Investing for Decumulation - Recommended Reading

Audaxer

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.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

TBC15

cfw1994 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/

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!

Yes I was in drawdown £1150 PM. Even if the market had gone through the floor I’d keep drawing the pension down. The only change I think I would make in the event of complete Armageddon is the monthly pension cash would get re invested outside of the pension.

TBC15

Audaxer 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.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

BritishInvestor

Audaxer 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.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

I think it's important to clarify what "high risk" is. For some, it's not taking enough equity exposure and running out of money. For others, they see high risk as their portfolio falling too far during periods of turbulence.
Regarding a poor series of returns, we already have historical returns and can perform this analysis, unless you are suggesting modelling something worse than we have seen previously/have data for?

[Deleted User]

TBC15 said:

Audaxer 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.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

Keep in mind that simulations are based on a ~100 year dataset (usually), that the monetary system is very different now from what it has been for most of the dataset and that you might need your pot for the next 40. That is a long time and you can easily see events happening that are different from the preceding 100 years. 

I am not saying that simulations are completely useless but they give people false confidence. Perhaps the future will be exactly like the past but the small chance that it won’t is exactly what a retiree needs to plan for. 

Linton

Deleted_User said:

TBC15 said:

Audaxer 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.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

Keep in mind that simulations are based on a ~100 year dataset (usually), that the monetary system is very different now from what it has been for most of the dataset and that you might need your pot for the next 40. That is a long time and you can easily see events happening that are different from the preceding 100 years. 

I am not saying that simulations are completely useless but they give people false confidence. Perhaps the future will be exactly like the past but the small chance that it won’t is exactly what a retiree needs to plan for. 

I agree with this, and would go further.  Data on the past 100+ years is the best we have but to treat it as any more than a useful random set of potential test problems of the type investors may have to face is assigning it more relevence than is justified.  The chance that the future is not like the past isnt small, it's a virtual certainty. We hopefully are not going to have 2 world wars again and if we are there may be little point in planning to survive them with our wealth intact.  Does the rise of automation and AI really correspond in some useful way to the rise of oil? To use historic data to derive meaningful values of % chance of future success is just playing with numbers. 

We have to accept we dont know what the future will bring.  The best we can do is to mitigate against some mainly shorter term eventualities and trust in the long term rise of the global markets.  If we cant do that one can ask whether it is sensible to invest in the first place.

BritishInvestor

Linton said:

Deleted_User said:

TBC15 said:

Audaxer 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.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

Keep in mind that simulations are based on a ~100 year dataset (usually), that the monetary system is very different now from what it has been for most of the dataset and that you might need your pot for the next 40. That is a long time and you can easily see events happening that are different from the preceding 100 years. 

I am not saying that simulations are completely useless but they give people false confidence. Perhaps the future will be exactly like the past but the small chance that it won’t is exactly what a retiree needs to plan for. 

I agree with this, and would go further.  Data on the past 100+ years is the best we have but to treat it as any more than a useful random set of potential test problems of the type investors may have to face is assigning it more relevence than is justified.  The chance that the future is not like the past isnt small, it's a virtual certainty. We hopefully are not going to have 2 world wars again and if we are there may be little point in planning to survive them with our wealth intact.  Does the rise of automation and AI really correspond in some useful way to the rise of oil? To use historic data to derive meaningful values of % chance of future success is just playing with numbers. 

We have to accept we dont know what the future will bring.  The best we can do is to mitigate against some mainly shorter term eventualities and trust in the long term rise of the global markets.  If we cant do that one can ask whether it is sensible to invest in the first place.

I'm not sure anyone is suggesting the future is like the past. What is suggested as a reasonable starting point is that someone planning for retirement now doesn't have a worse outcome than the worst period over the last 100+ years. Do you think that is unreasonable?

Thrugelmir

Historical data shows that when real interest rates are low. Returns on both equities and bonds tend to be lower rather than higher. 

TBC15

Deleted_User said:

TBC15 said:

Audaxer 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.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

Keep in mind that simulations are based on a ~100 year dataset (usually), that the monetary system is very different now from what it has been for most of the dataset and that you might need your pot for the next 40. That is a long time and you can easily see events happening that are different from the preceding 100 years. 

I am not saying that simulations are completely useless but they give people false confidence. Perhaps the future will be exactly like the past but the small chance that it won’t is exactly what a retiree needs to plan for. 

Most of the ones I’ve seen cover 146yrs.

Linton

BritishInvestor said:

Linton said:

Deleted_User said:

TBC15 said:

Audaxer 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.

TBC15, are you currently in receipt of any other retirement income like DB pensions, or State Pension yet?  If not, 100% equities and only 1-2 years cash does sound like high risk to me, but I think it maybe depends on what percentage you need to drawdown each year. If for example you need to drawdown over 3.5% of your pot each year, do you not think a bad sequence of returns over the next decade could be particularly risky?

The wife’s SP starts next year and mine in 2025. I converted a DB pension to a SIPP 3 years ago. Based on the various simulations available on line I think I’m happy with the risk. Still thinking about the size of my comfort blanket/ cash bucket though.

Keep in mind that simulations are based on a ~100 year dataset (usually), that the monetary system is very different now from what it has been for most of the dataset and that you might need your pot for the next 40. That is a long time and you can easily see events happening that are different from the preceding 100 years. 

I am not saying that simulations are completely useless but they give people false confidence. Perhaps the future will be exactly like the past but the small chance that it won’t is exactly what a retiree needs to plan for. 

I agree with this, and would go further.  Data on the past 100+ years is the best we have but to treat it as any more than a useful random set of potential test problems of the type investors may have to face is assigning it more relevence than is justified.  The chance that the future is not like the past isnt small, it's a virtual certainty. We hopefully are not going to have 2 world wars again and if we are there may be little point in planning to survive them with our wealth intact.  Does the rise of automation and AI really correspond in some useful way to the rise of oil? To use historic data to derive meaningful values of % chance of future success is just playing with numbers. 

We have to accept we dont know what the future will bring.  The best we can do is to mitigate against some mainly shorter term eventualities and trust in the long term rise of the global markets.  If we cant do that one can ask whether it is sensible to invest in the first place.

I'm not sure anyone is suggesting the future is like the past. What is suggested as a reasonable starting point is that someone planning for retirement now doesn't have a worse outcome than the worst period over the last 100+ years. Do you think that is unreasonable?

There are many criteria one could use for assessing whether a retirement strategy is sensible, none of which are definitive.  Passing the past history test is just one of these.  If it gives you the confidence to retire then fine, that is the only real purpose of checking. Perhaps, only when it is too late to do much about it will you discover whether that confidence is justified.  To take the results of historical simulations any more seriously than this does not seem justified to me.  In particular worrying about precise failure rates is pointless especially when the failure appears very unlikely.   People are too impressed with numbers and should really think through where they come from before over-relying on them.

The method I used was to create a year by year financial model with parameterised expenditure, % return and %inflation.  One fiddles with the numbers, stress tests the model etc until one has the confidence to jump.  Of course reality has been very different to original plan, but that has not been a problem for 15 years thanks to very cautious assumptions.  The financial model approach makes it easy to adjust the plan in line with actuals, and so one moves forward.