Suggestions on drawdown from 3 bucket retirement strategy

Prism

zagfles said:

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.

I agree at the moment and use fixed savings accounts myself, however under slightly more normal conditions that typical increase in value that you get with government bonds when there is an equity crash is an important part of the safe withdrawal rate. It even happened, in a slightly volatile way, last March when the interest rates were already pretty low. I think that maybe in a couple of years we will be back to a situation that government bond funds will do their job properly again.

JohnWinder

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?

It's a challenging question, and one's circumstances will suggest answers as well as is it 'bonds' or 'bond funds'. For example, if I was investing cash now for use in five years time, I'd probably go for a cash deposit rather than a bond fund since it's not easy to find a govt bond fund with very short duration to suit 5 years, and even then a cash account couldn't be much worse even if the bond fund out-did cash over those 5 years.

But if I was investing for another 30 years I would expect a bond fund to outperform a cash deposit over that period; there hasn't been a 15 year period when cash has outperformed intermediate gov bonds in the last 40 years. But if there was a massive reversal of expected returns over the next 30 years, you wouldn't expect cash to outperform those bonds by a lot. After all, you take more risk with bonds so you should get more return.

Second point is: is one a fan of market timing? The experts struggle to do it profitably, so I don't expect I can. So I wouldn't be getting out of bonds now to go to cash with a 20 year horizon. As well if you did swap now, how much would one waste in frictional costs (buy/sell spreads, brokerage, taxes)? And then there's the inevitable second decision: when do you get back into bonds from cash, or is it never? That's more market timing.

Third point: the beauty of bond funds is you can get index linked bonds. Yields are now low just as they are for nominal bonds, but if there's unexpected inflation you get protection which cash won't give you to the same extent. So whether or not one thinks bond yields are low and cash is better now, inflation linked bonds compared to cash is apples with oranges - they're very different beasts.

Interest rates might rise soon, and if you held a bond fund with a duration shorter than your investing horizon, then you should be praying they rise because you want your money lent for a higher interest rate.

That's only bond funds. There's another chapter if one is considering individual bonds to match a particular future liability.

Thrugelmir

JohnWinder said:

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?

But if I was investing for another 30 years I would expect a bond fund to outperform a cash deposit over that period; there hasn't been a 15 year period when cash has outperformed intermediate gov bonds in the last 40 years. 

Given it's been a bull bond market over that period hardly surprising. Starting today is a very different place to be. Very much a new era, Where the past no longer provides an indication as to what the future holds. 

MK62

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).  

Fair enough    though I did say "not suggesting a withdrawal strategy based just on income tax implications btw".....

Dead_keen said:    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.

I'm a bit confused as to what you are saying here......you appear to be saying "it may be better to have equity assets outside of the SIPP if the LTA is an issue"......fair enough - but unless I'm reading it wrong, you then appear to be saying if that's the case, sell your equities outside the SIPP to get cash, and then use non-equity assets inside the pension to buy the same equities......which would then be inside the pension......pretty much the opposite of what you want......

JohnWinder

Thrugelmir said:

JohnWinder said:

But if I was investing for another 30 years I would expect a bond fund to outperform a cash deposit over that period; there hasn't been a 15 year period when cash has outperformed intermediate gov bonds in the last 40 years. 

Given it's been a bull bond market over that period hardly surprising. Starting today is a very different place to be. Very much a new era, Where the past no longer provides an indication as to what the future holds. 

Agree, but some of those periods are worth a closer look. I said '40 years' of cash/bond comparison, but it was actually 50 years or close enough. Looking at the first 10, from 1972-82, USA Fed fund rate rose from 5% to 15%/year, but intermediate treasury bonds still returned 5%/yr while cash returned 8%/yr. It was definitely worth being in cash, but the curves don't seem to diverge much unless the interest rate change is occurring very sharply, which makes perfect sense I suppose since gradually increasing rates improve the returns on new bonds but don't hammer the old bonds too badly.

And a chart shown here indicates how little impact interest rate trends had for one fund over 70 years. https://www.bogleheads.org/forum/viewtopic.php?f=10&t=341224&p=5846789&sid=a3331907584ca8bd57448f8f93e2ec02#p5846789

Thrugelmir

JohnWinder said:

Thrugelmir said:

JohnWinder said:

But if I was investing for another 30 years I would expect a bond fund to outperform a cash deposit over that period; there hasn't been a 15 year period when cash has outperformed intermediate gov bonds in the last 40 years. 

Given it's been a bull bond market over that period hardly surprising. Starting today is a very different place to be. Very much a new era, Where the past no longer provides an indication as to what the future holds. 

