Approaching Retirement - Managing Sequence of Returns Risk

DairyQueen

Mr DQ retires at the end of this year - sooner if Covid-19 kills his self-employed income. There are plenty of educated resources (including this forum) warning against the dreaded sequence of returns risk. Looks like our cohort may be on the sharp end.

Thanks to this forum I had factored in the risk during pre-retirement planning and, over the last 15 months, have (hopefully) positioned our portfolio for the worst case. With hindsight I should have positioned sooner - very lucky to have completed early this year - as it's looking likely that the resilience of our portfolio will be tested over the next months/years. The intention was to sit tight during market falls so this is also a test of my resilience.

This market drop is also a learning curve and I am interested in others' strategies and experiences. For those in a similar position (approaching or recently retired):

- Have you adopted a withdrawal strategy? If so, which one? Why?
- What percentage allocations did you choose? Splits by asset type? Regions? Themes? Passive/Active? Others? Why?
- When did you begin repositioning (one year out? two years? five?). Or have you failed to do so? If so, what are the consequences of the delay (if any) if this is indeed the beginning of a bear market?

We are fortunate to have sufficient guaranteed income (DB/SP) to cover all non-discretionary expenses once all are in payment (in 5 years), so I chose to go overweight cash (pension-wrapped for drawdown in 1-5 years) and high equities for the 5+ year investment timeframe.

There are two sub-portfolios as our tax positions are different and I will frontload drawdown more than Mr DQ. We have an unwrapped cash buffer sufficient to suspend drawdown from 2025 onward for 3+ years. Mr DQ's portfolio is more volatile (higher risk) as his drawdown requirement is low and can be suspended indefinitely. My portfolio is entirely passives and a higher fixed interest allocation than Mr DQ, whilst Mr DQ's riskier portfolio is higher equities than mine and consists of core passives and peripheral actively managed funds (small companies by region plus a smidge of wealth preservation and bonds).

In early Feb we were collectively overweight UK, underweight US; overweight equities/cash, underweight bonds. Home bias plus UK CAPE values looking reasonable, and concern at US CAPE, may/may not be the wrong call. The pricing and returns on investment-grade bonds had changed because of QE, and corporate bonds were looking as risky as equities. Again, perhaps the wrong call. Time will tell.

So, before the current falls, our collective portfolio:

-  74.45% equities,  7.66% FI,  16.48% cash,  1.41% WP.

-  69.47% passive, 13.25% active, 0.80% single shares, 16.48% cash.

- Cash 16.48%,
  China 1.94%
  Emerging 4.21%
  Europe (x UK) 8.79%
  Global - 12.7%
  Japan - 5.64%
  Pacific Asia - 2.59%
  UK - 15.28%
  USA - 32.37%.

As of Saturday 7th March we were -6.9% over one month. As of now (pretty meaningless) we are -10.3% over one month but it remains to be seen how things will pan-out when US markets do their thing later. No idea how things will progress this week. 

How does our experience compare to others at a similar stage?

shinytop

Fairly similar to you.  Both Mrs S and I retired last August.  We're fortunate that DB pensions cover about 2/3 of our needs an all essentials as from next month.  In terms of non-DB, we're about 50-25-25 equities-bonds-cash. Most investments are in multi-asset passive-type ACC funds; slightly UK overweight overall.  Depending on big one-offs, we have 3-5 years cash so not overly concerned yet. As of middle of last week, non-DB was down 3.8%; obviously more now. 

One small consolation is that I was very slightly over LTA; not so now so I'll probably do another crystallisation to bank the lower %. I'm not planning on changing my investment investment strategy at the moment.  

Audaxer

Overall your portfolio looks quite high in equities to me, but it depends on your risk appetite. At first I thought 16.48% in cash doesn't look overweight to me, but if included in the cash buffer that covers you to 2025 and then 3 years after, then you do seem to have enough cash for all eventualities. Does the 16.48% cash include money set aside to put to your upgrade to the possible dream house you recently mentioned?

Thrugelmir

When you've lived through the Opec oil crisis, Black Monday, Black Friday, Nikkei Crash, Asian Debt crisis , Dot Com Boom, GFC etc etc. You'll harden up. Just take in your stride and make considered personal judgements. There's no book that's going to guide you through the volatility. Primarily don't lose your capital permanently. 
Afterwards is the time for reflection and digestion. When there's far more analysis that can be reviewed. 

NedS

If you are heavy in equities and are suffering large losses, and you are heavily dependent upon a drawdown strategy, I would be looking at any way possible to delay retirement for 12 months if you are able. We are now at 20% market drops, so that puts us just about into bear market territory. It could be an oversold situation with recovers or we could be on the start of a bear market and recession. If you have the ability to continue working that may prove to be a useful strategy to prevent/minimise starting retirement on the back foot.

Username999

Far too complex for me!!
I recently retired and hope the cash and natural yield of my portfolio of shares is adequate for my needs.
Good luck. 

[Deleted User]

Asset allocation depends on individual circumstances. If you have a really large pot then you can afford lower allocation to FI. Conversely, if you achieved exactly the amount you need and can’t tolerate a 5-year drop then FI allocation should be higher; at least 40 or 50%. 

Other than that, I would endeavour to automate decision making and remove human input into it. Spreadsheets tend to do a better job than our emotions 

MarkCarnage

Not dissimilar asset allocation. On a 'look through basis' a bit more cash, bit more sovereign bonds and gold (these last two from the WP funds). Virtually no credit (corporate bonds) save one smallish niche holding. Same rationale as you. Credit has started to bomb out too. 
Equities are all active, so unlike you there. I tend to think of my equity exposure by style rather than geography. It's quite 'bar belled' between growth and equity income, with some core global too, and some private equity. Former has very little UK exposure, latter has quite a lot. 
Main income from DB pension. Funding additional requirements from tax free cash from SIPP as it moves into drawdown, and then natural yield from that portfolio when it is in drawdown. Will use ISA portfolio for ad hoc funding perhaps in future, but no immediate requirement. 

NedS

One thing I've noticed with corporate bonds over the last 2 weeks, is they've been slow to react. I think my high yield corporate bond fund dropped 1.2% over the last 2 weeks whilst equity markets crashed more than 10%. My other more conservative corporate bond fund was flat at 0%, so there seems to be a lag to market reaction giving plenty of time to react bail out if markets go into free-fall.

MarkCarnage

NedS said:

One thing I've noticed with corporate bonds over the last 2 weeks, is they've been slow to react. I think my high yield corporate bond fund dropped 1.2% over the last 2 weeks whilst equity markets crashed more than 10%. My other more conservative corporate bond fund was flat at 0%, so there seems to be a lag to market reaction giving plenty of time to react bail out if markets go into free-fall.

That's true, but catch up going on now. Liquidity is also never as good in credit as equities, and has worsened in recent years due to capital constraints on market makers, so a bit of selling might be exacerbated by that. Junk debt is already performing like equities, not helped by the oil price fall, whilst the CDS market has moved significantly today even for investment grade.....it's coming....
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Thrugelmir

NedS said:

One thing I've noticed with corporate bonds over the last 2 weeks, is they've been slow to react. I think my high yield corporate bond fund dropped 1.2% over the last 2 weeks whilst equity markets crashed more than 10%. My other more conservative corporate bond fund was flat at 0%, so there seems to be a lag to market reaction giving plenty of time to react bail out if markets go into free-fall.

BOE continues to mop up liquidity in the market under the Asset Purchase Facility.  With little new issuance a diminishing pool of assets.