When should I think about retirement

[Cervelo]

The more I read, the more I think anybody with a lumpsum to invest on retirement would be better off toddling down to the local post office at some quiet time and asking for free help in choosing guaranteed return government savings.
From what have learnt here that after paying commissions, tax, risk, etc you can have little or nothing at the end of the day.

Leper you sure do come out with some beauties, in 2015 when we were deciding what to do with our money my wife was thinking about state savings to which our FP said " we can do much better than that"
Fast forward to today and I'm slightly annoyed to report that the state savings would have giving us a far better return than what we got.
In fact as of this morning after checking my portfolios strangely enough my holding in prize bonds is the only investment that has made some money for me over the last four years

 

[Sarenco]

And what would the tax rate be on that?

Well, zero while the fund remains within a pension wrapper.

Broadly, the net total return of a fund assumes that all dividends are reinvested, net of withholding taxes.

 

[Jimmy Dee]

Well, zero while the fund remains within a pension wrapper.

Broadly, the net total return of a fund assumes that all dividends are reinvested, net of withholding taxes.

So 41% on gains at exit? or 25% tax free lump sum + PAYE rate on withdrawals I guess?

 

[Sarenco]

It's a pension Jimmy - there's no exit tax.

 

[Jimmy Dee]

Hi sorry, I am not Irish I haven't insight into the detail of the taxes. But I assume its 25% Tax Free and tax at your rate from memory? The reason I am interested is that the difference between the best deposit rate that you can get that is tax free is the Solidarity bonds which offer 1.5%? over ten years (which is miserable but could be a cash proxy) but if returns are reduced so heavily as you illustrate (with no relief on losses) then whats better in terms of risk and reward especially facing the next few years of uncertainty in yields? Sad if that's even an option.

 

[Colm Fagan]

I want the option of DIY and this simply doesn't exist in any meaningful way

I too want the option of DIY. I enjoy the ups and downs of the stock market, choosing which stocks to put my money in, etc., but you and I are very definitely in a minority. The vast majority of people find it difficult to accept the risk of their investments falling in value. That's probably even more true for advisers: they can be made to look stupid if they advise a client to invest in equities and the chosen equities fall in value the next month (about a 50% probability). Therefore they're less likely to advise people to do what's objectively best for them. Risk aversion by advisers is probably the main reason why 40% of insurance based ARF's in Ireland are 100% in cash (or at least that was the ratio when the survey was done in 2015).

My proposal is for people who are not like you and me, who don't want to have to make decisions on whether to invest in equities, bonds, or property, whether to de-risk as they approach retirement (or if they're already retired, and are approaching advanced years), etc. The DIY option should always be left open for people like us who are that way inclined.

 

[Jimmy Dee]

+1
My preference would be for Vanguard and Blackrock to brought in by the civil servants to set up a scheme for ordinary investors which would be transparent and simple enough for clarity based upon their international model with ultra low costs. That would p--s off the advisers but is a reasonable proposal considering the mess that the investor faces!

 

[Gordon Gekko]

Leper you sure do come out with some beauties, in 2015 when we were deciding what to do with our money my wife was thinking about state savings to which our FP said " we can do much better than that"
Fast forward to today and I'm slightly annoyed to report that the state savings would have giving us a far better return than what we got.
In fact as of this morning after checking my portfolios strangely enough my holding in prize bonds is the only investment that has made some money for me over the last four years

What was the agreed time horizon?

 

[Colm Fagan]

You seem to be saying that the market return smoothed out will be 4%? Its not clear but it doesn't seem to be an "interest rate" to me.

What I'm saying is that, historically, real assets (equities, real estate, etc.) have outperformed bonds and cash by an average of 3% to 6% a year. When you think of it, such assets must give a higher return. Otherwise, people would just stick their money on deposit and not take a risk. The extra return from real assets is higher than is justified on purely rational economic grounds. This is because of the psychological phenomenon of loss aversion: people experience greater pain from losing money than the joy they experience from gaining the same amount. Thus, they have to be compensated when there's a risk of losing money. That was true in the past. It will equally be true in future.

Assuming average out-performance of 3.5% per annum (which is at the lower end of the above range) from such assets, and assuming bond yields of 2% per annum, we arrive at an average return (before fees) of 5.5% per annum. Deducting 0.5% annual fees, the net return is 5% per annum.

