#333586
Postby 1nvest » August 16th, 2020, 12:21 pm
Each and every asset have endured total net real losses over decade or longer periods. Drawing a income, no matter how drawn - dividends, interest, selling shares - would have induced further capital decline. Driving into the future looking in the rear view mirror - a exceptional historic period across the 1980's/1990's decades for instance (didn't really matter what stock/bond allocations you used, you made heaps of rewards fundamentally due to transition from very high to very low yields), and you run the risk of a crash.
If you own your own home then 'rent' is liability matched. The home value might also cover late life care costs for the longer survivor of a partnership (in most partnerships the first to die more often dies at home cared for by their partner). If your spending is £20,000/year then presently Linkers (Index Linked Gilts) come with around a 2.5%/year cost, so to buy a assured £20,000 in ten years times costs around 1.28 times more being needed to be deposited now - so £25,600 to buy £20,000 of inflation adjusted income in 10 years time, for £20,000 in a years time costs £20,500 ....etc. for all other years 1 to how-ever-many years out. A state pension might reduce that, if in x year times you receive £9000 state pension then that reduces the £20,000 amount having to be found down to £11,000.
For a 59 year old about to retire, who owned their own home so didn't have to find/pay rent, and whose spending was £20K/year, then a quick calculation indicates they'd need around £550K in a Linkers ladder assuming they'd receive £9K state pension at age 67, where that ladder assumes a 90 year age life expectancy. If instead invested in shares - spending a above average yield and that could work out fine, could lead to all sorts of problems/risks.
With Linkers providing a DIY annuity sorted, any amounts above/beyond that can be invested however preferred. If heirs are involved that surplus might grow fast enough to offset the decay/spending of the Linkers. If you die much sooner the value of the Linkers are also still largely there for heirs, unlike for a actual annuity where the value might be fully lost. If that surplus amount is £250K and that's invested in all-stock that earns 4% annualised real over the 30 years that the linkers are drawn-down/spent, then the combined portfolio value will have maintained its inflation adjusted value, Start with £800K, end with a inflation adjusted £800K still available in 30 years time. If limited to £550K and/or no heirs then you might just run the Linkers/drawdown. If less than £550K then you have to take on more risk and hit-n-hope.
The great case is where you have a decent inflation adjusted occupational pension alongside the state pension that in combination covers spending. In which case £0 savings is OK. Better still if you also have some savings as well.
In a bad case, perhaps £200K home value, £400K savings, I'd suggest pushing with the Talmud asset allocation, equal weightings of UK home, US stock, Gold in equal measure. £, $, global currency diversification, land, stock, commodity asset diversification. Drawing a 3.3% SWR from that (£20K/year). Likely that would be fine. As home values are illiquid, some UK stocks can be substituted in as part of that.
Yet another choice is to employ Harry Browne's Permanent Portfolio, 25% in each of UK stocks, gold, 30 year Gilt, cash deposits ... as a alternative to Linkers. Assume a conservative +2% real from that (likely results would be better), which is 4.5%/year more than Linkers, and you'd also likely be OK.
Fundamentally much of early years SoR risk can be largely mitigated via appropriate asset allocation. The risk is massively more pronounced with the likes of all-stock (HYP/whatever).