Spreadsheet for 3 pot asset management?

aroominyork

I have read about the 'three pot trick' for managing assets after retirement along the lines of: Pot 1 in cash, equal to around two years of income. Pot 2 worth around four years of income and invested in mixed assets to produce natural income from dividends and bond interest. The balance in Pot 3 invested in equities and other growth assets.

Does anyone know of a spreadsheet which, for each year, lets you insert different levels of return on each pot, different levels of income to withdraw, and shows how to rebalance the pots?


I'm also interested in any articles (or posters' views) discussing the strategy/process in detail.

bostonerimus

Pots, buckets, vases, amphoras etc. it's all just asset allocation.

The most important spreadsheet is the one that tracks your budget. Then put a year or two aside as a buffer, the rest in something like a 60/40 allocation and start with a 3% or 4% withdrawal and be prepared to economize in the bad times for your cash and fixed income go as far as they can.

dunstonh

I have read about the 'three pot trick' for managing assets after retirement along the lines of: Pot 1 in cash, equal to around two years of income. Pot 2 worth around four years of income and invested in mixed assets to produce natural income from dividends and bond interest.

Its one method. Not the only one. I don't particularly like it.

18-24 months in cash is fine. However, building the portfolio on yield at a time when yields are low means you could be sacrificing returns. Growth can be used to supply withdrawals as well.

I prefer asset allocation with 18-24 months cash and rebalance on that basis. All in income units feeding the cash account. If markets are down, then dont be in any hurry to sell more to cash and wait it out.

Audaxer

dunstonh wrote: »

I prefer asset allocation with 18-24 months cash and rebalance on that basis. All in income units feeding the cash account. If markets are down, then dont be in any hurry to sell more to cash and wait it out.

Are you confident that markets will always fully recover from an equity crash within 18-24 months? I'm just trying to work out if that is enough cash to keep?

AnotherJoe

Audaxer wrote: »

Are you confident that markets will always fully recover from an equity crash within 18-24 months? I'm just trying to work out if that is enough cash to keep?

You cant keep enough cash to cover every possible eventuality.
The idea is its a buffer to stop you having to sell immediately and 2 years covers "most" crashes.

There may well come times when you have to sell investments, though that should come after you've cut back first.

Alexland

AnotherJoe wrote: »

The idea is its a buffer to stop you having to sell immediately and 2 years covers "most" crashes.

I guess you might also get some extra time from the dividends you recieve assuming whatever caused the crash hasn't caused companies to stop paying.

In terms of the original question I prefer to make my own spreadsheets as it tests that I understand the theory and means I am less likely to break the logic doing updates.

Alex

aroominyork

I assume the idea of Pot 2 is to forfeit some growth in return for more reliable income - eg a more reliable 3.5% rather than a less reliable 4% - so there's less chance of having to cut back. Dunston, are you saying it's better to go for higher growth and build up the cash when markets are strong?

bostonerimus

Audaxer wrote: »

Are you confident that markets will always fully recover from an equity crash within 18-24 months? I'm just trying to work out if that is enough cash to keep?

You can add dividends and bond interest to you cash as well. Your drawdown can be taken to keep your asset allocation constant, so in a market crash when equities are way down you'll be spending from the bond allocation. How and when you decide to rebalance will be governed by your need for income and the size of the fall.

bostonerimus

aroominyork wrote: »

I assume the idea of Pot 2 is to forfeit some growth in return for more reliable income - eg a more reliable 3.5% rather than a less reliable 4% - so there's less chance of having to cut back. Dunston, are you saying it's better to go for higher growth and build up the cash when markets are strong?

Think about asset allocation, not pots with time scales. You need growth and natural income in a retirement portfolio and some weakly correlated assets so you can choose what to sell in various market conditions. The exact allocation depends your circumstances and psychology.

There's an argument for high growth equity allocations when you are young and have time and the wage income to recover from a downturn and for more bonds and dividend oriented stocks in retirement to emphasize wealth preservation a bit more. Historically people might have a stable income floor provided by a DB pension or an annuity, but those haven't been common recently.....although in the next few years I think partial annuitization will make a come back as interest rates rise.

aroominyork

,

bostonerimus wrote: »

You can add dividends and bond interest to you cash as well. Your drawdown can be taken to keep your asset allocation constant, so in a market crash when equities are way down you'll be spending from the bond allocation. How and when you decide to rebalance will be governed by your need for income and the size of the fall.

Your post #2 says you can shortcut a three pot approach, but your new post essentially describes it. It is discussed here - scroll down about two-thirds of the way to "How to invest for the three pot strategy" https://www.telegraph.co.uk/investor/ideas/the-three-pot-trick-to-make-you-pension-investments-last/, obviously ignoring the nonsense about suggested funds.

PS This crossed with your post #9. I still think you are describing three pots but that you do not feel the need to use a concept which may be useful for people with less experience of managing a retirement portfolio.

aroominyork

Alexland wrote: »

In terms of the original question I prefer to make my own spreadsheets as it tests that I understand the theory and means I am less likely to break the logic doing updates.

Sensible. I do mine too (and enjoy nothing more than a good spreadsheet!) but this one seems very complex. I will take your good advice but first can I check I understand the process correctly (while noting others' misgivings about the three pot process)?

Say I want to withdraw £38k in Year 1, and allow for 2.5% growth for inflation. I start with:
Pot 1, £80k in a 1% cash account
Pot 2, £300k which I estimate will return average 3%
Pot 3, £700k which I estimate will return average 8%.

In Year 1 my 1%, 3% 8% returns go to plan and my pots earn £800, £9000 and £56,000 respectively.
To rise with inflation going into Year 2 I want my pots to have no less than £82k, £307.5k and £717.5k respectively. So:
I move £1200 from Pot 2 to Pot 1 (Pot 2 now has an £7800 net gain)
I withdraw £300 from Pot 2 for living costs (bringing it down to the target £307.5k)
I withdraw £37,700 from Pot 3 (bringing it down to £718,300, above my target £717,500).

Before I look at scenarios where returns are lower than expected, can I please hear whether this is correct?