Investing for Decumulation - Recommended Reading

green_man

Thrugelmir said:

A poor opening sequence of returns may never be recovered from. Permanent capital loss is the risk. Given we are at the early stages of the greatest global economic downturn since the industrial revolution.  I'm sure there'll be a fair few new books and theories written once the crisis has past. 

That’s not what the research shows though is it?  Even starting drawdown in 1929 gave better results in 100% equities than other strategies.

TBC15 said:

green_man said:

TBC15 said:

I’ve been retired for just over a year and didn’t change my investment strategy ( 100% market no bonds) coming up to retirement apart from building up a cash buffer of about 4 yrs of cash.

The remarks of BritishInvestor gave me cause to revisit the 4yr cash buffer comfort blanket part of my plan. I’m now reasonably convinced my supper king size is a bit over the top and a double (1-2ys expenditure) would be more appropriate.

I found this article very helpful https://edrempel.com/reliably-maximize-retirement-income-4-rule-safe/

Yes it’s an interesting article and seems to be based on similar research to  this:
https://investmentmoats.com/financial-independence/why-having-a-cash-buffer-does-not-increase-the-longevity-of-wealth-in-financial-independence/
...or at least they reach similar conclusions.

I have brought up this research several times in threads,  including the recent thread about how much cash to keep in retirement. Yet pretty much all the ‘experienced’ investors here don’t seem to take it on board and I’ve not heard one person say they will use a 100% equity (or even 90% or 80%) in retirement as they deem it too risky, despite  this research suggesting it is in fact less risky.

Apologies for not reading your contributions and not taking it onboard. One thing I took from the article was that products such as VLS x unless it’s 100% are a complete waste of time in this day and age. I’m sure they had a use when there was a line in the sand i.e. you must buy an annuity on this date, but those days are long since gone.

I think that VLS and similar still can play a role, but it’s more a psychological benefit that smooths the peaks and troughs and thus gives an improved chance that a punter can maintain their strategy, rather than panic 2yrs into a depression and sell up just guaranteeing a failed strategy.

Despite my posts above, I myself do not follow a 100% equities path. I think I have convinced myself that it would be the best approach but I couldn’t guarantee that I wouldn’t be one of the panicking lemmings in such a prolonged crash.   Instead my current plan is using a multi asset fund, cash and high risk smaller companies /emerging market funds (to offset the deadweight of cash). 

Thrugelmir

green_man said:

Thrugelmir said:

A poor opening sequence of returns may never be recovered from. Permanent capital loss is the risk. Given we are at the early stages of the greatest global economic downturn since the industrial revolution.  I'm sure there'll be a fair few new books and theories written once the crisis has past. 

That’s not what the research shows though is it?  Even starting drawdown in 1929 gave better results in 100% equities than other strategies.

TBC15 said:

green_man said:

TBC15 said:

I’ve been retired for just over a year and didn’t change my investment strategy ( 100% market no bonds) coming up to retirement apart from building up a cash buffer of about 4 yrs of cash.

The remarks of BritishInvestor gave me cause to revisit the 4yr cash buffer comfort blanket part of my plan. I’m now reasonably convinced my supper king size is a bit over the top and a double (1-2ys expenditure) would be more appropriate.

I found this article very helpful https://edrempel.com/reliably-maximize-retirement-income-4-rule-safe/

Yes it’s an interesting article and seems to be based on similar research to  this:
https://investmentmoats.com/financial-independence/why-having-a-cash-buffer-does-not-increase-the-longevity-of-wealth-in-financial-independence/
...or at least they reach similar conclusions.

I have brought up this research several times in threads,  including the recent thread about how much cash to keep in retirement. Yet pretty much all the ‘experienced’ investors here don’t seem to take it on board and I’ve not heard one person say they will use a 100% equity (or even 90% or 80%) in retirement as they deem it too risky, despite  this research suggesting it is in fact less risky.

Apologies for not reading your contributions and not taking it onboard. One thing I took from the article was that products such as VLS x unless it’s 100% are a complete waste of time in this day and age. I’m sure they had a use when there was a line in the sand i.e. you must buy an annuity on this date, but those days are long since gone.

