Suggestions on drawdown from 3 bucket retirement strategy

[Deleted User]

Linton said:

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.

Predicting future bond rates long term is difficult.  And “historic” rates that may matter the most are the last 10 years as policies and conditions have more similarities (aging population, QE, internet, etc).  

Still, if I buy a 10 year government bond today and hold it to maturity, I am locking in the loss in real terms. It pays way less than predicted average inflation, although quite a bit more than recently.

My policy is to buy assets that provide a) diversification and b) have positive expected returns.  Bonds have a problem.

jamesd

GazzaBloom 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

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)

Provided the total value of your portfolio is not higher than about 15 years of income that doesn't look too horrible, but nor does it look good. 15 years is the constraint needed to keep your bond/cash combined holding to a sensible level for bad equity market performance cases. Going higher in equities increases the good equity results but hurts you on the bad side and it's the bad one that's your limiting one in drawdown.

Income funds rather than accumulation are likely to be better during drawdown because your get to delay selling decisions in down markets for longer. Ignore higher performance from reinvesting dividends arguments because you're forced to sell during drawdown anyway, you're not in the accumulation phase any more. All you're doing with accumulation is restricting your choices about where you reinvest and when you sell. Income units give you more of that flexibility.

Just three asset classes isn't great, more diversification can increase safe withdrawal rates, as Bill Bengen observes in William Bengen: The 5% Rule for Retirement Spending :

"My colleague, Ryan McClain, who owns a company that built software that studies this issues, he recently published a study with even higher withdrawal rates that I've been able to generate because he used a lot more asset classes. And he went from 4.2 to 5.0, so that's why I'm not a pessimist. I think if you have a well-diversified portfolio, four and a half percent is pretty cheap. I think five, five and a half percent is doable. Even in this environment."

bostonerimus

If you intend to be taking income from a portfolio then bond funds look like certain losers. If you can wait longer than the average maturity and plough back the distributions you'll make a few percent. They will hopefully be less volatile than stocks, but maybe keep the duration of the funds short or look at fixed term saving account ladders. The issue with holding to maturity and the range of maturities generally held inside a bond fund lead to the development of target maturity bond funds in the US that can be laddered. These have the "maturity" advantage of individual bonds and the diversity advantage of bond funds.

GazzaBloom

jamesd said:

GazzaBloom 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

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)

Provided the total value of your portfolio is not higher than about 15 years of income that doesn't look too horrible, but nor does it look good. 15 years is the constraint needed to keep your bond/cash combined holding to a sensible level for bad equity market performance cases. Going higher in equities increases the good equity results but hurts you on the bad side and it's the bad one that's your limiting one in drawdown.

Income funds rather than accumulation are likely to be better during drawdown because your get to delay selling decisions in down markets for longer. Ignore higher performance from reinvesting dividends arguments because you're forced to sell during drawdown anyway, you're not in the accumulation phase any more. All you're doing with accumulation is restricting your choices about where you reinvest and when you sell. Income units give you more of that flexibility.

Just three asset classes isn't great, more diversification can increase safe withdrawal rates, as Bill Bnegen observes in William Bengen: The 5% Rule for Retirement Spending :

"My colleague, Ryan McClain, who owns a company that built software that studies this issues, he recently published a study with even higher withdrawal rates that I've been able to generate because he used a lot more asset classes. And he went from 4.2 to 5.0, so that's why I'm not a pessimist. I think if you have a well-diversified portfolio, four and a half percent is pretty cheap. I think five, five and a half percent is doable. Even in this environment."

“A lot more asset classes” what do you think he means here. What extra asset classes beyond stocks/bonds?

If you have a Vanguard UK SIPP all of the current funds either active or passive are are mix of stocks and bonds no other asset classes.

Yet, Bengen's research is solely focussed on US assuming use of passive low cost index trackers. Are there low cost index trackers that track “a lot more asset classes”?

“I mean, my research has had a very narrow focus. It's basically been focused on U.S. investors, U.S. investments, U.S. bonds, U.S. stocks. So, I'm probably not very well qualified to comment about what's happening outside our borders”

” My research assumes that you are using funds with extremely low cost. So essentially they match their index. And obviously if you're investing in funds that have, or actively manage, or have high fees, you're going to have to reduce your withdrawal rate accordingly. I think it's very important in the context of my research to use very efficient investments that reproduce indices reliably, and don't sour you a lot of unnecessary costs.”

GazzaBloom

bostonerimus said:

If you intend to be taking income from a portfolio then bond funds look like certain losers. If you can wait longer than the average maturity and plough back the distributions you'll make a few percent. They will hopefully be less volatile than stocks, but maybe keep the duration of the funds short or look at fixed term saving account ladders. The issue with holding to maturity and the range of maturities generally held inside a bond fund lead to the development of target maturity bond funds in the US that can be laddered. These have the "maturity" advantage of individual bonds and the diversity advantage of bond funds.

