Over the weekend, three people pointed me to the article Don Ezra wrote for the FT. It’s a very good article and one of the best arguments I’ve read to explain why US Economist and Nobel Prize winner Bill Sharpe called paying yourself a pension “the nastiest, hardest problem in finance”. The article follows the journey Don and his wife took towards sorting the problem.
First, we assessed our combined longevity and its uncertainty. Second, we needed to balance cash flow safety and investment growth; in other words, decide on our tolerance for taking investment risk. Finally, we needed to estimate the pace at which we can sustainably withdraw money to spend.
Don talks us through each stage in a languid and easy style. He applies the lessons he’s learned from institutional investment to his private life, dividing his pot into growth and protection buckets , making assumptions on the length he and his wife will live and then working out a sustainable drawdown rate based on prudent assumptions on the growth of the money in the buckets.
This ends up giving him a sustainable drawdown rate of £5,100 pa, but he gives us a summary of his spreadsheet, with other options depending on different decisions on life expectancy and tolerance of risk.
The clue to this lies in the title – “per £100,000 pension pot”. Don is writing here for people who’s pension pots are measured in multiples of £100,000. Sadly there are very few of them, happily, most of those who have this kind of pension pot, read the FT and do their own spreadsheets. The article is well placed in the FT.
The article talks of allocating assets to growth and safety buckets but there’s another article waiting to be read, explaining how Don implemented his strategy and how he’s getting paid his pension. I suspect that the further Don goes on this journey , the fewer of us he will carry with him. But there will be a hardcore of followers at the end – and they may come to follow Don as people follow Warren Buffett. That’s because in a world of nasty hard problems, this is more than guidance – this is pure financial planning and what Don is giving , is what we all crave – financial advice.
Don is too wily to put his head into a noose and start giving “regulated advice” – that would involve making recommendations about financial products. The article about implementation may have been written but it is unlikely to be read by a general audience.
So the reader is left with the roadmap but has still to select the car.
DIY drawdown- Don Ezra style!
I can understand why people sent me the article. It makes sense of drawdown and is glamorous. It talks to our aspirations for our future selves.
But these glamorous images are of an affluent lifestyle that will be way beyond the means of most the 700,000 people who will be thinking this year about “their pension, their risk and their choice”. The tools they have been given include Pension Wise and the MaPS investment pathway comparator tool but there is little or no guidance for those who don’t read the FT and have the intellectual skillset to follow Don’s journey.
The dice are loaded in favor of those with wealth, financial education and self confidence, the people who take financial decisions for themselves based on an institutional style understanding of risk, longevity and value.
The dice are loaded against the financial lumpen, who never entered into that “pension, risk, choice” bargain . The people who are designing policy ,strategy and products are from the affluent elite to whom Don is writing. This is infact a closed loop , there is no wave of financial mobility that will give those who don’t get pensions a “leg-up (not a hand-out)”. Instead, those outside the closed loop are exposed to the hucksters who feed on ignorance and scam their way into people’s retirement finances.
Where is the freedom not to take risk or make choices?
I am writing on the morning of April 12th , when “freedom” means rushing out to the shops like it was Christmas Eve. We will see today herd behavior resulting from months of restrictions. The Government are warning against this and most people will heed these warnings. We understand the journey we are on.
But we don’t understand this drawdown journey and we don’t get the warnings about financial prudence because most people do not see their pension as their risk. It is something that is sorted for them by others – insurance companies, trustees – Government.
For most people, what is needed to “decumulate” is the same mechanism that got them saving, with an opt-out. Right now , drawdown is way too hard for most of us and Don’s excellent article shows just how high the bar is. What is needed is no bar at all, a way to a pension that doesn’t involve us taking risk or for that matter choice.