How Jon Guyton's firm does drawdown (Guyton-Klinger rules JG)

jamesd

No, because I understood the way things worked in the original Guyton and Guyton-Klinger research.

I described real G-K guard rail working in my previous reply to NedS while they ludicrously describe it as "the 0.2 guardrail is on top of the drop in the portfolio. If the portfolio is down by 50% and you hit the lower guardrail, the drop in the withdrawal is (1-0.5)x(1-0.2)=0.4 = 60% under the initial withdrawal".

Going back to my reply to NedS earlier In this thread, ERN would have a second year income of just £2,800 by that description ( (1-0.7)X(1-0.2) ), instead of £4,725 using the real rules. 

Though it's actually worse than that. Instead of smoothing income by making the change once a year, ERN applies the rules once a month, so you get far more radical swings in income than the real rules.

Or consider this:

"Amazing! Look at the 5% Guyton-Klinger rule. By construction, it stays between 4% and 6% (=5% times 1+0.2 and 1-0.2, respectively), so it never falls below 4% due to the guardrails."

As you can see from my worked example for NedS, not only can it go outside 4-6% of current pot value, it can do so by quite a lot, 7.9% and 8% before the 10% cut in the two years I worked through, 7.1% and 7.2% after cut.

You don't need brilliance to understand why their modified rule does very badly, you just need to compare the functioning of the real rules with what they say they did.

You might try few cases like my example for NedS and also compare what they claim some things do with what the actual G-K paper says they do. My other post can be a crib sheet to guide you to the main problems.

cfw1994

ErinGoBrath said:

michaels said:

For some of us the pre state pension period can be 20 years, no inflation protection for this whole period could prove costly.  I am thinking best buy savings accounts or very short gilts (bills) may be the best way to address this issue, index linked gov bonds are definitely a very expensive way to buy this protection.

5 years in cash and the rest in equities would be better. Gilts are overpriced at the moment.

So if a % of your funds were in those gilts.....which I know have been flat for quite some time....would you move them, or wait for them to tip back?
Asking for a friend 

My other post can be a crib sheet to guide you to the main problems.

Remind people of the link please!

ErinGoBrath

cfw1994 said:

ErinGoBrath said:

michaels said:

For some of us the pre state pension period can be 20 years, no inflation protection for this whole period could prove costly.  I am thinking best buy savings accounts or very short gilts (bills) may be the best way to address this issue, index linked gov bonds are definitely a very expensive way to buy this protection.

5 years in cash and the rest in equities would be better. Gilts are overpriced at the moment.

So if a % of your funds were in those gilts.....which I know have been flat for quite some time....would you move them, or wait for them to tip back?
Asking for a friend 

My other post can be a crib sheet to guide you to the main problems.

Remind people of the link please!

I wouldnt consciously invest in them thats for sure!

If any of my funds hold them (unlikely) then I bow to their better judgement!!!

Bravepants

Brilliant! Now try explaining all of this to my dad.

jamesd

cfw1994 said:

ErinGoBrath said:

michaels said:

For some of us the pre state pension period can be 20 years, no inflation protection for this whole period could prove costly.  I am thinking best buy savings accounts or very short gilts (bills) may be the best way to address this issue, index linked gov bonds are definitely a very expensive way to buy this protection.

5 years in cash and the rest in equities would be better. Gilts are overpriced at the moment.

So if a % of your funds were in those gilts.....which I know have been flat for quite some time....would you move them, or wait for them to tip back?
Asking for a friend 

My other post can be a crib sheet to guide you to the main problems.

Remind people of the link please!

I added the link to the post earlier in this thread, it's https://forums.moneysavingexpert.com/discussion/comment/78249782/#Comment_78249782 .

If you read enough analysis of drawdown rule  performance you'll find that there have been a few periods when it would be better to hold cash than bonds. We appear to be in one of those now. I have only minimal bond holdings even though I've reduced equities. I'm using P2P lending, an offset mortgage and cash as alternatives.

Albermarle

5 years in cash and the rest in equities would be better. Gilts are overpriced at the moment.

Are they still overpriced as they have seen a significant correction this year already ?

ErinGoBrath

Albermarle said:

5 years in cash and the rest in equities would be better. Gilts are overpriced at the moment.

Are they still overpriced as they have seen a significant correction this year already ?

Think we need 2% gross redemption yield on 10 year gilts for fair value, 3% on 30 year, otherwise too risky. 

bostonerimus

I think Guyton is an approach that people can intuitively grasp as modulating your spending as your pot size goes up and down to make sure it lasts is common sense. The actual implementation can get tricky, When I retired early I had 3 years to span until my DB pension started and this is how I did it. I had income from a rental that covered half of my income needs and I enough cash in the bank to cover the rest of my spending for the 3 years. I took dividends from my regular equity and bond investments and had them deposited in my bank account rather than reinvesting them so that I would not spend down the bank account entirely before the pension started. I also did a budget and cancelled a lot of TV subscriptions. I finished the 3 years with 1.5 year's money still in the bank. The first pension cheque was nice to get and now rent and pension cover my spending so that my retirement investment withdrawals are governed by tax planning rather than a need to spend them. I've also stopped doing anything about my asset allocation which is now at 80/20, because of the run up in equities. If you have things like rental property, state pension, a DB plan or an annuity and can live of those then it can greatly reduce and simplify withdrawals from your DC pension or other investments. I think you are then truly financially independent and really retired because you don't need to work at withdrawal strategies or worry about account balances.

jamesd

Yes, my own pension withdrawing is largely governed by tax planning: look to withdraw full basic rate band and buy enough VCTs to make income tax due for the year about nil. Pretty much totally decoupled from funding regular spending.

If using Guyton-Klinger you should do what you did and take all dividends and fund distributions as cash, where it'll be drawn from to pay income. This means using fund income units where available.

Even though I have had lower than my normal equity percentage the price rises have been nice. I'm back up to about 59% equities, 69% including VCTs. The VCTs are delivering some nice tax exempt income, about 6.6% of total share price (ignoring recent purchases).

Thrugelmir

jamesd said:

No, because I understood the way things worked in the original Guyton and Guyton-Klinger research.

Then you must have access to data that as far as I am aware isn't in the public domain. Particularly as you've modified the model US portfolio considerably. Your inclusion of P2P as a substitute for Government Bonds and VCT's as a substitute high quality equities. Bears no correlation or accord with any research released by GK.