Cash or bonds in retirement?

JohnWinder

Perhaps read some of Christine Benz from Morningstar.com on how to operate a bucket drawdown strategy. She's a bit of a believer, writes clearly and repeatedly on it, and might sell you on the idea.

What equity portfolio do you recommend that would sustain drawdown through any correction?

Considering that a portfolio might be any size from tiny to huge, and required drawdowns anything down to very small, and your 'correction' could be any size for any time period, you don't seriously imagine that question can be answered sensibly?

Even if you specified those conditions with realistic values, no one would know how an equity portfolio would behave years into the future. Your, our, everyone's problem with needing to take regular, similar value withdrawals from an investment whose return is unpredictable is that it's full of problems unless you're flexible; the problems being: living like a monk but dying rich, or running out of money early. Solution: essentially one needs to have the flexibility to spend less in bad times, and ramp it up when the grim reaper is sighted - pretty obvious really.

The other way is a liability matching portfolio without equities: either hand your money over and buy a lifetime inflation linked annuity, or make yourself a non-rolling bond ladder to well past your expected death date. Both give certainty of income.

If you go the equities route, you probably want 'well diversified' because that's best return for lowest risk, and low cost. Neither quality needs to be taken to extremes, but you get the idea. Hold no more than you can stomach the volatility that comes with it, but not too much less.

GazzaBloom

JohnWinder said:

Perhaps read some of Christine Benz from Morningstar.com on how to operate a bucket drawdown strategy. She's a bit of a believer, writes clearly and repeatedly on it, and might sell you on the idea.

What equity portfolio do you recommend that would sustain drawdown through any correction?

Considering that a portfolio might be any size from tiny to huge, and required drawdowns anything down to very small, and your 'correction' could be any size for any time period, you don't seriously imagine that question can be answered sensibly?

Even if you specified those conditions with realistic values, no one would know how an equity portfolio would behave years into the future. Your, our, everyone's problem with needing to take regular, similar value withdrawals from an investment whose return is unpredictable is that it's full of problems unless you're flexible; the problems being: living like a monk but dying rich, or running out of money early. Solution: essentially one needs to have the flexibility to spend less in bad times, and ramp it up when the grim reaper is sighted - pretty obvious really.

The other way is a liability matching portfolio without equities: either hand your money over and buy a lifetime inflation linked annuity, or make yourself a non-rolling bond ladder to well past your expected death date. Both give certainty of income.

If you go the equities route, you probably want 'well diversified' because that's best return for lowest risk, and low cost. Neither quality needs to be taken to extremes, but you get the idea. Hold no more than you can stomach the volatility that comes with it, but not too much less.

That pretty much sums up my intended approach, I am quite tolerant of volatility so can stomach a higher percentage of equities than maybe some others.

GazzaBloom

I've mulled this over further and I'm going to ditch the bucket strategy idea, it doesn't make sense. I will plan to keep some cash in retirement for peace of mind, maybe a couple of years living expenses or more. The investment portfolio will be 80/20 stocks/bonds and I will drawdown from this to a 80/20 ratio through the year and then rebalance back to 80/20 annually. Drawdown will be around 5% of starting portfolio value in year 1 but will reduce to less than 0.5% when the state pensions kick in. 

I may move to a more conservative ratio over time, certainly once state pensions kick in, as by then it will be more about preservation.

I just need to stay alive long enough to enjoy a retirement and avoid the zombie apocalypse, global nuclear obliteration or the sudden demise of Capitalism

AlanP_2

I don't think about our portfolio as 80/20 (or whatever) Equities / Bonds with £x of cash on the side, i look at it in its entirety.

If the £x is say 10% of the overall portfolio I am 70/30 Equities to Bonds / Fixed Interest / Cash.

I do smile ruefully when you see posts that say I am 100% invested in equities, and then a few posts later it comes out they also have £20-100k in cash and PBs.

Anyway back to the main point - there isn't a standard "one size fits all" answer.

We will have 2 DBs and 2 SPs that will more than cover our normal spend on everything including a decent holiday budget.

We will also have SIPPs, S&S ISAs and Cash / PBs for abnormal spends e.g. "big" holiday,new car, kids wedding etc.

Some would take the view that given our fortunate position with DB/SP we could safely go gung-ho with the investments as the outcome is relatively immaterial compared to someone living off their investments.

Others would say be very conservative with your investments, you have enough, preserve it and forget about it.

Neither view is generically right or wrong and will depend on the individuals "gut feel". We wouldn't want to be exposed to 100 equities as (even though it doesn't really matter) we would be uncomfortable with that level of volatility.

