Should retirees be 100% invested in equities?

Sarenco said:
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
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I might be misunderstanding this but in your example we can assume the retiree was 65 in 2000?

So as of today they are 89/90?

And theyve been getting the COAP for 20+ yrs and continue to do so?

And you assume theyll live to 95?

Am i missing something?

This is hardly disastrous.
 
Well, I think it’s prudent to plan on the basis of a 30-year retirement (or longer if retiring early). With advances in medicine, etc, it’s not exactly uncommon for people to live well into their 90’s these days.

Besides, my hypothetical retiree has a much younger dependant spouse that he needs to consider.

And, yes, I would expect a constant 4% inflation-adjusted drawdown from an appropriately balanced portfolio to survive a 30-year retirement. No guarantees, obviously, but that would be my expectation.
 
The more i read these the more im starting to find it to be watery. Now we are instroducing a much younger bride/groom.

Look, lets call a spade a spade. Even in your example Sarenco if we assume the typical things:

65 yrs old in 2000.
24 yrs late, if they are lucky enough to still be alive, they are aged 89 and they run out of cash in their arf but they still have their COAP. Which for lots of people is all they have in retirement in the 1st place and they are happy and content and i know of many.

Its not disastrous, even in this worse case scenario you presented.
 
Sarenco said:
With advances in medicine, etc, it’s not exactly uncommon for people to live well into their 90’s these days.
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That’s hand-waving. You can’t expect people to take your empirical arguments about sequence of returns seriously (which I do) but be vague about life expectancy which is measurable and predictable.

Sarenco said:
Besides, my hypothetical retiree has a much younger dependant spouse that he needs to consider.
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How many years is “much younger”? It’s again very vague.

For the sake of argument let’s add on five years. So it’s even less realistic to expect any portfolio to survive a 4% inflation-adjusted drawdown pattern for 35 years.
 
Dr Strangelove said:
That’s hand-waving.
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Hardly.

Obviously nobody knows how long they are going to live but there is roughly a 1 in 4 chance that a 64 year old female will still be alive at 94 and a 1 in 10 chance that she will still be alive at 98!
Dr Strangelove said:
How many years is “much younger”? It’s again very vague.
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It doesn’t really matter but, yes, let’s say 5 years younger for the sake of argument.

The point is that you cannot know in advance precisely how long the portfolio is going to need to survive so 30 years seems reasonably prudent to me for planning purposes.
 
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ArthurMcB said:
It’s not disastrous, even in this worse case scenario you presented.
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Well, my hypothetical 2000 retiree considers it pretty disastrous to have run out of money before he’s run out of life!

Scraping by on the State pension is not his idea of fun.

The point is that this could have been avoided with a more prudently allocated portfolio in his ARF.
 
ClubMan said:
Are all the hypothetical cases running out of pension prematurely blowing their tax free lump sum as soon as they receive it?
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My hypothetical retiree used his lump sum to pay off his debts and has no other assets or source of income.

Really, the focus of this thread is whether it is prudent for a retiree to be 100% invested in equities.
 
Sarenco said:
Does it really matter for the purposes of this thread?

To keep the focus on whether or not it is prudent for a retiree to invest his ARF 100% in equities, let’s say not.
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I think you're flogging a dead horse here Sarenco, mostly because you're now considering an extreme variation of a decumulation-only phase. If you're going to end up on the breadline by running out of money then no, 100% equities wouldn't be a good idea. But the more security you have elsewhere (COAP) and the more modest your needs (as opposed to wants), then 100% equities isn't such a bad idea provided you've stayed in 100% equities for the entire accumulation phase and not lifestyled down into lower-risk, lower-reward pattern pre retirement.

That said, I do agree that Colm's variation of 100% equities (self-selected stocks through familiarity, very senior financial services background) is an outlier rather than a template for regular Joe's to follow.

And I personally think an equity glidepath makes sense. And for my personal circumstances, I would like my wife to have a less complex, more secure pension set-up should I pre-decease here.... all of which illustrates that even for someone relatively comfortable with the concept of 100% equities like me, every situation has its own nuances.
 
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conor_mc said:
I think you're flogging a dead horse here Sarenco
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Fair enough but I wouldn’t fancy trying to live on the State pension alone.

Sure, you could survive but it would be a fairly bare bones existence - not how I would want to see out my golden years.

My objective is to maximise the probability that my portfolio will produce sufficient returns to allow me to continue living my desired lifestyle throughout retirement. The terminal value is of no real consequence to me.

Investing an ARF 100% in equities does not achieve that objective.
 
Sarenco said:
Does it really matter for the purposes of this thread?

To keep the focus on whether or not it is prudent for a retiree to invest his ARF 100% in equities, let’s say not.
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I guess people can agree with that, but also inventing a hypothetical that now has now got a young wife who needs to be supported, spent entire lump sum straight away to clear all debts, but still has highish expenses which can’t be reduced, then took full increasing 4% every year despite retiring at the worst possible time and now it turns out neither him or his wife even has access to the oap! He is a pretty unusually unfortunate soul (except for possibly the younger wife)

Nobody is suggesting I think that living off state pension is comfortable. It’s been suggested that if that’s the worst case scenario having taken some increasing silly decisions then it’s not too bad since you have had a pretty good retirement up until then and are now just in the same place as most other retireees.
 
