Goal based portfolios - from "How to calculate the worth of a fixed income portfolio"

Linton

DT2001 said:

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Thank you for the explanation. The link you provided later on helped me better understand, I hope, the logic. I can see it's merits -


1)the purpose is achieving an income goal first and foremost with lower risk followed by wealth preservation/growth?

2) Just to check can you comment on the example below
number £50k
DB £20k  
Create à portfolio to produce an ongoing £30k + CPI assuming growth at say CPI + 1%
Balance in a portfolio to preserve/grow wealth
Then at SPA move funds from income/growth portfolio to wealth preservation portfolio.
You could also create a portfolio to utilise IHT relief via excess income.

3) Each pot has its own asset mix and has doesn’t influence any of the others?

4) Does this presume someone has a larger pot than they need at the start of retirement or is it an adjustment one makes if your income/growth pot exceeds expectations after a few years?

5)The OP doesn’t then need to place a value on any DB/SP just use MK62’s idea above?

1)  Yes the primary aim is to have a steady inflation linked ongoing income until our death and to have sufficent accessible wealth to commit to planned future extravagent expenditure.  Beyond a reserve for care costs wealth at death is of zero importance. This primary aim then brings in second level requirements such as inflation matching and how one lives through crashes.

2) Basically yes though I would split preserve and growth as they need a different asset mix.  Growth can be 100% equity since it its primary purpose is inflation protection in the long term .The missing SP can be covered by cash.   So Income can start off immediately producing the approx £20K/year that will be needed in the long term. I have income in its own pot as I use dividends/ihnterest though there are other ways of playing this.  Generally there may be no point in splitting if two objectives can both be met by the same asset mix.

3) Each pot has its own independent asset mix.  However I do check the overall asset mix for diversification.  This enables higher risk assets in the Growth portfolio (eg a bit more tech) as high risk assets are under-represented in the other portfolios.

4) I dont know whether it means a larger or smaller total portfolio than the alternatives.  The problem is that the right size of each split portfolio can be predetermined from its objective and some basic assumptions.  I dont see a good way of getting that level of precision in a simple 60:40 portfolio.  In my view SWRs are very suspect except as a very broad brush sanity check.

Most people will probably have to make adjustments to their asset allocations over time.  The reason is that initial plans have to be made on very pessimistic assumptions unless you have no level of risk aversion regarding income during retirement.  These could be SWRs based on never running out of money in any 30 year period in history or assumptions on inflation and rates of return.  Usually the worst possibilities wont happen so people will be wealthier a few years into retirement than planned.  This has certainly happened to us over the past 15 years.  Excess wealth is largely going into Wealth Preservation awaiting the return of foreign holidays and work on the house.  Previously it helped us trade-up our home.

5) Yes, retirement planning based on an anlaysis of what you want to achieve means that you dont have to use dodgy factors to convert guaranteed income into assets.   It also means not getting into complications such as variable drawdown depending on annual returns.

DT2001

Thank you for explaining the concept most comprehensively.

I hope Mordko gives his thoughts on this as it is different from the bucket strategy that he didn’t like. He often comes at strategies from a different angle to that which I’ve thought of.