Do you needs bonds?

[aus_trader]

But if you are drawing down a fixed percentage of your capital, doesn’t that mean that the total amount you get each year decreases as your capital decreases?

Good Question VC. In fact this is the scenario some of the retirees are facing today. They planned their retirement when the interest rates were much higher so it was a pretty good assumption at the time to expect 5% or above from money parked in the bank or TD's etc. I know of a few having to re-allocate money into higher risk (relatively compared to cash) assets like shares and property since they fear that they will outlive their retirement nest egg thanks to the interest rate cuts. Some have gone to risky measures via leveraging up their nest egg (/SMSF) to buy investment property at the property peak a year ago and now even more worried as their asset is worth less by at least 100k. Oh dear... Hope property keeps rising for their sake.

This thread has been a very good discussion and I have had quite a few 'Ah Ha' moments into my own retirement planning while reading people's comments.

 

[ducati916]

Does 'active' trading fit into this mix as part of anyone's wealth preservation/growth strategy?

jog on
duc

 

[Zaxon]

I do like the 4% though mate.
each year the nest egg will go down by 4%. Therefore as you said,I will have 25 years to eat up my nest egg which means it'll be running out on the 90th birthday.

It may, but not necessarily. "The 4% rule", the one created by William Bengen in 1994, works like this. Let's say you retire with 100k (because 100 is a nice, round number). 4% of your balance at retirement (so $4000) is now set in stone. At this point, the "4%" concept has ended, as the math is only done once. From here on, that $4k is increased by the rate of inflation, and no longer references your actual balance. I'll arbitrary choose 3% for inflation.

Year 1 (of retirement): $100k (in shares) - $4k = $96k left
Year 2: $96k - $4120 ($4k with 3% inflation) = $91880. So far so good.
Year 2.9: Oops, the stock market crashes and drops by 50%
Year 3: $45940 - $4243.6 ($4120 with inflation) = $41696.4
Year 3.1: Obviously the share market is dangerous. Let's put the remaining balance into cash.

So after just three years, my portfolio is at 41.7% of it's original balance. And since I'm taking out a fixed, ever increasing amount each year of my now cash balance, I have left (without doing the actual math) let's say 9 more years of funds left. So we lost everything in 13 years.

(By contrast, my 5% rule rises and falls based on the balance each year, so the math in the above scenario would be quite different.)

This deliberately engineered example is really just to show that the 4% rule may not last 25 years, because it works on 4% of the original balance + inflation, not 4% of the current balance.

Now, if you were all in cash, 4% again doesn't last 25 years, since the withdrawal amount increases with inflation. 4% in a cash like instrument that grows in line inflation, does give you 25 years though. Phew!

The good news is that the Bengen 4% rule, which was based on you having 60% in stocks and 40% bonds, should last 30 years (with only a small chance of failure). I also read that Bengen, in 2006, revised his rule to 4.5% if tax-free, and 4.1% if taxed.

With that interlude aside, I return to your discussion about your upcoming death...

Chances are, would've moved onto another life by then if you believe in re-incarnation otherwise Salute to this world. Sorry to sound gloomy, but I like to evaluate my worst case scenario.

Let's predict your death. Such fun! I'm not sure how old you are, but in Australia, the average life expectancy for a middle aged male is 80.4 years (as at 2016). Now that "average" includes people who die early. As you age, your life expectancy goes up! I know, it's magic. If you live to 65, you're LE is now 84.6. If you live to 85, your LE becomes 88.9 years.



Medicine is increasing our longevity, so it's possible our life expectancy will continue to rise even further within our lifetime.

If you retired at 67, I'm thinking 30 years LE is probably a fairly safe estimate. The safest thing though, is to have a plan which allows your assets to grow considerably over time, which I believe is about to be your next point.

On a more optimistic scenario the returns (capital + dividends) will outpace the 4% draw-down on most years and that means the nest egg will actually grow in tiny increments, which means all the luxuries like pay rises in the 'Golden Years'

+1 for golden years and pay rises!

 

[Zaxon]

This thread has been a very good discussion and I have had quite a few 'Ah Ha' moments into my own retirement planning while reading people's comments.

I agree. There's lots of good stuff in this thread.

 

[Zaxon]

Does 'active' trading fit into this mix as part of anyone's wealth preservation/growth strategy?

Yes into mine, although in my case it's active investing rather than trading, but hopefully my thoughts can still be useful. Possibly, we'll retire before our nest egg is actually large enough. So my plan involves actively growing our AUM slowly throughout retirement.

