Suggestions on drawdown from 3 bucket retirement strategy

zagfles

dunstonh said:

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.

The whole point of "prime harvesting" is dynamic asset allocation, not the old fashioned static allocation based on emotional attitude to risk. It could end up 100% equities in some scenarios. So multi-asset funds don't really work with it.

Obviously not for everyone, and I doubt any advisers would be brave enough to use it for their clients partcularly if they have to base investment strategies on their clients' emotions.

bostonerimus

I would also keep bonds and equities separate as you can't control which you sell if they are all together in a single multi-asset fund.

JohnWinder

GazzaBloom said:

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

We've already been helped enormously on this question by the posts referencing the earlyretirementnow series and the McClung book the first three chapters of which used to be freely available by the author online.

Reading around 3 bucket strategies, and any other approach to retirement investing/spending strategies, suggests to me that you will never know in advance which will produce the best outcome in the end, because in some future financial scenarios (where interest rates do 'this', and stock prices do 'that' for 'so many' years) the 3 bucket strategy will outperform all others; but in other scenarios where different sequences play out, we'll find a plain vanilla balanced fund works best. You just can't know which will be best, other than cash alone for 40 years seems unwise!

Then there's the matter of which outcome you're seeking with your 3 bucket or whatever strategy. Is it 'maximum' spending possible without running out of money; or is it avoiding a gut-wrenching drop in value to within a whisker of sending you broke but rescues itself just in time to leave a massive inheritance; or is it one that gives a much more comfortable lifestyle but carries a 1% chance of failure?

The approach you take can be a source of endless discussion/argument without there being a right answer ahead of time. Just beware the dogmatic statements.

[Deleted User]

1. 2 years’ worth of expenditure in cash - isn’t it a bit low for a retiree? Depends on the purpose, I guess. And how tight you priced “expenses”.  And how much DB income you have on top. 

2. If you are splitting stocks and bonds, then I don’t like bond index funds. In general these buy most indebted industries and countries.  The more a company is borrowing, the more your index will load up on that company. Is that wise? Before 2008 such indices loaded on financial institutions. Before 2000 - on tech.  On top of that, right now bonds are a challenging asset class.   This one area when picking and choosing your Fixed Income might be worthwhile. Or pick an active bond fund.

3. Having said this, I love all in one multi-asset funds. Simple is beautiful. Improves investor behaviour. Makes it easy for the spouse to take control if/when needed. I don’t hold them because they didn’t exist at the time but as I get older might bite the bullet and migrate. 

4. For withdrawal strategy, I like VPW https://www.finiki.org/wiki/Variable_percentage_withdrawal

5. Assuming you are not charged for buying and selling, accumulating funds make a lot of sense.  And annual rebalancing is fine.  There is also Larry Swedroe 5/25 rule which is great.  Usually translates to rebalancing that is even less frequent. 

6. A lot depends on how much your have vs annual expenditure.  Someone with DB income and a decent size portfolio could use a very simple two-bucket strategy:

- a constant, say  3-year cash holding, refilled once annually. 

- everything else in stocks
- zero bonds. 

P.S. Holding a bond index in your “3-5 year bucket” is dodgy. Can and probably will tank over that time horizon. Certainly if you count in real money. 

JohnWinder

Lest any newcomers get the wrong idea here:

I don’t like bond index funds. In general these buy most indebted industries and countries.  The more a company is borrowing, the more your index will load up on that company. Is that wise?

Just to be clear, there are index funds which hold only government bonds, and the ones you'd readily come across probably don't hold too many Argentinian bonds. So just watch out for the 'in general' qualification. Indeed there seems little if any reason to own bond funds with anything but government bonds, since you can go up the risk/return scale by simply holding more stocks along with your government bonds. And that's before we even consider inflation linked bonds.

[Deleted User]

Yes, thank you.  OP said “global”, so I inferred Barclays Global Aggregate Index or similar.  Which includes investment grade corporate and government bonds. The rest applies, including loading up on things about to crash just before the crash. 

zagfles

JohnWinder said:

Lest any newcomers get the wrong idea here:

I don’t like bond index funds. In general these buy most indebted industries and countries.  The more a company is borrowing, the more your index will load up on that company. Is that wise?

Just to be clear, there are index funds which hold only government bonds, and the ones you'd readily come across probably don't hold too many Argentinian bonds. So just watch out for the 'in general' qualification. Indeed there seems little if any reason to own bond funds with anything but government bonds, since you can go up the risk/return scale by simply holding more stocks along with your government bonds. And that's before we even consider inflation linked bonds.

