Since the introduction of pension freedoms, providers have talked about ‘innovation’ until they, and we, are all blue in the face. Thankfully, it appears that’s starting to change!
Royal London has put its money where its mouth is. It recently launched a new Drawdown Governance Service (DGS). And there’s a lot to like about it.
It’s not quite in the same class as Frank Whittle’s invention of the Jet Engine or Tim Berners-Lee’s invention of The Internet, as RL’s marketing brochure seems to suggest. But considering how unimaginative providers have been on the subject of retirement income till date, … More →
Asset allocation is a key factor when deciding sustainable withdrawal rate in a retirement income portfolio. And one of the most important decisions is what proportion of a retirement income portfolio should be allocated to equities.
The received wisdom is that allocation to equities should be lower during the retirement income stage. The rational behind this include the fact that retirees tend to have lower risk appetite and reduced risk capacity.
Yet, the common practice in the industry isn’t supported by cold hard empirical evidence. Indeed, in his seminal 1994 paper, Bill Bengen recommended
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…a stock allocation as
I had the honour of meeting legendary Bill Bengen of the Safe Withdrawal Rate fame last week.
Our meeting took place near his home in Palm Springs, California. Given his accomplishments, he struck me as a very humble and down-to-earth person, a rare virtue in financial services!
After the pleasantries, we sat down and ordered a drink. I asked Bill if he had any idea when he wrote his first paper in 1994, that his methodology was going to become something of a gospel on retirement planning. “Not at all. I started the research in 1993 and wrote my … More →
One crucial but often forgotten point about Bengen’s Sustainable Withdrawal Rate (SWR) framework is that SWR is defined as a percentage of the capital only in the first year of retirement. Subsequent withdrawals in £ terms are adjusted for inflation, regardless of the outstanding balance in future years. So, in reality the actually current withdrawal rate in percentage terms will change from year to year as the outstanding balance and annual withdrawal changes. But the real withdrawal in £ terms remains the same as the income in the first year!
The two charts below show the nominal (left) and … More →
If I had a pound for every time someone in financial services talks about spending in retirement as being ‘U-shaped’, I’ll probably have enough money by now to never have to work again!
You’ve probably seen this image on spending needs in retirement before. It’s a rather commonly held view (see this, this and this) that most people spend more early in retirement, when they’re active and keen to enjoy their new-found freedom. Then they go into a less active stage where spending declines, only for it to pick up dramatically in later life due to care costs.… More →
One of the most common questions I receive about retirement income planning is, how realistic is the idea of relying on natural yield in one’s portfolio to meet retirement income needs. The rational is that by relying on the natural yield from their portfolio, retirees can avoid drawing on their capital or selling fund units, thereby avoiding the dangers of sequence risk.
The natural yield approach contrasts with the total return approach, which essentially ignores the difference between capital growth and dividends, and instead seeks to draw income from both in a sustainable way.
The natural yield approach is bandied … More →
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so’ – Mark Twain
The movie Big Short opens with above quote, which sums up the danger of thinking you know something that isn’t actually true. There’s only one problem. There’s little evidence that Mark Twain actually said or wrote those words, which makes the irony all the more powerful.
The point is, many practices in financial services just aren’t supported by actual observed data on how investment markets work. (Which makes you wonder, where do they come from? But … More →
I know, I know. I’ve been banging on about the subject for some time now… well, ehr… since George Osborne uttered these seemingly harmless words ‘No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity.”
And the reason I keep banging on about it is because sequence risk is perhaps the most significant risk for those looking to generate a lifetime income from a pension drawdown pot.
Sequence risk is the risk that the order of investment returns is going to be unfavourable. This risk exists at accumulation stage but it’s amplified … More →
When the now famous RBS analyst cried ‘sell everything’ in January 2016, it was apparent the intent was to grab attention. And grab attention it did. It was echoed by the financial press. Never mind that it was downright reckless for any investor to do so.
As it turns out, 2016 was a good year for mainstream asset classes. It was difficult not to have made money, even if you tried. Even gilts posted double digit returns again. Gilts!!!
Basically, everything… More →
One clear indictment of asset managers in the FCA interim report is the regulator’s verdict on closet indexers. Closet indexers are funds charging active management fees for what amounts to a little more than merely tracking an index. The FCA’s term for this phenomenal rip-off is ‘partly active,’ which it defined as active funds with a tracking error of 1.5% or less.
The regulator estimates that a whooping 42% (£142bn in assets ) of retail active equity funds are closet indexers, of which £109bn are considered expensive i.e. charging more than 0.50% for clean share class or 1% … More →