What is your trigger point to start spending from cash buffer?? + QE, Does it change the game?

coyrls

Linton said:

coyrls said:

Linton said:

coyrls said:

If cash is part of the 40 of a 60:40 portfolio, it will be subject to defined rebalancing rules.  With a cash buffer there doesn't seem to be any defined rules as to when it should be drawn from and when it should be increased, other than when the market is "down" and when the market is "up".

Why must the cash form a fixed % of the whole?  My cash tranche/portfolio/subportfolio or whatever you want to call it is rebalanced occasionally to roughly the size that it needs to be to meet its objectives.  Similarly with the income part and the WP part.  

At the moment equity happens to be 55%.  Last year it would have been around 60%.  Is that a problem?

No, it's not a problem.  Rebalancing occasionally to roughly the size that it needs to be to meet its objectives, is not the way that proponents of a cash buffer say that a cash buffer should be used.  I am not suggesting that cash can't be part of a portfolio and I am not suggesting that it should be a fixed percentage over time.  I am suggesting that holding a cash buffer to take income from when equity prices are low and to increase when equity prices are high without defining the terms high and low and without any evidence to support the strategy is hard to justify.

What is your alternative? Fixing an SWR prior to retirement and taking it regardless of what is happening to your portfolio might on average optimise your wealth at death. However I do not believe it will optimise your any partuicular retiree's well-being whilst alive. At some point you have to act to deal with the situation as it is with a judgement call, there is no perfect predefined strategy.

Alternative to what?  Cash or holding a cash buffer, these are two different things.  You are putting words in my mouth; I have never claimed that there is a perfect predefined strategy.  My point is that many posts suggest holding a cash buffer of between 2-5 years income to draw from when markets are low and to top up when markets are high as if it was financial orthodoxy, when in fact there is little evidence to support such a strategy.  My original post said the main benefit was psychological, which agrees with what you are saying, I believe.

Linton

NoMore said:

@Linton

Are you actually holding a cash buffer in order to specifically protect drawdown from equities when they are low ? I suspect that your not and have other reasons for cash but you aren't making it clear.

Well yes and no.  The objectives are to protect the long term equity investments from any need to sell at any time other than possibly as a result of the annual review and protect expenditure, both ongoing and one-off, from any short/medium term market-driven restriction.  Both are achieved by minimising the use of long term equity to fund short/medium term expenditure.

Sea_Shell

Just touching on sequence of returns risk for a moment.

We read that this would be a problem usually if it happens in the early years of retirement, but what is considered "early", when viewed over a 40 yr retirement (SP aside)

First year, 2, 3, 5, 10?

Is there a point whereby you're then "in the clear" as it were, if you've not suffered SRR in those "early" years?

Audaxer

Sea_Shell said:

Just touching on sequence of returns risk for a moment.

We read that this would be a problem usually if it happens in the early years of retirement, but what is considered "early", when viewed over a 40 yr retirement (SP aside)

First year, 2, 3, 5, 10?

Is there a point whereby you're then "in the clear" as it were, if you've not suffered SRR in those "early" years?

I've read it can be a problem if there is a poor sequence of returns in the first decade of a 30 year retirement. However it should really only affect those needing to drawdown around 4% or more plus inflation each year for 30 years.

You should be safe no matter what the sequence of returns, as you have DB and SP income to come, and even up until then you only require a small drawdown percentage from your investments and/or cash.  That is why in my view, there is absolutely no reason for you to be fully invested. You currently have around 10% cash, but I think if you decided to hold a much larger cash percentage you would still be perfectly safe.

Linton

Sea_Shell said:

Just touching on sequence of returns risk for a moment.

We read that this would be a problem usually if it happens in the early years of retirement, but what is considered "early", when viewed over a 40 yr retirement (SP aside)

First year, 2, 3, 5, 10?

Is there a point whereby you're then "in the clear" as it were, if you've not suffered SRR in those "early" years?

