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Forced to Consider Retirement at 50

Including Financial Independence and Retiring Early (FIRE)
Urbandreamer
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Re: Forced to Consider Retirement at 50

#349639

Postby Urbandreamer » October 21st, 2020, 6:43 pm

airbus330 wrote:
My gameplan was exactly the same as yours, remaining nearly fully invested and riding the bumps along the way. When the big correction occurred in March I saw a dramatic reduction in my wealth which was several years income. The psychological stress of sitting watching the fall was very difficult and it gave sleepless nights. I hung on in, but recognised that I did not want to experience that again,


May I ask how many times it has happened to you? I think that it's happened to me about 3 times. That's how I know what it feels like and what my reaction is.

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Re: Forced to Consider Retirement at 50

#349645

Postby airbus330 » October 21st, 2020, 7:00 pm

dealtn wrote:What are your thoughts on how well you might sleep if that 80% invested in gilts/bonds suffers a "big correction"?


Well this is the million dollar question. Nothing is totally safe, except cash unless hyperinflation sets in. I have a chunk of cash as a buffer, which I started living on this year. If I hadn't have had the cash, I'd have had to sell assets to live off in the falling market which would have added insult to injury. Sorry, I digress. I have tried to crash course learn about gilts and their behavior and one of the reasons for slowly moving back to a 60/40 position is that I believe inflation will kick in a few years down the line and long dated gilts will suffer, perhaps badly. I'm not totally comfortable except for the next few months with my bond exposure, but I want to see at least Covid beaten first before doing anything.

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Re: Forced to Consider Retirement at 50

#349650

Postby airbus330 » October 21st, 2020, 7:14 pm

Urbandreamer wrote:
airbus330 wrote:
My gameplan was exactly the same as yours, remaining nearly fully invested and riding the bumps along the way. When the big correction occurred in March I saw a dramatic reduction in my wealth which was several years income. The psychological stress of sitting watching the fall was very difficult and it gave sleepless nights. I hung on in, but recognised that I did not want to experience that again,


May I ask how many times it has happened to you? I think that it's happened to me about 3 times. That's how I know what it feels like and what my reaction is.


I have seen a big drop twice and a few more minor corrections. But the massive difference is that I was earning a substantial salary and was a lot younger. Now, after redundancy with little hope of another similar job at age 61, what I have has to last the next 30 years. I have seen poverty in old age and it is not pretty, so while the previous corrections in the market were simply shrugged off (and indeed the proof that the system works was the bounce back over the subsequent couple of years) the recent correction brought out a considerably more protective reaction. Even though I had previously rationalised that a correction would bounce, my cash chunk seeing me through the rough times, the reality was that I simply wasn't brave enough. I think the fact that covid was a global disease of humanity rather than the more usual disease of a sector of the market economy made it all feel less predictable. When I started to sell equity at the end of June I was pretty convinced that the disease would come back big again and although it has come back, even the chaotic global governmental responses are improving along with the medical improvements. So the 2nd. wave, as yet, has had little effect on markets and I believe this is the way the macro will continue. This is something to be managed rather than feared. Could be wrong, of course!

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Re: Forced to Consider Retirement at 50

#349676

Postby AWOL » October 21st, 2020, 9:12 pm

Urbandreamer wrote:
AWOL wrote:
...this book is well worth a read.
https://www.amazon.co.uk/Beyond-4-Rule- ... 095&sr=8-1


I have just reached the bit about 35% of the way in when he demonstrates that cash buffers aren't very efficient so the book is already "paying dividends", thank you.

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Re: Forced to Consider Retirement at 50

#349677

Postby AWOL » October 21st, 2020, 9:20 pm

airbus330 wrote:So, as the market recovered I moved nearly 80% of my equity into gilts/bonds and although I realise these are not a panacea, I can at least see the benefits of a differentiated portfolio when there are periods of instability. It hurts to watch US stocks reach new highs and lose 80% of the benefit, but I sleep better. When the Covid/Brexit/Trump situation calms a bit I will move gradually back to 60/40, which I think is where I should have been to start.


I completely understand why you acted in this way, and I used to restructure my portfolio based on my macro view and/or fear but it was almost always a mistake. I fear that in addition to any dealing costs, and time out of the market, there is an opportunity cost from being in bonds and you are swapping equity volatility for the risks of the bond market. I don't know your situation so perhaps being very heavily into bonds will work for you but I suspect it's best to find an asset mix that you can avoid tinkering with. I know I did. I've also grown to appreciate the value of one stop shop funds such as Total Market or Global trackers that companies like Vanguard offer.

