5 ms·

Maybe a bit high, but I found that dialing that rate down a few points didn't dramatically change my years to retirement.

by LVB 14y ago

Ntrails 14y ago
This is completely naive. There is a reason that modelling is mostly done stochastically - if you get a 1 in 20 event then your years to retirement is going to change hugely. Worst of all is the assumption that you can live on the interest of your retirement savings - complete rubbish unless you can actually drop your living costs negative should the market (or, more accurately, your assets) drop by 10% over the course of a year. The closest to a secure way to have your lifetime income guaranteed is an annuity. Guess what, 100k will buy you 4k pa for the rest of your life at age 65. At early retirement it is probably closer to 2k pa - assuming, say, 55? This, of course, ignores insurance companies going bust - but is clearly safer than investing chasing an RPI + 4% benchmark with your entire retirement nest egg
- RyanZAG 14y ago
  Not necessarily true. When you buy a guaranteed annuity, all you are doing is transferring risk (and reward). When you give the insurance company that 100k, they turn around and put it in the stock market. The amount of money they give you is an average of the stock market performance.. plus a very hefty fee to them for their trouble. So what you get out of them is the average stock market return minus that hefty fee. If the stock market performs on average or better than average, you lose by using a guaranteed annuity. If the stock market performs a little worse than expected, you win, and the insurance company will have to pay you out of their profits. If the stock market performs terribly badly, you lose again -- the insurance company has no money to pay you anything. So in 3 of the 4 cases presented here, you lose out by choosing a guaranteed annuity. It's still a solid option, but it's definitely not 'the' option. I personally would never choose such an option.
  - Ntrails 14y ago
    First off, insurance companies do not invest annuity value in the stock market, for the same reasons you should not. i.e. - it is risky and a significant loss of capital without further contributions will result in you running out of money. The reason that you get crap all for your money, is that the insurance company is estimating your life expectancy, low risk asset returns, and then using both the investment returns and capital to pay your annuity. Most of the risk to them comes from longevity - NOT THE STOCK MARKET. They hedge inflation, invest largely in gilts and bonds. And they draw down on the capital. This is mostly fine, because in practice some people live longer, some die young. The annuity provider can net these off and work to the average. As a single person the entire longevity risk goes on you. To try and live off the interest only is to require you to chase returns, and hence expose yourself to risk in the markets. The article is offering awful advice about retirement based on massive simplifications. Insurance companies have to reserve heavily to ensure that in the 1 in 20 events they continue to function. In solvency II they start to bring in the 1 in 200 risk (99.5 tail basically). I want to restate something for effect: No one in good sense should assume that for their entire retirement they can produce inflation beating returns without risking significant capital loss and subsequent penury.
    - RyanZAG 14y ago
      You can just as easily turn that last statement on it's head: No insurance company should assume that for their entire retirement portfolio they can produce inflation beating returns without risking significant capital loss and subsequent penury. The reason I can flip the argument is because, ultimately, the value of your investment is irrelevant. If you are investing $10 billion and earn 10%, or you invest $1 mil and earn 10% - you are still earning 10% in both events. It's just scare-mongering - you're saying to offload your risk and reward to someone else because they're so much better than you at it. However, there is very little proof that they really are better at it than just investing 50% in bonds and 50% in index funds. And, unfortunately, while you truly are offloading all of your reward, you are only offloading limited risk - and you are paying for the privilege. The financial industry as a whole does a wonderful job preying on fears for their own profit, and yes, I've worked in the financial industry.

Maybe a bit high, but I found that dialing that rate down a few points didn't dramatically change my years to retirement.

by LVB 14y ago

Maybe a bit high, but I found that dialing that rate down a few points didn't dramatically change my years to retirement.

Ntrails 14y ago

This is completely naive. There is a reason that modelling is mostly done stochastically - if you get a 1 in 20 event then your years to retirement is going to change hugely. Worst of all is the assumption that you can live on the interest of your retirement savings - complete rubbish unless you can actually drop your living costs negative should the market (or, more accurately, your assets) drop by 10% over the course of a year. The closest to a secure way to have your lifetime income guaranteed is an annuity. Guess what, 100k will buy you 4k pa for the rest of your life at age 65. At early retirement it is probably closer to 2k pa - assuming, say, 55? This, of course, ignores insurance companies going bust - but is clearly safer than investing chasing an RPI + 4% benchmark with your entire retirement nest egg

RyanZAG 14y ago
Not necessarily true. When you buy a guaranteed annuity, all you are doing is transferring risk (and reward). When you give the insurance company that 100k, they turn around and put it in the stock market. The amount of money they give you is an average of the stock market performance.. plus a very hefty fee to them for their trouble. So what you get out of them is the average stock market return minus that hefty fee. If the stock market performs on average or better than average, you lose by using a guaranteed annuity. If the stock market performs a little worse than expected, you win, and the insurance company will have to pay you out of their profits. If the stock market performs terribly badly, you lose again -- the insurance company has no money to pay you anything. So in 3 of the 4 cases presented here, you lose out by choosing a guaranteed annuity. It's still a solid option, but it's definitely not 'the' option. I personally would never choose such an option.
- Ntrails 14y ago
  First off, insurance companies do not invest annuity value in the stock market, for the same reasons you should not. i.e. - it is risky and a significant loss of capital without further contributions will result in you running out of money. The reason that you get crap all for your money, is that the insurance company is estimating your life expectancy, low risk asset returns, and then using both the investment returns and capital to pay your annuity. Most of the risk to them comes from longevity - NOT THE STOCK MARKET. They hedge inflation, invest largely in gilts and bonds. And they draw down on the capital. This is mostly fine, because in practice some people live longer, some die young. The annuity provider can net these off and work to the average. As a single person the entire longevity risk goes on you. To try and live off the interest only is to require you to chase returns, and hence expose yourself to risk in the markets. The article is offering awful advice about retirement based on massive simplifications. Insurance companies have to reserve heavily to ensure that in the 1 in 20 events they continue to function. In solvency II they start to bring in the 1 in 200 risk (99.5 tail basically). I want to restate something for effect: No one in good sense should assume that for their entire retirement they can produce inflation beating returns without risking significant capital loss and subsequent penury.
  - RyanZAG 14y ago
    You can just as easily turn that last statement on it's head: No insurance company should assume that for their entire retirement portfolio they can produce inflation beating returns without risking significant capital loss and subsequent penury. The reason I can flip the argument is because, ultimately, the value of your investment is irrelevant. If you are investing $10 billion and earn 10%, or you invest $1 mil and earn 10% - you are still earning 10% in both events. It's just scare-mongering - you're saying to offload your risk and reward to someone else because they're so much better than you at it. However, there is very little proof that they really are better at it than just investing 50% in bonds and 50% in index funds. And, unfortunately, while you truly are offloading all of your reward, you are only offloading limited risk - and you are paying for the privilege. The financial industry as a whole does a wonderful job preying on fears for their own profit, and yes, I've worked in the financial industry.