Using a cashflow ladder in retirement?

Thrugelmir

"Year 10+: Risk+, Tech stocks, Crypto, Emerging Markets? "

There's enough risk in holding a high % equities for the majority of people. Though they generally underestimate the downside. Such suggestions as above amount to speculative punts. Best left to those with money they can afford to lose. As hardly the foundation for a well diversified long term retirement portfolio. 

dunstonh

Segmented portfolios reflecting timescales is a viable method that some use when structuring their portfolio.  Although the method you have described is not conventional. It is a variance of a theme.

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? 

How you structure it is a matter of opinion but I do not like that.

I would have:
1-3 cash
4-7 - short term portfolio
8-15 - medium term portfolio
16+ - long term portfolio

The descriptions you have in brackets are much higher in risk for the timescale they cover.  For example, balanced funds typically have 60-85% equities.    That is totally unsuitable for an average consumer in a 3-5 year period.   And tech stocks, crypto and emerging markets for 10+ is also too early.

Now it looks like you (or the source) have tried to segment then different areas of timescale.  However, that is not the conventional way.   I consider the method described to be flawed as it makes each time period heavy in certain areas/asset classes which will perform better or worse at different times and make it harder to move money between the periods as time goes on.   Consider your long term portfolio in this structure would be heavy in techs and crypto.   Are you really sure you would want to put your long term side at risk of a 90% loss?      

The conventional way is to have the weightings of the portfolio adjusted to average out to match the timescale and risk profile.  i.e. as the time gets longer, the risk increases a bit.  e.g. if your profile was say risk 3 out of 5, you would have three portfolios covering short, medium and long term.   If the portfolio strategy doesn't cover timescales then you could have risk 1 for short term , risk 2 for medium term and risk 3 for long term.

In VLS terms, you may have 1-3 years in cash, 4-7 in VLS40, 8-15 in VLS60 and 16+ in VLS80

I have played with modelling on segmented portfolios and toyed with the idea but yet to have a single person using it.  Nearly all are on a 1-3 cash basis with a long term weighted portfolio until age 70 and then medium term weighted thereafter.

This is partly because consumer behaviour needs to be aligned with the method.   Too many consumers cannot see holistic outcomes and only look at the bottom line.   And partly because if you take the average of the three portfolios you broadly end up with the risk level of the medium-term portfolio.  And finally, because of life expectancy. i.e. If someone retires at age 65 and has a life expectancy of age 87 then that is a 22 year term.    So, you are only going to have 6 years in the long term portfolio at the outset before the bulk of it is in medium term.          

GazzaBloom

dunstonh said:

Segmented portfolios reflecting timescales is a viable method that some use when structuring their portfolio.  Although the method you have described is not conventional. It is a variance of a theme.

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? 

How you structure it is a matter of opinion but I do not like that.

I would have:
1-3 cash
4-7 - short term portfolio
8-15 - medium term portfolio
16+ - long term portfolio

The descriptions you have in brackets are much higher in risk for the timescale they cover.  For example, balanced funds typically have 60-85% equities.    That is totally unsuitable for an average consumer in a 3-5 year period.   And tech stocks, crypto and emerging markets for 10+ is also too early.

Now it looks like you (or the source) have tried to segment then different areas of timescale.  However, that is not the conventional way.   I consider the method described to be flawed as it makes each time period heavy in certain areas/asset classes which will perform better or worse at different times and make it harder to move money between the periods as time goes on.   Consider your long term portfolio in this structure would be heavy in techs and crypto.   Are you really sure you would want to put your long term side at risk of a 90% loss?      

The conventional way is to have the weightings of the portfolio adjusted to average out to match the timescale and risk profile.  i.e. as the time gets longer, the risk increases a bit.  e.g. if your profile was say risk 3 out of 5, you would have three portfolios covering short, medium and long term.   If the portfolio strategy doesn't cover timescales then you could have risk 1 for short term , risk 2 for medium term and risk 3 for long term.