The return in any year could be higher or lower than the average but I've minimised - almost to the point of completely eliminating - the risk of any individual investor losing money, even in the short-term, by spreading the return over many years. Back testing shows that, on reasonable assumptions for cash flows, there would have been a (small) negative return in 1974, but not since then.

In normal circumstances a smoothing approach on the lines proposed wouldn't work, because smart operators would buy when smoothed values were below market values and sell when they were above them, but I've suggested a number of simple rules, both for money coming in and for money going out, to prevent that happening.

 

[Colm Fagan]

it doesn't seem to be an "interest rate" to me.

It depends what you call an "interest rate". When you put money on deposit with a bank, the bank lends it out to lots of people at lots of different rates; some don't even repay their loans, but you still get an "interest rate" from the bank. I don't see much of a difference.

 

[Cervelo]

What was the agreed time horizon?

Not exactly sure what your asking GG, there was no agreed time frame for the investment as it is ongoing and both were bought in March 2015

 

[Leper]

Leper you sure do come out with some beauties, in 2015 when we were deciding what to do with our money my wife was thinking about state savings to which our FP said " we can do much better than that"
Fast forward to today and I'm slightly annoyed to report that the state savings would have giving us a far better return than what we got.
In fact as of this morning after checking my portfolios strangely enough my holding in prize bonds is the only investment that has made some money for me over the last four years

Sounds obvious to me that there are quite a few chancers of Financial Planners at large. Given that most people retire between 60 and 66 most of the male of the species will be dead by what would be their 75th birthday. The retired ladies will last a year or two longer on average.

From where I sit there would be a demand on the profit of investment within 5/10 years of investment. Anything longer would be stupid, sorry really stupid. Therefore, there is an opening for honest Financial Advisors to promote some scheme that will give some kind of decent low risk return in say five years (max). But, we have our financial experts here talking around the subject. If I were in the market for an honest Financial Planner, I would be very worried with what appears to be around.

 

[Marc]

A 65 year old man today has a 25% chance of living to age 94.

Women have a 14% chance of living to age 100 and men a 9% chance.

We stopped using the life expectancy tables in the Bible (three score years and 10) a while ago

 

[Cervelo]

I'm afraid to tell you that I don't think there is such a thing as a "low risk decent return product" on the market at the moment unless you consider the state savings as a good return, I don't by the way
Unfortunately when you invest on the stock market you have to take some level of risk and it would seem from my perspective that to get a good return now (if thats possible in the present climate) you now have raise your appetite to risk.
I don't think personally I have gotten bad financial advise or that my advisor is a chancer, my investments are as good as it gets but due to how fickle investors are and what is happening in the world over the last three plus years my investments haven't performed the way they did in the previous three years

 

[Conan]

[QUOTE="Given that most people retire between 60 and 66 most of the male of the species will be dead by what would be their 75th birthday. The retired ladies will last a year or two longer on average.
[/QUOTE]
Current longevity numbers are well beyond this. The average life expectancy for a male retiring at age 65 is now approaching 20 years and for females it’s some 3 to 4 years longer. So a typical male retiring at 65 will likely live to at least age 85, and some a lot longer. The most recent statistics suggest that just under 50% of males retiring at age 65 will make it to age 90 whilst a little more than 50% of females will do likewise.
Unless a client can tell me when they plan to die (most can’t) that makes the product decision making process complicated (buy an Annuity or invest in an ARF or a mixture of both). But then what type of Annuity (single life, joint life, level or indexed). If however it’s an ARF, that makes the investment decision making process more complicated. Do you simply take a 5 year time horizon, in the full knowledge that typical longevity is much longer? Do you go low/no risk (and therefore accept a very low rate of return) or are you seeking a better return (and therefore need to take on some level of investment risk)? So many issues, so many uncertainties, so the need for advice (perhaps). No Advisor/Planner has a crystal ball (that I have ever met). The only certainties are death (but when?) and taxes.
If you are retiring from a Defined Benefit scheme then the choices are limited (just seek to maximize the retirement lump sum). But if you are retiring from a Defined Contribution scheme then you have big decisions to make and potentially decisions to continue making during retirement. In such cases I suggest, that good advice, discussing the options, getting the client to really focus on their particular financial situation is worth paying for. There is lots of “cheap advice” available (“bar stool experts”), but quality professional advice (subject to clarity on the cost of such) pays for itself many times over.

