Drawdown and movement to 'safer' funds

westv

Triumph13 wrote: »

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.

Perhaps some people think they will find it difficult to cut back on an income they may have got used to for several years prior to the crash.

Audaxer

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.

If you are only taking natural income in the form of dividends, hopefully if there is a market crash of 40%, dividends wouldn't be cut by nearly as much if at all. If fund dividends were cut maybe that would be a good argument for choosing ITs like City of London which has paid a good growing dividend for over 50 years.

bostonerimus

Audaxer wrote: »

If you are only taking natural income in the form of dividends, hopefully if there is a market crash of 40%, dividends wouldn't be cut by nearly as much if at all. If fund dividends were cut maybe that would be a good argument for choosing ITs like City of London which has paid a good growing dividend for over 50 years.

If you have the ability to manage your funds to carefully distribute dividends and capital gains you should get income something similar to an IT, but possibly at a lower cost. You're just paying a "wizard behind a screen" with an income IT.

The safest way to manage your drawdown is simply not to touch it. If you have something like an income property rental, a DB pension or use some of your DC pension pot to buy an annuity you can be "safe" and your DC pot can actually grow. The utility of that is debatable as some want to spend as much as possible while others might want to leave as much as possible to the next generation or fund a family trust. I'm thinking about funding a family trust so that my money can help future generations

cfw1994

ams25 wrote: »

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.

Will take a look into this....
On that last point: "If markets crash I would rebalance back to my equity allocation" - what do you mean there?
Just as example numbers: say you had 500K in equity for drawdown and 100K in cash. Then the markets tumble 20%, taking the equity down to 300K - how would your rebalancing work?

Thanks!

Thrugelmir

Audaxer wrote: »

If fund dividends were cut maybe that would be a good argument for choosing ITs like City of London which has paid a good growing dividend for over 50 years.

That's a fallacy. Drawing on income reserves isn't growing the dividend. When BP cancelled it's dividend for 3 quarters due to Deepwater Horizon, it hit income funds hard. Likewise in the post GFC era. Financial stocks which previously had paid good levels of dividends were greatly diminished.

ams25

cfw1994 wrote: »

Will take a look into this....
On that last point: "If markets crash I would rebalance back to my equity allocation" - what do you mean there?
Just as example numbers: say you had 500K in equity for drawdown and 100K in cash. Then the markets tumble 20%, taking the equity down to 300K - how would your rebalancing work?

Thanks!

currently I am about 55% equities, the rest in a mix of bonds, cash, property and alternatives. Cash is around 10-15%, bonds 15-20%. My equities allocation went from 90% when working down to 55% when I stopped. My plan is to gradually take it back up again once some db pensions kick in in 7 years or so. Until then I am realiant on investments to live off so need a decent chunk in cash/bonds.

Lets use 100k portfolio for easier maths.
So If equities tumble 20% my equity allocation falls from 55k to 44k. Lets assume the non equity allocation holds steady at 45k. My equity allocation is now 49% (44 of 89). I would use some of the bonds/cash allocation to buy equities back up to 55%, so buy 5k of equities (55% of 89 is 49). I would expect to take all (or most) of this from the bond allocation, on the basis that cash is primarily for covering short term (1 to 2 years) living expenses.

Hope that helps.

ams25

Some interesting insights on the drawdown/swr topic here

cfw1994

ams25 wrote: »

currently I am about 55% equities, the rest in a mix of bonds, cash, property and alternatives. Cash is around 10-15%, bonds 15-20%. My equities allocation went from 90% when working down to 55% when I stopped. My plan is to gradually take it back up again once some db pensions kick in in 7 years or so. Until then I am realiant on investments to live off so need a decent chunk in cash/bonds.

Lets use 100k portfolio for easier maths.
So If equities tumble 20% my equity allocation falls from 55k to 44k. Lets assume the non equity allocation holds steady at 45k. My equity allocation is now 49% (44 of 89). I would use some of the bonds/cash allocation to buy equities back up to 55%, so buy 5k of equities (55% of 89 is 49). I would expect to take all (or most) of this from the bond allocation, on the basis that cash is primarily for covering short term (1 to 2 years) living expenses.

Hope that helps.

Very clear, thanks!

Is this all inside a SIPP, using a drawdown account to manage both equities and non-equities? do you manage that rebalancing and where the funds are inside a SIPP, or do you use an IFA?

I ask because the bulk of my DC fund is in one Aviva pot, whereas my non-equity funds are external.
I do wonder whether a chunk of that ought to be in the (utterly rubbish!) sterling fund, in order to effectively enable the rebalancing you describe to take place within the pot (by then perhaps a drawdown account).
At such times I would envisage not withdrawing from the fund anyway, but to use other investments to live on.

Logically this makes sense to me, although with the ‘cash sterling’ account inside Aviva (& I imagine many SIPP funds elsewhere) effectively flat for interest, in the current booming equity space that would clearly be losing money for me all the time (& losing to inflation year on year too!).
Another option could be to simply to have sources external to “the pot” to hold the cash today, then invest elsewhere (ISAs) at such times.....
Sorry, a bit rambling....I need to consider my overall “wealth” as The Pot, methinks!


Thanks, this is a useful thread!

Malthusian

Audaxer wrote: »

If you are only taking natural income in the form of dividends, hopefully if there is a market crash of 40%, dividends wouldn't be cut by nearly as much if at all.

Depends what you invest in. If you invested in economically sensitive companies then your income would be slashed dramatically in a crash as the companies stopped paying dividends.

And, to labour the point, if you can cope with dramatic drops in income then you have little to worry about. All the debate and academic literature about "safe withdrawal rates" assumes that the punter will not want to slash their income when the markets crash.

Your retirement fund is supposed to sustain your lifestyle, not t'other way round. If you are cutting your lifestyle to sustain your retirement fund, then you are in the same position as someone walking down the road with a bike on their shoulders. If it's a brief stretch of bad road, it may be logical to carry the bike for a while so you don't get a puncture and the bike can carry you the rest of the way. If you find yourself shouldering the bike for long enough to feel its weight, you chose the wrong bike.

If you invested in investment trusts which aim to provde stable and growing dividends, you would hope to see less dramatic cuts. But as per Thrugelmir and bostonerimus, all you are doing is paying a wizard behind a curtain to hold a cash buffer for you. When you could manage that yourself by, say, drawing something like 4% a year, not spending all of it, and cutting your withdrawals and spending your cash instead during a crash.

Triumph13

Malthusian wrote: »

If you are cutting your lifestyle to sustain your retirement fund, then you are in the same position as someone walking down the road with a bike on their shoulders. If it's a brief stretch of bad road, it may be logical to carry the bike for a while so you don't get a puncture and the bike can carry you the rest of the way. If you find yourself shouldering the bike for long enough to feel its weight, you chose the wrong bike.

I love that analogy - or I would do if it didn't remind me that whilst walking up Haystacks this summer I was overtaken by a guy carrying a mountain bike on his shoulder!