1. For adviser use only. Not approved for use with customers.
Retirement & Investment Conference
Retirement landscape: investment strategy, rebalancing & decision rules
John Lawson, Head of Financial Research, Aviva UKI

2. Talking points Sustainable income – best asset mix
Does rebalancing actually work?
Decision rules versus rebalancing

3. But first, some assumptions…
Aviva’s own research
Data source: Barclays Equity Gilt Study annual returns from
Gives 88 * 30 year periods
Analysis is based on UK returns on equities, gilts and cash
Annual (rather than monthly) income withdrawals
1% pa charge assumed
A 30-year retirement is assumed
These figures are illustrations of what might have happened in the past

4. The 4% rule?
4% initial draw with inflationary rises considered “safe” for a 30 year retirement
Based on analysis of US historic returns e.g. Bengen, 1994 (50/50 stocks and bonds portfolio, inflation-linked draws, 30 year horizon and zero charge)
UK historic returns would suggest a lower safe rate of c.2.5% (1% charge)
An inflation-linked annuity is currently c.2.7%
The lowest draw we consider in this work is 3.5%, on the assumption that the key aim is to increase income alongside leaving a possible inheritance

5. Success rates by initial draw and equity content, with inflation-linked draw and 30-year retirement, passive strategy

6. Success rates by initial draw and equity content: inflation-linked, no cap v 5% cap, 30-year retirement, passive strategy

7. Success rates by initial draw and equity content: 5% capped inflation v level, 30-year retirement, passive strategy

8. Passive or rebalance? 50% equity, 4% income withdrawal

9. Passive or rebalance? 80% equity, 4% income withdrawal

10. Retiring on 1st January 1973…
7.0% draw, with inflation-linked rises capped at 5%
Choose 80% equity, 10% gilt, 10% cash mix
But 1973 saw equity losses of 28% followed by losses of 50% in 1974
Drawing from the equity pot in 1973 and 1974 massively erodes capital
But 1975 saw 150% equity growth… unless you rebalanced back towards equity then you missed out on a lot of this and the high yields of the 80s and 90s
In this example, the passive fund runs out in the 19th year, whereas the rebalancing approach lasts 30 years
This is an extreme example to show the impacts of missing out on good equity returns!

11. Retiring on 1st January 1973…

12. Retiring on 1st January 1973…

13. Guyton and Klinger Portfolio Rule
Following a year where positive return achieved such that equities or bonds exceeds target weighting, sell excess and place in cash to meet future withdrawals
Income withdrawals funded in order:
1) Overweighting in equity assets from prior year end,
2) Overweighting in fixed income from prior year end
3) Cash
4) withdrawals from remaining fixed income and
5) withdrawals from remaining equity assets in order of prior year’s performance
No withdrawals are taken from any equity following a year of negative returns if cash or fixed income assets are sufficient to cover withdrawals

14. Guyton and Klinger Portfolio Rule - 1973

15. Rules or rebalancing?

16. Rules summary Some promising initial findings
Offer some protection when more risk is taken
Offers greater protection when overall portfolio returns are lower
Largely perform better than rebalancing
At higher equity contents perform similarly or slightly better than a passive strategy
BUT… so far we have looked only at UK historic returns and one risky asset (equities) => important to not make generalisations as very limited data set