In VLS terms, you may have 1-3 years in cash, 4-7 in VLS40, 8-15 in VLS60 and 16+ in VLS80

I have played with modelling on segmented portfolios and toyed with the idea but yet to have a single person using it.  Nearly all are on a 1-3 cash basis with a long term weighted portfolio until age 70 and then medium term weighted thereafter.

This is partly because consumer behaviour needs to be aligned with the method.   Too many consumers cannot see holistic outcomes and only look at the bottom line.   And partly because if you take the average of the three portfolios you broadly end up with the risk level of the medium-term portfolio.  And finally, because of life expectancy. i.e. If someone retires at age 65 and has a life expectancy of age 87 then that is a 22 year term.    So, you are only going to have 6 years in the long term portfolio at the outset before the bulk of it is in medium term.          

It's not my strategy, what I have outlined is what is suggested in the video, the asset allocation isn't specified in detail so I just threw some in on the descriptions offered. My point is the re-balancing required and whether this really works over time, not to get too hung up on a hypothetical asset allocation on each ladder.

 

BritishInvestor

DairyQueen said:

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.

Given the choice between decent market returns and having to pay some additional tax and poor returns and not having to pay some tax, surely the former is preferable? Otherwise, why are you holding such a high % of equities?

I'm not clear why you would need to suspend withdrawals in a market downturn in a non-bucketed approach? You could have a "one-bucket" approach of equities, high-quality bonds (and if you really felt it necessary, some cash). 

I'm not sure what a WP is?

MallyGirl

I am guessing at Wealth Preservation

DairyQueen

BritishInvestor said:

DairyQueen said:

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.

Given the choice between decent market returns and having to pay some additional tax and poor returns and not having to pay some tax, surely the former is preferable? Otherwise, why are you holding such a high % of equities?

I'm not clear why you would need to suspend withdrawals in a market downturn in a non-bucketed approach? You could have a "one-bucket" approach of equities, high-quality bonds (and if you really felt it necessary, some cash). 

I'm not sure what a WP is?

WP = Wealth Preservation

High %age of equities = Long term inflation protection.

Not sure why you think that bucketing always means poor returns. We don't foresee needing to go below 80% equities, once all guaranteed income is in payment, as our planned withdrawal rate is reasonably low.

We are front-loading so withdrawing at a higher rate in the early years. We need cash to avoid selling equities over the short term. I don't see the point of holding bonds for the foreseeable other than to reduce volatility. High-quality bonds are likely to return zero-to-negative and lower quality are behaving akin to equities. The inverse performance of equities and bond seems to be a thing of the past.

So our short-term drawdown requirements are all in cash. Medium term is mostly WP but we do hold a smidge in bonds.

Mr DQ will need to keep below 2% drawdown rate at current valuations to avoid HRT once his SP kicks-in. If we are entering a prolonged bear market then he will remain a BR taxpayer. If, OTOH, equities begin another upward curve we will take a view on whether to increase his drawdown rate and pay HRT rather than risk the bigger tax hit of breaching the LTA.

If we were reliant on drawdown to meet most of our income needs I may take a different approach, but we are in the fortunate position of having sufficient guaranteed income to cover expenses. In three years we won't need to drawdown from Mr DQ's SIPP for income but we will need to do so in order to avoid onerous tax. having said that, prolonged high inflation may put paid to our plans so I keep an open-mind. This forum has taught me that flexibility is an important aspect of planning/managing retirement income.

I didn't realise that managing a portfolio in the accumulation phase of life is relatively easy compared to managing decumulation in retirement. I am no expert but I know enough to avoid major pitfalls. I don't try and wring every ounce of growth out of our portfolio; I am not that skilled. The aim is to provide sufficient for our wants/needs whilst sleeping soundly at night.

dunstonh

GazzaBloom said:

dunstonh said:

Segmented portfolios reflecting timescales is a viable method that some use when structuring their portfolio.  Although the method you have described is not conventional. It is a variance of a theme.

