The Money Mustache Community
General Discussion => Welcome and General Discussion => Topic started by: Slow road to freedom on February 23, 2020, 08:55:16 AM
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Any UK forumite will be familiar with Monevator, which has a very good weekly roundup of articles that are interesting to people....er, interested in things that we are. I normally enjoy these weekly collections, but one (from a blog that I personally hadn’t come across before) got me thinking - a not necessarily in a good way.
The central argument is that efficient markets mean prices for stocks etc are ‘right’ based upon clever buyers and sellers having complex financial models to reach that price. So rather than model things ourselves, why not let the market do that?
I studied Economics to a fairly rudimentary level, but I understand that markets are always efficient, right, or helpful. But they are a proxy for what people think about things now, and dependent upon the product, the future. Doesn’t make it right or wrong, of course.
Anyway - the thing that got me thinking was the idea that annuity rates are the market’s (I.e. insurance companies selling those products) view of what the SWR is today. Now, cleverer folks than I will explain that it can’t be right because companies have to make a profit, they have to match liabilities with less volatile (!) instruments therefore not lean towards equity, which has a premium (or should have).....
I’m no expert. But there are many things I don’t know, so I keep reading. I was surprised to learn that in the UK, the proxy SWR is 1.7%. So for every £100k paid over for an annuity, you might expect £1,700 per year, forever (well, until death, obviously).
That’s very different to my perception of a 3-3.5% SWR (in the UK, globally diversified) given I’d want my stash to last up to 50 years.
The article is here: https://www.finumus.com/blog/low-interest-rates-and-the-safe-withdrawal-rate-swr
I’d really like some help in understanding - in plain language, please (I’m a simple soul) - what am I missing - and whether I can rest easy that 3-3.5% remains a viable option, so I can call it a day and never have to do paid work again in all but the most extreme circumstances.
Thanks in advance those folks cleverer than me!
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There’s a lot of bullshit in this article, (the first paragraph especially is very strawmanny), but it really hits the bottom of the barrel in the last paragraph, when the author basically says “annuity rates are this low because the providers are required to hold low-risk assets, and you shouldn’t hold any risky assets because risk is bad and will make you run out of money”. No, I absolutely want to hold risky assets, because the long-term average return is much higher.
Also, the author then completely shifts the goalposts in the final parenthetical, saying that anyone who claims they can beat 1.7% per annum has a “magic investment strategy” that can outperform the markets. But we’re not talking about outperforming the market, we’re talking about outperforming UK government bonds. Which any reasonable equity portfolio can do in most years.
And if you still don’t believe me, I tried a different annuity calculator (from Charles schwab) and it says I could get a single life annuity starting today that returns 3.7% annually. So not only is this article based on crap, it’s hand-selected, cherry-picked crap.
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So not only is this article based on crap, it’s hand-selected, cherry-picked crap.
Which is pretty funny since the opening sentence lambasts the FIRE community for using cherry-picked backtests to support the 4% SWR. Yeah, of course your long term results are going to be worse with conservative annuities.
You should read the Stop worrying about the 4% rule thread (https://forum.mrmoneymustache.com/investor-alley/stop-worrying-about-the-4-rule/).
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That article was a pantload. The annuity company also has overhead and needs to make a profit. Guess where that money comes from? Hint: Your wallet.
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Wow. Some rare unanimity in opinion here. I didn’t think much of the article.
Two big issues I see: (1) annuities include fees and profit for the insurance company that you would keep on comparable investments. (2) the mix of assets underlying an annuity is much more conservative than what we would encounter in most private (FIRE) portfolios. Bonds offer a lousy return right now. Insurance companies may be forced to own them. We aren’t. Risk is generally compensated over time.
My suggestion to anyone who wants to read up on SWRs is to read the series at Early Retirement Now.