Vanguard LS60 risks ?

[Deleted User]

Inflation is bad for drawdown but deflation can be good: asset values may drop but the purchasing power is rising.

Not really. The value of many assets, such as stocks, is damaged far more and over longer term by deflation

[Deleted User]

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, 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?

Depends on the method. The standard, constant “safe withdrawal” approach isn’t particularly safe. If you are prepared to change spending somewhat in response to market performance (which most people would anyway), then you would increase spending when the pot is too large but also reduce when it’s too small.

Here is one of the approaches https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

lvader

Deleted_User wrote: »

Not with short term government bonds, no.

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

Not true if it's buying through a fund, I wouldn't even know how to buy short term gilts in a pension wrapper.

Linton

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, 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?

Yes, it makes sense to review your SWR every so often. Most people most of the time will find their SWR increasing significantly over time as SWR is manly targetted at the worst cases, which probably wont happen. At the extreme, 1 year before your estimated death the SWR is 100%.

Linton

Deleted_User wrote: »

1. Discussion started when Linton referred to a “cash buffer” approach. I interpreted that as a fixed amount in cash, which you use to draw from in bad times. Perhaps he can clarify, but if he actually meant a variable percentage withdrawal method, such as Guyton-Klinger, he could have said “Guyton-Klinger”.

.....

There are three different issues with the variants onSWR:
1) How much do you withdraw?
I am retired. My ongoing expenses are largely fixed in advance. A steady income increasing with inflation is an absolute requirement - I dont want Mr Klinger telling me that I have to reduce my standard of living because there happened to be a crash in the previous year. The purpose of a cash buffer is to ensure that is not necessary. OK if the markets continue to fall for 10 years then the plan will fail, but any viable plan would fail under those circumstances.

2) Where do you withdraw it from?
I like the strategy in Jamesd's summary...

“ The Guyton-Klinger rules don't have a fixed pot of cash and specify that income in all years is to come from:

1. cash
2. if no more cash, bonds
3. if no more bonds, equities

They also say:

A. If anything had a positive return and is now at an overweight allocation, sell the overweight amount and put that in cash.
B. If equities are overweight, sell enough of them to get back to target weight, putting the proceeds in cash.
C. If fixed income is overweight, sell enough of them to get back the target weight, putting the proceeds in cash.

If you work out the scenarios it is pretty clear that this will work in the way I suggested - when equity is down the cash pool falls but is repaid when equity rises. So this is simply a way of implementing what I said.

I assume that when Jamesd talks about "overweight" he is referring to the equity/bond portfolio and does not including the cash %....

There is a serious problem with this strategy: what happens when bonds have very poor returns? You should see that these rules assume that both equity and bonds have a better long term returns than cash and so when markets are high natural growth witll increase the % invested vs cash with the reverse happening in falling markets. However in the extreme case if bonds have zero growth, any growth in equity is passed on to cash by the overweight rule. This is not a good way to match long term inflation.


3) How do you manage the equity/bond portfolio?
Going back to my original point that simply investing in VLS60 is not satisfactory: The rules that Jamesd listed cannot operate if the fund manager is moving assets around behind your back - bonds and equities would never be overweight.


From (2) we need some more complete rules that include the possibility of moving cash to equity/bonds. However I do not see this as a simple % allocation as the more you can build up cash as a % in the good times allows more resiliance during the bad ones. However this must not happen to the extent that inflation matching is compromised.

jamesd

Whether the 300k is nominal (same numeric value) or real (adjusted for inflation, same purchasing power) affects the magnitude but not what to do.

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, 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?

You not only can do this, you're expected to. The SWR with 300k and 15 years to go is going to be significantly higher than the original 300k for 35 years.

You can restart the SWR calculation whenever you like, using your new shorter (or maybe longer) planning horizon. 4% rule is expected to produce large under-spending unless you live through the extreme bad times and while Guyton-Klinger does better it still won't ramp up fast enough for good times.

Finding that you've avoided an initial bad five then ten years would also be a good time to review upwards. So would one and two years after starting for someone beginning in the depths of a bull market.

Thrugelmir wrote: »

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

Depends whether it was or wasn't negative but recognising that the same money has to last less than half the time takes precedence.

[Deleted User]

lvader wrote: »

Not true if it's buying through a fund, I wouldn't even know how to buy short term gilts in a pension wrapper.

A “fund” could be anything charging between zero and 250 basis points. Just get a good fund.

Short term government bonds are cash equivalent. That is something supported by theory and empirically. If you think about it, a government obligation to pay in 12 months or so, isn’t all that different from a government backed savings account.

Anyone can buy bonds directly; you just need a lot of cash.

Long term bonds behave differently because 30 years is a long time and better (or worse) bonds with different rates come up.

jamesd

Deleted_User wrote: »

Not really. The value of many assets, such as stocks, is damaged far more and over longer term by deflation

Depends a bit on degree and cause though. The Swedish cause was a return to a gold standard at a too high value that caused a crash. Bad, but cash and bond real values will have increased substantially, reducing the impact on those in drawdown.

More typically, a recession would be a cause and that's not good for asset values.

On the irrelevant blip end of things are deflation due to say lower oil pries or good crop yields for a year or two.

It's notable that developed countries tend to have inflation targets moderately close to their economic growth. Seems sensible to me.

I expect that you already know this but others might find it interesting.

jamesd

lvader wrote: »

Not true if it's buying through a fund, I wouldn't even know how to buy short term gilts in a pension wrapper.

You'd pick a fund with that objective.

More generally, the weighted average maturity of the bonds held by a fund is one of the things that's routinely provided.

Cash or money market funds are alternatives. Anything in a money market fund can be expected to have relatively short maturities and their chance of capital loss is very low but not quite zero, going down by a low single digit percentage for one fund every ten years or less sort of frequency. Newsworthy on the odd occasions when it happens.

lvader

Past performance isn't a guide to the future. In the event of a proper gilt sell-off (like what happened in Greece for example) your capital will be at risk regardless of the fund.