Using a cashflow ladder in retirement?

GazzaBloom

I watched the Meaningful Money video on reducing risk in retirement again the other day, where Pete Matthew outlines his views on the real risks in retirement plus suggesting using a cashflow ladder, effectively bucket strategy for managing drawdown as follows:

Year 1-2: Cash
Year 3-5: Low Risk (balanced fund or bonds)
Year 6-10: Invested as per your normal risk appetite (lets say 80/20 or 100% stocks)
Year 10+: Risk+, Tech stocks, Crypto, Emerging Markets? 

Now that all makes sense to me until it comes to rebalancing between the buckets or rungs on the ladder. If you rebalance after the end of year 1 and move money down the ladder to top up cash then effectively you are drawing from Year 6-10 or 10+ buckets in Year 1.

This is where the whole bucket thing gets a little flaky for me, as, if bucket 6-10 is down and you don't rebalance that year, is there any real difference from just simply drawing from an invested pot, say 60/40 or 80/20 stocks/bonds but switching to a cash buffer that you hold when the market has dropped?

Or keep everything invested save for say a 6 months emergency fund held as cash and use Guardrails to reduce/increase drawdown annually to reflect market swings?

https://youtu.be/qh4Mf5rcQ9w

https://meaningfulmoney.tv/2021/05/10/building-your-cashflow-ladder/

MK62

Yes......unfortunately the stock market and inflation seem to have a habit of not playing ball with these carefully laid out plans.....

I've modelled quite a few different withdrawal plans and they all seem to have one thing in common (or is it two).....either the real income varies wildly, or the failure rate does. Cash buffers and "guard rail" type plans (eg Guyton Klinger) can smooth the annual income fluctuations, but they can't change the underlying numbers. The bottom line is that, imho, there is no real way to plan to have that desirable nice steady inflation linked income from a stock market based pension over say 30yrs, unless, perhaps, you start at an income level only a little higher than an annuity. Of course, that doesn't mean you can't have that, just that you can't really fully plan for that.....there are just too many variables involved.......all you can do, again imho, is come up with a plan and review it annually based on the real numbers....so if you start with a 30 year plan, after year 1 you then have a 29 year plan, after year 2 a 28 year plan, and so on.

My own plan is a fairly simple one based on 2 "pots", a cash "barrel", and an annual "target" figure........I started it in 2018, and luckily for me (returns have been pretty good over the last 4 years overall), the real figure is currently ahead of the target, so I have no need to make any adjustments to annual income for now....a prolonged and significant market downturn might well change that though, and while I do use a cash buffer (of sorts) too, the underlying numbers might mean some belt tightening has to happen at some point down the line.

BritishInvestor

GazzaBloom said:

I watched the Meaningful Money video on reducing risk in retirement again the other day, where Pete Matthew outlines his views on the real risks in retirement plus suggesting using a cashflow ladder, effectively bucket strategy for managing drawdown as follows:

Year 1-2: Cash
Year 3-5: Low Risk (balanced fund or bonds)
Year 6-10: Invested as per your normal risk appetite (lets say 80/20 or 100% stocks)
Year 10+: Risk+, Tech stocks, Crypto, Emerging Markets? 

Now that all makes sense to me until it comes to rebalancing between the buckets or rungs on the ladder. If you rebalance after the end of year 1 and move money down the ladder to top up cash then effectively you are drawing from Year 6-10 or 10+ buckets in Year 1.

This is where the whole bucket thing gets a little flaky for me, as, if bucket 6-10 is down and you don't rebalance that year, is there any real difference from just simply drawing from an invested pot, say 60/40 or 80/20 stocks/bonds but switching to a cash buffer that you hold when the market has dropped?

Or keep everything invested save for say a 6 months emergency fund held as cash and use Guardrails to reduce/increase drawdown annually to reflect market swings?

https://youtu.be/qh4Mf5rcQ9w

https://meaningfulmoney.tv/2021/05/10/building-your-cashflow-ladder/

"This is where the whole bucket thing gets a little flaky for me"

Yep. 

https://www.moneymarketing.co.uk/opinion/abraham-okusanya-why-providers-are-getting-crps-wrong/

k6chris

I think this type of investement plan, as well as things like 'natural yield' investing, are as much about giving people a warm(er) sense of security as they are about maximising returns.  I would argue that is not a bad thing, since sleeping well and not overly fretting about investments means you are less likely to make a stupid and harmful (investment) decision.  There is no 'do it this way' plan that suits everyone.  My view (which is worthless) is keep a 2 year cash buffer and invest the rest at a level that allows you to sleep well, which for me is about 70% equity and 30% bonds / non equity.  Rebalance every year.  Good luck

westv

BritishInvestor said:

"This is where the whole bucket thing gets a little flaky for me"

Yep. 

https://www.moneymarketing.co.uk/opinion/abraham-okusanya-why-providers-are-getting-crps-wrong/

Pity you have to register to view it.

