How do professionals manage sequence of return risk?

Thrugelmir

tacpot12 wrote: »

I know I can't afford an annuity,

Annuities still serve a useful purpose in retirement planning. Better a guaranteed income than speculating totally on the whims of the market. Even investing a modest sum with a 10 year guaranteed period could prove worthwhile.

my attitude to risk and volatility is quite aggressive, and I am planning for a 45 year retirement!

Maybe so. However much of the capital gain from investing in markets is by reinvesting the income. Drawing the income over extended periods of time diminish the capital growth achieved significantly. Higher risk likewise could result in a significant depletion of capital. Once retired you are less likely to have any means of replacing wiped out capital.

Audaxer

ams25 wrote: »

check out Wade Pfau's book https://www.amazon.co.uk/How-Much-Spend-Retirement-Investment-Based/dp/1945640022. He covers this in great detail.

My approach is to work out what the SP and my DB will provide in 7 and 14 years, bridge those gaps with cash amounts so I have the ongoing amount needed from my investments...then use a suitable withdrawal amount.

Say I have 10k from db and state pensions in 5 years.
I have total expenses of 20k pa
So I need approx 50k (5x10) to bridge the gap with the DB and SP.
I need a starting 10k pa from investments from now
If I had a 300k portfolio then 3% would cover it fairly safely
If I had 200k then 5% is needed...which is more agressive and would need careful management (ie you would have to cut expenses or find new income) in a severe and prolonged down market.

Simplified example but by splitting out your income streams you can derive the required withdrawal approach.

In that example would it not be safer just to keep £50k of the portfolio (whether it was a £300k or £200k portfolio) in cash savings to cover the gap? You would still have £250k or £150k invested in either case without being overly concerned about markets crashes as your expenses are already covered.

ams25

Audaxer wrote: »

In that example would it not be safer just to keep £50k of the portfolio (whether it was a £300k or £200k portfolio) in cash savings to cover the gap? You would still have £250k or £150k invested in either case without being overly concerned about markets crashes as your expenses are already covered.

yes just realised I had not made it clear that it was the portfolio after allowing for the bridging amount. Have edited earlier post.

The actual treatment of the gap amount can of course vary...you may want keep in cash or equivalents or something else depending on timescales and risk appetite. I'm 14 years away from SP..so not intending to keep c.130k (14x £8.5k inflated) in cash but I know I have this amount to allow for.

jamesd

Thrugelmir wrote: »

However much of the capital gain from investing in markets is by reinvesting the income. Drawing the income over extended periods of time diminish the capital growth achieved significantly. Higher risk likewise could result in a significant depletion of capital.

The theoretical objective of drawdown is to fully deplete the capital on the day of death in order to maximise the income that can be taken. If inheritance is desired, depleting to that level instead. Capital values dropping long term is desirable, should be expected and should lead to considering higher income if it isn't happening.

One of the significant problems for US advisers seems to be getting clients to take as much money as they could.

jamesd

tacpot12 wrote: »

I was wonder if any advisors/pension managers have developed models to identify an initial safe withdrawal rate for each model portfolio or client risk profile. Or a model that takes the other income streams into account.

SWRs tend not to vary greatly with portfolio unless the bond proportion is excessive, more than 50%, though high equities is likely to do much better in cases that aren't the worst. See Does Asset Allocation Affect Withdrawal Rates?

US advisers seem to like a 95% success rate. Blanchett criticise this as too high, even 75%, quoting one of my posts:

Blanchett has some suggestions for what success rate to use, scroll down to the end. To get state pension's capital value to use it as a percentage, you could work out the cost to buy an annuity delivering the same income level. As illustrated here a minimum income need of 50% of income, guaranteed income equivalent to 50% of wealth and medium income stability objective would suggest a 47% success rate target.

It's also worth looking at Guyton's sequence of return risk reduction approach.

I suspect that you could handle significant income variation and might be happiest using Guyton-Klinger rules with a success rate below 50%, then adjusting more than GK if you live through a sustained bad period.

bostonerimus

The standard numbers in the US retirement community are still 95% success rate and a 30 year retirement. There's going to have to be a lot more papers for people to accept the 75% level, even if it does juice retirement income.

jamesd

Thanks, I've tweaked my post.

kidmugsy

Thrugelmir wrote: »

Annuities still serve a useful purpose in retirement planning ... Even investing a modest sum with a 10 year guaranteed period could prove worthwhile.

Why the ten year guarantee? We don't even know if the OP is married.

I admit that I am puzzled by the huge proportion of posters who don't tell us something so important as whether or not they are married.

bostonerimus

Thrugelmir wrote: »

Annuities still serve a useful purpose in retirement planning. Better a guaranteed income than speculating totally on the whims of the market. Even investing a modest sum with a 10 year guaranteed period could prove worthwhile.

As interest rates increase we'll see annuity sales recover from their current trough. They can still be a useful tool to provide an income floor, particularly as people age and might not want (or be as able) to manage drawdown. As that income gets closer to the alternative drawdown projections then the insurance value will tip the scales towards the annuity. From personal experience I'm glad I took the opportunity to buy an annuity at a very good rate just before I retired as having income coming form an annuity every month is a great way to keep the blood pressure down.

bowlhead99

kidmugsy wrote: »

I admit that I am puzzled by the huge proportion of posters who don't tell us something so important as whether or not they are married.

On the other hand, I'm somewhat puzzled by the proportion of respondents who always want to know the fine details of someone's life in order to answer questions that don't depend on those largely unimportant details. If someone wants the forum to build them a personalised plan using every possible option then, yes, give us all the facts about amounts of money involved, tax brackets and allowances, types of existing investments and income streams and the financial status of wives and husbands and exes and kids, etc etc. If they are just curious about investment techniques unrelated to their marital status, they should spare us - and not fill their posts with such unnecessary fluff.

The OP's question was originally, how do professionals manage sequence of returns risk and determine safe withdrawal rates. They later clarified that they were aware of some of the theoretical background and research but wondered how it might translate into the real world of managing a client's drawdown for a specific target income level. And then commented that they had a number of DB pensions or alternate income streams and an attitude to risk which led them to 80/20 equity/non equity, but were still curious about whether in practice, advisers in the real world had standard models of safe withdrawal rates for each client risk profile or that could take into account existing income streams.

I don't see that with such questions it is 'puzzling' why (s)he wouldn't mention his/her marital status.

"Hi, I am wondering how professionals determine safe withdrawal rates given sequence of returns risk and also the income floor provided by existing income streams? By the way, I am married with a dog."

The second sentence does not change the answer to the first. It merely makes for a more interesting soap opera for onlookers if we know all about the family background of the person asking the question and perhaps some reader of the thread can throw in their favourite canned response if they hear that the OP has a spouse.

But when someone is asking for an insight into how an aspect of invesmtent management or financial planning works, it doesn't follow that it's 'so important' to know if they are married or that we should be shocked or puzzled if they don't include that information.