Any point in a Cash buffer in Pension Drawdown Account?

kidmugsy

Spreadsheetman wrote: »

Interesting. The bond-based strategy appears to ignore real-world inflation though unless I've missed something?

You missed the fact that they are considering Treasury Inflation Protected Securities.

Linton

kidmugsy wrote: »

No; versus CPI it's about -0.5%.

Nor does it much matter because in the UK (unlike the US back then) it's easy to buy an index-linked annuity which would probably do a better job than a ladder of I-L gilts.


Anyway, that's two commenters I've seen who've missed the point. Any more?

SWR may result in excess wealth at the end of life, but you have still to suggest and cost a practicable alternative for todays conditions. A strategy that depends on the use of non existant inflation beating safe bonds is irrelevent.



An index linked annuity provides a worse return than the SWR alternative and has other disadvantages because of its lack of flexibility. However I agree it may well make sense when one reaches an age close to average life expectancy especially since one may be losing the capability or interest to sensibly manage a large portfolio.



I do have a simple modification which is to recalculate the SWR every say 5 years. Most of the time this should result in an increased drawdown and a reduction in wealth at end of life since most of the time the highly damaging early crashes wont have happened.

kidmugsy

Linton wrote: »

SWR may result in excess wealth at the end of life, but you have still to suggest and cost a practicable alternative for todays conditions. A strategy that depends on the use of non existent inflation beating safe bonds is irrelevent.

Maybe not: locking in an annual loss of 0.5% versus CPI may do triumphantly better than SWR.

The point is that it's daft to say that a decade of QE and ZIRP have driven down ILG yields and yet ignore completely the fact that they've driven up equity valuations to quite unsustainable levels (if fact it proves to be).

You can't legitimately point out that QE and ZIRP will have impaired one of the two strategies being compared but then ignore the possibility that they haven't impaired the other (in all likelihood).

Linton wrote: »

An index linked annuity provides a worse return than the SWR alternative

Come now; you can't possibly know that. We have had a decade of the lowest interest rates in 5,000 years, a decade of central banks buying up sovereign debt, and even corporate debt, promiscuously.

How the devil can anyone blithely assume that Bergen's 4% SWR - published, was it not, in 1994 - is unchanged? It makes no sense.

Anyway, look at the publication in its own terms. It demonstrated that Bergen was wrong: a retiree could have done distinctly better than with the 4% rule. So why then worship the 4% rule? Why assume that things have changed so that what wasn't a good idea when it was published is magically a good idea in our much changed circumstances?

So much for Sharpe and company; but the deep problem with SWR is even more profound. The idea of "proving" it to be a good idea by assuming that the future must bear a great resemblance to a small part of the past is, it seems to me, reckless. When did Bergen's history begin? 1926, was it? Where did it apply? The US.

What convinces you that that is a representative enough sample to gamble all your retirement capital on?

Triumph13

The simple fact is that a risk free strategy based on bonds must, by definition, come out at a worse deal than just buying an annuity as there is more variability in individual life expectancy than in average life expectancy. If they are coming up with an answer that's higher than annuity rates then they have clearly got it wrong - or else they should set up in business selling annuities!

Audaxer

bearshare wrote: »

The 'problem' with that approach is that the natural income from a balance equity portfolio is fairly low: about 1.8% from memory, which is lower than the safe withdrawal rate. If the fund focuses on high income equities, you can get up to about 3.5%, BUT the total return of the fund tends to be much lower.

The yield from a balanced portfolio of equity and bonds if investing at present would be over 4%. There are a number of ITs with a history of many decades of continually growing dividends, so I would hope you would get a sustainable growing natural income of over 4% from these type of ITs and funds over the long term.

If you went for high yield/maximiser funds the yields could be as much as 6% or 7%, but I have my doubts whether these type of funds are sustainable over the long term.

bearshare

Audaxer wrote: »

The yield from a balanced portfolio of equity and bonds if investing at present would be over 4%. There are a number of ITs with a history of many decades of continually growing dividends, so I would hope you would get a sustainable growing natural income of over 4% from these type of ITs and funds over the long term.

If you went for high yield/maximiser funds the yields could be as much as 6% or 7%, but I have my doubts whether these type of funds are sustainable over the long term.

You may get approaching 4% from a balanced portfolio of UK equities and bonds, but if you want a global portfolio, you would struggle. It CAN be done but only by selecting high dividend payers, which usually implies low growth, or ITs paying income from capital (like EAT).

Anyhow my point is, you sacrifice total returns for income. Compare pretty much any high income fund with their corresponding 'regular' fund and see the difference..

Robert_McGeddon

kidmugsy wrote: »

Right then, young man, another one for your reading list: be sure to be suspicious of strategies that rely on so-called safe withdrawal rates from equity portfolios. They are probably a rather extravagant way to fund a retirement. To see why, google "The 4% Rule—At What Price?"
by Jason S. Scott , William F. Sharpe , and John G. Watson

Ha ha! You obviously don't know me, but thank you for the (presumed) compliment.

Thanks also for the link to the article which I've downloaded and partially digested. I hadn't realised retiring was so hard . ..

Robert_McGeddon

kidmugsy wrote: »

Do you know a good source for a graph showing the history of dividends? I don't think I've ever seen one. Yet it must exist because I've seen many dozens of people assuring me that dividends are pretty stable.

I think this merits a separate thread to avoid going off topic. When I get a mo . . . .

No it isn't: that's why the writers compare equities with Treasuries or Gilts, on which they assume that both revenue risk and principal risk are negligible. (On Gilts, history bears them out. So far.)

Even index linked gilts can lose out in real terms If your real return could be plus or minus 1% then there is uncertainty in the outcome. Low risk? For sure. Negligible risk? Only maybe.

coastline

A few links..

A detailed site showing examples of Annuities

https://www.sharingpensions.co.uk/

Historic S&P 500 dividends ..

http://www.multpl.com/s-p-500-dividend-yield/

Inflation adjusted.

http://www.multpl.com/s-p-500-dividend/

Dividend growth showing the effects of recent downturns.

http://www.multpl.com/s-p-500-dividend-growth

Same chart in table form showing a 20% cut in 2009 which was reversed by 2011.

http://www.multpl.com/s-p-500-dividend-growth/table/by-year

Breakdown of S&P 500 ratios showing various time periods.

https://www.quandl.com/data/MULTPL-S-P-500-Ratios

Thrugelmir

bearshare wrote: »

You may get approaching 4% from a balanced portfolio of UK equities and bonds, but if you want a global portfolio, you would struggle. It CAN be done but only by selecting high dividend payers, which usually implies low growth, or ITs paying income from capital (like EAT).

EAT is cutting it's dividend by 22%. The chickens are coming home to roost.