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Protecting against inflation part 2

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
Clariman
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Protecting against inflation part 2

#510691

Postby Clariman » June 29th, 2022, 3:25 pm

I asked 3 months ago about how to protect against inflation. Our current asset split is 43% property (excludes our home), 43% cash, 14% equity funds. After 3 months of inaction I need to make some decisions about maturing bonds and cash-ISAs. What are current thoughts about how best to protect against inflation. In fact, if I moved the maturing cash products into equities, I could alter the split to 43% property, 26% cash, 31% equities. Would that be wise?

Original discussion here viewtopic.php?f=8&t=33862

I want to keep it simple by investing in funds, bonds, trackers rather than individual stock picks. I don't have the inclination to research sectors and companies. Or more accurately I know that if I got into that it would consume a lot of my time and attention.

Thanks
Clariman

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Re: Protecting against inflation part 2

#510696

Postby Dod101 » June 29th, 2022, 3:40 pm

Nothing much has changed in the last three months and so the previous comments seem to me to be still valid. You need to get out of much of the cash and I would certainly support the idea of buying some wealth preserving trusts such as those mentioned in the previous thread. This is when they should come in to their own.

Dod

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Re: Protecting against inflation part 2

#510703

Postby Clariman » June 29th, 2022, 4:02 pm

Dod101 wrote:Nothing much has changed in the last three months and so the previous comments seem to me to be still valid. You need to get out of much of the cash and I would certainly support the idea of buying some wealth preserving trusts such as those mentioned in the previous thread. This is when they should come in to their own.

Dod

Thanks. I've just been looking at the Capital Gearings Trust (CGT) and their objectives and approach sound right up my street. Just looking at Personal Assets Trust (PNL) at the moment. How does one choose which - or split between the two?

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Re: Protecting against inflation part 2

#510706

Postby Lootman » June 29th, 2022, 4:19 pm

Clariman wrote:
Dod101 wrote:Nothing much has changed in the last three months and so the previous comments seem to me to be still valid. You need to get out of much of the cash and I would certainly support the idea of buying some wealth preserving trusts such as those mentioned in the previous thread. This is when they should come in to their own.

Thanks. I've just been looking at the Capital Gearings Trust (CGT) and their objectives and approach sound right up my street. Just looking at Personal Assets Trust (PNL) at the moment. How does one choose which - or split between the two?

I have held both for 20 years and I don't bother trying to differentiate them. Just hold equal amounts of both. They are my two largest holdings after index funds.

If it wasn't mentioned before there is also Ruffer (RICA) which has been doing well this year when few other things have managed that. It is London-traded but domiciled overseas, which might bother some.

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Re: Protecting against inflation part 2

#510718

Postby Dod101 » June 29th, 2022, 4:47 pm

Clariman wrote:
Dod101 wrote:Nothing much has changed in the last three months and so the previous comments seem to me to be still valid. You need to get out of much of the cash and I would certainly support the idea of buying some wealth preserving trusts such as those mentioned in the previous thread. This is when they should come in to their own.

Dod

Thanks. I've just been looking at the Capital Gearings Trust (CGT) and their objectives and approach sound right up my street. Just looking at Personal Assets Trust (PNL) at the moment. How does one choose which - or split between the two?


I would split the funds between the two of them. For a risk averse person (which you say you are) they ought to be ideal and the current conditions are pretty much what they are designed to meet.

I see they are also endorsed by Lootman.

Dod

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Re: Protecting against inflation part 2

#510721

Postby Clariman » June 29th, 2022, 4:54 pm

OK here is my provisional plan for me and Mrs C. Please shout out if any of this is ill-advised. Also have a few questions.

Mr C (me) - Using existing Hargreaves Lansdown Account
  • Move cash (£20K) from an expiring bond into my HL Stocks and Shares ISA for 2022/23 allowance
  • Transfer an expiring cash-ISA and an easy-access Cash ISA into HL Stocks and Shares ISA
  • Use above money to buy Capital Gearing Trust within the ISA

Mrs C- Using existing iWeb Account
  • Do something very similar to the above but probably with PNL

Questions
  • What should I do with the existing L&G Trackers and Vanguard LS60 and LS80 Funds that are within our HL and iWeb ISA accounts? Leave them be or move them into the CGT/PNL trusts?
  • We each have some old L&G Tracker ISAs which are now managed by Fidelity. Should we move them to our respective HL and iWeb accounts?
  • Should we consolidate to one account or one account each (HL, iWeb, Fidelity)? If so, who is the cheapest for these type of Fund or Equity Trust accounts?

