How Much to Accumulate for Retirement? (Excel analysis)

BritishInvestor

Audaxer said:

BritishInvestor said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

I'm not sure the cash buffer is going to be a massive help (certainly not if you take it from the equity allocation).

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

If for example I needed £4,000 a year income from a pot of £120,000, I would prefer to have £100,000 invested and take a 4% withdrawal rate with a cash buffer of £20,000. With the whole £120,000 invested, the £4,000 income would mean a withdrawal rate of 3.33%. Some may prefer that option, but the buffer option would feel safer to me. 

Yep, I fully accept that emotions play a part - I was commenting more on how things have historically panned out for the non-emotional investor (if there is such a thing )

Linton

Robert_McGeddon said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

Yes to SoR being important.

Additionally, the ability to "rein in" outgoings during years of poor investment returns is also important.  Several of the SWR methodologies suggest changes if returns are other than expected.  SWR is a guide, not a mandate - in a 30 year retirement flexing income (up as well as down) should be expected.

I agree that SoR is important,  it should be taken into account when setting up a withdrawal strategy. However the damage it causes decreases as one gets older because long term high equity investments approach irrelevence.

For a relaxing retirement ISTM an important requirement is that one should be able to maintain one's standard of living. I would see the need to temporarily rein-in outgoings over the short term as a symptom of a poor withdrawal strategy.

pensionpawn

Linton said:

BritishInvestor said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

I'm not sure the cash buffer is going to be a massive help (certainly not if you take it from the equity allocation).

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

 - None of the strategies tested matched what it is proposed here that one does with a buffer. ie use it for covering crashes
 - The strategies were mostly tested when bond returns were of some significance - one of the major reasons for choosing a cash buffer is that safe bonds now seem to be sub-optimal.  If bond were returning say 5% the need for cash would be significantly reduced.
 - In retirement I would think most people are prepared to sacrifice returns if necessary to reduce risk

If having a large cash buffer enables you to sail through a crash worry-free when you would otherwise lie awake at night then a cash buffer is a massive help.

Yes, a cash buffer is a sensible strategy. Even though cash is vulnerable to inflation on balance I believe holding a couple of years (I have around 4) worth of withdrawal calms the nerves, just a Linton illustrates above. Essential for the early years however as time (decades) go by and your funds hopefully continue to grow significantly, you can start to whittle down the cash holding as with decreasing years ahead it has performed it's role.

DT2001

Linton said:

Robert_McGeddon said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

Yes to SoR being important.

Additionally, the ability to "rein in" outgoings during years of poor investment returns is also important.  Several of the SWR methodologies suggest changes if returns are other than expected.  SWR is a guide, not a mandate - in a 30 year retirement flexing income (up as well as down) should be expected.

I agree that SoR is important,  it should be taken into account when setting up a withdrawal strategy. However the damage it causes decreases as one gets older because long term high equity investments approach irrelevence.

For a relaxing retirement ISTM an important requirement is that one should be able to maintain one's standard of living. I would see the need to temporarily rein-in outgoings over the short term as a symptom of a poor withdrawal strategy.

If you employ a strategy that requires no chance of downward adjustment of income you will be overly cautious.
Flexibility allows you to have a greater overall level of income.

If retiring before SPA without any guaranteed income maybe a combination of cash reserve and flexibility is ideal. It is the time when supposedly you’ll be spending most in retirement (unless needing care later on) but if you can tweak the timing of say long haul holidays by a year or so you must improve the longevity of your pot.

Audaxer

pensionpawn said:

Linton said:

BritishInvestor said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

I'm not sure the cash buffer is going to be a massive help (certainly not if you take it from the equity allocation).

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

 - None of the strategies tested matched what it is proposed here that one does with a buffer. ie use it for covering crashes
 - The strategies were mostly tested when bond returns were of some significance - one of the major reasons for choosing a cash buffer is that safe bonds now seem to be sub-optimal.  If bond were returning say 5% the need for cash would be significantly reduced.
 - In retirement I would think most people are prepared to sacrifice returns if necessary to reduce risk

If having a large cash buffer enables you to sail through a crash worry-free when you would otherwise lie awake at night then a cash buffer is a massive help.

Essential for the early years however as time (decades) go by and your funds hopefully continue to grow significantly, you can start to whittle down the cash holding as with decreasing years ahead it has performed it's role.

If your investments grow significantly in retirement, I would say that is a good reason for converting more to cash to enable you to lower your risk profile and spend more of it if you want. As others have previously said, there is no point in being the richest person in the graveyard.

pensionpawn

Audaxer said:

pensionpawn said:

Linton said:

BritishInvestor said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

I'm not sure the cash buffer is going to be a massive help (certainly not if you take it from the equity allocation).

