Suggestions on drawdown from 3 bucket retirement strategy

GazzaBloom

OK, What would be your views on a recommended drawdown strategy from a 3 bucket retirement portfolio:

• 2 years worth of annual expenses held as cash
• 3 years worth of annual expenses held in a Global bonds index fund
• The rest held in an accumulating Stocks index fund

I have been thinking drawdown from stocks fund first in good years, that should generate enough for annual retirement expenses with some left over to keep accumulating. If market drops 10% or more I would switch to Bonds fund until stocks recover, if market has not recovered in 2 years to allow switching drawdown back to stocks, switch to cash fund for up to another 2 years before switching back to stocks and hopefully market recovers (that's 4 years that the stock fund would be left to recover)

Would that be your strategy or would you drawn the cash for 2 years then move money down the ladder from bonds to cash and stocks to bonds to rebalance the pots as they were at the start?

Any refinement or suggestions of above would be welcome.

Thanks

dunstonh

OK, What would be your views on a recommended drawdown strategy from a 3 bucket retirement portfolio:

• 2 years worth of annual expenses held as cash
• 3 years worth of annual expenses held in a Global bonds index fund
• The rest held in an accumulating Stocks index fund

Personally?  - yuk to that.  I know there are models that segment your fund into different timescales but they tend to be on a mutli-asset basis with x% allocated to a spread that caters for the long term amount and y% allocated to multi-asset for the medium term.  Your spread seems more extreme

2 years worth in cash. No problems with that. Indeed, possibly three years worth given the outlook for bonds.

However, explicitly splitting the rest of the short term money into bonds and the long term into equities seems like a lot of hard work.  You would be constantly rebalancing and shifting.

Having cash and a single portfolio that is multi-asset would be cleaner.  It achieves a similar thing but with less work.  

Plus, I wouldn't hold a single global bond index fund to cover the fixed interest allocation.  Usually, when looking at bond allocations, you see the split between, gilts, index-linked gilts, investment-grade corp bonds, high yield bonds and global bonds. (some may split high yield and global further).  I am not saying all would necessarily be right but limiting it to global bonds is not likely to a good thing.    I wouldn't use accumulation units either.

I have been thinking drawdown from stocks fund first in good years, that should generate enough for annual retirement expenses with some left over to keep accumulating. If market drops 10% or more I would switch to Bonds fund until stocks recover, if market has not recovered in 2 years to allow switching drawdown back to stocks, switch to cash fund for up to another 2 years before switching back to stocks and hopefully market recovers (that's 4 years that the stock fund would be left to recover)

Would it not be easier and cleaner to draw from the cash?   Use income units on the lot with income going into cash.   Therefore extending the possible timescale to cover payments.   Then all you need to do is keep the cash topped up when units are higher and skip it when units are lower.

Thrugelmir

Equities and bonds are probably as highly correlated as they've ever been. The cause of the markets to fall may impact bonds similarly. 

GazzaBloom

Thrugelmir said:

Equities and bonds are probably as highly correlated as they've ever been. The cause of the markets to fall may impact bonds similarly. 

OK, I agree that does seem the case currently, what would be your alternative suggestion? 

GazzaBloom

dunstonh said:

OK, What would be your views on a recommended drawdown strategy from a 3 bucket retirement portfolio:

• 2 years worth of annual expenses held as cash
• 3 years worth of annual expenses held in a Global bonds index fund
• The rest held in an accumulating Stocks index fund

Personally?  - yuk to that.  I know there are models that segment your fund into different timescales but they tend to be on a mutli-asset basis with x% allocated to a spread that caters for the long term amount and y% allocated to multi-asset for the medium term.  Your spread seems more extreme

2 years worth in cash. No problems with that. Indeed, possibly three years worth given the outlook for bonds.

However, explicitly splitting the rest of the short term money into bonds and the long term into equities seems like a lot of hard work.  You would be constantly rebalancing and shifting.

Having cash and a single portfolio that is multi-asset would be cleaner.  It achieves a similar thing but with less work.  

Plus, I wouldn't hold a single global bond index fund to cover the fixed interest allocation.  Usually, when looking at bond allocations, you see the split between, gilts, index-linked gilts, investment-grade corp bonds, high yield bonds and global bonds. (some may split high yield and global further).  I am not saying all would necessarily be right but limiting it to global bonds is not likely to a good thing.    I wouldn't use accumulation units either.