I hope this doesn't come across as critical, and some of it may already be your own conclusions. Good luck.

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Re: Forced to Consider Retirement at 50

#349705

Postby airbus330 » October 21st, 2020, 11:28 pm

AWOL wrote:
I completely understand why you acted in this way, and I used to restructure my portfolio based on my macro view and/or fear but it was almost always a mistake. I fear that in addition to any dealing costs, and time out of the market, there is an opportunity cost from being in bonds and you are swapping equity volatility for the risks of the bond market. I don't know your situation so perhaps being very heavily into bonds will work for you but I suspect it's best to find an asset mix that you can avoid tinkering with. I know I did. I've also grown to appreciate the value of one stop shop funds such as Total Market or Global trackers that companies like Vanguard offer.

I hope this doesn't come across as critical, and some of it may already be your own conclusions. Good luck.


Couldn't agree more. For the last 20 years, pre retirement, I have had most of my funds in a single low cost global tracker, which has done very nicely. As is so often the case and often demonstrated on this forum, doing nothing after selecting your position is the best course of action. I acknowledge that I have not done the most sensible thing, but what I was trying to get over was the power of your own psychology to influence your decision making plus the effects of age and your reliance on the income. I'm currently mostly invested in 3 low cost funds covering UK/EM/Developed World. I'll just sell the bond fund in sections to bulk up these three as the next 12 months develops and leave it from there on.
Having re-read your 1st post, you didn't work in aviation by any chance?

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Re: Forced to Consider Retirement at 50

#349725

Postby Urbandreamer » October 22nd, 2020, 7:07 am

airbus330 wrote:
I have seen a big drop twice and a few more minor corrections. But the massive difference is that I was earning a substantial salary and was a lot younger.


If twice, then one of them was the financial crash. You remember, it was the end of the world. Companies left, right and centre collapsing and people being made redundant by txt message. Yet you were not concerned that who you worked for might be affected? I know that I was.

I wasn't affected by "Black Wednesday" in the 80's, as I didn't start investing until a couple of years later. But I remember the sea of red on national news and a grim faced ill looking government.

Looking back further we had large amounts of unemployment, presumably that means failing companies. Starting as employed can be more of a psychological crutch than a real support for your wealth in such times.

However, being able to sleep at night is important. If bonds help you then they do make sense.

Re global trackers. I enjoy picking where I invest, don't do badly and have issues with how they effect the "price discovery mechanism". That said if you don't both enjoy the process and are "ok" at it then they are the way to go IMHO.

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Re: Forced to Consider Retirement at 50

#349733

Postby JohnW » October 22nd, 2020, 7:55 am

Urbandreamer wrote:have issues with how they effect the "price discovery mechanism".

How do they affect the price discovery mechanism?
I can't see that they either enhance it or detract from it.

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Re: Forced to Consider Retirement at 50

#349738

Postby Urbandreamer » October 22nd, 2020, 8:22 am

JohnW wrote:How do they affect the price discovery mechanism?
I can't see that they either enhance it or detract from it.


The price discovery mechanism is a term used for how the optimal price of an item is arrived at. In this case the concept is embodied in the phrase that we use for the exchange, the stock "market".

Different people have different opinions of the value and hence the price is established.
https://en.wikipedia.org/wiki/Price_discovery

The "wisdom of crowds" produces the optimal price. However that depends upon there BEING a crowd, or many buyers and sellers. Index trackers or ETF's play no part in the price discovery process (as they follow the index) but are gradually reducing it's effectiveness as they become the dominant buyer and seller. Were we to get to the position where only index trackers existed price discovery would cease to exist (though I accept that won't happen).

There are many articles written on the subject and the question of liquidity if the only buyer or seller's are the index trackers. There are compeating claims. I side with those that argue that it's a growing problem.

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Re: Forced to Consider Retirement at 50

#349741

Postby JohnB » October 22nd, 2020, 8:37 am

There will always be people, and more importantly, companies, who think they have a better handle on prices so will continue to make the market. The ones that have an edge will beat the market, but provide a useful service to the rest of us by setting prices, and we get the benefit of their expertise and research for free.

As a private investor, always ask yourself what edge you might have over these market makers. Now that might be sector knowledge, but you'd be bold to claim you have a general price discovery method.

I suspect the complaints about trackers distorting price discovery is FUD put about by those who have an interest in being paid for their price discovery efforts in active funds.

