How to maximise your Ruin Age and avoid poverty in retirement


#1

Originally published at: http://whichinvestmenttrust.com/how-to-maximise-your-ruin-age-and-avoid-poverty-in-retirement/
At a recent investment seminar a presenter from a well-known financial institution, the audience were introduced to the concept of “The Ruin Age”. This was devised by Moshe Milevsky, a Canadian actuarial academic, and is the age when a pensioner exhausts their pension pot and runs out of money. The seminar was largely focussed on…


#2

Very interesting. Of course the real trick would be to have a big enough pension pot so that you could live off the dividends alone.

I’ve got a long way to go before my pension pot is large enough for that but I’ve got a few decades to get there too. :hankey:


#3

Well time is your friend @citygirl especially if you’re willing to put a little bit of money away each month. I don’t know how old you are but the earlier you start the greater the opportunity that you will have a wealthy retirement.


#4

Ruin age is actually a clever way to describe it. I thought it was silly when I first read this article a few days ago (which I think is sound @robert_davies I agree with your main point), and it is a good reminder to keep invested coz you’ll be earning a dividend while you wait.

The biggest mistakes I have made have been selling a fund or a trust coz I think the market is going to fall, then it doesn’t fall, it gets dearer, I buy back in and then it falls.

P.S. I am ignoring my other big mistake of buying shares in a mining company from a tip off a bulletin board for £6K that subsequently went bust four months later. Yeah, that was a mistake.


#5

What seems to be frequently ignored is the fact that when a dividend is re-invested, it ceases to be a dividend and instead becomes capital. Therefore, the ongoing volatility(ies) and performance of re-invested dividends will become exactly that of the capital.

Further, re-investing a dividend is not the same as a company retaining more of its earnings and re-investing in intself. With the former, the investor is simply buying a greater share of the same prospects. With the latter, the company is looking to improve its prospects, both in terms of capital and the potential for dividend growth.

A high dividend yield is usually a sign that either the company has low capital growth prospects, so a higher dividend is compensation for that; or the company is under stress, which could lead to either a cut in the dividend or - ultimately - a cut in shareholders’ capital due to dilution via rights issues or bondholders being given equity stakes due to default. Re-investing dividends in these companies is buying back into those lower capital growth prospects. Whilst these types of company might be fashionable at times, especially when alternative sources of income give a lower yield, that does not mean that they will do so well in the future.

Investing for higher dividends where there are lower prospects for capital growth can make more sense when the income is not being re-invested, i.e. the investor has entered their drawdown stage. This is where the lower-volatility attribute of dividends does come to the fore. But for long term growth, i.e. total return, I would rather invest in companies which pay out a lower dividend to investors and retain more of their earnings to invest in themselves - which should lead to an improved rate of growth in both capital and dividends. Worse, are those companies spend their earnings on share buybacks, but even these aren’t as bad as those companies which have been increasing the amount of debt on the balance sheet in order to support the dividend and/or buybacks - examples of financial Majick Arts!

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Interesting to look at two types of volatility figures from Morningstar for the author’s fund (the article fails to mention which type is being considered), There is a 3-year standard deviation of 9.75 and a 3-year beta of 0.97 (Morningstar using the FTSE All Share as the benchmark). Using the Vanguard FTSE 100 ETF as a proxy for the FTSE 100 and the Vanguard FTSE All Share UT as a proxy for the FTAS give standard devations of 9.85 and 10.07 respectively (Figures as at 30 June).

That beta value shows that the fund tracks market movements quite closely, and its standard deviation also shows that the volatility of its returns are also similar to those from the market, certainly the All Share. So if there is merit in holding a fund with a high dividend yield and which has low volatility, the author’s fund is not it.


#6

There is a lot of good research on the effect of reinvesting dividends in to a fund or rust over time though @arkwelder

Yes I agree to your caveats about the risks of chasing high dividends. I like funs like Lowland that pays a dividend that’s not that high but is growing well or the Henderson EuroTrust (the one managed by Tim Stevenson if I’ve got the name wrong). It pays a 2% div that’s grown at an annualised compounded 10% per year.


#7

It is true that capital grows faster than dividends, but not by a huge amount. The problem is that companies like Nokia and Blackberry remind us of the dangers of relying on capital growth only.


#8

Sure, and re-investing dividends received is essential for the total-return investor, i.e. those for whom the objective is to grow their portfolio. But this is frequently translated into meaning those companies that have higher dividend yields are a better option than those with lower yields - and where lower does not have the same meaning as zero