Would you mind explaining what these numbers refer to please? I’m guessing equities versus bonds but I don’t know which is which.
Should retirees be 100% invested in equities?
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Gordon Gekko
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I don’t believe that’s relevant actually. It doesn’t matter what the fund is worth when the ARF is created if it’s 100% in equities thereafter. What happened before and the starting value shouldn’t matter. In the real-world scenarios that Sarenco cited, the fund bombed-out. It doesn’t matter whether it roared to €1.2m prior to retirement or glided to €800k. 100% in equities and the mandatory drawdowns destroyed it in those lived experiences.
I suspect it's bonds:equities, but I agree that several aspects of this thread are very confusing because people insist on using jargon and stuff that's not immediately obvious (took me a while to figure out that "DCA" presumably means "Dollar (sic.) Cost Averaging").
Thanks @Dr Strangelove,
Your updated figures are certainly more in line with what I had understood to be the bomb out risk. They are pretty stark.
In the real world, the chances are that the ordinary investor wouldn't even get the massive equity uplift post 2008 - he'd be in cash, in the pub and in marriage counselling at best. This is what happens when things go nasty. Think all-in capitulation. Think Bryson when he whacks the driver anywhere - sure it can work sometimes, but it ain't going to work all the time.
Your updated figures are certainly more in line with what I had understood to be the bomb out risk. They are pretty stark.
In the real world, the chances are that the ordinary investor wouldn't even get the massive equity uplift post 2008 - he'd be in cash, in the pub and in marriage counselling at best. This is what happens when things go nasty. Think all-in capitulation. Think Bryson when he whacks the driver anywhere - sure it can work sometimes, but it ain't going to work all the time.
Sorry, that’s my fault - I was being lazy.
The convention in the asset management industry is to quote the proportion of a portfolio held in equities first. So, 30:70 means 30% in equities, 70% in bonds, etc.
Now, you can argue about what exactly I mean by “equities” (do I include small caps, emerging market equities, etc?) or bonds (global or euro-denominated only, short, intermediate or long duration?). But frankly that is very much of second level importance to the equity/bond split decision.
So, when I said there was no reason to expect a portfolio that “glides” from 30:70 to 90:10 to outperform a fixed 60:40 portfolio, on average, what I mean is a portfolio that starts with a 30% allocation to equities and ends with a 90% to equities will, on average, have a 60% allocation to equities.
Hopefully that makes sense.
But it’s late so please come back to me if it doesn’t and I’ll have another go tomorrow.
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Gordon Gekko
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I don’t know the answer to this, mainly because I’ve never thought about it, but intuitively sequencing of returns risk should surely mean that 30:70 transitioning to 90:10 over time could deliver outcomes that vary quite considerably from a steady 60:40 allocation?
You’re correct, of course. To say otherwise, or to “average”, is just to deny SoRR even exists.
We’ll have to agree to differ, maybe on the basis that nobody who goes 100% equities on decumulation is gonna reduce their exposure towards the end of the accumulation phase, whilst most (not all) who have reduced exposure in decumulation will have gotten there via lifestyling. Let’s not make this about us AAM’ers though, it’s about Sarenco’s hypothetical unluckiest retiree in Ireland ever - he’s not a gambler according to Sarenco, so he lifestyled like the pension industry advised. He therefore retired with a smaller pot than Colm, our sophisticated retail investor who’s 100% in equities all the way through.
@gledswood - I'm not sure what age you are or your stage in life but here's the question: how would you feel if you were a new retiree with all your private retirement savings in equities and the market properly tanked - say, by 30 or 40%? How do you think you'd enjoy Christmas? Is the possible incremental gain from 100% equities really worth it? There have been loads of studies which show that most humans are not hard-wired to be relaxed about market declines. The truth is losses hurt more than equivalent gains. When I retire, I want to sleep at night!! Do you know that Irish Life did a study after the 2008 crash which found that a really high percentage of ARF holders switched from equity-based funds into cash-like funds and, as a result, missed out on the subsequent bounce? Emotions play a huge importance in the normal person's experience of investment - envy, fear, greed, etc.