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Re: Forced to Consider Retirement at 50

#349746

Postby JohnW » October 22nd, 2020, 8:55 am

Thanks.
I think I get that. I picked you up on saying they affect price discovery; you didn't say because 'they could affect' it, which I agree would be possible.
Currently half, no, almost certainly less than half of invested money is in index funds. That leaves a LOT of trading to be engaged in price discovery, looking for an edge over someone else. Is anyone seriously suggesting that with the remaining hundreds of active investment funds and their thousands of managers working on this all day that there is any shortage of price discovery? I'd say that space is pretty crowded now, with new active funds still being put up.
Index funds could become the overwhelming buyers and sellers, but just a handful of the best active investors (and they'd be the only ones left) would have all the information that the thousands currently do, resulting in the same accurate price discovery.
Quite right to dismiss that straw man.

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Re: Forced to Consider Retirement at 50

#349860

Postby AWOL » October 22nd, 2020, 4:10 pm

airbus330 wrote:
AWOL wrote:
I completely understand why you acted in this way, and I used to restructure my portfolio based on my macro view and/or fear but it was almost always a mistake. I fear that in addition to any dealing costs, and time out of the market, there is an opportunity cost from being in bonds and you are swapping equity volatility for the risks of the bond market. I don't know your situation so perhaps being very heavily into bonds will work for you but I suspect it's best to find an asset mix that you can avoid tinkering with. I know I did. I've also grown to appreciate the value of one stop shop funds such as Total Market or Global trackers that companies like Vanguard offer.

I hope this doesn't come across as critical, and some of it may already be your own conclusions. Good luck.


Couldn't agree more. For the last 20 years, pre retirement, I have had most of my funds in a single low cost global tracker, which has done very nicely. As is so often the case and often demonstrated on this forum, doing nothing after selecting your position is the best course of action. I acknowledge that I have not done the most sensible thing, but what I was trying to get over was the power of your own psychology to influence your decision making plus the effects of age and your reliance on the income. I'm currently mostly invested in 3 low cost funds covering UK/EM/Developed World. I'll just sell the bond fund in sections to bulk up these three as the next 12 months develops and leave it from there on.
Having re-read your 1st post, you didn't work in aviation by any chance?


No I didn't work in aviation, although one of my few regrets in life is that I didn't join the RAF as I was an aviation enthusiast as a youth and still love to read RAF/RFC memoirs.

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Re: Forced to Consider Retirement at 50

#349865

Postby AWOL » October 22nd, 2020, 4:23 pm

JohnB wrote:There will always be people, and more importantly, companies, who think they have a better handle on prices so will continue to make the market. The ones that have an edge will beat the market, but provide a useful service to the rest of us by setting prices, and we get the benefit of their expertise and research for free.

As a private investor, always ask yourself what edge you might have over these market makers. Now that might be sector knowledge, but you'd be bold to claim you have a general price discovery method.

I suspect the complaints about trackers distorting price discovery is FUD put about by those who have an interest in being paid for their price discovery efforts in active funds.


Personally I think the potential to distort price discovery is there however the reports of 45-50% of the market being passives are inaccurate. When I last looked it was 45-50% of the US FUNDS market. 71% of the US primary market is still other buyers. Then there is the secondary market... Also trading volume has not decreased. In fact I see no evidence of price discovery being distorted at current levels of index fund stock ownership. However I do recognise that a level could be reached where this would happen but it would require funds to dominate the market first and I don't see the proportion of the market tripling to make that happen.

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Re: Forced to Consider Retirement at 50

#349875

Postby Urbandreamer » October 22nd, 2020, 4:59 pm

JohnW wrote:Thanks.
I think I get that. I picked you up on saying they affect price discovery; you didn't say because 'they could affect' it, which I agree would be possible.
Currently half, no, almost certainly less than half of invested money is in index funds. That leaves a LOT of trading to be engaged in price discovery, looking for an edge over someone else. Is anyone seriously suggesting that with the remaining hundreds of active investment funds and their thousands of managers working on this all day that there is any shortage of price discovery?


As has been said, it's more of an issue in some markets than others. Yes it HAS been seriously suggested that it might be an issue. It has been suggested that it may have been an issue in the 2015 flash crash. It's also more of an issue with gold than index trackers. The proportion of paper gold as opposed to the real stuff is very high and it is a single commodity rather than an index*

All the above said, I don't have a solution or answer. There is no doubt in my mind that for many, possibly even most individuals, an index tracker is the best choice. I just limit the use that I make of them.

*https://link.springer.com/article/10.1007/s12197-011-9205-8
We find that the availability of ETFs has shifted price discovery for gold and silver to the ETF market, while the oil market has price discovery occurring still predominantly in the futures market.