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? 

How you structure it is a matter of opinion but I do not like that.

I would have:
1-3 cash
4-7 - short term portfolio
8-15 - medium term portfolio
16+ - long term portfolio

The descriptions you have in brackets are much higher in risk for the timescale they cover.  For example, balanced funds typically have 60-85% equities.    That is totally unsuitable for an average consumer in a 3-5 year period.   And tech stocks, crypto and emerging markets for 10+ is also too early.

Now it looks like you (or the source) have tried to segment then different areas of timescale.  However, that is not the conventional way.   I consider the method described to be flawed as it makes each time period heavy in certain areas/asset classes which will perform better or worse at different times and make it harder to move money between the periods as time goes on.   Consider your long term portfolio in this structure would be heavy in techs and crypto.   Are you really sure you would want to put your long term side at risk of a 90% loss?      

The conventional way is to have the weightings of the portfolio adjusted to average out to match the timescale and risk profile.  i.e. as the time gets longer, the risk increases a bit.  e.g. if your profile was say risk 3 out of 5, you would have three portfolios covering short, medium and long term.   If the portfolio strategy doesn't cover timescales then you could have risk 1 for short term , risk 2 for medium term and risk 3 for long term.

In VLS terms, you may have 1-3 years in cash, 4-7 in VLS40, 8-15 in VLS60 and 16+ in VLS80

I have played with modelling on segmented portfolios and toyed with the idea but yet to have a single person using it.  Nearly all are on a 1-3 cash basis with a long term weighted portfolio until age 70 and then medium term weighted thereafter.

This is partly because consumer behaviour needs to be aligned with the method.   Too many consumers cannot see holistic outcomes and only look at the bottom line.   And partly because if you take the average of the three portfolios you broadly end up with the risk level of the medium-term portfolio.  And finally, because of life expectancy. i.e. If someone retires at age 65 and has a life expectancy of age 87 then that is a 22 year term.    So, you are only going to have 6 years in the long term portfolio at the outset before the bulk of it is in medium term.          

It's not my strategy, what I have outlined is what is suggested in the video, the asset allocation isn't specified in detail so I just threw some in on the descriptions offered. My point is the re-balancing required and whether this really works over time, not to get too hung up on a hypothetical asset allocation on each ladder.

 

The descriptions probably muddied the water then as that isn't how segmenting normally works (as previously mentioned).   

In respect of rebalancing, you would rebalance each time weighted segment at least annually.   However, moving money between the time-weighted segments would not necessarily be annual.    By having 3 years of cash, and having income units on all part of the portfolio that pay into cash, you cover 90% of periods.  You probably end up with around 4 years in cash with income distributions.     So, you can delay moving amounts from the time weighted segments if it is not a good time to be doing it.   If you get a 4 year period with losses then you can just move some from the short term to cash but not from long to medium or medium to short.    Then when it is a good time to do it, then you bring it back in line.

MK62

DairyQueen said:

BritishInvestor said:

DairyQueen said:

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.

Given the choice between decent market returns and having to pay some additional tax and poor returns and not having to pay some tax, surely the former is preferable? Otherwise, why are you holding such a high % of equities?

I'm not clear why you would need to suspend withdrawals in a market downturn in a non-bucketed approach? You could have a "one-bucket" approach of equities, high-quality bonds (and if you really felt it necessary, some cash). 

I'm not sure what a WP is?

 I don't try and wring every ounce of growth out of our portfolio; I am not that skilled. The aim is to provide sufficient for our wants/needs whilst sleeping soundly at night.

Nobody is that skilled......even the professionals, with access to far more information and research than we do......I agree with you here, trying to "wring every ounce of growth" out of a portfolio would undoubtedly lead to taking big risks - might pay off, but the chances are slim.

BritishInvestor

DairyQueen said:

BritishInvestor said:

DairyQueen said:

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.