I think that VLS and similar still can play a role, but it’s more a psychological benefit that smooths the peaks and troughs and thus gives an improved chance that a punter can maintain their strategy, rather than panic 2yrs into a depression and sell up just guaranteeing a failed strategy.

Despite my posts above, I myself do not follow a 100% equities path. I think I have convinced myself that it would be the best approach but I couldn’t guarantee that I wouldn’t be one of the panicking lemmings in such a prolonged crash.   Instead my current plan is using a multi asset fund, cash and high risk smaller companies /emerging market funds (to offset the deadweight of cash). 

The industrial revolution was a lot earlier than the 1929 depression. 

A very different interlinked world today as well. 

gm0

Not sure this link is "sufficient" or should be relied upon to support 100% equities in deaccumulation. (I agree 100% is fine as a *choice* of place to stand on the risk/return expected volatility curve if that's what you want and accept the volatility and time horizons AND constraints on withdrawls that may imply.  And it's generally totally fine in accumulation

I have done 100% equity for many years (all the way in accumulation) and only recently moved to 75% to support flexibility in what happens next - short term cashflow, wrapper and reinvestment changes.  But then my time horizon for those draws is "this tax year".  As I now enter deaccumulation.   I don't want to muck around with these mechanics without a "buffer" or be constrained on choice of timing by a correction of several years.  So for me, now, 1/4 portfolio "out of the market" and loss of that return for 6 months is worth it for ease of implementation.  But where will I go back to ?

It is all about what question you choose to ask.  Which gets complex fast in SWR debate if you start weaving in buffers, variable income etc. etc.  So the writer may not be "wrong" on their own specific assumption set and test design but that doesn't make it "sufficient".  I would draw attention to another pov.  I followed the same "appropriate" deaccumulation asset allocation argument through the lengthy McClung book (living off your money) and he draws a different conclusion again from backtesting WR scenarios for different retirement start dates, methods and portfolios and market data series.

He seems to find that above 70-80% the "worst of the worst" starting conditions and SORR start throwing in retirement failures.  For sure (as he notes) many or even most people in most cohorts would still died richer with 100% than 70% but *some* of them for some start dates start to get depleted along the way in retirement or have a dodgy 2nd half of a 40 year early retirement run.  Essentially he is saying that volatility driven bad equity sales from "(nearly) all equity" portfolios starts to hurt those portfolios too much on a rare set of occasions - even for sensible extraction approach and choices of WR.    It's a good if challenging read.

Now a buffer can help with that not selling the equities problem or a "fuse portfolio" not correlated and lower risk for a one off rebalance in a correction to buy equities - but then you don't REALLY have 100% any more.   All these ideas get done to death - monevator, ern etc. And nothing is *magic* but several things are helpful - some of the time. 

Backtesting on a single market series beyond a certain point you ARE looking at an over tuned data mining bias.
Clearly if you can push down the WR (large pot vs income need) all these problems largely disappear and the asset allocation decision is how much risk beyond what I need to take do I choose to.  It's only the combination of pushing the retirement length, the WR (up) to the maximum and the desired inheritance and risk asset % that this issue becomes more pressing and the failure levels creep from one offs to 1% or 5% or 10%.     For people getting into this territory I would say it is very helpful to do back testing (or read several trusted sources) about it. And to play with MonteCarlo Sim (using Flexible Retirement Planner) or otherwise to do some simulations for statistical distributions of returns journeys, inflation etc. to see how the selected plan seems to cope - how sensitive or "close to the edge" it actually is.   You won't be Taleb proof (Fat tails) but you will understand where you are on Normal.   Your maths needs to be up to it. My statistics was and arguably is *very* rusty

gm0

https://www.amazon.co.uk/Living-Off-Your-Money-Retirement/dp/0997403403/ref=sr_1_1?dchild=1&keywords=mcclung+living+off+your+money&qid=1596402406&sr=8-1

green_man

Good post gm0.

