Building SIPP for the wife

[Quint]

In my humble opinion, you have way too many investments, it looks to me rather like a scatter gun approach. Given that each investment trust holds dozens or more company shares, I reckon all you have done is build yourself a pseudo tracker fund. You might want that outcome, I don't know. But there you go, others may well disagree, but I'd hold far fewer ITs (I wouldn't be holding the majority ITs presently anyway, but that's another story).

Kind of a pseudo tracker but not. To cover these areas I would need multiple trackers as an all world etf (or lifestrategy) would not give the required yield (I do not want to dump it all in a ftse tracker) but would require top slicing which I have already stated (several times) is not what I want for the wife's SIPP in case anything happens to me and she has to manage it herself.

IT's will do what I want for this for the timespan I need it to.

My SIPP is a different beast with large holdings of Fundsmith and Lindsell Train Global Equity. I do not wish to replicate this across both SIPP's. Also I am 5 years younger so my SIPP has a longer growth span.

[Pipsmum]

I love reading this. Never delay any retirements or activities unless you love your job so much that it's still enjoyable. Leave room for those who want or need it more. You're already being sensible, so remember to kick some heels and have fun before that great big Monty Python foot in the sky sees you and stamps on you.

I am a year older than your wife. Last summer after seeing one of the children off to uni on a Friday. Jumped for joy as the perceived time had come for the post family career time. Then the following Friday after my mum had a bad fall, we removed one of the 'e's. From career to carer just one week later. You never know what is around the corner, so make hay whilst the sun shines.

[Quint]

I love reading this. Never delay any retirements or activities unless you love your job so much that it's still enjoyable. Leave room for those who want or need it more. You're already being sensible, so remember to kick some heels and have fun before that great big Monty Python foot in the sky sees you and stamps on you.

I am a year older than your wife. Last summer after seeing one of the children off to uni on a Friday. Jumped for joy as the perceived time had come for the post family career time. Then the following Friday after my mum had a bad fall, we removed one of the 'e's. From career to carer just one week later. You never know what is around the corner, so make hay whilst the sun shines.

We are doing just that. Wife has done the caring bit for her late parents. Mine are 70 and 73 and I am the only child so will have to see how that plays out.

[GeoffF100]

Putting all your pension money in equities is extraordinarily risky. Your age in bonds as a percentage is a common rule of thumb.

That rule of thumb has long been discredited.

TJH

Thank you for that. I have read a quite a few of your posts including the ones where you did some analysis on the real return of Gilts in recent years. I found that very helpful.

My response was going to be that at 56 with a potential 25 - 30 year or more investment horizon putting 56% of her SIPP in to bonds in a low interest rate environment for the strong prospect of rising interest rates does not seem the best option.

She will be getting 50% of her income from an index linked final salary pension which I would compare to a bond holding without any risk.

When the state pension kicks in that will be income on top, at that point the SIPP will only be needing to top off about 10 - 15% of the required income.

There is also a large safety net in cash ISA's and Premium Bonds so the overall portfolio is actually not all in equities but the SIPP is.

If the SIPP is 10-15% of the required income, it may be acceptable to take a total loss on that. You probably will not face a 100% loss, but losses in the region of 75% are not unknown. There is also a possibility that your safer pensions will be watered down in some way.

Low interest rates or not, bonds will be much less hard hit when equities in a severe downturn. Historically, 60% equities / 40% bonds, with rebalancing, has done as well as 100% equities over very long periods. Rebalancing makes a profit by buying low and selling high, if the market jiggles up and down, but does badly if the market rises or falls relentlessly.

As others have said, a large portfolio of ITs is effectively a tracker with very high costs. The costs are very important because they compound up over time. Yield is irrelevant. Total return and risk are the only things that matter.

Here is a simple and sound approach:

http://monevator.com/this-former-hedge- ... ck-videos/

[tjh290633]

Your mistake is looking at capital values, rather than income from dividends. 2008-9 apart, dividends have held up well during downturns, as the history of several prominent ITs will testify. Their reserves allowed them to avoid reducing their dividends, and to raise them, during that and earlier downturns.

