How much of an ARF should be in equities?

Bob2018 said:
Duke,

I get most of what your saying but my head is now completely fried. I remember being told once (by a good friend) "normally I say there's no such thing as a stupid question but honestly, Bob, there are times when you come very close." So apologies in advance but I'm struggling with the bit quoted below:

"After contacting his local actuary he is told that using an annuity rate at 6% p.a. he can afford to withdraw 7.3% p.a."

Tell me this is a typo PLEASE!
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Colm has already addressed this but I accept that it is ambiguously written. We assume our assets (equities) can earn 6% p.a. so an annuity based on these returns will be higher than that, reflecting the dissipation of the initial capital. Over 30 years this asset dissipation adds 1.3% extra return. Use Excel and calculate 100/(PV(.06,30,1)

I think some of the discussion is missing the essentials of Ms. Normal. Ms. Normal goes through an accumulation phase and then goes through a decumulation phase. Those lucky enough to be able to live off their property rentals or equity dividends are not decumulating. They might argue that they have the perfect balance between living expenses and estate planning but this is somewhat post hoc and society could not afford this luxury to Ms. Normal. So in society moving from DB to DC we have to accept the fact that in many situations the pension pot will extinguish over the lifetime of the pensioner. The pensioner needs to budget for the maximum expenditure compatible with surviving the course. Over investment in equities will expose her to unacceptable sequence of returns risk.

Note to kind moderator: I think my Excel ARF "App" could be very helpful in informing this debate. What are the chances of me emailing the App to a moderator and then s/he onward emailing it to the participants in this discussion?
 
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Duke
Have I mentioned to you my proposal for a smoothed fund, invested 100% in equity type instruments, that would be ideal for Ms. Normal?? :)
 
Thanks Duke,

That's so well put about Mr Normal's decumulation and I do agree that the thread is moving away from the best currently available solutions for Mr. Normal. Like I've no idea if I'll ever have access to Colm's group proposals so I'd prefer to concentrate on the here and now and if Colm's proposals become available that will be a welcome bonus. What I'd really like is to see actual sample proposals from advisers. I think the challenges are well known at this stage. But we 60+ posts in and still waiting?
 
Sorry Steven,

I don't think that's fair. I think you could easily assume a profile and present something on that basis. We're talking about Mr. Normal! Otherwise, we are just rehearsing non stop the problems and not the solutions.
 
To be fair to Stephen and other advisors who post on this site using their real identity, they already contribute a lot. Asking them to do case studies for mr and miss normal that people might take as formal advice is unfair. Even if they write all disclaimers in the world, I don’t think it is fair to ask them.
 
Bob2018 said:
Sorry Steven,

I don't think that's fair. I think you could easily assume a profile and present something on that basis. We're talking about Mr. Normal! Otherwise, we are just rehearsing non stop the problems and not the solutions.
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Hi Bob,

How much do you have available to invest?

Gordon
 
Colm Fagan said:
Duke
Have I mentioned to you my proposal for a smoothed fund, invested 100% in equity type instruments, that would be ideal for Ms. Normal?? :)
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Colm I agree with you that we are facing a quite serious societal issue in the shift from DB to DC for Mr and Ms Normal. Your smoothing suggestion is possibly the way forward but it must involve cross generational subsidies. With Profits used to do that but has somehow fallen into disrepute. The solution might come from the market but it might require state intervention.
 
Sunny said:
To be fair to Stephen and other advisors who post on this site using their real identity, they already contribute a lot. Asking them to do case studies for mr and miss normal that people might take as formal advice is unfair. Even if they write all disclaimers in the world, I don’t think it is fair to ask them.
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I must admit that this is a fair criticism and I don't like it (because it's completely justified!). Fair play, Sunny and I'm sorry Steven!

I probably should be gracious and leave it at that. I suppose that I pushed a little hard but it's really just because I'd like to understand smart and practical solutions to this problem for Mr. Normal. My sense is that advisers could possibly say something like for a given risk profile one could do x and y and z and then people would be able to adjust such a template up or down the risk curve depending on their personal circumstances.

Like all we have to date is very polarised positions of 15 years in cash or all equity. I'd just like to know what the middle looks like other than as one of the posters said lobbing it into blah blah fund.

I'm enjoying this debate but it would just be nice if some solutions could be suggested. I'm not asking them to specially prepare case studies, I simply asking them to share some solutions with us.
 
Rather than start another thread, what are people’s thoughts on the optimum investment strategy where someone in the pre-retirement world has accumulated €2.15m but cannot take their retirement benefits or escape any other way (e.g. offshore)?
 
Duke of Marmalade said:
Your smoothing suggestion is possibly the way forward but it must involve cross generational subsidies.
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Duke, why the "but"? There's no problem with cross-generational subsidies, provided they're not biased in one direction or the other. Actually, I think they're more in the nature of what I might call "temporal adjustments" (I'm sure there's a better term, but it's late for an auld fella like me) for the same generation, i.e. Ms Bloggs gets a lower than market return in year t, in return for a higher than market return in year t+r. Also, I don't see why there's a requirement for state intervention.
 
@Colm Fagan

What was involved in setting up your ARF?

Presumably you directed all the decisions

Were there any costs involved?

