Approaching Retirement - Managing Sequence of Returns Risk

Thrugelmir

MarkCarnage said:

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. 

Bond maturities and income received are by default to maintain a level holding.
US companies used bond issuance to fund share buybacks. Perhaps will prove not to be such a good idea in the medium term. 

DairyQueen

green_man said:

To OP.   I am in a similar position to you and I’m not quite sure what you are worried about.  

Not worried, just interested in others' experiences and perspectives.

With hindsight, I took a risk in delaying increasing cash allocation. Lucky escape given that the process was only completed in Feb. 

bostonerimus

I think the OP is just fine and can sit tight for a recovery with the DB pensions and the cash and bond allocation. Their planning has been good so now just follow through and as an insurance policy cut back on unnecessary spending.

Going into this down turn I was 75/25 with around 3 years spending in cash and DB pensions and rent covering my expenses. There might be some rebalancing to do at the end of the month, but other than that I see no reason to do anything else.

[Deleted User]

Thrugelmir said:

MarkCarnage said:

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. 

Bond maturities and income received are by default to maintain a level holding.
US companies used bond issuance to fund share buybacks. Perhaps will prove not to be such a good idea in the medium term. 

I agree that debt could be a problem for the companies. Note that in the financial industry Debt to Equity ratio in the US is 2. In Britain it’s 6. 

OldMusicGuy

I retired 18 months ago with a large DC pension pot and no DB pensions (my wife has a small DB pension). I was very worried about sequence of returns risk in the early years of retirement so I set up my portfolio to protect against just this type of occurrence. I hold a lot of cash (in HL, so it costs nothing) and spread the rest across 3 multi-asset funds with an overall 50/50 bond/equity split. As of today, my total DC pot is down just over 5% from its peak in February and the invested part is down just under 7%.

So the portfolio is performing just as I hoped but as I am in the decumulation phase early in retirement, I am all about minimising downside rather than maximising upside.  

DT2001

OP, can I ask why you hold so much in cash? My M-in-L had her portfolio tweaked a few years back to generate more natural income (to move money out of her estate using the surplus income rules) and this has produced steady returns so I was looking to adopt this approach when we retire. We have small DB’s to give us guaranteed income plus other assets providing variable amounts. All told we will cover necessary income and have a variable amount for ‘desired’. Our capital I hope will be less vulnerable to a bad run of returns but would be more heavily invested than holding years of cash.

I am still tweaking my strategy so this thread is most interesting. Thank you!

I am 10% down on the peak but 1% up on 12 months ago according to my platform.
My wrapped investments are about 60% equities, 10% of their value in cash outside wrappers plus a foreign holiday property (exchange rate risk). 

We are self employed, ex Company directors and have been through a number of ‘bumps’ on various investments so look at this as something to be worked around. The early years of retirement are when we plan to be most flexible as we will have more options available to cope with a poor sequence of events. 

DairyQueen

DT2001 said:

OP, can I ask why you hold so much in cash? 

Mr DQ is also self employed (company director) so we hold retained dividends in cash sufficient to provide income until he retires should Covid-19 put a spoke in our retirement plans this year.

We are holding sufficient wrapped cash to cover front loaded drawdown for the first 5 years of retirement (from April 2021). Mr DQ has deferred taking his main DB but it plus another small DB and 2 x SPs will provide sufficient income to meet all of our expenses by 2025. Other than front loading, the balance of our SIPPs will provide extra discretionary income. We are very lucky as this will be cherries on the cake. I also need to drawdown in order to use my personal allowance before SP kicks-in. 

We also have unwrapped cash sufficient to fund additional cost of our dream retirement home and other short-term spending plans, plus emergency fund and slush fund for large capital items. We have an additional cash buffer to provide cherries on the cake when the markets are down.

OH needs to keep an eye on tax as he is in danger of paying HRT in retirement and breaching the LTA. The latter is less of a concern since the recent market drop. Every cloud has a silver lining.

We chose to maintain a high equity allocation in the lead-up to retirement as we knew that we wouldn't need to sell if markets fell. We are unlikely to sell equities for at least another 8 years.