 

[Leper]

Sticking with the traditions of Christmas our decorations and tree don't see the light of day until after the 7th December every year. They are not taken down until after 6th January (Epiphany). The decos are kept in the attic and used year after year therefore cost nothing now. However, last week Mrs Lep decided to visit one of these houses with external and internal Christmas lights that could potentially be a danger to incoming flights to Cork Airport. The householders do this every year "for charity."

Fair enough, but I asked the unaskable e.g. do you deduct the electricity cost? - do you deduct the amount used to purchase all this tat? - do you deduct for wear-and-tear to your house? - do you deduct for your labour? I asked a few more "deduct" questions too. Needless to say, Mr and Mrs Tat gave me some Christmas Cold Shoulder and failed to answer any of my questions. While my dwindling conversation with the house owners was going south, Mrs Lep was having deep and meaningful conversations with "the other girls" with all of the words "Really" - "No Wayyyyyy" - "Seriously" - "Stopppppp" each syllable being lengthened and pitch raised in conversation. While driving home Mrs Lep had become somewhat curious at the new high-altar-type-fireplace, the new flooring, the manicured lawns, the quality of the cars etc. Even Mrs Lep wondered "Are the house owners taking some commission(s) but also contributing to charity? If so how much is being retained and how much is being contributed to charity? Next time, we'll toddle down to St-Vincent de Paul and contribute and all will be used for the purpose meant.

Coincidentally, the contents of this thread flittered across my mind. You worked your way through the rat-race for between 40 to 50 years; paid your taxes; paid for everything up front and suddenly facing retirement you decide to enter another less paying rat-race investing your hard earned cash lump sum and life savings. You see the glossies, experience the "we-can-do-better-than-that" when challenged about secure state savings schemes. You don't know what is being deducted in commissions, fees, charges, tax, emoluments etc.

. . . . and I felt the difference between some Financial Planners and the House Owners mentioned in my first paragraph above, they (FP's) do their collecting from 7th January to 7th December and few dare to question.

 

[elacsaplau]

Leper,

Are you saying that people would purposely avoid answering inconvenient questions? Shame on you! Whilst my questions have been ignored, I am sure that this is a simple oversight and nothing more. But, I'm a reasonable man and will put your hypothesis to the test.

1. Can advisers provide details (the web links) of advisers that work on a genuine fee only basis please (full details in post 51)? and

2. How much would it approximately cost to set up a simple PRSA - assuming no need for on-going advice (full details in post 68)?

I am genuinely concerned by the lack of transparency in relation to all this.

 

[Steven Barrett]

Leper you sure do come out with some beauties, in 2015 when we were deciding what to do with our money my wife was thinking about state savings to which our FP said " we can do much better than that"
Fast forward to today and I'm slightly annoyed to report that the state savings would have giving us a far better return than what we got.
In fact as of this morning after checking my portfolios strangely enough my holding in prize bonds is the only investment that has made some money for me over the last four years

What was the agreed time horizon?

Not exactly sure what your asking GG, there was no agreed time frame for the investment as it is ongoing and both were bought in March 2015

He's eluding to the fact that investing is a long term game. In order to have the opportunity to get returns above deposit rates, you have to take an element of investment risk. That means that at times, the deposit rate investment will out perform the equity based investment. As the investment period lengthens, the chances of deposit rates returning more than equities reduces.

Think of investing like sailing a boat. You can't expect to have calm seas at the time, sometimes you will have storms. But you wouldn't think of stormy seas as anything unusual, that's just the way it is. With investing, there's lots of stormy days.


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

 

[PGF2016]

Lots of talk of about the risk of investing in stocks.
Are there many people who have diligently invested in a diversified manner during their working lives and been wiped out by the market?
Is there not a much bigger risk if you don't invest?

 

[Gordon Gekko]

Lots of talk of about the risk of investing in stocks.
Are there many people who have diligently invested in a diversified manner during their working lives and been wiped out by the market?
Is there not a much bigger risk if you don't invest?

I would venture that there’s nobody.

Some people who invested unwisely were carried out and their experiences have contaminated the concept of investing in equities for others.

I agree with Steven; it is bonkers to draw any meaningful conclusion from a three year period where State Savings may have outperformed a particular equity strategy.

Equities tend to outperform over the longer term but it’s not an easy ride. The return compensates for the volatility, but if it was easy, everyone would do it.

I no longer check my pension fund for example.