Thanks

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Re: Protecting against inflation part 2

#510730

Postby Parky » June 29th, 2022, 5:13 pm

PNL/CGT and RICA currently all hold cash and near-cash(short -term government bills and bonds) in their portfolios (PNL 21%, CGT 12% and RICA 10.7%, figures from end April or end May fact sheets) for the purpose of market timing their purchase of further equities when they think the time is right. We assume from their performance record they are good at that. That's how they preserve and increase wealth with relatively low volatility. I agree with others they are a lower-risk investment, and I hold all three.

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Re: Protecting against inflation part 2

#510731

Postby Dod101 » June 29th, 2022, 5:16 pm

Clariman wrote:OK here is my provisional plan for me and Mrs C. Please shout out if any of this is ill-advised. Also have a few questions.

Mr C (me) - Using existing Hargreaves Lansdown Account
  • Move cash (£20K) from an expiring bond into my HL Stocks and Shares ISA for 2022/23 allowance
  • Transfer an expiring cash-ISA and an easy-access Cash ISA into HL Stocks and Shares ISA
  • Use above money to buy Capital Gearing Trust within the ISA

Mrs C- Using existing iWeb Account
  • Do something very similar to the above but probably with PNL

Questions
  • What should I do with the existing L&G Trackers and Vanguard LS60 and LS80 Funds that are within our HL and iWeb ISA accounts? Leave them be or move them into the CGT/PNL trusts?
  • We each have some old L&G Tracker ISAs which are now managed by Fidelity. Should we move them to our respective HL and iWeb accounts?
  • Should we consolidate to one account or one account each (HL, iWeb, Fidelity)? If so, who is the cheapest for these type of Fund or Equity Trust accounts?

Thanks


I will not try to answer your questions except to say that I would leave the trackers as they are as they will give you some diversification and the chance to compare the one result with the other.

Yu should try to get hold of the Annual Reports for both of PNL and CGT. Certainly the PNL one is worth reading. I have a high regard for Sebastian Lyons of Troy who manages PNL. Peter Spiller who manages CGT also gets a good crit, although I guess he must be approaching retirement. They both write with some original thought about the investment climate which I find helpful even although these days I hold neither trust.

Dod

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Re: Protecting against inflation part 2

#510736

Postby Dod101 » June 29th, 2022, 5:30 pm

Parky wrote:PNL/CGT and RICA currently all hold cash and near-cash(short -term government bills and bonds) in their portfolios (PNL 21%, CGT 12% and RICA 10.7%, figures from end April or end May fact sheets) for the purpose of market timing their purchase of further equities when they think the time is right. We assume from their performance record they are good at that. That's how they preserve and increase wealth with relatively low volatility. I agree with others they are a lower-risk investment, and I hold all three.


As you hold all three trusts you will have a better idea than me how they operate but PNL for instance holds a lot more near cash than you indicate. They held only 35% in equities at 31 May, Gold related investments (as they describe them) at 11% and most of the balance in Index linked bonds or UK T Bills. That is I think a matter of policy, not held for the purpose of buying equities when the time is right, although they do so from time to time. I think that Sebastian Lyons would never claim to be trying to time the market.

Dod

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Re: Protecting against inflation part 2

#510741

Postby Urbandreamer » June 29th, 2022, 5:42 pm

Dod101 wrote:Yu should try to get hold of the Annual Reports for both of PNL and CGT. Certainly the PNL one is worth reading. I have a high regard for Sebastian Lyons of Troy who manages PNL. Peter Spiller who manages CGT also gets a good crit, although I guess he must be approaching retirement. They both write with some original thought about the investment climate which I find helpful even although these days I hold neither trust.

Dod


In addition I recommend frequenting Ruffers web site. Given the fact that C is splitting the investments between two accounts it's likely that adding Ruffer at this point would simply make things more complicated, but it's still worth reading their thoughts.