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

 - None of the strategies tested matched what it is proposed here that one does with a buffer. ie use it for covering crashes
 - The strategies were mostly tested when bond returns were of some significance - one of the major reasons for choosing a cash buffer is that safe bonds now seem to be sub-optimal.  If bond were returning say 5% the need for cash would be significantly reduced.
 - In retirement I would think most people are prepared to sacrifice returns if necessary to reduce risk

If having a large cash buffer enables you to sail through a crash worry-free when you would otherwise lie awake at night then a cash buffer is a massive help.

Essential for the early years however as time (decades) go by and your funds hopefully continue to grow significantly, you can start to whittle down the cash holding as with decreasing years ahead it has performed it's role.

If your investments grow significantly in retirement, I would say that is a good reason for converting more to cash to enable you to lower your risk profile and spend more of it if you want. As others have previously said, there is no point in being the richest person in the graveyard.

I think it depends on the value of your holding compared to what you need to withdraw pa. If you have £400k in funds and £100k in cash, are 65 and drawdown £20k per year it may be worth keeping your 5 year cash safety net. However if you now have £800k in funds and still £100k in cash at 75 you may well be asking what sort of catastrophic world event is going to leave you struggling to get by at 80 after you've used all your cash? Bearing in mind you have a full SP and say £0.5M equity in your house. What we don't spend from our drawdown each year will go into savings such as an ISA, however besides that I'm not going to significantly add to my cash buffer.

BritishInvestor

Linton said:

BritishInvestor said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

I'm not sure the cash buffer is going to be a massive help (certainly not if you take it from the equity allocation).

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

 - None of the strategies tested matched what it is proposed here that one does with a buffer. ie use it for covering crashes
 - The strategies were mostly tested when bond returns were of some significance - one of the major reasons for choosing a cash buffer is that safe bonds now seem to be sub-optimal.  If bond were returning say 5% the need for cash would be significantly reduced.
 - In retirement I would think most people are prepared to sacrifice returns if necessary to reduce risk

If having a large cash buffer enables you to sail through a crash worry-free when you would otherwise lie awake at night then a cash buffer is a massive help.

 - None of the strategies tested matched what it is proposed here that one does with a buffer. ie use it for covering crashes

How do you envisage a cash buffer working when you really need it to - such as a long multi-year drawdown with big inflation - that's a pretty big buffer.

 -The strategies were mostly tested when bond returns were of some significance - one of the major reasons for choosing a cash buffer is that safe bonds now seem to be sub-optimal.  If bond were returning say 5% the need for cash would be significantly reduced.

See my comment about taking cash from the equity allocation - taking from bond allocation has not been so harmful, but I don't see a huge upside. I'm not clear what you mean when you say "mostly tested when bond returns were of some significance" - the periods that the SWR has historically been put under stress have seen some abysmal bond returns.

 - In retirement I would think most people are prepared to sacrifice returns if necessary to reduce risk
The biggest risk for a lot of people is running out of money - I'm not clear what cash buffers do to help this (other than the comfort blanket already discussed).

"If having a large cash buffer enables you to sail through a crash worry-free when you would otherwise lie awake at night then a cash buffer is a massive help."

Agreed.

Linton

DT2001 said:

Linton said:

Robert_McGeddon said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

Yes to SoR being important.

Additionally, the ability to "rein in" outgoings during years of poor investment returns is also important.  Several of the SWR methodologies suggest changes if returns are other than expected.  SWR is a guide, not a mandate - in a 30 year retirement flexing income (up as well as down) should be expected.

I agree that SoR is important,  it should be taken into account when setting up a withdrawal strategy. However the damage it causes decreases as one gets older because long term high equity investments approach irrelevence.

For a relaxing retirement ISTM an important requirement is that one should be able to maintain one's standard of living. I would see the need to temporarily rein-in outgoings over the short term as a symptom of a poor withdrawal strategy.

If you employ a strategy that requires no chance of downward adjustment of income you will be overly cautious.
Flexibility allows you to have a greater overall level of income.

If retiring before SPA without any guaranteed income maybe a combination of cash reserve and flexibility is ideal. It is the time when supposedly you’ll be spending most in retirement (unless needing care later on) but if you can tweak the timing of say long haul holidays by a year or so you must improve the longevity of your pot.

