The right portfolio for extended retirement

gadgetmind

chucknorris wrote: »

Could you please elaborate

The worst case is large drops in the markets for the few years after you first retire. If you don't temper your withdrawals, you take a lot of capital from a portfolio that's on its knees, and this can be impossible to recover from.

So, while you do need a lot of equities for a long retirement, you'd be a bit crazy to be holding 80%-90% equities for that first difficult decade (or so).

I'm about three years off retiring, and do intend to take a flexible approach (some may call it "making it up as I go along"!), but I will definitely be building up a cash buffer and reducing equity exposure.

dunstonh

So what? Someone planning a 40+ year retirement is probably not what you'd call average.

So what? It matters as the person should have what is right for them.

What rate of drawdown can these sustain for 40+ years with a 90% chance of success?

The OP hasnt stated what sort of income he is looking for. However that range is able to handle income payments you would typically expect.

Personally, I'd rather hold a big slug on unwrapped cash, but that's just me.

Not just you. Holding cash to cover the first few years is one of the recognised drawdown methods. Then moving risk based investments into cash periodically to ensure you have enough to ride out any short term volatility.

diveleader

Thanks for the replies so far.
Enjoying the debate.


Our equities are currently around the 60% and I was looking to increase them further.


Already do P2P and was thinking if increasing this and look to it has a buffer between cash and equities.


Our drawdown was based on 3%, so again this should give us capacity to ride out market swings.


The biggest worry though is turning off the income stream (from your employment). After all, its been a teat we've been on since 16 years of age...

chucknorris

gadgetmind wrote: »

The worst case is large drops in the markets for the few years after you first retire. If you don't temper your withdrawals, you take a lot of capital from a portfolio that's on its knees, and this can be impossible to recover from.

So, while you do need a lot of equities for a long retirement, you'd be a bit crazy to be holding 80%-90% equities for that first difficult decade (or so).

I'm about three years off retiring, and do intend to take a flexible approach (some may call it "making it up as I go along"!), but I will definitely be building up a cash buffer and reducing equity exposure.

Ah I thought that you meant something else, to do with investing a lot in the market all at once. But I see what you are saying, don't put money in shares short term (as we all know) the short term being the first few years that you would be immediately withdrawing, best to keep that out of equities.

atush

I would have thought for the OP
looking at 40 years of returment you would want to

A hold at least one year but 2/3 better in cash
B to split the money int decades with
C the pot of money for 30+ years time invested more into equities than the
D first decade, second etc

I would certainly thing pot C would be heavily in equities, maybe even 90%

and that the other pots could contain ITs with decades of increasing dividends be part of the pot, with the pots to be for more than 10 years time to be still reinvesting dividends. those with less time to be banking dividends to the income stream.

jamesd

gadgetmind wrote: »

Yes, this sequence risk is a problem. There is a good argument for entering drawdown with a high bond allocation and then reducing it once you've ridden out the first cycle.

Indeed it is.

gadgetmind wrote: »

Personally, I'd rather hold a big slug on unwrapped cash, but that's just me.

But at the moment I'd rather use a lot of commercial property and P2P rather then really heavy bond allocations. The tax free lump sum provides a really convenient way to diversify into say P2P with some of the money.

jamesd

diveleader wrote: »

Our drawdown was based on 3%, so again this should give us capacity to ride out market swings.

At 3% you're roughly matching the dividend yield of the UK stock market. That would drop a bit in sustained down times but it's very likely that you will die with more money in real terms than you have today at that drawing rate.

gadgetmind

dunstonh wrote: »

So what? It matters as the person should have what is right for them.

Agreed, but some people may express a (badly understood) attitude to risk that would suggest an asset allocation that is contrary to their own best interests.

Everyone wants a 5% drawdown for 40+ years with no risk to capital, but that's not possible.

What has to give?

dunstonh

Agreed, but some people may express a (badly understood) attitude to risk that would suggest an asset allocation that is contrary to their own best interests.

True. Going too light or too heavy can be damaging. What can be more damaging it going equity heavy, suffering a loss and draw it out. No matter how many times someone says you should stick with it and go through the loss period, there will be people that pull out and crystallise that loss.

jamesd

Sadly some will. And in the advised world that you practice in, you also have to pay very careful attention to a regulatory system that pays far more attention to risk tolerance than to target income level. You would be the person paying for a shortfall in quite a lot of cases.