Drawdown and movement to 'safer' funds

ams25

cfw1994 wrote: »

Be interesting to see some analysis for this: my view is that your logic makes perfect sense....have some cash buffer in some form to allow lower withdrawals for some time where needed....it will clearly be a bit of a moving feast (or famine!) come retirement time, especially for any lucky enough to enjoy 30+ years of it, and having a rigid withdrawal % could be dangerous!

try this analysis from Abraham Okusanya.

It seems the benefits are more marginal than you might expect and in some cases the performance drag of holding cash is not helpful, but on balance it seems to make sense mostly from a behavioural perspective. Seems the key is not to overdo the cash. I hold a cash (and bonds) buffer and more than I should as I sleep better... If markets crash I would rebalance back to my equity allocation.

Malthusian

Audaxer wrote: »

Is it safer to withdraw 4% per annum using a cash buffer for loss years, or to be fully invested and draw 3% of the outstanding balance every year without a cash buffer?

Depends on how likely the cash buffer is to run out but without bothering to run the numbers, I would say almost certainly the first option.

The average return for a balanced portfolio over historic time periods usually comes out around 8% per annum. 5% is considered a reasonably conservative projection for the future. This however is an average which includes the loss years. If you looked at the average return of good and flat years only, excluding loss years, the average stockmarket return will historically be more like 10%. If you draw 4% from your portfolio in years where the average return is 10%, and withdraw nothing in the bad years, you won't run out of money.

It's pound cost ravaging (withdrawing at the bottom of the market) that kills.

That confident statement aside, in theory it's not impossible to run out of money - for example if the global stockmarket crashed by 50% and then grew by 1% per annum for 20 years, you would run out of money by withdrawing 4% per annum in positive years only. But if something that apocalyptic happens to the global economy, this entire conversation about safe withdrawal rates is pointless. Safe withdrawal strategy will be about what you can withdraw from a bin to eat without contracting cholera, not pension funds.

Audaxer

Maybe the safest way, if you can afford it, is to withdraw 4% each year of the outstanding balance. So if your portfolio is £300k, let's say it's lowest value in an equity crash could be £200k. In years that it was down to £200k you could only draw £8k. Would that be sustainable through a long retirement?

Triumph13

Audaxer wrote: »

Maybe the safest way, if you can afford it, is to withdraw 4% each year of the outstanding balance. So if your portfolio is £300k, let's say it's lowest value in an equity crash could be £200k. In years that it was down to £200k you could only draw £8k. Would that be sustainable through a long retirement?

I will be doing something very much like that myself as it completely eliminates sequence of returns risk. It does have its downsides though:

1. You need to be able to cope with a fluctuating income
2. If long term average returns are below your %age take then your pot will shrink over time (but never actually run out entirely)
3. You will almost certainly leave a lot of money unspent when you die (you may see this as a good thing if you want to leave an inheritance)

If you have any fixed income eg SP or DB then that can help dilute the variability of this approach - if half your income is fixed then a 40% market crash only drops your income by 20% rather than 40%. A small cash buffer could then smooth this even further eg 6 months income buffer could be used to reduce the above drop from 20% to 10% and would last for 5 years in that situation.

MK62

Audaxer wrote: »

Is it safer to withdraw 4% per annum using a cash buffer for loss years, or to be fully invested and draw 3% of the outstanding balance every year without a cash buffer?

That's going to depend on the size of the cash buffer, and your rules for using it.
If it's on the smaller side, you may also need to plan for how to replenish it after the first use, as the whole plan is blown if the cash buffer is subsequently needed and it can't service that need.

The rules you use for dipping into the cash buffer will have a large bearing on the outcome too. In negative total return years, do you supply all your cash needs from the cash buffer? What about only-just positive years, where the total return doesn't meet your cash needs - do you supply the difference from the cash buffer?

