their ability to ride out a catastrophic market collapse is the most important consideration here.

As I said at the top of the thread if you are fortunate to have a defined benefit pension and a state pension and land and property and a huge pile of cash in the bank and your pension is an AVC that you took out because of the tax break but it’s really just another line of inheritance for your family then sure you have a high capacity for loss. If the market tanks it’s not going to have a material impact on your ability to feed yourself. High equity approach is objectively fine.

So fortunate people who may be in the top 10% of society by wealth shouldn’t extrapolate their lucky experience to society in general. It’s not appropriate. That’s my point.

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That's a bit over dramatic. This is Ireland not a third world country- there's plenty of free food available to people who need it. And it's even available to people who don't need it but like free stuff. Just because I don't go around the houses taking the free food doesn't mean i can't. There's never any questions asked.

For the vast majority of retirees the state pension (whether contributory or not) provides a floor on their retirement income. Very few are reliant on their pension fund for the bare necessities, it's to get them a level of comfort above subsistence.

So we come back to risk appetite- do i risk hitting the floor for the chance of a significantly more comfortable retirement, or do i put my fund into raising the floor by sacrificing that chance.

Sarenco said:

Not sure why you are using US figures given that we are in Ireland!

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I’ll re-run it later with € figures. Lower inflation will be offset a bit by currency devaluation.

Sarenco said:

Regardless, my hypothetical 2000 retiree is still alive and well and expects to live another 6 years.

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So a retiree with a life expectancy of 30. In 2000 that would have been 48 for a man and 52 for a woman! That’s a decade ahead of typical retirement ages then or now.

Even at today’s (longer) life expectancies a 51 year old male can be expected to live 30 years. Would you advise a constant 4% inflation-adjusted withdrawal strategy and expect for it to last him his life? I would advise that it’s too high a starting percentage, no matter what the equity/bond mix.