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Re: Protecting against inflation part 2

#510742

Postby Lootman » June 29th, 2022, 5:42 pm

Dod101 wrote:
Parky wrote:PNL/CGT and RICA currently all hold cash and near-cash(short -term government bills and bonds) in their portfolios (PNL 21%, CGT 12% and RICA 10.7%, figures from end April or end May fact sheets) for the purpose of market timing their purchase of further equities when they think the time is right. We assume from their performance record they are good at that. That's how they preserve and increase wealth with relatively low volatility. I agree with others they are a lower-risk investment, and I hold all three.

As you hold all three trusts you will have a better idea than me how they operate but PNL for instance holds a lot more near cash than you indicate. They held only 35% in equities at 31 May, Gold related investments (as they describe them) at 11% and most of the balance in Index linked bonds or UK T Bills. That is I think a matter of policy, not held for the purpose of buying equities when the time is right, although they do so from time to time. I think that Sebastian Lyons would never claim to be trying to time the market.

I cannot speak for PNL very recently as I do not follow it that closely. But historically they used equity index futures to get some of their general exposure to equities (over and above whatever individual shares they own). So the percentage allocation to shares and cash can be a little misleading.

I would agree that they are not engaged in market timing. However they have often stated that they will increase their exposure to equities when share prices are depressed. I just think they would call that "asset allocation" rather than "market timing". :D

Use of futures allows a fund to increase or decrease the exposure to equities very quickly, over the alternative of buying individual shares.

The last PNL fund report I read showed how they had secured long-term returns about equal to the FTSE-100 but with a much lower level of volatility. That is what you want to see. Of course the FTSE-100 has not been the greatest benchmark to aim for in a long time, but it's still something.

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Re: Protecting against inflation part 2

#510752

Postby RockRabbit » June 29th, 2022, 6:29 pm

The wealth preservation trusts mentioned (eg Ruffer and Personal Assets) have a significant proportion of their assets in UK IL gilts and/or US TIPs.

You can invest in these yourself via an ETF (eg iShares) and therefore save on the IT annual charge (usually around 1% pa compared with etf 0.1-0.2%) While 1% pa may not sound much, that's 10% over ten years. Furthermore Ruffer IT is currently on a 5% premium to underlying assets. Pre-2020 this IT was at a discount.

US TIPs will of course give you exposure to the USD which you may not want at current FX rates. Again you can mitigate against this by buying a GBP hedged etf.

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Re: Protecting against inflation part 2

#510754

Postby AsleepInYorkshire » June 29th, 2022, 6:36 pm

Clariman wrote:I asked 3 months ago about how to protect against inflation. Our current asset split is 43% property (excludes our home), 43% cash, 14% equity funds. After 3 months of inaction I need to make some decisions about maturing bonds and cash-ISAs. What are current thoughts about how best to protect against inflation. In fact, if I moved the maturing cash products into equities, I could alter the split to 43% property, 26% cash, 31% equities. Would that be wise?

Original discussion here viewtopic.php?f=8&t=33862

I want to keep it simple by investing in funds, bonds, trackers rather than individual stock picks. I don't have the inclination to research sectors and companies. Or more accurately I know that if I got into that it would consume a lot of my time and attention.

Thanks
Clariman

Hi Mr. C, I hope you and your family are all well.

I'm assuming that the 43% property is the bedrock of your income and needs to remain in place. I know you've talked about you holiday home[s?] in other posts. I think this may be a risk tolerance question for you. Equities have been pummeled recently. Does that mean they are cheap and offer good value or does it mean they are going to continue to fall? If you are investing in funds and don't want to spend your time researching then yes trackers are the way to go in my opinion. I'd suggest the S&P 500 may be worth a look. I'm not a big fan of bonds and have never tried to understand them. I'm sure there will be other Fools far better suited to chat about bonds in detail with you. The problem I have with funds is I can't value the retched things :lol: And some of the funds on offer start to "speculate" in areas I know little about, such as investment in China.

I think if you buy into none tracking funds you're going to have to do some work to at least know what companies the fund is invested in. And that can consume more time than anticipated.

If by the term cash you mean money sat in a current account or in an ISA or other savings account earning buttons in interest then I think there's definitely a need to review this.