I'm with @Sarenco - at a high level and in simple terms (as, of course, there are always nuances) having a higher probability that my money will last my retirement is more important to me than attempting to maximise my income. Investment is all about trade-offs. Retirement well-being involves sleeping soundly.
Edit: I'm pretty sure @gledswood asked a question/made a post which has now disappeared. Otherwise, the cognitive decline has started earlier than is normal! Perhaps the said poster will confirm whether I need to seek medical attention prompto.
I'm with @Sarenco - at a high level and in simple terms (as, of course, there are always nuances) having a higher probability that my money will last my retirement is more important to me than attempting to maximise my income. Investment is all about trade-offs. Retirement well-being involves sleeping soundly.
Edit: I'm pretty sure @gledswood asked a question/made a post which has now disappeared. Otherwise, the cognitive decline has started earlier than is normal! Perhaps the said poster will confirm whether I need to seek medical attention prompto.
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Gordon Gekko
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Especially when the ability to accumulate is largely gone.
Steven Barrett
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And advisor would have also told said ARF holder to adjust their withdrawal rate.
In practice, the vast majority of my ARF holders make their withdrawals as a % of their ARF, so the figure fluctuates. The few who take a fixed amount need to be watched.
The ARF holders I have are all post 2008 crash, so those with heavy equity exposure are up even after making all those withdrawals. An example of sequence risk but a positive one.
I think we can all agree that equity returns in good times are beautiful. I think we all understand that what goes down can also go up! The point of the thread is to discuss whether investors should be 100% in equities. It seems clear to me that all-in equities should be a minority sport and I'm genuinely struggling to see how advocating a not well diversified, self-selected stock picked all equity portfolio is a sensible or implementable strategy for all but the few. I'm not always a total fan of Marc's posting style but, in fairness to him, in this thread, he has given very clear views.
Having a heavy equity exposure is not the same as having an all-equity exposure. Having all your ARF all invested in equities is not the same as an all-equity exposure when you've other income streams (DB pension, annuity, rental, etc.) apart from social welfare!
Scenario one matching imputed distributions
retire end of 2000 and take 4% of the value of the account each year from a cautious/balanced or aggressive investment strategy (I've used sector average data for these because they reflect the investment choices available in Ireland way back then and also represent a "typical" investors experience buying retail investment products in Ireland. I have compared this with 100% equities for which i am using the MSCI All Country World index which includes both developed and emerging markets and avoids selection bias of using say S&P 500 which we know would provide a more favourable result with the benefit of hindsight.
The monthly income for the 100% equity investor is down 60% by Feb 09, Yes they recovered eventually but they had to wait 15 years before their monthly income "caught up" but there is a lag before they have paid back the lower income received. So, if they had retired at 65 they would be well into their 80s before they saw the benefit of taking the investment risk. Probably with declining health and, potentially having missed the "best" years of their retirement. In reality, behavioural finance literature tells us that an investor in 100% equities would have bailed long before they had the opportunity to benefit from the risk they took. In practice this is exactly what did happen with many investors capitulating in 2009 and selling.
I’m not sure I’d sign up for a job that said; look we are going to reduce your pay pretty much every year for the next 15 years but look your kids are going to be loaded.
Scenario 2 a retiree with real bills to pay and an expectation of a decent quality of life in retirement
Now, contrast that with a retiree who is torn between an annuity giving a fixed income for life (current rate for a 65 year old male with a 10 year guarantee is 4.85% from Irish Life) and the ARF option and elects to take a fixed annual income of €47,500 irrespective of market conditions equal to the annuity that they could have guaranteed themselves at the outset and avoid any angst from the ARF.
Note this year 2024, our 65 year old retiree is aged 89 and their life expectancy is increasing (all the people skewing the average down have already died) and they have a high possibility of living another 10 years. No real chance of keeping up with that annuity now. With the benefit of hindsight this investor should have bought the annuity at outset and just given away the surplus income using the annual small gift exemption.
Scenario 3 rose tinted spectacles
Now, contrast that experience with someone who retired in December 2010 and took an income of 6% (€5,000pm) from an ARF.
