Vanguard LS60 risks ?

Audaxer

jamesd wrote: »

...
Michael: ... from a practical perspective, when people are spending 4% or 5% a year, if you hold 3 years of spending in cash, you have a 15% cash allocation. And if you hold 15% in cash for life, you just end out with less money because that’s a lot of cash to hold for life for a multi-decade timeframe.

Jon: Well, it is, and it really hurts if it’s only the remaining 85% that you allocate 60/40.

I don't see that as a problem. It just makes the portfolio a bit more cautious in that instead of 60/40, it is now 51% equities, 34% bonds and 15% cash. As I see it, we should consider the 15% cash as another defensive asset which could perform better than bonds. I also think if there is a poor sequence of returns in the early years of retirement, the portfolio with 15% cash would be more beneficial.

[Deleted User]

Audaxer wrote: »

I don't see that as a problem. It just makes the portfolio a bit more cautious in that instead of 60/40, it is now 51% equities, 34% bonds and 15% cash. As I see it, we should consider the 15% cash as another defensive asset which could perform better than bonds. I also think if there is a poor sequence of returns in the early years of retirement, the portfolio with 15% cash would be more beneficial.

There is little difference between “cash” and short term government bonds. Kinda interchangeable

Audaxer

Deleted_User wrote: »

There is little difference between “cash” and short term government bonds. Kinda interchangeable

I would say the only difference is with cash it is savings so you can't lose your capital, whereas with a bond fund, there is risk that the value will fall, although not as much as equities.

[Deleted User]

Not with short term government bonds, no.

The real value may fall for both cash and short term bonds, but not the nominal value.

Thrugelmir

Audaxer wrote: »

I would say the only difference is with cash it is savings so you can't lose your capital, whereas with a bond fund, there is risk that the value will fall, although not as much as equities.

"Bond" is a broad generalisation. Like equities certain types of bonds run the risk of a 100% default if the issuing entity defaults. While not common. Always a risk to be considered.

jamesd

Deleted_User wrote: »

2. The article you linked does talk about SWR of 4%% based on US and SWR of 3.7% based on 100 years of UK data. When it moves on to US researchers and their method, it is not at all clear that 5.5% is based on UK data. Are you sure?

Sure enough to be using it routinely because I do recall a more explicit mention. I'll add a link to the SWR topic if I find something more explicit.

Unless you happen to retire close to a repeat of the worst time the Guyton-Klinger rules can handle the UK-US difference anyway. The static nature of the 4% rule makes that more vulnerable.

But none should actually be hugely affected because you're supposed to be paying attention and because the rules calculation can be restarted at any time.

Deleted_User wrote: »

3. In a way it’s irrelevant whether the data are UK or US. Who is to say that the future behaviour of stocks in Britain won’t resemble some other country, like Sweden which had its stocks boom during WW2 and completely collapsed after WW2?

The key point is that they are using bad times during a 100 year period to tell us “all will be fine over the next 40 years”. 40 years is a long time and a high proportion of 100. I would have been more comfortable if we had 1000 years worth of data.

Well, "the spectacular bull market turned into a devastating crash when Sweden joined the gold standard at the prewar parity, which set off a deflationary spiral and plummeting stock prices" but Pfau still found the SWR there to be 4.23% limited by a 1914 start. Inflation is bad for drawdown but deflation can be good: asset values may drop but the purchasing power is rising.

But since I wrote earlier in this discussion "No rule banning the real world from delivering something worse and requiring additional action" I definitely agree that there is some level of possibility that greater changes than are part of any rules being used could be necessary. But it is worth recognising how bad things would have to be and the potential effect on a DB scheme of such extreme times. Annuities in payment may survive, the FSCS protects 100% of the payment but would have to rely on the UK government being able to borrow enough to fund it, which isn't certain in extreme times. The state pension should be fairly safe but pensioners in Greece faced cuts so in really bad times that isn't certain.

Essentially, by the time things get worse than the base SWR rules can handle, there's also reason to wonder about the alternatives.

You might have noticed that I like state pension deferral to provide an income floor, and eventual annuity buying.

jamesd

Audaxer wrote: »

I don't see that as a problem. It just makes the portfolio a bit more cautious in that instead of 60/40, it is now 51% equities, 34% bonds and 15% cash.

A problem is that SWRs are based on the asset allocation and an unconsidered cut to the equity percentage means the SWR will be too high. No problem if an SWR that includes the cash is used.

For 30 years and up, the drops in SWR start to matter quite a bit once the equity percentage goes below 50%. Bigger effect for longer terms, lower for short.

Audaxer

jamesd wrote: »

A problem is that SWRs are based on the asset allocation and an unconsidered cut to the equity percentage means the SWR will be too high. No problem if an SWR that includes the cash is used.

For 30 years and up, the drops in SWR start to matter quite a bit once the equity percentage goes below 50%. Bigger effect for longer terms, lower for short.

On the subject of Safe Withdrawal Rates, if you had say a £300k portfolio and withdrew a fairly cautious 3% increasing each year with inflation, and after say, 20 years of some ups and downs, your portfolio balance was still around the £300k mark, would that mean your SWR for the next 15 years could be significantly higher if you didn't need to leave an inheritance?

Thrugelmir

Audaxer wrote: »

On the subject of Safe Withdrawal Rates, if you had say a £300k portfolio and withdrew a fairly cautious 3% increasing each year with inflation

Breaks one of the rules. If the portfolios total return was negative the previous year then the drawdown is frozen for the next.

[Deleted User]

jamesd wrote: »

Pfau still found the SWR there to be 4.23% limited by a 1914 start. But it is worth recognising how bad things would have to be and the potential effect on a DB scheme of such extreme times. Annuities in payment may survive, the FSCS protects 100% of the payment but would have to rely on the UK government being able to borrow enough to fund it, which isn't certain in extreme times. The state pension should be fairly safe but pensioners in Greece faced cuts so in really bad times that isn't certain.

Essentially, by the time things get worse than the base SWR rules can handle, there's also reason to wonder about the alternatives.

You might have noticed that I like state pension deferral to provide an income floor, and eventual annuity buying.

Agreed, including with the plan to eventually buy an annuity (which also has risks)