 

[Value Collector]

Good Question VC. In fact this is the scenario some of the retirees are facing today. They planned their retirement when the interest rates were much higher so it was a pretty good assumption at the time to expect 5% or above from money parked in the bank or TD's etc. I know of a few having to re-allocate money into higher risk (relatively compared to cash) assets like shares and property since they fear that they will outlive their retirement nest egg thanks to the interest rate cuts. Some have gone to risky measures via leveraging up their nest egg (/SMSF) to buy investment property at the property peak a year ago and now even more worried as their asset is worth less by at least 100k. Oh dear... Hope property keeps rising for their sake.

This thread has been a very good discussion and I have had quite a few 'Ah Ha' moments into my own retirement planning while reading people's comments.

Yeah, age is also a consideration.

I guess if you are 70, planning to consume your capital base over the next 30 years is an ok strategy, by if you are 36, you need to be living off investment earnings alone.

I still think 99% of retirees would be served well by having most of their funds in broad based sharemarket index funds, both local and global.

But, a lot of people don’t understand shares, so would freak out about fluctuations.

 

[aus_trader]

But, a lot of people don’t understand shares, so would freak out about fluctuations.

I think most of us have not seen market downturns or crashes that take a very long time to recover such as the Japanese market. The GFC has been a real eye opener though. It has taken 10+ years for the share market to make a new high. So I think the persons with lesser lifespan left (i.e. over the retired age) would be less likely to go heavy on shares due to having to 'stay in' shares through a recovery which could extend beyond their "RIP" date.

Most retirees I know of have a mix of cash, investment property and shares. A few even have some wine and fine art but I don't know if that was a 100% investment based asset or part hobby/part investment. Maybe they like a fine drop and appreciate/enjoy fine art. Having talked to them directly though, I found that their share allocation is much smaller than when they were younger due to intolerance for volatility in their retirement assets. They want a steady cash flow from the nest egg of assets without the portfolio going up and down like a rollercoaster.

 

[Value Collector]

I think most of us have not seen market downturns or crashes that take a very long time to recover such as the Japanese market. The GFC has been a real eye opener though. It has taken 10+ years for the share market to make a new high. So I think the persons with lesser lifespan left (i.e. over the retired age) would be less likely to go heavy on shares due to having to 'stay in' shares through a recovery which could extend beyond their "RIP" date.

Most retirees I know of have a mix of cash, investment property and shares. A few even have some wine and fine art but I don't know if that was a 100% investment based asset or part hobby/part investment. Maybe they like a fine drop and appreciate/enjoy fine art. Having talked to them directly though, I found that their share allocation is much smaller than when they were younger due to intolerance for volatility in their retirement assets. They want a steady cash flow from the nest egg of assets without the portfolio going up and down like a rollercoaster.

Yeah, I can understand why they would be worried about the ups and Downs, but by avoiding shares and sticking to cash they are taking the most dangerous route.

When you factor in dividends, the share market didn’t take that long to recover.

Also there was a big boom before the crash, so a retiree that put their money in a couple of years before the drop wouldn’t have dropped that far below heir entry point, and would have quickly recovered, given the higher dividends + franking than a cash investor.

 

[So_Cynical]

This thread has been a very good discussion and I have had quite a few 'Ah Ha' moments into my own retirement planning while reading people's comments.

Agree its been an eye opener and valuable discussion, i have had a couple of 'Ah Ha' moments as well.

 

[aus_trader]

Off topic, for a bit of a chuckle...

 

[sptrawler]

Yeah, I can understand why they would be worried about the ups and Downs, but by avoiding shares and sticking to cash they are taking the most dangerous route.

When you factor in dividends, the share market didn’t take that long to recover.

Also there was a big boom before the crash, so a retiree that put their money in a couple of years before the drop wouldn’t have dropped that far below heir entry point, and would have quickly recovered, given the higher dividends + franking than a cash investor.

What I did, was keep some in shares outside super, in the wife's name.
Split what was in super two thirds me in shares, in pension phase, the other third left in cash and the wife in accumulation phase.
The idea being, run mine down over the next 10-15 and build the wife's in accumulation as she is a few years younger. It also gives a degree of flexibility, with adjusting your draw down, as the wife can pull lump sums without going into pension phase if required.
Also as happened in the last election, if the muppet show decides to move the goal posts, there is still a degree of flexibility in the fund.
Just my plan and it seems to be working for me, so far.

 

[trading_rookie]

I'm curious if anyone knows how a superfunds Index Bond works.

Are the unit prices determined soley from the yield?

Ie, when yield goes down, the price increases and so do the unit prices.

Are the interest earnings distributed to the investors?

 

[So_Cynical]

Betashares have a new fund - BetaShares Australian Government Bond ETF (ASX: AGVT)

Paying about 1.5% PA ~ i suppose it has a (small) place in a balanced retirement portfolio strategy.
https://www.betashares.com.au/fund/australian-government-bond-etf/

 

[Value Collector]

I'm curious if anyone knows how a superfunds Index Bond works.

