Retirement Income Plan for The Miggins

John and Jo Miggins have worked hard all their lives. They saved as much as they could and now they’re ready to retire.

They've paid off their mortgage and their home is worth £260k. Between them, they have £300k in their pension pots. And that’s it! 

They expect to receive £14,000 in State Pensions.  They reckon they need a minimum of £20k a year to get by. Of course, any additional income would be great for holidays and occasional treats for the grandkids. The Miggins are expecting a relatively laid back retirement spent volunteering at their local dog trust and spending time with their grandkids. But before they settle down into retirement, the Miggins want £25k of their savings for the holiday of a lifetime. 

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Lessons from 119 years of capital market data

The latest Credit Suisse Global Investment Yearbook (excerpt here) compiled by Professor Elroy Dimson and his colleagues Paul Marsh and Mike Stanton, is a treasure trove of information. It covers asset class return and inflation in 26 different markets over the 119 years between 1900 and 2018. 

And before you join in the chorus - '... yeah, but nobody has an investment horizon of 119 years...' - the point isn't to suggest that anyone has that long to invest. Or that investors should expect to receive long term averages. This data doesn’t help us predict future returns with any degree of accuracy. What it does provide is a colourful perspective on the behaviour of asset classes under a very wide range of market conditions, from the best of times to the worst. 

For instance, rather than relying on long term averages, we can think of probability of a given outcome by running every rolling 20 or 30-year period within this data-set. We can look at lowest/highest return as well as percentiles over multiple periods as well as the range of outcomes.  This can be crucial for financial planning purposes; it can help us set expectations and calibrate our plans, particularly when we're stress-testing how a financial plan might fare under severe market conditions.

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