My thinking behind having the amount in Bonds was not for it to grow particularly but provide an alternative source of income during market crashes, assuming the bonds wouldn't crash anywhere near as hard as the stocks would. All the growth would come from the stocks fund which would provide all the drawdown until a 10% or more market drop then I would cease stock withdrawal completely and switch drawdown to the bonds. Hopefully never having to use the 2 years held as cash.

Audaxer

GazzaBloom said:

bostonerimus said:

If you intend to be taking income from a portfolio then bond funds look like certain losers. If you can wait longer than the average maturity and plough back the distributions you'll make a few percent. They will hopefully be less volatile than stocks, but maybe keep the duration of the funds short or look at fixed term saving account ladders. The issue with holding to maturity and the range of maturities generally held inside a bond fund lead to the development of target maturity bond funds in the US that can be laddered. These have the "maturity" advantage of individual bonds and the diversity advantage of bond funds.

My thinking behind having the amount in Bonds was not for it to grow particularly but provide an alternative source of income during market crashes, assuming the bonds wouldn't crash anywhere near as hard as the stocks would. All the growth would come from the stocks fund which would provide all the drawdown until a 10% or more market drop then I would cease stock withdrawal completely and switch drawdown to the bonds. Hopefully never having to use the 2 years held as cash.

Yes, but in that scenario, if bonds also fell by say 5%, I would think it would then be better to drawdown the cash rather than bonds? If not, in what scenario would you drawdown from the cash? 

GazzaBloom

Audaxer said:

GazzaBloom said:

bostonerimus said:

If you intend to be taking income from a portfolio then bond funds look like certain losers. If you can wait longer than the average maturity and plough back the distributions you'll make a few percent. They will hopefully be less volatile than stocks, but maybe keep the duration of the funds short or look at fixed term saving account ladders. The issue with holding to maturity and the range of maturities generally held inside a bond fund lead to the development of target maturity bond funds in the US that can be laddered. These have the "maturity" advantage of individual bonds and the diversity advantage of bond funds.

My thinking behind having the amount in Bonds was not for it to grow particularly but provide an alternative source of income during market crashes, assuming the bonds wouldn't crash anywhere near as hard as the stocks would. All the growth would come from the stocks fund which would provide all the drawdown until a 10% or more market drop then I would cease stock withdrawal completely and switch drawdown to the bonds. Hopefully never having to use the 2 years held as cash.

Yes, but in that scenario, if bonds also fell by say 5%, I would think it would then be better to drawdown the cash rather than bonds? If not, in what scenario would you drawdown from the cash? 

In an extreme emergency, cash is simply a comfort blanket as there will be no other "earned" income until state pensions kick in some years later.

[Deleted User]

Interesting little article in FT. ETF in- and out-flows strongly suggest that institutional investors have been pulling out of bond fnds since early 2021  while “buy and hold” retail sector continued buying. 

https://www.ft.com/content/9cb05d24-bf8f-420c-9bb8-0449c9406a6f

GazzaBloom

Deleted_User said:

Interesting little article in FT. ETF in- and out-flows strongly suggest that institutional investors have been pulling out of bond fnds since early 2021  while “buy and hold” retail sector continued buying. 

https://www.ft.com/content/9cb05d24-bf8f-420c-9bb8-0449c9406a6f

interesting, I am torn as to whether to just hold extra cash rather than a chunk in bonds to use in market downturns and just go 2 bucket cash/100% stocks. I certainly don't see Bonds as a growth vehicle for the foreseeable. 

bostonerimus

GazzaBloom said:

Audaxer said:

GazzaBloom said:

bostonerimus said:

If you intend to be taking income from a portfolio then bond funds look like certain losers. If you can wait longer than the average maturity and plough back the distributions you'll make a few percent. They will hopefully be less volatile than stocks, but maybe keep the duration of the funds short or look at fixed term saving account ladders. The issue with holding to maturity and the range of maturities generally held inside a bond fund lead to the development of target maturity bond funds in the US that can be laddered. These have the "maturity" advantage of individual bonds and the diversity advantage of bond funds.

My thinking behind having the amount in Bonds was not for it to grow particularly but provide an alternative source of income during market crashes, assuming the bonds wouldn't crash anywhere near as hard as the stocks would. All the growth would come from the stocks fund which would provide all the drawdown until a 10% or more market drop then I would cease stock withdrawal completely and switch drawdown to the bonds. Hopefully never having to use the 2 years held as cash.

Yes, but in that scenario, if bonds also fell by say 5%, I would think it would then be better to drawdown the cash rather than bonds? If not, in what scenario would you drawdown from the cash? 

In an extreme emergency, cash is simply a comfort blanket as there will be no other "earned" income until state pensions kick in some years later.

Cash is the asset that you can use to avoid selling at a loss. If interest rates go up you could see both stock and bonds going down. Bond percentage losses will probably be less than stocks, but that's when you'd spend some cash. You could add a short term bond fund or a fixed term saving account ladder.