It isnt a matter of being cautious but rather of using your assets  to their best advantage.  In particular a 60/40 portfolio is seen as reasonable for retirement.  There should be plenty of money in the 40% to avoid selling equities for at least 5 years and for taking your long-booked luxury holiday.  Better to see the 40% as part of your armoury rather than simply as padding .  This implies that you should devote as much time to the allocation of your non-equity assets as you do to your equities.

I can't see that the savings from simply cutting excess expenditure for the short term without seriously reducing your standard of living are going to be significantly large to justify the pain. Rather than reacting in a panic to a crash by cutting all your expenditure by as much as say 25% for a year or two it would be better to plan to reduce expenditure by a few % for the rest of your life which is something you probably would not notice.  Such a small change would probably be reversed when your equities recovered anyway.

Linton

Audaxer said:

pensionpawn said:

Linton said:

BritishInvestor said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

I'm not sure the cash buffer is going to be a massive help (certainly not if you take it from the equity allocation).

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

 - None of the strategies tested matched what it is proposed here that one does with a buffer. ie use it for covering crashes
 - The strategies were mostly tested when bond returns were of some significance - one of the major reasons for choosing a cash buffer is that safe bonds now seem to be sub-optimal.  If bond were returning say 5% the need for cash would be significantly reduced.
 - In retirement I would think most people are prepared to sacrifice returns if necessary to reduce risk

If having a large cash buffer enables you to sail through a crash worry-free when you would otherwise lie awake at night then a cash buffer is a massive help.

Essential for the early years however as time (decades) go by and your funds hopefully continue to grow significantly, you can start to whittle down the cash holding as with decreasing years ahead it has performed it's role.

If your investments grow significantly in retirement, I would say that is a good reason for converting more to cash to enable you to lower your risk profile and spend more of it if you want. As others have previously said, there is no point in being the richest person in the graveyard.

A difficult one I think.  In the early days of retirement you need protection against SoR risk and so there could be a case for excess non equity for the first say 5 years.  Nearly always the SoR risk wont materialise and you will have a larger pot than planned which could then justify extra equity perhaps for long term inflation protection.  Then in the latter stages of retirement there is the case for reducing equity on the grounds that you dont need to take the risk.

Audaxer

pensionpawn said:

Audaxer said:

pensionpawn said:

Linton said:

BritishInvestor said:

Audaxer said:

SouthCoastBoy said:

It seems most people take the swr as the way forward. My understanding of swr is that the pot will be preserved at the swr? Is that incorrect? 

Whether or not the pot will be preserved will depend on the Sequence of Returns. If for example you get a poor sequence of returns in the first decade of retirement, the pot might not last throughout retirement if you don't have a cash buffer to draw from in loss years.

I'm not sure the cash buffer is going to be a massive help (certainly not if you take it from the equity allocation).

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

 - None of the strategies tested matched what it is proposed here that one does with a buffer. ie use it for covering crashes
 - The strategies were mostly tested when bond returns were of some significance - one of the major reasons for choosing a cash buffer is that safe bonds now seem to be sub-optimal.  If bond were returning say 5% the need for cash would be significantly reduced.
 - In retirement I would think most people are prepared to sacrifice returns if necessary to reduce risk

If having a large cash buffer enables you to sail through a crash worry-free when you would otherwise lie awake at night then a cash buffer is a massive help.

Essential for the early years however as time (decades) go by and your funds hopefully continue to grow significantly, you can start to whittle down the cash holding as with decreasing years ahead it has performed it's role.

If your investments grow significantly in retirement, I would say that is a good reason for converting more to cash to enable you to lower your risk profile and spend more of it if you want. As others have previously said, there is no point in being the richest person in the graveyard.

I think it depends on the value of your holding compared to what you need to withdraw pa. If you have £400k in funds and £100k in cash, are 65 and drawdown £20k per year it may be worth keeping your 5 year cash safety net. However if you now have £800k in funds and still £100k in cash at 75 you may well be asking what sort of catastrophic world event is going to leave you struggling to get by at 80 after you've used all your cash? Bearing in mind you have a full SP and say £0.5M equity in your house. What we don't spend from our drawdown each year will go into savings such as an ISA, however besides that I'm not going to significantly add to my cash buffer.

That's fine, but if your investments have grown to that extent, I'm not looking at it from the point of view of being more cautious. In your example, if your investments have gone up to £800k and you had £100k cash, you could if you wanted to, convert a bit more of the £800k to cash, say another £100k, to spend it on luxuries over the next few years or give some to good causes.  You would still have £700k in investments and £100k cash, which would still be enough to drawdown £20k per year for your remaining years. My point being, you can't take it with you.