Agree, but some of those periods are worth a closer look. I said '40 years' of cash/bond comparison, but it was actually 50 years or close enough. Looking at the first 10, from 1972-82, USA Fed fund rate rose from 5% to 15%/year, but intermediate treasury bonds still returned 5%/yr while cash returned 8%/yr. It was definitely worth being in cash, but the curves don't seem to diverge much unless the interest rate change is occurring very sharply, which makes perfect sense I suppose since gradually increasing rates improve the returns on new bonds but don't hammer the old bonds too badly.

And a chart shown here indicates how little impact interest rate trends had for one fund over 70 years. https://www.bogleheads.org/forum/viewtopic.php?f=10&t=341224&p=5846789&sid=a3331907584ca8bd57448f8f93e2ec02#p5846789

I've absolutely no interest in historic US data. Totally irrelevant to me.  Likewise I don't invest using a rear view mirror approach. The predictable nature of fixed interest stocks makes the immediate future very easy to ascertain. No need to over complicate matters unneccessarily. 

JohnWinder

Sorry. Point me to similar UK data, Swedish or whatever you prefer and I'll try to use that. But I think the principles are transferable across nations. Ah, well I'm constantly looking back, the view is much clearer than ahead.

Thrugelmir

JohnWinder said:

Sorry. Point me to similar UK data, Swedish or whatever you prefer and I'll try to use that. But I think the principles are transferable across nations. Ah, well I'm constantly looking back, the view is much clearer than ahead.

Do your own research. Then you can remain a free thinker. Arriving at your own informed decisions. Perhaps start by accessing some UK sites to broaden your outlook. 

Dead_keen

MK62 said:

I'm a bit confused as to what you are saying here......you appear to be saying "it may be better to have equity assets outside of the SIPP if the LTA is an issue"......fair enough - but unless I'm reading it wrong, you then appear to be saying if that's the case, sell your equities outside the SIPP to get cash, and then use non-equity assets inside the pension to buy the same equities......which would then be inside the pension......pretty much the opposite of what you want......

It depends on what you are comparing.  Before explaining that though, I should make clear that this is only interesting if you expect to pay the LTA on a future BCE.

If you are comparing (i) my desired position of cash in the SIPP, equity outside with (ii) cash outside the SIPP then you are absolutely right.  I would end up paying almost no tax on the interest on the cash now (since interest rates are low) but end up with a big LTA charge when I get my BCE (since in my wonderful would the equity has gone up in value hugely).  

But that's not what I was comparing. Or at least when I wrote that post, that's not what I was comparing in my head. Also, I was assuming that I'd taken money out of the SIPP so that I had used the full basic rate band (e.g. investing that all in equity held personally) but then needed some cash.

So in my head I was comparing:

1. Drawing extra cash from the SIPP: I'd pay 40% tax on all of this cash.

2. (a) Selling some of the equity owned personally: I may pay no tax on this or some CGT if I've used my (or my spouse's) annual allowance.  So that might be 0%, 10% or 20% on any growth in value. (b) the SIPP using its cash to buy equity similar to that sold (no tax).

Ignoring transaction fees / timing differences on the sale and reacquisition, I think that the second way beats drawing extra cash from the SIPP.



 

Linton

JohnWinder said:

Thrugelmir said:

JohnWinder said:

But if I was investing for another 30 years I would expect a bond fund to outperform a cash deposit over that period; there hasn't been a 15 year period when cash has outperformed intermediate gov bonds in the last 40 years. 

Given it's been a bull bond market over that period hardly surprising. Starting today is a very different place to be. Very much a new era, Where the past no longer provides an indication as to what the future holds. 

Agree, but some of those periods are worth a closer look. I said '40 years' of cash/bond comparison, but it was actually 50 years or close enough. Looking at the first 10, from 1972-82, USA Fed fund rate rose from 5% to 15%/year, but intermediate treasury bonds still returned 5%/yr while cash returned 8%/yr. It was definitely worth being in cash, but the curves don't seem to diverge much unless the interest rate change is occurring very sharply, which makes perfect sense I suppose since gradually increasing rates improve the returns on new bonds but don't hammer the old bonds too badly.

And a chart shown here indicates how little impact interest rate trends had for one fund over 70 years. https://www.bogleheads.org/forum/viewtopic.php?f=10&t=341224&p=5846789&sid=a3331907584ca8bd57448f8f93e2ec02#p5846789

For how much of that time were interest rates below 1%?  

Improved interest rates will hammer old bonds.  Have a play with https://exploringfinance.com/bond-price-calculator/.  

For example since January this year the 20 year gilt rate has risen from 0.7% to 1.5%.  From the calculator this corresponds to a 14% drop in price.  14% in 10 months for a "safe" bond!  This is more like equity.  And 1.5% is still historically very low - there's lots of upside.