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Re: Forced to Consider Retirement at 50

#349904

Postby xeny » October 22nd, 2020, 6:00 pm

airbus330 wrote:Well this is the million dollar question. Nothing is totally safe, except cash unless hyperinflation sets in..


If you've a reasonable life expectancy, then cash even with moderate inflation decays quite fast. 2% inflation over 10 years is down 18.3% .

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Re: Forced to Consider Retirement at 50

#350395

Postby JohnW » October 25th, 2020, 1:00 am

Urbandreamer wrote: It's also more of an issue with gold than index trackers. The proportion of paper gold as opposed to the real stuff is very high and it is a single commodity rather than an index*

*https://link.springer.com/article/10.1007/s12197-011-9205-8
We find that the availability of ETFs has shifted price discovery for gold and silver to the ETF market, while the oil market has price discovery occurring still predominantly in the futures market.

Thanks for that paper. The https reference didn't find it for me, but the text did. I'm a thousand miles from understanding the paper, but the abstract says it's based on the belief that the futures markets rather than the cash markets (presumably current time rather than futures) are major determinants of price setting. So it compares etf price setting with futures trading price setting.
Really, not in the spirit of dueling quotes here's Zvi Brodie: 'It only takes two well-informed competitive bidders to cause the price to accurately reflect intrinsic value.' https://ideas.repec.org/p/nfi/nfipbs/2006-pb-07.html 'A Note on Economic Principles and Financial Literacy.' I put it up as the article might be of general interest to readers as it covers a broad topic clearly; it's not an academic paper.

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Re: Forced to Consider Retirement at 50

#353540

Postby AWOL » November 4th, 2020, 9:32 pm

So I have quotes for my defined benefit pension of £7720 at 55 and £9,201 and 60 which will supplement my investment income. I did a quick calculation and ignoring inflation it looks like I would need to live until 86 to derive more benefit from having deferred my pension. Is there a clever formula for deciding if this really is the right thing to do?

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Re: Forced to Consider Retirement at 50

#353560

Postby tjh290633 » November 4th, 2020, 11:15 pm

AWOL wrote:So I have quotes for my defined benefit pension of £7720 at 55 and £9,201 and 60 which will supplement my investment income. I did a quick calculation and ignoring inflation it looks like I would need to live until 86 to derive more benefit from having deferred my pension. Is there a clever formula for deciding if this really is the right thing to do?

All it needs is a spreadsheet, but the big unknown is inflation. I compared three options when buying an annuity in 1998 - a level annuity, one escalating at 5% per year and one linked to inflation as LPI (5% max, I think from memory).

I also looked at the effects of commuting my pension to an extent. The comparison looked at the annual amount and the cumulative ammount to each anniversary.

The Level pension was obvious and was used as the yardstick. The 5% escalating pension reached parity with the level pension after 12 years, but the cumulative amount received took 22 years. The LPI linked pension took 13 years to reach the level pension's amount, but the cumulative amount is forecast to take 25 years (assuming the current rate of 1.53% continues). At the time when it started, the Level annuity rate was £797.86 per £10k, the 5% was £448 and the LPI rate (which I took) was £570.76.

So you need two columns for each case, one with the annual amounts and the other with the cumulative amounts, and a column with the dates. You can then see when the amounts overtake the lower option.

TJH

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Re: Forced to Consider Retirement at 50

#353623

Postby AWOL » November 5th, 2020, 8:18 am

Do I need to do some sort of present value adjustment though? It seams to me that money now has a value over future money as it can be put to work and regardless of what I do with it, getting it gives me optionality. This is where my thinking is a bit bogged down at the moment.

One benefit I get of current guaranteed income is that I have the option of drawing less income from my pension pools (thus growing the pension pool and offsetting the reduction in guaranteed income) another is that I can have a higher income earlier than my current plan (which is good as currently my income increases over time, doubling by state retirement age). In reality I will probably do a bit of both of these for example I could take more income but during market corrections take a bigger reduction in drawdown to improve sustainability.

The take more income but hunker down in a correction option is difficult to model accurately using deterministic models. I'd probably need to build a stochastic model although with a delivery of wine arriving today this seams unlikely! I know I am weak and lazy :roll:

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Re: Forced to Consider Retirement at 50

#353694

Postby JohnB » November 5th, 2020, 10:40 am

You said you had a young family, so your expenditure profile will vary a lot over the next 40 years. I think you need to match income against that, and while excess income earlier can be banked to buffer later, you obviously can't do the reverse. Even without a family, retirees observe a U profile when the go from world-explorers to home-bodies to needing care.


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