You then also need to compare the effect of having the cash buffer at all vs being fully invested.....

hyperhypo

i've been following this thread holding my breath as if it were somehow veering towards address my current task...how to create a cash / cash -like buffer within active sipp.
Sipp currently 150k , contributions 2k pcm, mixed asset funds.
accumulate for two further years assume same rate.
Then need to effectively remove £50k to finance pre DB living expenses for TWO years therafter.

no external cash assets ..all liquidity in DC sipp

Given time is close ..within two years ..do i create some or all of requirements by selling the MA funds now , for at least part of £50k...perhaps deal with remaining requirement by making all contributions in cash henceforth.
I don't know , but am minded to do something to move c. 50k to cash or cash like to fund this phased drawdown...how to go about it ? Half of it in one go the rest over time ??

Balance stays invested in 50/50 MA type funds.

I had posted this as a separate thread but included it here as it seems in same area as the OP. Thanks !

ams25

Audaxer wrote: »

Maybe the safest way, if you can afford it, is to withdraw 4% each year of the outstanding balance. So if your portfolio is £300k, let's say it's lowest value in an equity crash could be £200k. In years that it was down to £200k you could only draw £8k. Would that be sustainable through a long retirement?

one option is a hybrid of the normal (?) 4% rule (inflation adjusted each year) and a fixed 4% of the remaining portfolio. I believe it's called the endowment approach. (4% could be 3% or whatever)

So if you have a 500k portfolio in year 1
You with withdraw 20k comprising 4% of 250k (ie 10k) and 4% of 250k
But if the portfolio falls to 450k in year 2 and inflation is 2.5% then
You withdraw 19250 comprising 10k+2.5%=10250 and 9k from 4% of half of the portfolio actual value

This gives some smoothing of the income volatility of fixed % of portfolio and limits overwithdrawing by the inflation adjusted approach.

The usual 4% rule would give a year 2 withdrawal of 20.5k
A full 4% fixed rule would give 18k

Also worth looking at guyton klinger rules as they take this a step futher and provides greater sequence of returns protection. Some folk regard the gk rules as a way of taking a higher initial withdrawal, but I am minded to adopt it with a lower withdrawal rate to give better sequence of returns protection. Ie use to gk rules but with an intial 3% wr. But I am looking at c. 40 year period, have a younger spouse and want leave a legacy...so 30 year withdrawal horizons are not what I am planning for.

Malthusian

Audaxer wrote: »

Maybe the safest way, if you can afford it, is to withdraw 4% each year of the outstanding balance. So if your portfolio is £300k, let's say it's lowest value in an equity crash could be £200k. In years that it was down to £200k you could only draw £8k. Would that be sustainable through a long retirement?

Simple maths says withdrawing 4% of the current fund value is sustainable indefinitely - you will never run out of money. The stockmarket could fall by 50% every single year, year in year out, and you'll still not run out of money, you'll just eventually be in a position where the fund has falllen to £1 and your 4% annual income is 4p. But you'll never run out of money, even after another 50% crash you'll have 48p and your income will be 2p.

In less extreme terms, the problem with this strategy is that in a year in which the markets fall 40% your income will be cut by 40%. If you can cope with this - e.g. plenty of income from other sources, or very modest means where the State Pension forms the bulk of your annual income - then you haven't got much to worry about.

The whole debate about "safe withdrawal rates", whether it's the 4% rate or Guyton-Klinger, assumes that you don't want to cut your income. If you can happily slash your income by 40-50% when the markets crash, then you have little to worry about.

westv

Actually Guyton Klinger assumes you ARE happy to cut income when needed.

Triumph13

Malthusian wrote: »

The whole debate about "safe withdrawal rates", whether it's the 4% rate or Guyton-Klinger, assumes that you don't want to cut your income. If you can happily slash your income by 40-50% when the markets crash, then you have little to worry about.

It always amazes me when people don't get this. People with £1M using a 2% WR 'to be safe' and living on £20k pa come-what-may, rather than living on £40k and just cutting back if there's a crash.