We will be approx 60/40 Equities to Bonds / Cash / FI when we retire and will probably let this drift out towards 75/25 later when SoR impacts will be lower and "big" holidays are fond memories. 


I can honestly say I do not envy those who have larger investment pots than us but are totally dependent on them.

Thrugelmir

GazzaBloom said:

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?

US stocks pay low levels of dividends. That's down to the tax treatment of income. Other markets offer alternative options. No single market or trade is going to perform continually hence my balanced comment. 

SouthCoastBoy

AlanP_2 said:

I can honestly say I do not envy those who have larger investment pots than us but are totally dependent on them.

Totally agree, I have a relatively large pot but no DB and am envious of people with DB pensions. If I had taken notice of pensions at an earlier date I would have moved to the public sector to ensure I was one of the DB brigade, unfortunately I think that boat has sailed for me.

GazzaBloom

AlanP_2 said:

I don't think about our portfolio as 80/20 (or whatever) Equities / Bonds with £x of cash on the side, i look at it in its entirety.

If the £x is say 10% of the overall portfolio I am 70/30 Equities to Bonds / Fixed Interest / Cash.

I do smile ruefully when you see posts that say I am 100% invested in equities, and then a few posts later it comes out they also have £20-100k in cash and PBs.

Anyway back to the main point - there isn't a standard "one size fits all" answer.

We will have 2 DBs and 2 SPs that will more than cover our normal spend on everything including a decent holiday budget.

We will also have SIPPs, S&S ISAs and Cash / PBs for abnormal spends e.g. "big" holiday,new car, kids wedding etc.

Some would take the view that given our fortunate position with DB/SP we could safely go gung-ho with the investments as the outcome is relatively immaterial compared to someone living off their investments.

Others would say be very conservative with your investments, you have enough, preserve it and forget about it.

Neither view is generically right or wrong and will depend on the individuals "gut feel". We wouldn't want to be exposed to 100 equities as (even though it doesn't really matter) we would be uncomfortable with that level of volatility.

We will be approx 60/40 Equities to Bonds / Cash / FI when we retire and will probably let this drift out towards 75/25 later when SoR impacts will be lower and "big" holidays are fond memories. 


I can honestly say I do not envy those who have larger investment pots than us but are totally dependent on them.

Great reply - thanks

You are right, when working as an employee you typically have some surety of monthly income to manage, in retirement heavily supported by a DC pension pot reliant on market performance, as I and may others will, certainly until state pensions take up some of the load, it becomes a whole new beast to think about managing.

. I am happy with the funds were are in for accumulation. It's been more the drawdown/re-balancing/portfolio mix in retirement that I have been thinking about. Also, how large a cash buffer needed for peace of mind.

NedS

GazzaBloom said:

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?

Have a read here, particularly chapter 3 which discusses different harvesting strategies:

http://livingoffyourmoney.com/wp-content/uploads/2016/05/LivingOffYourOwnMoney_eBook_FirstThreeChapters.pdf

I think the important thing is to have a strategy, and then stick to it when it all hits the fan. Plan a strategy in advance that you think will work for you, and implement it. This helps you make the right decisions when emotions are running high during market turmoil.

GazzaBloom

NedS said:

GazzaBloom said:

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?

Have a read here, particularly chapter 3 which discusses different harvesting strategies:

http://livingoffyourmoney.com/wp-content/uploads/2016/05/LivingOffYourOwnMoney_eBook_FirstThreeChapters.pdf

I think the important thing is to have a strategy, and then stick to it when it all hits the fan. Plan a strategy in advance that you think will work for you, and implement it. This helps you make the right decisions when emotions are running high during market turmoil.

Thanks - that's a good read that, I skimmed it but will read properly when I get time, it does sum up what I'm tryng to get my head around and recognises the challenge drawdown presents.

cfw1994

Just one (maybe irrelevant) point about buckets….

My main DC pot is with Aviva, & I have a number of funds inside it, ranging from relatively safe (eg, “pre-retirement fixed interest”) to the recklessly adventurous (eg, “BG American” 🤣).
Right now the BG American is painfully down.
Aviva don’t have an easy way I am aware of in my particular scheme for me to say “only drawdown from the safe fund for now please, I don’t want to touch BG American” 👀

So when you think of cash ‘buckets’, you might want that in either another pension, or indeed outside pensions in premium bonds, savings accounts, ISAs: somewhere you can easily get yours hands on it should you decide to pause drawing down on the DC pot (as I have done for now).

As I say, just a thought…