BritishInvestor

westv said:

BritishInvestor said:

"This is where the whole bucket thing gets a little flaky for me"

Yep. 

https://www.moneymarketing.co.uk/opinion/abraham-okusanya-why-providers-are-getting-crps-wrong/

Pity you have to register to view it.

"Bucketing approach

"This involves creating multiple buckets to fund withdrawals over different time horizons. The typical approach involves three buckets: a short-term bucket largely comprising cash and near-cash assets to fund withdrawals for up to five years, a medium-term, medium-risk bucket to fund expenses in the fifth to 10th year of retirement, and a more aggressive long-term bucket.

Bucketing doesn’t really work. You end up with an overall asset allocation skewed heavily towards cash and bonds compared to a single pot with a total return portfolio."

BritishInvestor

k6chris said:

I think this type of investement plan, as well as things like 'natural yield' investing, are as much about giving people a warm(er) sense of security as they are about maximising returns.  I would argue that is not a bad thing, since sleeping well and not overly fretting about investments means you are less likely to make a stupid and harmful (investment) decision.  There is no 'do it this way' plan that suits everyone.  My view (which is worthless) is keep a 2 year cash buffer and invest the rest at a level that allows you to sleep well, which for me is about 70% equity and 30% bonds / non equity.  Rebalance every year.  Good luck

I can't see how a natural yield approach will give peace of mind.

(But agreed that peace of mind is important).

jim8888

I went for a simpler version. Keep 3 years expenses in cash, invest the rest in Vanguard 80/20 LS fund. Each year, I will cash in one year's expenses from the VG funds. (I am also drawing down £1,000 per month from a SIPP, so my "expenses" are anything over and above that £12k p.a..) I suppose this means that sometimes I will be taking the drawdown out of equities when the market is "down", but not at a rate that worries me too much. 

Albermarle

 My view (which is worthless) is keep a 2 year cash buffer and invest the rest at a level that allows you to sleep well, which for me is about 70% equity and 30% bonds / non equity.  Rebalance every year. 

Looks nice and simple, which is good. I could add one more factor that can help . If possible have a bigger war chest  than you really need . Then if things do not go 100% to plan, it does not matter .

The downside of course is that it would probably mean retiring later.

MK62

Albermarle said:

 My view (which is worthless) is keep a 2 year cash buffer and invest the rest at a level that allows you to sleep well, which for me is about 70% equity and 30% bonds / non equity.  Rebalance every year. 

Looks nice and simple, which is good. I could add one more factor that can help . If possible have a bigger war chest  than you really need . Then if things do not go 100% to plan, it does not matter .

The downside of course is that it would probably mean retiring later.

TBH I would probably have a larger cash buffer too, but if you go too large you can run into inflationary issues, especially at the current time, when inflation far exceeds any return on cash.......it's all a balancing act in the end though, with many ways of doing that - none of us can know today which will end up being the best withdrawal plan....unfortunately. Having said that though, in my view any plan which succeeds in it's basic aim should be viewed as a success, even if another might have turned out better with hindsight.

DairyQueen

BritishInvestor said:

"Bucketing doesn’t really work. You end up with an overall asset allocation skewed heavily towards cash and bonds compared to a single pot with a total return portfolio."

I think it depends on how drawdown is situated within an individual's circumstances.

For example, Mr DQ is at risk of breaching the LTA when next tested at age 75 . His pot is fully crystallised. He has decent guaranteed income from a DB in payment and will receive full SP next year. His drawdown has to be carefully managed to mitigate against paying excess tax. 

Nice problem to have but who wants to save for years only to pay a large tax bill in later life?

He needs to drawdown as much growth as possible whilst staying within the BRT threshold.  He cannot suspend drawdown in bear markets without adding to the risk of future tax liability. He needs to use all of his BRT allowance each year, and he needs to draw all growth in excess of his LTA whilst he is under 75. We are not relying on a prolonged bear to fix the LTA issue.

He holds 5 years drawdown in wrapped cash. The inflation hit is the cost of reducing the risk of a bigger tax hit down the line. He holds an additional 3 years of drawdown in WP plus a smidge of bonds. The balance is 100% equities. 

My drawdown is positioned as a satellite to his tax-wise. I am also front-loading before SP kicks in (in 3 years). I then plan to drawdown UFPLS up to max tax free. I do not wish to suspend drawdown in a downturn and waste my personal allowance. 

We are reasonably high equities (79% Mr DQ and 73% me) and plan to maintain 75/80% going forward.

You have to look at all circumstances (income needs/income streams/tax situation) to determine the best drawdown strategy, and the bucket system works for us at the moment. Of course, that may change once all guaranteed income is in payment.