There was many a widow living on a fixed income at a time of high inflation. Capital preservation is little comfort in such circumstances.

TJH

[Quint]

That rule of thumb has long been discredited.

TJH

Thank you for that. I have read a quite a few of your posts including the ones where you did some analysis on the real return of Gilts in recent years. I found that very helpful.

My response was going to be that at 56 with a potential 25 - 30 year or more investment horizon putting 56% of her SIPP in to bonds in a low interest rate environment for the strong prospect of rising interest rates does not seem the best option.

She will be getting 50% of her income from an index linked final salary pension which I would compare to a bond holding without any risk.

When the state pension kicks in that will be income on top, at that point the SIPP will only be needing to top off about 10 - 15% of the required income.

There is also a large safety net in cash ISA's and Premium Bonds so the overall portfolio is actually not all in equities but the SIPP is.

If the SIPP is 10-15% of the required income, it may be acceptable to take a total loss on that. You probably will not face a 100% loss, but losses in the region of 75% are not unknown. There is also a possibility that your safer pensions will be watered down in some way.

Low interest rates or not, bonds will be much less hard hit when equities in a severe downturn. Historically, 60% equities / 40% bonds, with rebalancing, has done as well as 100% equities over very long periods. Rebalancing makes a profit by buying low and selling high, if the market jiggles up and down, but does badly if the market rises or falls relentlessly.

As others have said, a large portfolio of ITs is effectively a tracker with very high costs. The costs are very important because they compound up over time. Yield is irrelevant. Total return and risk are the only things that matter.

Here is a simple and sound approach:

http://monevator.com/this-former-hedge- ... ck-videos/

I have already seen that video. In fact I have seen a lot of video's, read a lot of articles and blogs, including monevator, been on several forums and read a good few books. I did not simply formulate our plans while taking my morning dump.

The SIPP is merely one piece of the puzzle. There are also two quite large S&S ISA's invested with a different strategy some of which tilts towards trackers but I am not going in to detail about them on here.

The main purpose of this thread is to share what I am doing and give updates along the way. If this helps anybody as a way of doing it or even not doing it then it serves it's purpose.

I appreciate any input or suggestions of course that is what forum's are for. I have taken your advice on board but at this point in time am sticking with my plan.

I do reserve the right however to make changes in the future to reflect any changes in our circumstances.

[xxd09]

Hi Quint
As a retired 71 year old-15 years retired -who did what you are doing for his wife years ago-a couple of points strike me
1) I do the money -she spends it-I kept it simple so that if she faces some predatory financial adviser after my demise -men usually die first-she would have the ability to understand her money situation
I use 2 Global Index Trackers only -one Equities one Bonds.Low cost-Vanguard
Asset Allocation 30% Equities 70% Bonds-she has enough so maintenance of the Portfolio a prime need
2) I think the differences between capital growth and income are semantic. I just sell some units as cash is required to top up her Cash float(equivalent to 1years income).I usually take £10000.00 chunks at a time as required.Remembering to reclaim Tax if appropriate using HMRC P55 form
A simple setup-fire and forget .All she has to master is the mechanics of withdrawals which are complicated enough without worrying too much if at all about the underlying Investments .System has worked since 1998-successfully gone through some serious ups and downs-proven to my satisfaction-so far!
xxd09

[Quint]

Hi Quint
As a retired 71 year old-15 years retired -who did what you are doing for his wife years ago-a couple of points strike me
1) I do the money -she spends it-I kept it simple so that if she faces some predatory financial adviser after my demise -men usually die first-she would have the ability to understand her money situation
I use 2 Global Index Trackers only -one Equities one Bonds.Low cost-Vanguard
Asset Allocation 30% Equities 70% Bonds-she has enough so maintenance of the Portfolio a prime need
2) I think the differences between capital growth and income are semantic. I just sell some units as cash is required to top up her Cash float(equivalent to 1years income).I usually take £10000.00 chunks at a time as required.Remembering to reclaim Tax if appropriate using HMRC P55 form
A simple setup-fire and forget .All she has to master is the mechanics of withdrawals which are complicated enough without worrying too much if at all about the underlying Investments .System has worked since 1998-successfully gone through some serious ups and downs-proven to my satisfaction-so far!
xxd09

Sounds like a good plan, and the fact it has worked for 15 years backs that up. If you are taking multiple chunks of 10k per year that is obviously a very large portfolio so capital preservation would be a prime objective.

