Suggestions on drawdown from 3 bucket retirement strategy

Audaxer

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.

How long until your State Pension kicks in? If it is only around 3 or 4 years, I think it is worth holding enough cash to pay yourself the equivalent of the State Pension over that period. Your drawdown rate from your investments will therefore just be what you need over and above your annual income including the State Pension.

bostonerimus

Audaxer said:

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.

How long until your State Pension kicks in? If it is only around 3 or 4 years, I think it is worth holding enough cash to pay yourself the equivalent of the State Pension over that period. Your drawdown rate from your investments will therefore just be what you need over and above your annual income including the State Pension.

When I retired I had to span a gap of 3 years until my pension started. I did something similar to what you suggest. I put 3 years spending in the bank and just lived off that. I carefully monitored my spending and also reduced my spending so that I had plenty still left in the bank after the 3 years. I did things like stopping TV subscriptions and limiting what I spent in coffee shops. As a result I saved money and I think both my mind and body became healthier.

jamesd

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

Well, except me and anyone who paid attention to what I and others have written here about low interest rates and low inflation being a bad time to buy bonds and cash historically having done better in that combination...

jamesd

GazzaBloom said:

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. 

In totally general investing the mix is equities:bonds but low interest rates and inflation is a time when that's best varied to use cash instead of bonds. It's temporary, happens a few times a century historically, so just something to adjust for when it happens. I've also used peer to peer lending, asset-backed lending investing focussed VCTs and mortgage offset in the not really bonds low volatility mixture.

jamesd

Dead_keen said:

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.

That's a bit of a variation on the Guyton-Klinger method which is very effective. One reason is that taking income from cash (sometimes generated from bull market equity sales) then bonds and finally equities produces a rising equity glidepath, gradually increasing equity weights over time.

BTW, the other site you mentioned did a piece that falsely claimed to be analysing the Guyton-Klinger method. You should disregard the performance of the not really GK approach they came up with, for many and varied reasons partly enumerated in this post. Sadly many people have approached them about the problems and they haven't been willing to correct their mistakes so their piece is useless except to illustrate how badly wrong they can be in their analyses.

jamesd

GazzaBloom said:

...

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?

It looks like it may be How Diversification Improves Safe Withdrawal Rates by Ryan McLean, 12/21/20. Bengen started out with US large cap and US government bonds, then later added small cap. McLean varied it a bit more with combinations including large cap, international (to US investor), small cap, mid cap, micro cap and total market equities in addition to bonds. The ones with greater mixtures did better, raising 60:40 equity:bonds at 4.2% to 5.0% for the two most varied mixtures. He used a  955 success rate in his analysis, not 100%.

More asset classes is what I'd normally take to include commercial property, private equity and non-bond fixed interest including for me P2P, mortgage offset, savings and perhaps other things. Not something a US-centric analysis is likely to include and I haven't seen how McLean's specific combination does internationally.

[Deleted User]

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.

And its a solid strategy. If you hold bonds for major crashes then you need to be very selective.  Gilts would work well. US treasuries - ditto. That’s where everyone would rush into. USD tends to jump.  Best to buy the actual government bonds and avoid risks of failing fund providers.  

Note that I wouldn’t buy an international bond fund with corporate bonds if this is your objective. The next crash will happen because certain corporations, industries or whole countries would be failing.  Their bonds would become unsafe.  You need government bonds from the country of your currency and, arguably, US.  

Now… If you buy a government bond today, you will lose money to inflation. Personally I would wait a bit; until after QE ends.

GazzaBloom

Deleted_User 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.

And its a solid strategy. If you hold bonds for major crashes then you need to be very selective.  Gilts would work well. US treasuries - ditto. That’s where everyone would rush into. USD tends to jump.  Best to buy the actual government bonds and avoid risks of failing fund providers.  

Note that I wouldn’t buy an international bond fund with corporate bonds if this is your objective. The next crash will happen because certain corporations, industries or whole countries would be failing.  Their bonds would become unsafe.  You need government bonds from the country of your currency and, arguably, US.  

Now… If you buy a government bond today, you will lose money to inflation. Personally I would wait a bit; until after QE ends.

Thanks, some good feedback there. I don't hold any bonds currently as I am a 100% stocks investor and have been for many years. Learning more about Bonds is something I need to do before I get to retirement if I am going to seriously consider holding them down the road.

I plan to move my pension to a Vanguard SIPP for retirement so will look closely at their US Government Bond funds.

JohnWinder

Now… If you buy a government bond today, you will lose money to inflation.

A good note of caution, but I think I'm right in saying that because govt bonds can be nominal or inflation linked we have two different situations.

The inflation linked bond shouldn't lose money to inflation as its adjusted face value and coupon will rise with any inflation by the same % as the inflation. But you will lose money as their yields are currently negative, UNLESS interest rates fall and the bond value rises as a consequence enough to overcome the negative yield. No one is coming out bravely enough to say they expect interest rates will fall, agreed; and I'll leave that there.

The nominal bond will lose money to inflation, but if inflation finishes up to be what the market expected then you should have been compensated for that inflation with the coupons it is yielding; all bond buyers know there'll be some inflation while the bond issuer has their money, so they demand some compensation for that in the yield. With yields as negative as they are now, that still will leave you losing money (maybe longer duration bonds have positive yields now, I don't know), UNLESS interest rates fall enough.

[Deleted User]

The nominal bond will lose money to inflation, but if inflation finishes up to be what the market expected then you should have been compensated for that inflation with the coupons it is yielding; 

Key words are highlighted. 10 year treasuries yield 1.551%. Feds target average inflation of 2%. They have also been tasked with achieving equality and singing Kumbaya. Like you say, its a loss in real terms. 

Also, not all inflation linked government bonds have a “floor” you referenced.  You are right that they will lose money “full stop”.  10 year TIPS yield -0.9%.   And you are losing to inflation.  If it goes up from current (high) levels you’ll be compensated but by buying you are locking in a loss to inflation. And you would  be carrying the risk of default for the privilege of losing money.  And short term volatility risks due to tapering and  interest rates going up.