some questions on arfs

[monagt]

Can the PRSAs be left untouched until ARF time?
Is there a list of best ARF providers?
@5% - the optimum withdrawal amount recommended in USA is @4% to make sure your fund does not run out.
Can a withdrawal of 5%+ARF provider fees be covered by a conservative funds income?

3 questions, appreciate replies, thx m

 

[Conan]

1. A PRSA can be "left untouched" until you decide to drawdown the funds on retirement (but by age 75 at the latest).
2. The "best" ARF really depends on what type of investment structure (and costs) you want. Are you going to invest in funds, direct equities, property, deposits etc?
3. You are correct to say that a drawdown of 5% + fees could run the fund down over time. But remenber the capital is designed to be a source of retirement income, not necessarily an inheritance vehicle (though an ARF can be that also). Ideally one should match the investment strategy to the level of expected drawdown (whether 5% or more) and ones own attitude to risk. Ideally if you know how long you will live in retirement it makes the process easier.

 

[monagt]

Thx Conan.
Currently in IL Consensus so will hope to keep it in Dividend equities at lowest TER but Ireland seems very expensive.

 

[LDFerguson]

But remenber the capital is designed to be a source of retirement income, not necessarily an inheritance vehicle (though an ARF can be that also).

This a point that I find many people forget. In comparing an ARF with an annuity, many ignore the fact that an annuity consumes the entire fund on the day of purchase. Prior to the existence of ARFs (around ten years ago) the only drawdown vehicle available was an annuity. You handed over your fund in return for a guaranteed income. Your fund was gone from day one.

If an ARF fund is growing at 4% and you're withdrawing 5%, it's still declining in value at a rate that will far outlive you. Which is more than an annuity will ever do.

 

[DerKaiser]

This a point that I find many people forget. In comparing an ARF with an annuity, many ignore the fact that an annuity consumes the entire fund on the day of purchase. Prior to the existence of ARFs (around ten years ago) the only drawdown vehicle available was an annuity. You handed over your fund in return for a guaranteed income. Your fund was gone from day one.

If an ARF fund is growing at 4% and you're withdrawing 5%, it's still declining in value at a rate that will far outlive you. Which is more than an annuity will ever do.

The income on an annuity is calculated assuming the fund does attract a long term safe return.

If you invest the ARF similarly (in safe government bonds) and draw down the same amount as the annuity you can end up in three situations:

1) You will die at the exact age expected and your final drawdown will just about exhaust your fund

2) You will live longer than expected and be left with nothing for your remaining years

3) You will die earlier than expected and leave an additional inheritance

 

[Marc]

This is a good point but there is another factor to consider here.

Many people believe that an insurance company pockets the fund when an annuitant dies.

This is a gross oversimplification of the facts and ignores a concept known as mortality gain.

Insurance companies provide everyone with a better annuity rate than simply the long bond yield because of the cross subsidy provided by annuitants who die early.

Everyone obtains a slightly better annuity rate because of this.

The impact of the loss of the cross subsidy by those who opt for an ARF becomes more dramatic the older the client. This concept is known as mortality drag and is the additional return that the ARF investor must earn to compensate for loss of the annuity forgone.

So in practice a generic critical yield is the sum of the following parts
Long bond yield as identified in the post above
Plus charges differential between annuity and ARF which is at least 1%pa
Plus mortality drag which depends on age but is generally around 1 to 2%pa

This is the average annual return an ARF investor must earn to match the annuity forgone.