Warren Buffett: 'Sage of Omaha' reveals perfect pension portfolio
Retired savers who choose to avoid annuities and live off the income generated by their investments received help from an unlikely source last month: Warren Buffett, the world’s most successful investor.
In his annual letter to the shareholders of his company, Berkshire Hathaway, the “Sage of Omaha” published the instructions that he has left for his executors about the way they should invest the money he leaves to his wife when he dies.
In doing so, he provided an answer to the question that faces every retired person who refuses to buy an annuity at today’s depressed rates: how to invest the money in a pension pot so that it will pay a decent income that rises over time.
Or to put it another way, the legendary investor was outlining the “Warren Buffett income drawdown plan”.
“Income drawdown” is the product that retired savers must use if they don’t buy an annuity. What happens is that when you retire, and after you have withdrawn a quarter of your pension savings as a tax-free lump sum, the remainder goes into a ring-fenced fund from which you can withdraw, subject to certain rules, your retirement income.
Drawdown investors face the problem of where to invest. They have a more or less free choice, encompassing cash, shares, bonds, funds and even, depending on the company that runs the plan, more unusual assets such as commercial buildings.
But when Mr Buffett described how he wanted his widow’s retirement fund to be invested, he cut through all this complexity and came up with almost the simplest investment plan possible: “My advice to the trustee could not be more simple: put 10pc of the cash in short-term government bonds and 90pc in a very low-cost S&P 500 index fund.” He even tipped a particular tracker fund: “I suggest Vanguard’s.”