One guy on here has an even simpler plan, he dumped it in to a life strategy and sells a chunk each year.

There are multiple ways to reach an investment objective and most mainstream ones work in general and can be adapted to suit ones personal goals and circumstances.

I do not at this point in time want a strategy that involves me selling down capital, for reasons I have stated.

My wife is 6 years older than me so that evens up the men die first (excluding accidents) and I am not worried about financial predators, my wife will not answer the phone to an unknown number, we always let it go to voicemail and screen the calls. She even hung up on her bank when they called to discuss a suspect transaction on her credit card and called the bank on the number on her statement. Also she worked in finance for nearly 30 years.

Did you really start with 70% bonds 15 years ago? You will have benefited from the capital increase of bonds over the last decade of QE and ultra low interest rates. I am not convinced now is the time to be dumping loads of money in to bonds when looking at a 25 - 30 year investment horizon.

I could be wrong but I am not going to do it.

[GeoffF100]

Everyone appears to think that interest rates will rise substantially. They thought that in Japan too. It did not happen. Even if it does, that is only a short term problem for a bond portfolio. The lower yield bonds mature and get replace by higher yielding bonds. If interest rates do rise, equities will be hit far harder than bonds. You can then sell some bonds to buy more equities, and do the opposite when the equities eventually recover.

[xxd09]

Hi Quint
Just answering your query-I followed John Bogle,s advice -if you have made your pile-your age in Bonds is a good general rule
Was 40% Equities at 60 and reduced from that starting point
At the time of setting up the SIPP hade a lot of cash from exiting with profits Scottish Widows,Equitable Life(got out in time and intact),Norwich Union etc
I would not personally go below 30% Equities-probably will stick at this Asset Allocation to the finish
xxd09

[GeoffF100]

The age in bonds rule would have a 90 year old in 90% bonds and 10% equities. The basic assumption here is those investments are all that 90 year old has in the world, and he needs that money to pay for essentials. He is not likely have long to live. His average life expectancy in the US is about 5 years:

https://www.ssa.gov/oact/STATS/table4c6.html

Nonetheless, there is small probability that he will live a lot longer. He cannot afford to take many risks. If there is a bear market, he has very little chance of sitting it out. Hence the heavy bond allocation.

The age in bonds rule is only a rule of thumb. Nonetheless, it is a reasonable one.

[Quint]

Hi Quint
Just answering your query-I followed John Bogle,s advice -if you have made your pile-your age in Bonds is a good general rule
Was 40% Equities at 60 and reduced from that starting point
At the time of setting up the SIPP hade a lot of cash from exiting with profits Scottish Widows,Equitable Life(got out in time and intact),Norwich Union etc
I would not personally go below 30% Equities-probably will stick at this Asset Allocation to the finish
xxd09

Sounds good. Always nice to see it work out.

[tjh290633]

Nonetheless, there is small probability that he will live a lot longer. He cannot afford to take many risks. If there is a bear market, he has very little chance of sitting it out. Hence the heavy bond allocation.

Past experience has been that it is better to sit out bear markets. Usually the income flow is maintained while share prices do their own thing.

You obviously have your own agenda.

TJH

[Quint]

The age in bonds rule would have a 90 year old in 90% bonds and 10% equities. The basic assumption here is those investments are all that 90 year old has in the world, and he needs that money to pay for essentials.

If I were 90 the essentials would be hookers and Rum

[xxd09]

Sounds expensive-in that case I would advise a high allocation to Equities!
Seriously though:-
Most studies show that going below 20% Equities is counterproductive for Portfolios.
New Idea:-
Starting to raise the Allocation to Equities from 75 onwards is now being talked about
The fun never ends!
xxd09

[Alaric]

The age in bonds rule is only a rule of thumb. Nonetheless, it is a reasonable one.