” Clearly if you can push down the WR (large pot vs income need) all these problems largely disappear” 

Yes, the strategies I was testing (using MonteCarlo, FIREcalc Etc) were based around 2.5 or 3% withdrawal strategies on a 40 yr horizon.  With 5his withdrawal rate, most strategies are 100% successful, but the higher equity options leave you with a much higher end balance.

Of course if you are ensuring you can cope with a 60% crash enduring 10 years then we will all be in very high cash positions.

Linton

Two issues I see with the 100% equity approach during deccumulation....
1) Maximum return is not necessarily one's major objective.  If you look at the research data you will see that a 60% equity portfolio does not result in a substantially lower SWR than 100% equity or substatially increase the risks.  It is only when you get to much lower %s does income and risk really suffer.    In my view the marginally smaller income is less important than the sleepless nights if your risk acceptance is tested with a 2008 type equity crash affecting 100% of your life-savings.  In any case if you have survived the frst few years of retirement without a major cash you will be able to safely take a higher income than originally planned.
2) Flexibility is important.  WIth a 40% cash/bond/etc buffer one can happily book a one-off round the world cruise for next year without worrying what may happen to one's investments in the meantime.

[Deleted User]

100% equity when approaching or passed retirement is nuts in my book... It comes from not having had a long bear for quite a while and not understanding risk. 2008 and 2020 had V shaped recoveries. Not sustained enough for a real lesson. Japan 1990s or US 1970s were different but we haven’t personally experienced that kind of market. 

Now... If you have a large portfolio, like over 10M, then knock yourself out and put it all in equities. Then you’ll be OK under most scenarios regardless of the sequence of returns. 

In general,  one needs a clear set of rules. This is the approach I like. Guarantees you won’t run out of money. https://www.bogleheads.org/wiki/Variable_percentage_withdrawal

BritishInvestor

gm0 said:

Not sure this link is "sufficient" or should be relied upon to support 100% equities in deaccumulation. (I agree 100% is fine as a *choice* of place to stand on the risk/return expected volatility curve if that's what you want and accept the volatility and time horizons AND constraints on withdrawls that may imply.  And it's generally totally fine in accumulation

I have done 100% equity for many years (all the way in accumulation) and only recently moved to 75% to support flexibility in what happens next - short term cashflow, wrapper and reinvestment changes.  But then my time horizon for those draws is "this tax year".  As I now enter deaccumulation.   I don't want to muck around with these mechanics without a "buffer" or be constrained on choice of timing by a correction of several years.  So for me, now, 1/4 portfolio "out of the market" and loss of that return for 6 months is worth it for ease of implementation.  But where will I go back to ?

It is all about what question you choose to ask.  Which gets complex fast in SWR debate if you start weaving in buffers, variable income etc. etc.  So the writer may not be "wrong" on their own specific assumption set and test design but that doesn't make it "sufficient".  I would draw attention to another pov.  I followed the same "appropriate" deaccumulation asset allocation argument through the lengthy McClung book (living off your money) and he draws a different conclusion again from backtesting WR scenarios for different retirement start dates, methods and portfolios and market data series.

He seems to find that above 70-80% the "worst of the worst" starting conditions and SORR start throwing in retirement failures.  For sure (as he notes) many or even most people in most cohorts would still died richer with 100% than 70% but *some* of them for some start dates start to get depleted along the way in retirement or have a dodgy 2nd half of a 40 year early retirement run.  Essentially he is saying that volatility driven bad equity sales from "(nearly) all equity" portfolios starts to hurt those portfolios too much on a rare set of occasions - even for sensible extraction approach and choices of WR.    It's a good if challenging read.

Now a buffer can help with that not selling the equities problem or a "fuse portfolio" not correlated and lower risk for a one off rebalance in a correction to buy equities - but then you don't REALLY have 100% any more.   All these ideas get done to death - monevator, ern etc. And nothing is *magic* but several things are helpful - some of the time. 

