Episode 418 - On this week's episode, I explain the concept of value averaging as an alternative investment strategy to achieve a specific future monetary goal. Then, I address frequently asked questions related to pensions which have emerged from recent live events I’ve participated in. Finally, Andy provides a quick update on house prices, explaining the significance of recently released data.
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Abridged transcript of Episode 418
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On this part of the podcast I discuss value averaging as an investment strategy and compare it to pound cost averaging and lump sum investing, including its pros and cons. Some of the insights include:
- Value averaging is a strategy where you adjust your regular investment amount based on a target value you want to achieve in the future.
- The goal of value averaging is to reach a predetermined target value over time, regardless of market conditions.
- Unlike pound cost averaging, where you invest equal amounts over time, value averaging involves adjusting your contributions based on the portfolio's performance at each point that you make a contribution.
- If the portfolio falls behind the predicted value when you are due to make a contribution, you increase your contributions to catch up, buying more shares or units in a fund when the market is low.
- If the portfolio exceeds the expected value, you can reduce your contributions or sell some investments to bring it back in line with the expected value at that point.
- Value averaging enforces disciplined investing behaviour by buying low and selling high, aiming to optimise long-term returns.
- It also provides a systematic approach that removes emotional decision-making from the investment process.
- The big disadvantage is that value averaging can be time-consuming and requires initial setup calculation with realistic assumptions and a cash pool to invest additional funds if needed in the future.
- Value averaging can outperform pound cost averaging during periods of significant market fluctuations and declines.
- Luck and timing ultimately play a role in value averaging, just like in other investment strategies.
- Value averaging may appeal to those wanting to achieve a set target amount by a specified future date and who are willing to take risks and invest more during market downturns.
In this section of the podcast I discuss the most popular questions I am asked about pensions and retirement planning at live events. Some of my key insights are given below:
- The amount of money needed for a decent standard of living in retirement varies based on lifestyle choices. The PLSA (Pensions and Lifetime Savings Association) Retirement Living Standards provide figures based on the annual income needed for a comfortable retirement, categorised into three levels: minimum, moderate, and comfortable. You can find the latest figures in the resources section below.
- The 4% rule for a sustainable withdrawal rate from a defined contribution pension is a broad guideline, but a more realistic range is between 1.8% and 3% as we explained in episode 210 of the MTTM podcast (see resources section below)
- Annuities are becoming popular again due to increased annuity rates resulting from higher gilt yields. Currently a 65 year old can get over 7% for an annuity with a 5 year guarantee period. This is twice the level achievable at the start of 2022.
- Consider using retirement calculators (see link to our pension calculator in the resources section below) to estimate the income you can expect from your pension and plan accordingly.
- Visualise your ideal retirement by thinking about what you don't want it to be and working towards what you do want.
- Have conversations about money with your partner.
- Make sure you take advantage of auto-enrolment via a company pension scheme and employer pension contributions if you are employed.
- The general rule of thumb for pension contributions is to contribute at least half your age as a percentage of your income if you've not started already.
- Starting early with pension contributions can take advantage of the power of compounding, while delaying contributions will require significantly larger monthly amounts to achieve the same retirement income. A 25 year old investing £200 a month (£100 employee and £100 employer contributions) over 40 years will retire at 65 with a pension pot worth over £500,000. A 45 year old starting to contribute to their pension would have to invest a total of around £1,000 a month to achieve the same result.
- Unconventional retirement approaches, such as generating income from hobbies or passions, can help supplement retirement funds.
- Carry forward rules allow for unused pension allowances from previous tax years to be used, but you must have been a member of a pension for the entire period to take advantage of the rules.
- Retirement spending habits can change over time, with spending increasing slightly in the early years and then shifting towards different categories of expenses later on - listen to MTTM podcast 372 below for more information.
- Freelancers should still put money aside for retirement, even though they don't benefit from auto-enrolment.
- Directors of businesses should remember to prioritise their own pension contributions, with gross pension contributions paid by the company usually being the most tax-efficient way to do this.
House price highlights
In this section of the podcast we discuss the latest house price data and explain the chart below.
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Links referred to in the podcast:
- Value averaging spreadsheet
- MTTM - Ep 332 - Pound cost averaging weakness
- MTTM Podcast 210 – Debunking the 4% rule
- Pension Calculator
- Pension carry forward rules explained
- MTTM Podcast Episode 372 – Retirement spending truths
- PLSA Retirement Living Standards
- VouchedFor review
- Halifax records first annual fall in house prices in 11 years
- What is going to happen to house prices?
Data sources: Halifax, Nationwide