My final advice - open a bottle of wine, or if you prefer have a cup of tea and just Google for an hour or two. You may see something that inspires you to pursue a certain route.

AiY(D)

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Re: Protecting against inflation part 2

#510755

Postby Parky » June 29th, 2022, 6:53 pm

Lootman wrote:
Dod101 wrote:As you hold all three trusts you will have a better idea than me how they operate but PNL for instance holds a lot more near cash than you indicate. They held only 35% in equities at 31 May, Gold related investments (as they describe them) at 11% and most of the balance in Index linked bonds or UK T Bills. That is I think a matter of policy, not held for the purpose of buying equities when the time is right, although they do so from time to time. I think that Sebastian Lyons would never claim to be trying to time the market.

I cannot speak for PNL very recently as I do not follow it that closely. But historically they used equity index futures to get some of their general exposure to equities (over and above whatever individual shares they own). So the percentage allocation to shares and cash can be a little misleading.

I would agree that they are not engaged in market timing. However they have often stated that they will increase their exposure to equities when share prices are depressed. I just think they would call that "asset allocation" rather than "market timing". :D

Use of futures allows a fund to increase or decrease the exposure to equities very quickly, over the alternative of buying individual shares.

The last PNL fund report I read showed how they had secured long-term returns about equal to the FTSE-100 but with a much lower level of volatility. That is what you want to see. Of course the FTSE-100 has not been the greatest benchmark to aim for in a long time, but it's still something.


Dod - I did not include the index-linked bonds as "near-cash". I understand they are an inflation hedge as opposed to cash waiting to be reinvested.
Lootman - I guess one persons asset allocation is another's market timing.

Anyway, my point (which I should have stated) was that the OP, by investing in any of these three, would not be moving entirely out of cash, but putting some of it where it would be expertly deployed when appropriate (we hope).

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Re: Protecting against inflation part 2

#510757

Postby Kantwebefriends » June 29th, 2022, 7:15 pm

A recent Vanguard report (my link now dead) concluded that the two best bets as protection from unexpected inflation were TIPS (the US equivalent of index-linked gilts) and commodities.

TIPS, however, protected only the money you'd invested in them while commodities did so well as to protect other parts of your capital too.

The report also warned that in the long term commodities have proved disappointing, their returns averaging out as being little different from cash while their capital values are erratic.

But is the inflation I expect in the next few years "unexpected"? I don't know but I might very well want to invest in insurance against whatever inflation might eventually happen.

Personally, having seen the recent performance of copper, I can't pluck up the courage to plonk money into commodities. I suppose I might specifically ignore industrial metals and just go for oil/gas/coal/uranium on the one hand and wheat/coffee/cocoa on the other.

But when?

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Re: Protecting against inflation part 2

#510762

Postby Hariseldon58 » June 29th, 2022, 8:01 pm

Kantwebefriends wrote:A recent Vanguard report (my link now dead) concluded that the two best bets as protection from unexpected inflation were TIPS (the US equivalent of index-linked gilts) and commodities.

TIPS, however, protected only the money you'd invested in them while commodities did so well as to protect other parts of your capital too.

The report also warned that in the long term commodities have proved disappointing, their returns averaging out as being little different from cash while their capital values are erratic.

But is the inflation I expect in the next few years "unexpected"? I don't know but I might very well want to invest in insurance against whatever inflation might eventually happen.

Personally, having seen the recent performance of copper, I can't pluck up the courage to plonk money into commodities. I suppose I might specifically ignore industrial metals and just go for oil/gas/coal/uranium on the one hand and wheat/coffee/cocoa on the other.

But when?