Isn't there an assumption in there that you are running down the assets so as to leave next to nothing in your estate? If your income needs are rather better funded, you don't need the automatic selling which maturing bonds will represent. There are at least two problems with bonds, one being out of control inflation as we saw in the 1970s and the other being derisory rates of return as we are seeing now.

[GeoffF100]

Nonetheless, there is small probability that he will live a lot longer. He cannot afford to take many risks. If there is a bear market, he has very little chance of sitting it out. Hence the heavy bond allocation.

Past experience has been that it is better to sit out bear markets. Usually the income flow is maintained while share prices do their own thing.

You obviously have your own agenda.

TJH

Our man is 90. His life expectancy is 5 years. His cost of staying alive is £10K p.a. There is no social security system. He has £100K. He can invest his money in an index linked bond ladder yielding 0% real (better times than now, but not historically good). Alternatively, he can buy equities. The rule says he should invest £80K in the bond ladder, and 20K in equities. That looks reasonable to me.

Our man ignores this advice and buys equities. A severe bear market strikes. His £100K pot is now worth 30K. "No problem," you say "sit it out." He runs out of money after 3 years and starves.

My agenda is common sense.

[GeoffF100]

The age in bonds rule is only a rule of thumb. Nonetheless, it is a reasonable one.

Isn't there an assumption in there that you are running down the assets so as to leave next to nothing in your estate? If your income needs are rather better funded, you don't need the automatic selling which maturing bonds will represent. There are at least two problems with bonds, one being out of control inflation as we saw in the 1970s and the other being derisory rates of return as we are seeing now.

Yes, of course that is the assumption. If you have more money than you need when you get to 90, you can invest the excess in whatever you like.

If you fear inflation, you can buy index linked bonds. If fear deflation you can buy conventional bonds. Most investors have a combination of both.

Bonds have a known rate of return, which is lower than we have been used to in recent years. The long term expected return is still the long term government bond yield plus the equity risk premium. The future equity return is not known, but the expected equity return has reduced by the same amount as the reduction in the known bond return.

[GeoffF100]

The difference in the yield of high risk bonds and government bonds has decreased. When the "risk free" return is low, people are more willing to take a risk.

Many people are taking the view that bond yields are so low that they might as well take the risk of buying more equities. That inflates the price of equities, and reduces their expected long term return.

Right now, the equity risk premium is probably less than it was historically. That being the case, the expected long term return from equities will be reduced by more than the long term return of government bonds.

The truth is that all asset prices are inflated, and the expected long term returns are all reduced. The riskier the asset the greater the reduction in the long term return.

[Quint]

Nonetheless, there is small probability that he will live a lot longer. He cannot afford to take many risks. If there is a bear market, he has very little chance of sitting it out. Hence the heavy bond allocation.

Past experience has been that it is better to sit out bear markets. Usually the income flow is maintained while share prices do their own thing.

You obviously have your own agenda.

TJH

Our man is 90. His life expectancy is 5 years. His cost of staying alive is £10K p.a. There is no social security system. He has £100K. He can invest his money in an index linked bond ladder yielding 0% real (better times than now, but not historically good). Alternatively, he can buy equities. The rule says he should invest £80K in the bond ladder, and 20K in equities. That looks reasonable to me.

Our man ignores this advice and buys equities. A severe bear market strikes. His £100K pot is now worth 30K. "No problem," you say "sit it out." He runs out of money after 3 years and starves.

My agenda is common sense.

Would a 90 year old person be in a position where he has to build a 100k portfolio or would be be living on a portfolio he built in his 50's.

You will not get a 10k income from a 100k portfolio without selling down capital and you will not get a 10k income from dividends on a new portfolio so you need a different strategy.

The main point here is that a strategy that requires selling down equities to generate an income is not good in a long bear market. A decent sized cash and or bond holding would be needed as a safety net. A strategy where you live on the natural yield of the portfolio will hold up better in a bear market. Investment trusts are one of the products that can help with this.

That is the point tjh has been making.

This all good theory but this thread has gone so far off topic it will be now of little use.

Maybe a new thread on retirement investing strategy would have been better.