You can never know you are safe as the future is unknown.  The best you can do is to make what you consider to be pessimistic assumptions about future expenditure, inflation, income and returns and calculate the consequences given your current situation.  If the assumptions and consequences are acceptable it is logical to continue on that basis.

If the consequences are not acceptable you must change the assumptions and act accordingly.

If you have not suffered an SOR it is likely that your pension pot is higher than originally planned so you have more leeway in the future.

Sea_Shell

If I make too many pessimistic assumptions, computer will say "get a job"!!! 😉😲

zagfles

Sea_Shell said:

Just touching on sequence of returns risk for a moment.

We read that this would be a problem usually if it happens in the early years of retirement, but what is considered "early", when viewed over a 40 yr retirement (SP aside)

First year, 2, 3, 5, 10?

Is there a point whereby you're then "in the clear" as it were, if you've not suffered SRR in those "early" years?

Basically if you've got a large amount in equities, then you'll suffer more if equities fall in value. If you have a static asset allocation during accumulation and decumulation, then your equity holdings will peak at retirement, so it's worse if equities fall near that peak. But that's both before and after retirement, not just after.

For instance if equities went up 20% pa in the 3 years leading up to retirement and then fell 10% a year in the next 3 years, that's likely to be overall beneficial to you even though you have a bad SOR immediately after retirement. (unless of course you bring your retirement forwards because you think you're richer than you were!)

So it's really nothing to do with sequence of returns, it's returns compared to assets. It's really just to avoid the mistake of saying "average returns are x% so I'll assume x%", but if returns are below average when you have the greatest amount in equities, then your returns will be worse than average even if average returns over your retirement are x%.

michaels

Sea_Shell said:

Just touching on sequence of returns risk for a moment.

We read that this would be a problem usually if it happens in the early years of retirement, but what is considered "early", when viewed over a 40 yr retirement (SP aside)

First year, 2, 3, 5, 10?

Is there a point whereby you're then "in the clear" as it were, if you've not suffered SRR in those "early" years?

I guess one way of looking at it would be to rerun your SWR calc each year factoring in your updated pot value and adjusted max life expectancy and seeing if the rate had increased or decreased.  In general the SWR  will go up as life expectancy falls for the same size pot or in other words your initial SWR percentage will hopefully become safer and safer.

[As an aside, has anyone compared outcomes for annual SWR recalc vs other rules based variable draw down strategies such as fixed percent of pot or Guyton Kinger?  For me the winner is not the highest draw-down but the most steady draw down without ever depleting the pot whilst also minimising the average pot size on death]

GazzaBloom

I'm planning to use Guyton's annual inflation adjustment rule and Guyton's guardrails and have tested it in Timeline and get a 99% success rate and our portfolio leaves a legacy even in the apps “worst case” setting.

Adding these rules to drawdown gives a major boost to the back tested success rate of our drawdown plan.

To achieve the 10% withdrawal adjustment up or down on the annual review (increase withdrawal if SWR is 20% less or decrease withdrawal if it's 20% more than starting SWR), it's not a huge reduction and would come from discretionary spending not living expenses so should be manageable.

it's interesting that if I were in drawdown now, the rules may have suggested drawdown was increased for 2022 if reviewed at end December 2021.

By February it would have felt completely wrong…but that would be an emotional response

MK62

Sea_Shell said:

Just touching on sequence of returns risk for a moment.

We read that this would be a problem usually if it happens in the early years of retirement, but what is considered "early", when viewed over a 40 yr retirement (SP aside)

First year, 2, 3, 5, 10?

Is there a point whereby you're then "in the clear" as it were, if you've not suffered SRR in those "early" years?

With a stock market based pension you'll probably never be "in the clear" from a poor SOR, but the consequences might be more severe if such a period occurs earlier in your retirement.

For a 30 year retirement I'd consider the first 10 years as the "early" period, but there's no real set definition as such (at least AFAIK)