From this we should conclude sequence of returns, the historical accident of your birth and retirement date and the card that mother nature deals you really makes all the difference.
retire end of 2000 and take 4% of the value of the account each year from a cautious/balanced or aggressive investment strategy (I've used sector average data for these because they reflect the investment choices available in Ireland way back then and also represent a "typical" investors experience buying retail investment products in Ireland. I have compared this with 100% equities for which i am using the MSCI All Country World index which includes both developed and emerging markets and avoids selection bias of using say S&P 500 which we know would provide a more favourable result with the benefit of hindsight.
The monthly income for the 100% equity investor is down 60% by Feb 09, Yes they recovered eventually but they had to wait 15 years before their monthly income "caught up" but there is a lag before they have paid back the lower income received. So, if they had retired at 65 they would be well into their 80s before they saw the benefit of taking the investment risk. Probably with declining health and, potentially having missed the "best" years of their retirement. In reality, behavioural finance literature tells us that an investor in 100% equities would have bailed long before they had the opportunity to benefit from the risk they took. In practice this is exactly what did happen with many investors capitulating in 2009 and selling.
I’m not sure I’d sign up for a job that said; look we are going to reduce your pay pretty much every year for the next 15 years but look your kids are going to be loaded.
Scenario 2 a retiree with real bills to pay and an expectation of a decent quality of life in retirement
Now, contrast that with a retiree who is torn between an annuity giving a fixed income for life (current rate for a 65 year old male with a 10 year guarantee is 4.85% from Irish Life) and the ARF option and elects to take a fixed annual income of €47,500 irrespective of market conditions equal to the annuity that they could have guaranteed themselves at the outset and avoid any angst from the ARF.
Note this year 2024, our 65 year old retiree is aged 89 and their life expectancy is increasing (all the people skewing the average down have already died) and they have a high possibility of living another 10 years. No real chance of keeping up with that annuity now. With the benefit of hindsight this investor should have bought the annuity at outset and just given away the surplus income using the annual small gift exemption.
Scenario 3 rose tinted spectacles
Now, contrast that experience with someone who retired in December 2010 and took an income of 6% (€5,000pm) from an ARF.
From this we should conclude sequence of returns, the historical accident of your birth and retirement date and the card that mother nature deals you really makes all the difference.
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Brendan Burgess
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Pensioners should have 100% of their investments in equities
Marc has raised the question here: https://www.askaboutmoney.com/threads/should-retirees-be-100-invested-in-equities.238746/ A few people have told me that they could not follow the thread so... 1) I will summarise the arguments from that thread 2) Explain why I believe that investing 100%...
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SquirrelChaser
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As someone who saw his annualised return go negative over the course of 2022 I didn't like it, but I never considered changing. Because the available data said there'd most likely be a bounce (and boy was there a bounce) after.
As someone who's seen his annualised returns hit 21% (due to what I can only assume is an worldwide excess supply of stimulants and hallucinogens amongst investors) I also don't really care. Because the available data suggests this also won't last.
Even early humans had to accept the risk of becoming dinner in order to have opportunity to dine.
It's also not exactly a new concept that it's prudent to set aside your windfall from the good times to provide for the bad times. That's literally one of the key themes in the Book of Genesis with the 7 fat years followed by the 7 lean years. Ignoring the faith aspects of the Abrahamic religions, they didn't grow over thousands of years to constitute half the world's population by teaching lessons which resulted in poor long term outcomes.
People are terrible at making good long term decisions. That's not exactly news.
Exactly. You'd be extremely dumb to ignore the rapidly reducing balance when deciding how much money to take each year.
That's what prompted me to post the above.
I have no idea why my post disappeared. I have 25% of my investments invested in the stock market. I am in my early 70's and I believe what I had to say was relevant.
The shock fall in the Dow Jones yesterday and today's knock on effect on the FTSE will be causing worries for some people, especially those of my age who has been through previous stock market crashes. Recovery takes time and it is relevant for people who are in their 70's to understand this and to consider their exit strategy from the market.
I really don’t understand this logic.
Surely the 100% equities for life brigade would counsel my retiree to reverse any previous life styling and revert to 100% equities.
If not, why not?
This thread is about how best to invest in retirement. How the portfolio got to where it is at that stage is beside the point.