Backtesting on a single market series beyond a certain point you ARE looking at an over tuned data mining bias.
Clearly if you can push down the WR (large pot vs income need) all these problems largely disappear and the asset allocation decision is how much risk beyond what I need to take do I choose to.  It's only the combination of pushing the retirement length, the WR (up) to the maximum and the desired inheritance and risk asset % that this issue becomes more pressing and the failure levels creep from one offs to 1% or 5% or 10%.     For people getting into this territory I would say it is very helpful to do back testing (or read several trusted sources) about it. And to play with MonteCarlo Sim (using Flexible Retirement Planner) or otherwise to do some simulations for statistical distributions of returns journeys, inflation etc. to see how the selected plan seems to cope - how sensitive or "close to the edge" it actually is.   You won't be Taleb proof (Fat tails) but you will understand where you are on Normal.   Your maths needs to be up to it. My statistics was and arguably is *very* rusty

Monte Carlo can overstate the tails.
https://www.kitces.com/blog/monte-carlo-analysis-risk-fat-tails-vs-safe-withdrawal-rates-rolling-historical-returns/

cfw1994

TBC15 said:

I’ve been retired for just over a year and didn’t change my investment strategy ( 100% market no bonds) coming up to retirement apart from building up a cash buffer of about 4 yrs of cash.

The remarks of BritishInvestor gave me cause to revisit the 4yr cash buffer comfort blanket part of my plan. I’m now reasonably convinced my supper king size is a bit over the top and a double (1-2ys expenditure) would be more appropriate.

I found this article very helpful https://edrempel.com/reliably-maximize-retirement-income-4-rule-safe/

AnotherJoe said:

Same as TBC15, eg no change.

Just curious: if either of you were in drawdown mode at the start of this year, did you pause if from Feb/March for a bit and use up some cash reserves instead?   Or perhaps even invest some of them during the market correction to counter any withdrawals?
& if not.....what are those reserves for?

Thrugelmir said:

A poor opening sequence of returns may never be recovered from. Permanent capital loss is the risk. Given we are at the early stages of the greatest global economic downturn since the industrial revolution.  I'm sure there'll be a fair few new books and theories written once the crisis has past. 

In some ways, I feel anyone retiring over the next 1-2 years might benefit from the likely poorer returns now, for precisely this reason.  Any thoughts?

Of course we are still amid the pandemic, and markets may react badly for a while, perhaps even a few years.  I imagine if anyone is drawing down, now might be the time to use those cash reserves up.

That said, I appreciate many funds are up on the start of the year.  
The world we live in now is very, very different to that of even 20 years ago, never mind 40-100, where historical comparisons are made.  Decisions can be made much faster (business, investing), and where industries suffer, others will benefit.  
Predicting the future is tricky stuff!

On the original topic: sorry to hear of your ill-health, OP.  

On the topic of reading matter, I like that if you go to https://www.kroijer.com/, you can listen to Lars explain things.  Made a lot of sense to me, worthwhile taking time there.   And all for free - this is MSE, after all!

gm0

Very interesting article on MC overstating tails due to long term return mean reversion.  I think MC and RetirementPlanner senstivity tab + heatmap are excellent not for ultimate predictive accuracy around fat tails or anything else but to bring to life variable income and the affect of SORR when drawing down each year i.e. the "spread of possible outcomes".  It's tunable as you can choose the standard deviation range of interest.   But it's the "range of possibilities" angle that's helpful.

I think you can get lost in the artificial precision of modelling a single average return in Excel flipping it low/medium/high and mentally going on a "this is what will happen" journey when it really isn't anything other than a guess at an average central case in the middle of a wide range of possible outcomes and more importantly sequences.  And of course mean reversion of long term returns (40 years say) doesn't save you from a bad sequence when forced to sell the wrong assets for income over a prolonged early period of retirement by poor (over aggressive) portfolio design.

I started thinking about this a couple of years back with what I now see as a simplistic view:
Age 55 planned retirement. 
So a 40 year investment horizon.
Long term income need + inflation risk. So lots of equities.
Stay invested = 100%. 

But that was before I had understood SORR and why I need to refine that plan to support both a desired cashflow and a desired level of calm in the two (or more) corrections/crises that will arise during that 40 year period.