I am moved to comment further, despite my earlier resolution not to.
Firstly, some people completely misunderstand aspects of my approach to investing because they have a mistaken idea of what investing is really about. A classic is the following:
Marc said:
You are picking stocks. That is objectively imprudent because one can invest in index funds for very low cost.
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@Marc defines my practice of buying shares in companies and holding them for years as "speculation" while his practice of choosing index funds is "investing". @Marc is probably the only person in the world who thinks that.
Real investors study an investment opportunity and assess its merits before making a long-term commitment to it. They need to assess the dynamics of the business, how much profit it's likely to earn, the dividend and how it's likely to change, the risks to the business, etc. That simply can't be done with an index fund.
Another area of misunderstanding is viewing investments dichotomously as "equites" or "bonds". I see them completely differently. I buy some shares for dividends, some for long-term growth. They may both be called "equities", but they're completely different.
For "dividend" shares, I look at the current dividend as a percentage of the current price and try to assess whether it's likely to increase or fall in future. For "growth" shares, I look at the ratio of price to earnings and consider how both earnings and the P/E ratio might move in future.
For a quick example of the thinking summarised above, one of my "dividend" shares pays a yearly dividend of over 10% of the current share price. I'm satisfied that the dividend is safe for years to come. The dividend has never fallen - and has increased most years - since I bought my first shares in the company over 9 years ago. That's far more than I could get from an ultra-safe bond, so there's no way I would buy a bond when shares paying that high a dividend (safely, I think) are available.
One of the "growth" shares is on a P/E multiple of over 40. I bought shares in the same company in 2015 at a P/E multiple of under 20. I don't think its prospects are much better now than they were in 2015, so I'm thinking of selling some or all of my shares in that company. I only did this analysis now, when drafting this post. It's very - VERY - superficial, but it seems to support the impression that came through a few times during the current exchange, that the current hype about AI etc. has many similarities to the dot-com bubble that ended with a bang in 2000.
My conclusion may be completely misplaced- I emphasise that it was arrived at quickly and will need further checking. Also, I haven't been looking at the market recently because of my AE activities; however, it shows how I make decisions on my investments based on the simple metrics of dividend and earnings yield. It's not possible to do that with index funds.
Another area of continuing misunderstanding is the hypothetical example of someone retiring from an ARF on 1 January 2000. I agree that someone who started withdrawing 4% a year from that date - based on the then market value (an important qualifier) - would have suffered a sorry fate. But it's not that straightforward. @Dr Strangelove kindly posted figures showing how the index moved after 2000 and how the fund would have been depleted. However, I would like to draw attention to how the market moved BEFORE 1 Jan 2000. It is quite obvious from those figures that the market went mad in the few years up to 2000. That's not hindsight. It was clear as a pikestaff at the time. Here are the numbers (UK FTSE, but I'm sure the US was much the same - all figures are 1 January): 1996: 196.73 1997: 229.58 1998: 283.63 1999: 322.73 2000: 400.84. In other words, the market more than doubled in those four years - and in 1996 it was already 50% above its level three years previously. That should have led advisers to caution clients against taking (say) 4% of the fund's value at 1 January 2000, because of the risk that some of the windfall gains in the preceding few years might be reversed in future.
Finally, the only things of real importance for the investor are what it costs them to get into the market, how much they get back in dividends each year, and how much they get out at the end. Market movements in the interim are irrelevant. As Benjamin Graham said, the stock market is a voting machine, not a weighing machine. Looking at the example of the company mentioned earlier (current dividend yield 10%), the dividend yield was somewhat less than 10% when I bought it 9 years ago (I think it might have been around 8% - I don't have the precise figures to hand). The dividend has either stayed constant or increased every year since then. It doesn't matter a whit that the share price moved in a 60% range - up and down - in the last four years alone. @Marc can do his wonderful lognormal and fat tail calculations, with a bit of Mandelbrot thrown in for good measure, on those price movements , but they mean nothing - if we focus on the weighing machine, not the voting machine.
 
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The younger dependant spouse is really not at the core of this scenario. I was just making the point that a portfolio can have to support folks for a long time.

I still think that it’s prudent for somebody retiring in their mid-60’s (with or without a dependant spouse) to plan on the basis of a possible 30-year retirement. There is obviously a non-trivial possibility that somebody in their mid-60’s will still be alive in their mid-90’s.

But, hey, the all-equity portfolio of my hypothetical 2000 retiree barely made it past 20 years, never mind 30 years.

As regards the lump sum, I think it will be increasingly common for folks to use that money to clear their mortgage and other debts. Or to assist children to purchase homes.

But, sure, if a lump sum is retained and kept on deposit then a more aggressive allocation within the ARF would certainly be appropriate. Obviously you have to look at the overall financial position of any retiree rather than focusing on any account in isolation.

As regards cutting expenses when markets are in drawdown, well for how long? And by how much? I would have thought that most retirees would want to maintain a fairly consistent standard of living.

And don’t forget imputed distributions…

Finally, you won’t know that you retired at the “worst time possible” until many years have passed.
 
Colm Fagan said:
That should have led advisers to caution clients against taking (say) 4% of the fund's value at 1 January 2000, because of the risk that some of the windfall gains in the preceding few years might be reversed in future.
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I’m pretty confident most prudent advisers would have advised clients to take some risk off the table and not to stick with a 100% equity portfolio in retirement.

And, with hindsight, we now know that would have been the correct advice.
 
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