IHT could be an issue for me so that's helped by retaining pension-wrapped investments.

Our challenge is a first world problem - minimising tax. I belatedly began looking at retirement income and was amazed at how much we could sustain. We have always been savers and workers and have used pensions as much as possible, Despite a few tough years recently we are planning for a starting income of net £52k-£55k. Much of that will be provided by drawdown in the early years thus the high cash allocation in our pensions at the start of retirement. We don't need the portfolio to produce yield so the rest can be allocated to longer term growth.

gm0

DQ - I was caught by recent events while not yet fully setup quite how I want - for reasons too long to go into here.  Now need to navigate in these uncertain times.  With an employer scheme trading is a bit of a rubber handle you pull and something happens in a day (or two or three) and no limit orders supported.  With daily swings at the 10% level this is a tad vexing. So sitting on hands.

I was and am running in age 50 - 55 with 100% global ethical equities @0.07 drag (because I planned to be in drawdown for up to another 40 years and didn't have a truly fixed start date and zero intention to buy an annuity).  Have been struggling with bonds purchase.  Very averse to buying funds with lumps of lower quality US corporates in (this was pre-corona) as anticipating a problem with this area down the trail.  Still working on the what to buy for that component question beyond cash holdings.

I went into the correction at around 90/10 portfolio wide (10 is cash) - the cash buffer a good deal lower than it would have been had preparations been completed using some TFLS but is still enough for a few years. >3 <5.

I imagine this is reading like a slightly odd mix of aggression and caution.  Given market recovery timescales I feel a bit cash light but not in a state of panic about it.  I can probably bridge to 5 with some family juggling.  Still short for an investment perspective but not completely off the wall.

Emerging drawdown plan:

Asset allocation about 70% equities overall.  I am convinced by the backtesting arguments 40<x<70 i.e. that more than circa 70 = more volatility and risk of failure so hotter than that not real world better in deaccumulation.
I don't need to run that hot purely for income but can likely afford to do so due to other non-correlated capital medium term and then SP and spouse pensions later (still saving into those).

I also planned to put the S&S ISA and cash buffer deposits into something less aggressively correlated with core equities holding as a one time "fuse portfolio" against SORR.  Planned to set this up with TFLS for LTA management purposes and then address IHT.

My overall takeaway around current volatility was that with this plan approaching 4/5 of it was going to happen to me anyway at least twice in retirement. And I need to be comfortable with that or change the plan to something less aggressive.
Provided we are still in the domain of "known risk" from past / synthetic failure markets (McClung) then that's OK. 

As to performance data - down 20% from February peak to unit prices around 24/3 this week.

But the fund is still up about 3.5% from when I switched into it (Feb 2018).
Not drawing so while not great news this is not a disaster either (or at least not yet). 
Having seen the fund value roughly cut in half before (in a UK FTSE All Share tracker at the time as I was 89-2018). 

Proposed drawdown method

Taken from the McClung book - I plan to use Extended Mortality table calculation of a variable sustainable drawdown income.  But the actual draw for income is to be tax managed to avoid missing out on annual income tax allowances.  (avoid LTA @ 75 BCE issues).  LTA is not an issue now although it was in February but it will return as and when markets recover.

Ultimately still feeling blessed by a mix of prior career good fortune, effort, prudence and opting for deferred gratification. Whatever comes of current turmoil we'll be OK.  Other people have a lot more pressing concerns.

quirkydeptless

DairyQueen said:

We are holding sufficient wrapped cash to cover front loaded drawdown for the first 5 years of retirement (from April 2021).

How are you holding the wrapped cash? Are you getting any interest on it?

DairyQueen

quirkydeptless said:

DairyQueen said:

We are holding sufficient wrapped cash to cover front loaded drawdown for the first 5 years of retirement (from April 2021).

How are you holding the wrapped cash? Are you getting any interest on it?

SIPP-wrapped and they have cut interests rates from paltry AJB (0.15%) to 0% (from 10 April) and already 0% (HL). We decided to take the inflation hit rather than risk money market funds or (gulp) bonds.