Are the unit prices determined soley from the yield?

Ie, when yield goes down, the price increases and so do the unit prices.

Are the interest earnings distributed to the investors?

I would imagine the unit price would move based on total return, eg based on both interest payments made and the changes to the price of the bond.

Remember Bond prices rise and fall based on a range of factors just like share prices.

 

[Smurf1976]

Recently, one of my shares went into a trading halt for a month. Needless to say, I wasn't impressed. Had I needed to cash out, I have other shares. But if that had been a weak performing stock that I was looking to sell, I would have lost control over the timing.

That's a risk often overlooked when it comes to setting stop losses and determining maximum risk.

Just because you've got a stop set 10% below the current price doesn't mean it can't go into a trading halt and end up worth considerably less than 90% of the current price.

 

[Smurf1976]

Once "retired", we'll take 5% of the total portfolio out each year for expenses. That's 5% of the fluctuating, total balance. This means if the market crashes 50%, you still take out only 5%, but of course, in dollar terms that's only half as much as you're taking out if the market hadn't crashed. So it has an inbuilt safety into it where you're taking out fewer dollars in a bad market, and more in a good market. In a sense, it's a version of reverse dollar cost averaging.

I'm not retired and not planning to be anytime soon but once I decided to take a career jump, out of the nice safe pot and into the fire so to speak, I also decided to live off my investments.

I withdraw 4% annually on a fortnightly basis, so that's one 26th of 4% of the balance each fortnight, and split that into three accounts - one for bill paying, one for asset replacement (furniture, car, whatever) and the other for living expenses.

100% of income (after tax) from working, dividends, capital gains and anything else goes into the investment pool.

That does mean living somewhat cheaply at the moment but I'm not planning any overseas trips etc in the near future anyway so no big drama.

If circumstances change then I can of course always change the plan.

 

[Smurf1976]

So what's the most easily traded generic bond fund?

I'm thinking along the lines that if someone wanted to trade shares as as generic asset class then VGS is a simple way to do that - an international fund listed on the ASX so all very easy.

What would be the most generic global bond fund if I wanted to trade bonds as a generic asset class without getting into the detail of individual bonds etc ?

 

[Junior]

Vanguard, I would have thought. https://www.vanguardinvestments.com...tail/etf/portId=8200/assetCode=bond/?overview

As an aside, this is an interesting alternative to a Bond Fund: https://www.ardea.com.au/our-funds/ardea-real-outcome-fund/

Disclaimer: Do not interpret this as advice, do your own reasearch, etc. etc.

 

[Zaxon]

I'm not retired and not planning to be anytime soon but once I decided to take a career jump, out of the nice safe pot and into the fire so to speak, I also decided to live off my investments.

I withdraw 4% annually on a fortnightly basis, so that's one 26th of 4% of the balance each fortnight, and split that into three accounts - one for bill paying, one for asset replacement (furniture, car, whatever) and the other for living expenses.

Wow! This is "upside down land", but it's a fascinating approach. So you're effectively pretending you're retired, living off your savings, and secretly working as well. And you've placed financial independence as the absolutely #1 priority above all else. Nice.

100% of income (after tax) from working, dividends, capital gains and anything else goes into the investment pool.

So the withdrawal come from the cash inside your investment pool. The 4% creates the "budget". But the cash is really mostly from your wage?

That does mean living somewhat cheaply at the moment but I'm not planning any overseas trips etc in the near future anyway so no big drama.

I would imagine so. Well done. I couldn't live on 4% of my investments at this point.

If circumstances change then I can of course always change the plan.

Your withdrawal amount will increase over time, outpacing inflation. Plus you're pumping in new money. It's a powerful setup. I think stick with it.

 

[HelloU]

That's a risk often overlooked when it comes to setting stop losses and determining maximum risk.

Just because you've got a stop set 10% below the current price doesn't mean it can't go into a trading halt and end up worth considerably less than 90% of the current price.

OT
interesting point, trading halt, as it made me think about as yet a non-triggered conditionals upon resumption of trade. (cos on resumption it is not an order, so not killed, but that may be just a moment away ....) .... depends upon the owners desired outcome after trade resumes i suppose as to what they do with their conditional (to ensure it is still valid).

smurf, 2 musing points, u can still do the $25K super thing if not retired by telling the tax man (at 15%), and not sure if asking about fund trading for u (or rhetorical?) but some have very poor liquidity for exits. The choice (street, van, black etc) is sometimes queue spread, sometimes returns (fees) and sometimes liquidity for me, depending upon the what and why.