Approaching Retirement - Managing Sequence of Returns Risk

[Deleted User]

This is from Canada, but could be interesting for you.  For a number of years they have been tracking “the plight of a year 2K retiree”, using investment vehicles available at the time. 

The assumption is that 4% is withdrawn annually and that the retirement will last 30 years. 

The only portfolio which might be in the danger of failing is 100% TSX (Canadian stocks). The growth portfolio also looks bad. The best by far? Real Return Bonds (Canadian TIPs). Does not mean this would be the case for other retirement dates. 

https://www.financialwisdomforum.org/forum/download/file.php?id=4668

cfw1994

DairyQueen said:

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?
<snip>
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?

Ahh, we are at a broadly similar stage.   Very well aware that this is NOT a precise science, and in some ways would be duller if it was (heck, where would we spend out idle hours reading and posting ).
Not sure precisely when I will jack it in: the current drop has made me reassess a little, and actually as one approaches that point, I find one really enjoys the work a lot more!
I did get itchy feet mid-Feb, to the point I crystallised another lump of pension and tweaked my "main pot" portfolio to slightly de-risk: turned out to be almost mystical foresight as things turned out.....about 2 days later was the peak!

NOT yet figured out detail of withdrawal strategy.  My goal is to not need to touch any for at least 12 months & let the crystallised lump continue to grow (likely take the sub-tax band 12k).
About half our funds are now outside my main pension, and the TFLS is accessible through bonds and some investments.
Allocations: well, I suspect I've popped these up before, but I now have 50% in two 'riskier' funds (which have fallen 16% since Feb 21st peak - booo!) and the other half in 'less-risky' funds (up 4.5% since that 'peak' - hurrah!).
From least-risky to most:

• Aviva Pension Pre-retirement Fixed Interest 20.0%
• Aviva Pension BlackRock Over 15 Year Corporate Bond Index Tracker 15.0%
• Aviva Pension BlackRock Over 15 Year Gilt Index Tracker 15.0%
• Aviva Pension BlackRock World ex UK Equity Index Tracker 25.0%
• Aviva Pension North American 25.0% 

I've been keeping an eye on things for about 16 years, to be honest....with some tweaking along the way: perhaps every 8 months for the past couple of years, & monitoring it VERY closely for the past 6 months (yes, I know I shouldn't!)
That said, we have other funds outside this pot: some with Intelligent Money, various other policies, some bonds, etc.
Overall, our monies are around the following:

• 12% Cash (bonds/ISAs)
• 17% Stock outside pension (mostly ISAs, some US work stock)
• 27% "Safe" pension funds
• 27% "Riskier" pension funds
• 17% Other (mostly DB pension funds (which won't kick in for a few years...)

Consequences of delay? 
Well, actually, my main concern has always been the 'sequence of returns risk'.   Actually having a "decent dip" right at the start probably helps, rather than 6 months after quitting!   
How low it goes and how long it loiters along the bottom remains to be seen, of course: none of us have that crystal ball!
Main focus (mentally) for us now is how to spend the time after stepping away from the daily role.   Plenty of thoughts & ideas....health, relaxation, tasks around the house (& a holiday place we have) are right up there.....and one elderly relative who spent many hours in A&E Resus last week firmly reminded me that money isn't everything.  Not a great experience (back out now, pleased to say, but looked very touch and go when I got there) 
Not sure whether this helps, but thanks for letting me post my thoughts, it helps me 

MarkCarnage

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.

Yes, they are in a 'perfect storm'. But the Donald says it will all be fine.....so why are we worried? 

Thrugelmir

MarkCarnage said:

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.

Yes, they are in a 'perfect storm'. But the Donald says it will all be fine.....so why are we worried? 

Times like this you realise that the language is similar. But the culture is totally different. 

MarkCarnage

Deleted_User said:

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. 

Junk/HY is a subset of corporate bonds essentially, more properly called sub-investment grade. There is a reason for the term 'junk' as the default rates take an inflexion point upwards below BBB rating (the cut off for investment grade). Many will exhibit equity like performance currently, or even worse....in that a well capitalised equity will very probably recover, whilst a junk bond might not. 
Inflation linked bonds are a decent diversifier generally, though at present this looks like a deflationary shock, so it's going to be the credit quality element (sovereign debt) that's driving things. TIPS have done better than UK linkers in part because of the issues around RPI which has hung over linkers for some months now. 

MarkCarnage

The best by far? Real Return Bonds (Canadian TIPs). Does not mean this would be the case for other retirement dates. 

I expect that this would be the same for UK ILG or US TIPS. Essentially you would be holding the building block investments of an index linked annuity.  Doesn't mean that you should hold your portfolio 100% in these right now though! As part of a diversified portfolio, yes. 

MarkCarnage

Thrugelmir said:

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. 

Yes indeed, but my point was that there was still very significant issuance last year. Also, be interesting to see how sustained the CB programmes are in future. The Fed one isn't targeted at credit now, rather the short end of Treasuries, and was intended to sort out repo market problems last year, ostensibly at least. ECB have come and gone in the market in last few years. Either way, it's probably been a helpful tailwind, but won't be there for ever, and won't help HY. 

[Deleted User]

MarkCarnage said:

The best by far? Real Return Bonds (Canadian TIPs). Does not mean this would be the case for other retirement dates. 

I expect that this would be the same for UK ILG or US TIPS. Essentially you would be holding the building block investments of an index linked annuity.  Doesn't mean that you should hold your portfolio 100% in these right now though! As part of a diversified portfolio, yes. 

I think it was very specific to those retiring in 2000. A bad decade for stocks was coming up and inflation-linked bonds were undervalued (based on hindsight). Still, a real scenario. TIPs are not quite like annuities; for one thing they are liquid and the underlying value responds to market demand around the clock. 

MarkCarnage

TIPs are not quite like annuities;

Hence I said that they are the building block investment for them.....:)  Life companies have a portfolio of yield assets for that book, mix of gilts, ILG, long IL lease property, credit including private credit and infra. 

green_man

To OP.   I am in a similar position to you and I’m not quite sure what you are worried about.  You appear to have around 10 years of cash if needed!  I have 3-4 years of cash and would assume that sometime within a 3-4 year span I could sell some shares such that I was not near the bottom of the market.  

My own split will be somewhat simpler with about 70% in HSBC Balanced Global Strategy.  10% FTSE250 tracker, 10% global smaller companies. 10% Cash.

My main consideration is whether to include a wealth preservation trust for a couple of years of drawdown income (along the lines of PNL/CGT) and if so whether to take from the cash allocation or equities (or likely a bit of both).