You can compare TIPs with conventional US treasuries of a similar duration, the difference between the real yield of the former and the yield of the latter is the priced in inflation over the duration of the bonds, this is simplified somewhat, but the market expects inflation of circa 2 ½ % for an intermediate tracker, duration 7 or 8 years. The market is assuming the current inhalation spurt will die back fairly quickly, TIPs would protect you if the outcome was worse. I think TIPs are not unattractive but who knows…

Pensioncraft did an excellent YouTube video on index linked bonds, well worth watching to get a succinct explanation of what otherwise can be a confusing investment. https://www.youtube.com/watch?v=NJrtspvT_FU

(Peter Spiller of Capital Gearing has been on a couple of podcasts lately, talks a lot of sense and the annual report is recent, well worth a read. I don’t hold CGT but I hold a lot of TIPs and infrastructure/property investment companies that are not dissimilar in outlook to CGT holdings) Here is a link to a recent video https://www.youtube.com/watch?v=TCtrCDsNePg


These two videos will occupy an hour in total but both are very instructive…

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Re: Protecting against inflation part 2

#510873

Postby Clariman » June 30th, 2022, 12:51 pm

Clariman wrote:Our current asset split is 43% property (excludes our home), 43% cash, 14% equity funds.

First trades done. Split is now 43% property, 40% cash, 17% equity. Once some existing cash-ISA money is transferred in, the numbers will move more significantly. It's an expensive business buying equity-based trusts. Cash is easier and cheaper at first :? :lol:

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Re: Protecting against inflation part 2

#512865

Postby AsleepInYorkshire » July 9th, 2022, 6:50 am

Clariman wrote:
Clariman wrote:Our current asset split is 43% property (excludes our home), 43% cash, 14% equity funds.

First trades done. Split is now 43% property, 40% cash, 17% equity. Once some existing cash-ISA money is transferred in, the numbers will move more significantly. It's an expensive business buying equity-based trusts. Cash is easier and cheaper at first :? :lol:

About 3 months ago (11-04-22) I popped a mock portfolio of a few shares together. They've all fallen. I won't list them all. Generally the falls have all been between 20 & 55%. Of 13 shares over 8 of them have fallen more than 28%.

However, two have shown resistance that differs.

1. Microsoft
2. F&C Investment Trust

Both have fallen less than 10% (YTD)

Microsoft still represent good returns over the last decade with annualised returns of 28%. F&C is not so good at 12.75%.

There may be a reason that Microsoft is showing good returns, despite the pressures now being exerted on markets. It may be worth looking at a small purchase of MS ... obviously highly dependent upon your own views of how you want to gear your portfolio for the future.

Have a great weekend and don't forget the sun cream :lol:

Take care

AiY(D)

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Re: Protecting against inflation part 2

#512964

Postby 1nvest » July 9th, 2022, 2:54 pm

The 4% SWR guide, take 4% of the initial portfolio value as income at the start of the first year, and then uplift that £££ amount by inflation each year as the amount drawn in subsequent years, historically was safe, saw you through 30 years in the worst of cases, more often did considerably better. That includes historic periods of high/rising inflation, well into double digit levels (north of 20% at times). The worst of cases typically arose when there was a bad sequence of returns (SoR) risk in the earlier years. Someone might save up 25 times their yearly spending, hit their 'goal/figure' and retire, but if a bad year(s) occur in those earlier years that strains the portfolio, is more inclined to 'just about' achieve a 4% SWR.

Often goals are achieved after relatively fast/large up-runs, such that some retire at relative highs and are more exposed to bad-early-year-SOR risk. One way to reduce that risk is to, at the point of retiring, swap into a 67/33 global stock fund/gold. No rebalancing, just let that run ... except if the portfolio weightings adjust to 33/67 i.e. gold heavy. At which time sell the gold and transition to 100/0 stock/gold. In bad historic cases where that occurred you did OK/well. In good cases where stocks just rose and gold became increasingly more lightly weighted relative to the total portfolio the gold-drag effect was acceptable, good instead of great rewards where both were 'more than enough'. If after a number of years of stocks doing well there is a large dip after say 10 years more often that is just giving back some of other-peoples-money, largely irrelevant.

A steady/consistent inflation adjusted income, with earlier years SoR risk reduction/protection, better protection of ones own interest, but at the expense of more often leaving less for heirs than if you'd been 100% stock all-along. Broadly inflation is irrelevant, as your income/spending rises in alignment to that. But there is the risk factor that your personal rate of inflation may be significantly different/higher than that of the broader inflation rate figure. But even then, more often a higher than 4% SWR could (can) have been used such that even that risk is partially/fully diluted.