I have been thinking drawdown from stocks fund first in good years, that should generate enough for annual retirement expenses with some left over to keep accumulating. If market drops 10% or more I would switch to Bonds fund until stocks recover, if market has not recovered in 2 years to allow switching drawdown back to stocks, switch to cash fund for up to another 2 years before switching back to stocks and hopefully market recovers (that's 4 years that the stock fund would be left to recover)

Would it not be easier and cleaner to draw from the cash?   Use income units on the lot with income going into cash.   Therefore extending the possible timescale to cover payments.   Then all you need to do is keep the cash topped up when units are higher and skip it when units are lower.

I don't envisage rebalance any more frequently than annually, not exactly a taxing task.

My thinking is that drawing from the stocks growth during good years and keeping the cash would "feel" safer, it would have the psychological effect of knowing you had the 2 years buffer in the bank at all times not exposed to risk until absolutely necessary to draw it down.

The Bonds fund I have been considering is the Vanguard Global Bonds Index - Hedged Accumulation, it appears to have a wide spread of different classes of Bonds and durations, what's wrong with it?

Why would you not use Accumulation units for stocks? reinvesting the dividends would lead to higher growth if not drawing the full annual gains wouldn't it?

dunstonh

I don't envisage rebalance any more frequently than annually, not exactly a taxing task.

Then your portfolio is going to go out of sync quickly if you are drawing against a risk based asset class.

My thinking is that drawing from the stocks growth during good years and keeping the cash would "feel" safer,

And it will give you lower returns.  If it's a risk-based issue then adjust the asset class weightings accordingly.    And as you are only reviewing annually, you will be drawing in months when it's down.    For example, during the coronavirus loss months, you would have been selling units when it's lower.       The same would have occurred in 2018 and 2015/6

The Bonds fund I have been considering is the Vanguard Global Bonds Index - Hedged Accumulation, it appears to have a wide spread of different classes of Bonds and durations, what's wrong with it?

Nothing wrong with it if it's what you want. 

Why would you not use Accumulation units for stocks? reinvesting the dividends would lead to higher growth if not drawing the full annual gains wouldn't it?

But each month you are selling units to pay for the withdrawal because you are not using the cash.     It sounds like your draw is greater than the natural yield as you are using this method.  So, you are not actually increasing the equity allocation by reinvesting.

GazzaBloom

OK thanks, food for further thought. I'm some years away so all good ideas to put in the pot.

Thrugelmir

GazzaBloom said:

Thrugelmir said:

Equities and bonds are probably as highly correlated as they've ever been. The cause of the markets to fall may impact bonds similarly. 

OK, I agree that does seem the case currently, what would be your alternative suggestion? 

That's a difficult one. As not exactly a new challenge with money starting to be being reallocated a some ago. Alternative investments appear to be generally fully priced or trading at sizable premiums to NAV.  

Dead_keen

Can I recommend this book: "Living Off Your Money: The Modern Mechanics of Investing During Retirement with Stocks and Bonds": https://www.amazon.co.uk/gp/product/0997403403

I plan to use the prime harvesting method described in there and here: https://earlyretirementnow.com/2017/04/19/the-ultimate-guide-to-safe-withdrawal-rates-part-13-dynamic-stock-bond-allocation-through-prime-harvesting/

This basically says:

1. Keep equity and non-equity assets separate (i.e. not in one fund).
2. Draw down the non-equity assets first.
3. When the equity assets have gone up a lot (e.g. by 20% above inflation) sell some of the equity assets and use those to buy more non-equity assets.

How much you have in non-equity assets is an interesting question and will be based on your own personal circumstances (e.g. size of your retirement assets, your consumption plans, your attitude and so on).  You've mentioned five years of expenses.  I have a lot more.  Some people will have a lot less. Like all things to do with pensions, there are a range of answers.

In terms of the non-equity assets, there's lots of different answers there.  But for me, they'd need to be cash or easily turned to cash without too much loss if the market is bad.  Gilts should be fine.  I suspect that high yield bonds may not suit that and so I don't have them.                

dunstonh

1. Keep equity and non-equity assets separate (i.e. not in one fund).

I disagree with that and I suspect most will.  It would eliminate every multi-asset fund out there and they are perfectly suitable options for many people.

2. Draw down the non-equity assets first.

Seeing as ideally, you should draw cash first and then use other assets to replenish the cash, that would make sense.

3. When the equity assets have gone up a lot (e.g. by 20% above inflation) sell some of the equity assets and use those to buy more non-equity assets.

Disagree with that.  You should rebalance the portfolio but what if the other assets went up?   You would then be going in too heavy.

Investing is very much about opinion but I cant agree with two of those points.

Dead_keen

dunstonh said:

Investing is very much about opinion but I cant agree with two of those points.

That's fine. I've thought about it quite a bit based on my own position and I intend to follow the prime harvesting strategy (described in the book I linked to) until I find something that, on the evidence, appears to be better or more suited to my circumstances.