Given you can get returns on fixed short term cash deposits paying more in interest than yields on govt bond funds, without the capital risk, charges or platform fees, is it even worth using govt bonds? Tax may be an issue for some people, as such accounts tend to be unwrapped only, but for those only earning or drawing down up to the personal allowance, they can earn £6k in interest without tax, so even at 2% interest could have £300k before paying tax.

MK62

You also have to factor income tax into your planning. If the bulk of your non-cash retirement assets are within pension wrappers, then they are subject to income tax on withdrawal (apart from the PCLS)......it then becomes more problematic to take eg nothing one year and double the next, as the total income tax payable might end up being more than the market drop on the assets you might withdraw anyway. Not so much of an issue if the cash "bucket" is also held within the pension, but many hold this outside (often financed by the PCLS/other life savings). I'm not suggesting a withdrawal strategy based just on income tax implications btw.....just that it's another factor to consider.

Dead_keen

MK62 said:

You also have to factor income tax into your planning. If the bulk of your non-cash retirement assets are within pension wrappers, then they are subject to income tax on withdrawal (apart from the PCLS)......it then becomes more problematic to take eg nothing one year and double the next, as the total income tax payable might end up being more than the market drop on the assets you might withdraw anyway. Not so much of an issue if the cash "bucket" is also held within the pension, but many hold this outside (often financed by the PCLS/other life savings). I'm not suggesting a withdrawal strategy based just on income tax implications btw.....just that it's another factor to consider.

I think for some people it is important to have a withdrawal strategy that is based on income tax implications. 

The way I deal with that is to imagine that my pension is not just my SIPP but includes my other retirement assets.  So if I take money out of my SIPP it might be for (i) consumption, or (ii) putting it with my other retirement assets.  Income tax then becomes another layer of thinking that is, to some extent, independent of consumption (e.g. if your consumption is low you might still want to withdraw more money from the SIPP using the whole of the basic rate tax rather than risk a higher tax rate later or an LTA charge later).   

As well as normal income tax, the lifetime allowance charge then influences what assets are where (e.g. it may be better to have equity assets outside of the SIPP if the LTA is an issue).  But I think that's less of an issue in terms of getting cash because if it was ever to be a concern you could simulateneously sell equities outside the SIPP to get cash and use the non-equity in the SIPP to buy the same equity. 

zagfles

Dead_keen said:

MK62 said:

You also have to factor income tax into your planning. If the bulk of your non-cash retirement assets are within pension wrappers, then they are subject to income tax on withdrawal (apart from the PCLS)......it then becomes more problematic to take eg nothing one year and double the next, as the total income tax payable might end up being more than the market drop on the assets you might withdraw anyway. Not so much of an issue if the cash "bucket" is also held within the pension, but many hold this outside (often financed by the PCLS/other life savings). I'm not suggesting a withdrawal strategy based just on income tax implications btw.....just that it's another factor to consider.

I think for some people it is important to have a withdrawal strategy that is based on income tax implications. 

The way I deal with that is to imagine that my pension is not just my SIPP but includes my other retirement assets.  So if I take money out of my SIPP it might be for (i) consumption, or (ii) putting it with my other retirement assets.  Income tax then becomes another layer of thinking that is, to some extent, independent of consumption (e.g. if your consumption is low you might still want to withdraw more money from the SIPP using the whole of the basic rate tax rather than risk a higher tax rate later or an LTA charge later).   

As well as normal income tax, the lifetime allowance charge then influences what assets are where (e.g. it may be better to have equity assets outside of the SIPP if the LTA is an issue).  But I think that's less of an issue in terms of getting cash because if it was ever to be a concern you could simulateneously sell equities outside the SIPP to get cash and use the non-equity in the SIPP to buy the same equity. 

Yes, my SIPP withdrawal strategy will be entirely driven by income tax, but it's easy enough to rebalance so that you're "drawing" from the asset types you want to draw from.

For instance, if you have a SIPP purely in equities and cash unwrapped, and you want to drawdown from the SIPP for tax reasons: if you want to draw from equities just sell them in the SIPP and drawdown, if you want to draw from cash then do the same ie sell equities & drawdown from the SIPP, but at the same time buy equities outside the SIPP (eg in an ISA) with your cash.