Cash or bonds in retirement?

GazzaBloom

Would you recommend holding cash or bonds or a mix of both as an alternative source of drawdown income from a 100% stock retirement portfolio when the market is down?

I'm currently looking to build a cash/bonds pot to cover 5 years worth of typical retirement drawdown as an alternative source of drawdown for when the market drops into correction for any length of time so the stocks portfolio can be left to recover.

JohnWinder

You might see what big ERN has to say: https://earlyretirementnow.com/2021/09/14/bucket-strategies-swr-series-part-48/

Linton

I would recommend both cash and bonds plus anything else you can find which will provide non equity returns.  100% equity is likely to lead to sleepless nights when your life savings drop by 20-50% in a crash.

GazzaBloom

Linton said:

I would recommend both cash and bonds plus anything else you can find which will provide non equity returns.  100% equity is likely to lead to sleepless nights when your life savings drop by 20-50% in a crash.

That depends on an individuals emotional resilience and ability to take the long view or succumb to short term panic. The retirement starting position I am currently targeting would effectively be 80/20 stocks to cash/bonds but drawdown would be from the stock only outside downturns and from cash/bonds during downturns. I would rebalance annually with a view to moving along to 70/30 then 60/40 over time.

I also will have a final salary pension covering around 17% of drawdown needs and 2 full state pensions for myself and my wife after around the first 10 years of retirement.

[Deleted User]

Linton said:

I would recommend both cash and bonds plus anything else you can find which will provide non equity returns.  100% equity is likely to lead to sleepless nights when your life savings drop by 20-50% in a crash.

A retired person with 100% equities needs his head examined.  If Shiller PE were to drop to the early 80s level (not saying it would but it may), equities would drop by a factor of 7. 

Yes, a bit of everything is the answer. 

Thrugelmir

GazzaBloom said:

Would you recommend holding cash or bonds or a mix of both as an alternative source of drawdown income from a 100% stock retirement portfolio when the market is down?

I'm currently looking to build a cash/bonds pot to cover 5 years worth of typical retirement drawdown as an alternative source of drawdown for when the market drops into correction for any length of time so the stocks portfolio can be left to recover.

Positioning the equity portfolio in a balanced manner. Should enable a sustainable level of income to be drawn down through any correction. Equities is a broad generalisation. Companies are not the same. 

kinger101

GazzaBloom said:

Linton said:

I would recommend both cash and bonds plus anything else you can find which will provide non equity returns.  100% equity is likely to lead to sleepless nights when your life savings drop by 20-50% in a crash.

That depends on an individuals emotional resilience and ability to take the long view or succumb to short term panic. The retirement starting position I am currently targeting would effectively be 80/20 stocks to cash/bonds but drawdown would be from the stock only outside downturns and from cash/bonds during downturns. I would rebalance annually with a view to moving along to 70/30 then 60/40 over time.

I also will have a final salary pension covering around 17% of drawdown needs and 2 full state pensions for myself and my wife after around the first 10 years of retirement.

So you're giving yourself more exposure to the stock market at the time SOR risk would be most damaging?  I'd rethink that one.  

DT2001

GazzaBloom said:

Linton said:

I would recommend both cash and bonds plus anything else you can find which will provide non equity returns.  100% equity is likely to lead to sleepless nights when your life savings drop by 20-50% in a crash.

That depends on an individuals emotional resilience and ability to take the long view or succumb to short term panic. The retirement starting position I am currently targeting would effectively be 80/20 stocks to cash/bonds but drawdown would be from the stock only outside downturns and from cash/bonds during downturns. I would rebalance annually with a view to moving along to 70/30 then 60/40 over time.

I also will have a final salary pension covering around 17% of drawdown needs and 2 full state pensions for myself and my wife after around the first 10 years of retirement.

If you rebalance annually during a stock market downturn don’t you have to sell stocks/shares to replenish your cash/bond?

If you have say 5 years of ‘cash’ your final salary pension will extend your time before ‘needing’ to sell shares/stocks by a year. You could also take natural income. Hopefully the bear market will then have finished. Along the way there will have been some ups in the stock markets, you hope, when you could top up your cash pots.

The key is mitigating the worst case scenario for you which might mean reducing your upside as well.

michaels

Suppose you have 50:50 Cash and Equities

Suppose the equities half in value, your portfolio is now 67% cash, 33% equities.

If you don't re-balance the you are saying, before when equities were 'high' I wanted to weight them more highly in my portfolio than I do now when they are 'low' - effectively a buy high / sell low strategy which will not be effective long term for sure.

GazzaBloom

OK so what you recommend as a suitable portfolio and drawdown strategy for a pensioner who is not risk averse?

Start with 80/20, 70/30, 60/40? stocks/bonds and cash?

Drawdown equally from stocks/bonds & cash as per the weighting regardless of market ups/downs?

Rebalance or don't Rebalance?

The thing I don't get about the "bucket" withdrawal strategy is that often it's advised that you hold cash in bucket 1 to cover short term, then bonds in bucket 2 for medium term then bucket 3 in equities for longer term.

However, at the end of year 1 what do you do? Do you top up the cash buffer? and from where? Isn't that the same as drawing from stocks from the start? You may not be selling the stocks to cover spending needs but topping up bucket 1 or 2, so you are still selling stocks from the off. At some point you have to top up bucket 1 and 2 or they deplete completely and you end up with 100% equities.

So, why not draw from equities from day 1 but switch drawdown to cash/bonds when stocks are down and then resume when the market recovers?

Or, do you drawdown from all assets proportionally regardless of market swings? ie 60% from stocks, 40% from cash/bonds year in year out?

GazzaBloom

Thrugelmir said:

GazzaBloom said:

Would you recommend holding cash or bonds or a mix of both as an alternative source of drawdown income from a 100% stock retirement portfolio when the market is down?

I'm currently looking to build a cash/bonds pot to cover 5 years worth of typical retirement drawdown as an alternative source of drawdown for when the market drops into correction for any length of time so the stocks portfolio can be left to recover.

Positioning the equity portfolio in a balanced manner. Should enable a sustainable level of income to be drawn down through any correction. Equities is a broad generalisation. Companies are not the same. 

My equities portfolio is invested via a low cost US stocks index fund that tracks the FTSE USA Index and reinvests dividends. What equity portfolio do you recommend that would sustain drawdown through any correction?