Supplementing that, owning rather than renting liability matches rent risk. A home value can also serve as late life care home fees cover, typically for the longer surviving partner (as the first often tends to be cared for by the other in their own home). The average I believe is for 4 years in a care home, so at around £80K/year costs, after pension payments that might be a £60K x 4 years = £240K cost (appropriate/reasonable home value). So any retirement downsizing might look to buy a home value of no less than that.

The 4% SWR is a guide rather than rule, in bad cases it could fall short of the 30 years measure that was made against. But even then the shortfall tends to still be towards the upper end, maybe just sustaining 25 years for instance. For a 65 year old, living to 90 is a achievement that many wont achieve or if they do they may be near/at the stage of entering care anyway which the £80K/year sale of home funding covers.

As ever there are exceptions, nothing is truly safe and for instance high younger years illness/care-costs could be devastating. Life. The only insurance/protection there is to have way-way more than enough.

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Re: Protecting against inflation part 2

#513017

Postby tjh290633 » July 9th, 2022, 6:40 pm

1nvest wrote:The 4% SWR guide, take 4% of the initial portfolio value as income at the start of the first year, and then uplift that £££ amount by inflation each year as the amount drawn in subsequent years, historically was safe, saw you through 30 years in the worst of cases, more often did considerably better. That includes historic periods of high/rising inflation, well into double digit levels (north of 20% at times). The worst of cases typically arose when there was a bad sequence of returns (SoR) risk in the earlier years. Someone might save up 25 times their yearly spending, hit their 'goal/figure' and retire, but if a bad year(s) occur in those earlier years that strains the portfolio, is more inclined to 'just about' achieve a 4% SWR.

Often goals are achieved after relatively fast/large up-runs, such that some retire at relative highs and are more exposed to bad-early-year-SOR risk. One way to reduce that risk is to, at the point of retiring, swap into a 67/33 global stock fund/gold. No rebalancing, just let that run ... except if the portfolio weightings adjust to 33/67 i.e. gold heavy. At which time sell the gold and transition to 100/0 stock/gold. In bad historic cases where that occurred you did OK/well. In good cases where stocks just rose and gold became increasingly more lightly weighted relative to the total portfolio the gold-drag effect was acceptable, good instead of great rewards where both were 'more than enough'. If after a number of years of stocks doing well there is a large dip after say 10 years more often that is just giving back some of other-peoples-money, largely irrelevant.

A steady/consistent inflation adjusted income, with earlier years SoR risk reduction/protection, better protection of ones own interest, but at the expense of more often leaving less for heirs than if you'd been 100% stock all-along. Broadly inflation is irrelevant, as your income/spending rises in alignment to that. But there is the risk factor that your personal rate of inflation may be significantly different/higher than that of the broader inflation rate figure. But even then, more often a higher than 4% SWR could (can) have been used such that even that risk is partially/fully diluted.

Supplementing that, owning rather than renting liability matches rent risk. A home value can also serve as late life care home fees cover, typically for the longer surviving partner (as the first often tends to be cared for by the other in their own home). The average I believe is for 4 years in a care home, so at around £80K/year costs, after pension payments that might be a £60K x 4 years = £240K cost (appropriate/reasonable home value). So any retirement downsizing might look to buy a home value of no less than that.

The 4% SWR is a guide rather than rule, in bad cases it could fall short of the 30 years measure that was made against. But even then the shortfall tends to still be towards the upper end, maybe just sustaining 25 years for instance. For a 65 year old, living to 90 is a achievement that many wont achieve or if they do they may be near/at the stage of entering care anyway which the £80K/year sale of home funding covers.

As ever there are exceptions, nothing is truly safe and for instance high younger years illness/care-costs could be devastating. Life. The only insurance/protection there is to have way-way more than enough.

I retired at 65 and am now 89. I have stayed 100% in equities apart from some cash savings. I have the State Pension, an occupational pension and an annuity. I am better off now than ever. Going partly into bonds in 1998 would have been a disaster. Earlier I had it in mind to do so, but it was pointless when it came to the crunch.

The elephant in the room is the cost of care, but it may never come to that. Spending capital, if it becomes necessary, deprives the Treasury of 40% that might otherwise be payable in IHT.

What it comes down to is that you need to have more than enough income for normal living expenses, and inflation plus growth will see you all right. People focus on capital, but they should focus on income.

TJH


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