Approaching Retirement - Managing Sequence of Returns Risk

MarkCarnage

I was talking global credit. £ issuance has become a smaller part for various reasons. 2019 was a record year for global issuance. 

Thrugelmir

MarkCarnage said:

I was talking global credit. £ issuance has become a smaller part for various reasons. 2019 was a record year for global issuance. 

ECB started a Corporate Bond purchase programme in June 2016. The Fed and BoJ both have programmes too. Central Banks are pro-active market partcipants. All part of the QE experiment. 

Mothman

Recently retired and will commence drawdown in April, portfolio is approx 55/35/10 equities/bonds/cash. Intention is to take 2.7%+CPI though obviously don't know whether future returns will be sufficient to meet this. Fortunately this year's drawdown was moved to cash before the current falls and I'm hoping my cash buffer won't be needed next year, but time will tell.

DairyQueen

Audaxer said:

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?

The 16.48% wrapped cash is ring-fenced for the first 5 years of drawdown income. If I include our unwrapped cash then the cash percentage more than doubles. We have spending plans for a reasonable chunk of that, including the dream house, plus it includes the 3-year cash buffer required to maintain an ideal income level should we need to suspend drawdown.

We don't plan to sell equities for at least 8 years and can suspend drawdown indefinitely if necessary. Thus the high equities. 

DairyQueen

shinytop said:

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.  

Similar to Mr DQ. He crystallised his SIPPs last year as he was flirting with an LTA breach. This drop has allayed that concern for the foreseeable.

DairyQueen

MarkCarnage said:

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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I have just read an article on the impact on US frackers. Author states that not only is their viability closely linked to the oil price but they are heavily indebted. Seems that a large %age of that debt falls due this year and they may struggle to renew in a tightening credit market. Double whammy.

DairyQueen

Thrugelmir said:

ECB started a Corporate Bond purchase programme in June 2016. The Fed and BoJ both have programmes too. Central Banks are pro-active market partcipants. All part of the QE experiment. 

How much ammunition do they have in reserve after more than a decade? This may prove to be a very costly experiment.

jsinc

Parent 3-4 years from retirement. DC portfolio is 77% Bonds, 22% Equities, 1% Cash.

About half allocated for annuity to meet essential expenses with DB pension and deferred State pension. Modelling annuity provider portfolios and longevity adjustments is too complicated, so simplified with mix of long- and all- bond fund to partially hedge against annuity rate changes via weighted average duration.

The rest approx 51% equities, 47% bonds, 2% cash. New contributions + tax relief will remain as cash to meet TFLS if required. On retirement total minus annuity allocation minus any cash pencilled in as 40:60 equities:bonds

Discretionary income will come from DC drawdown, 60:40 S&S ISA drawdown, retail bond liquidation and downsize funds drawdown minus cash buffer from TFLS or house monies. Net equities:bonds excluding cash increase from around 45:55 to 60:40 over retirement years as available cash spent and transferred from savings ladder to S&S ISA. But 75% of funds may initially be cash from existing savings + downsizing so equity allocation may be higher. And there's mixed research and opinion on whether to increase equity exposure post retirement, so may just come down to their risk tolerance over time. In reality I think a lot of potential income could prove surplus to requirements and end up re-saved or re-invested.

Funds are passive gilts (FTSE indices) and passive global equities. ISA 60:40 is Vanguard LS. If yields keep dropping and inflation remains low non-annuity bond gains may be locked in and moved to cash. The numbers work with leeway so focus now is tax relief and preservation, not further compounding. Opinion of an IFA closer to retirement may change things later.

Thrugelmir

DairyQueen said:

Thrugelmir said:

ECB started a Corporate Bond purchase programme in June 2016. The Fed and BoJ both have programmes too. Central Banks are pro-active market partcipants. All part of the QE experiment. 

How much ammunition do they have in reserve after more than a decade? This may prove to be a very costly experiment.

Reliance on and an addiction to Central Banks monetary policies isn't healthy. With banks balance sheets deleveraged. Time for politicans (as in Governments) to set up to the mark and make decisions instead. No one said that exiting was going to be painless. Perhaps the current crisis is the trigger that was required. 

[Deleted User]

With regards to bonds, the quality is very important. The only reason I hold bonds is for times like this. So, no junk bonds (they tend to drop during a downfall). No prefs (same thing). Corporate bonds also fall under pressure whenever bankruptcy becomes a real prospect. Mostly hold government bonds, a lot of them TIPs (inflation protected). Year to date return on my TIPs fund is 8%. Psychologically helps to see something in green. And VERY helpful when dealing with the sequence of return risk.