Given the choice between decent market returns and having to pay some additional tax and poor returns and not having to pay some tax, surely the former is preferable? Otherwise, why are you holding such a high % of equities?

I'm not clear why you would need to suspend withdrawals in a market downturn in a non-bucketed approach? You could have a "one-bucket" approach of equities, high-quality bonds (and if you really felt it necessary, some cash). 

I'm not sure what a WP is?

WP = Wealth Preservation

High %age of equities = Long term inflation protection.

Not sure why you think that bucketing always means poor returns. We don't foresee needing to go below 80% equities, once all guaranteed income is in payment, as our planned withdrawal rate is reasonably low.

We are front-loading so withdrawing at a higher rate in the early years. We need cash to avoid selling equities over the short term. I don't see the point of holding bonds for the foreseeable other than to reduce volatility. High-quality bonds are likely to return zero-to-negative and lower quality are behaving akin to equities. The inverse performance of equities and bond seems to be a thing of the past.

So our short-term drawdown requirements are all in cash. Medium term is mostly WP but we do hold a smidge in bonds.

Mr DQ will need to keep below 2% drawdown rate at current valuations to avoid HRT once his SP kicks-in. If we are entering a prolonged bear market then he will remain a BR taxpayer. If, OTOH, equities begin another upward curve we will take a view on whether to increase his drawdown rate and pay HRT rather than risk the bigger tax hit of breaching the LTA.

If we were reliant on drawdown to meet most of our income needs I may take a different approach, but we are in the fortunate position of having sufficient guaranteed income to cover expenses. In three years we won't need to drawdown from Mr DQ's SIPP for income but we will need to do so in order to avoid onerous tax. having said that, prolonged high inflation may put paid to our plans so I keep an open-mind. This forum has taught me that flexibility is an important aspect of planning/managing retirement income.

I didn't realise that managing a portfolio in the accumulation phase of life is relatively easy compared to managing decumulation in retirement. I am no expert but I know enough to avoid major pitfalls. I don't try and wring every ounce of growth out of our portfolio; I am not that skilled. The aim is to provide sufficient for our wants/needs whilst sleeping soundly at night.

"WP = Wealth Preservation"

Tbh I don't think they have enough of a track record to necessarily do what they say they will. I'm therefore not sure what place they have in a portfolio (but that's off topic)


"High %age of equities = Long term inflation protection."

Agreed, but a wider dispersion of returns which might mean LTA issues (which is also your focus)?

"Not sure why you think that bucketing always means poor returns."

In the same way that having a reduced overall equity % reduces the returns, on average

"We don't foresee needing to go below 80% equities, once all guaranteed income is in payment, as our planned withdrawal rate is reasonably low."

That seems a contradiction - higher equities gives a higher withdrawal rate (typically)

"The inverse performance of equities and bond seems to be a thing of the past."

According to whom? Certainly bonds provided a buffer during COVID. 

"If we were reliant on drawdown to meet most of our income needs I may take a different approach, but we are in the fortunate position of having sufficient guaranteed income to cover expenses."

And this is why I don't understand the high equity %. If you have "won the game", why continue to expose yourself to unnecessary volatility?

"The aim is to provide sufficient for our wants/needs whilst sleeping soundly at night."

Ditto

Thrugelmir

DairyQueen said:

BritishInvestor said:

DairyQueen said:

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.

Given the choice between decent market returns and having to pay some additional tax and poor returns and not having to pay some tax, surely the former is preferable? Otherwise, why are you holding such a high % of equities?

I'm not clear why you would need to suspend withdrawals in a market downturn in a non-bucketed approach? You could have a "one-bucket" approach of equities, high-quality bonds (and if you really felt it necessary, some cash). 

I'm not sure what a WP is?

I didn't realise that managing a portfolio in the accumulation phase of life is relatively easy compared to managing decumulation in retirement. 

The longest bull market in history is your answer. There'll be many people overestimating their own abilities. If it were that easy fund managers would all be out of a job.