Colm Fagan said:
It is a long time since my ARF was set up, I don't recall the precise costs, but I doubt very much if it would be worth the associated overhead for a smaller pension pot.
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moneymakeover said:
What was involved in setting up your ARF?
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On reflection, it wasn't that difficult or expensive. The costs and difficulties came much earlier, when I set up a one-man company pension scheme in 1996. At that time, I had to establish a Trust Deed and Rules, get a Pensioneer Trustee, an actuarial assessment of the required funding rate, set up accounts for the scheme, arrange for the transfer of my deferred entitlement from my former employer's scheme, appoint investment managers (I was/am my own investment manager, but I do all my trades through a particular firm of stockbrokers, who I've been with from the start, through a couple of incarnations). When I set up the ARF (and an AMRF, as I don't have any other pension entitlements) at end 2010, it was simply a case of transferring assets from the company pension scheme to the ARF/ AMRF (and to a separate portfolio for the tax-free lump sum that I was able to take on "retirement"). I think my stockbroker completed all the formalities at relatively little cost, in recognition of the business I'd given them in the past, and which they anticipated (correctly) would continue to come their way in the future.
 
In relation to portfolio concentration, which was discussed earlier in this thread (and elsewhere), I came across an interesting paragraph from a paper by Falkerson & Riley (2017), which reflects my conclusions on this topic (after threshing around for years before stumbling on the right approach):
"We contend that mutual fund managers are compensated for holding more concentrated portfolios through a concentrated portfolio’s ability to give disproportionate weight to a fund manager’s most valuable information. If a fund manager has no information of significant value, then holding a fully diversified portfolio is preferable, since there would be no expected performance benefit from concentrating to offset the risks. Conversely, if the fund manager does have information of significant value, then concentrating the portfolio on those securities most affected by that information should increase the expected performance of the fund and potentially justify the risks of increased concentration. Some fund managers could have means other than increased portfolio concentration to take advantage of valuable information. However, in our analysis, we focus on the investment behavior of common equity funds that rarely use shorting, leverage, or derivatives, so increasing portfolio concentration is typically the only available route to leverage information of value."
To this, I would add that a professional manager takes a high risk, in terms of the longevity of his or her career, by straying too far from the benchmark. My own experience, which I'm sure would also be replicated by anyone running a concentrated portfolio, is that one can under-perform relative to whatever the chosen benchmark happens to be for a protracted period. That is balanced by equally long periods of out-performance. I have learned to live with both extremes. Someone who's paid to manage relative to an index wouldn't be allowed that luxury.
 
Hi Colm, I've reading this thread and am interested in your smoothed fund proposal but cannot find details of the actual proposal, did you post it somewhere?
 
To me, this thread started out full of promise but as it lengthens, I'm getting an uneasy feeling that I'm actually getting further away from getting valuable, practical nuggets as to how best to manage my ARF. Maybe all this will be of no consequence if the I have access to Colm's group ARF.

Colm - can you give a brief update on the expected timescale here and whether self-employed people will have access to it please?
 
I’m out at the moment and I’m not great at posting links, but you can access a discussion of my proposals on the Pensions Forum of AAM under “New Proposals for Pensions Drawdown”. The last posting was around March 22.
 
I thought I might expand somewhat on my tentative proposal for discussion purposes – all criticism is very much encouraged!

By way of a recap, my current plan on retirement is to have roughly 15 years' worth of residual expenses in cash and fixed-income investments, with the balance (if there is a balance!) in equities. By residual expenses, I mean the amount I think I will need to fund a comfortable lifestyle, less any State pension, etc. I also plan to draw down the cash/fixed-income portion of the ARF first, so that I effectively increase my allocation to equities over time (with a ceiling of no more than, perhaps, 80% of my ARF in equities at any point in time).

To put some numbers around this, let's say I'm retiring today at 66, with a paid for house and I qualify for the full State (Contributory) Pension. I have DB pension income of €3kpa from an old employer and an ARF with a value of €600k. For simplicity, let's say I have no material savings outside my ARF (I used the tax-free lump sum to pay off my mortgage) and I have no desire to hold an AMRF.

I estimate that I will need around €25kpa to have a comfortable lifestyle. Importantly, €25kpa isn't necessarily what I would spend on my desired or target lifestyle - it's pretty much a floor as to what would be acceptable to me.

So, using my proposed formula, I would set the initial allocation within my ARF at €150k in cash/fixed-income investments and the balance (€450k) would be invested in equities. I get the impression that most posters think this is very conservative, which I must admit surprises me.

Why roughly 15 years' worth of residual expenses in cash and fixed-income investments? Well, I freely admit that 15 years is something of an arbitrary figure but my objective is to avoid having to sell equities during a drawdown if I can avoid it, particularly during the early part of my retirement (thus mitigating the sequence of returns issue).

A few notes:-
  • I'm only interested in the total return on the investments in my pension pot – I'm entirely agnostic as to whether those returns are derived from income or capital gains.
  • My overarching investment philosophy is to try to reach my financial objectives (in this case, funding my retirement) while taking the least amount of risk possible.
  • I've zero interest in stock picking – the equity investments in my ARF will all be in index funds.
Thoughts?:)
 
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sarenco finding it a bit difficult to follow your figures. 150K is 15 years residual expenses? I take this to mean that you target to live on 10k + State Pension + 3k (other DB). Or in other words your target pension income from your current situation is 10k p.a.

Annuity rates are c.4% for a 66 year old. So your 600k could buy an annuity of 24k p.a. more than comfortably meeting your target. The proposed strategy seems to be going all in to have the prospect of having a wail of a time in your 80s/90s.:rolleyes:
 
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