Using a cashflow ladder in retirement?

DairyQueen

BritishInvestor said:

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

"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).

Each to their own. We use RIT Capital Partners (decades-long track record). Reasonable capital growth is their first priority but they invest with a view to limiting downside, so volatility is reduced. Plus, they add more diversification as their assets include private equity.


"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)?

Yes, but it's a risk over which we have some control. Growth is the objective for assets invested for 10+ years. We will reduce equities if/when we need to. Once OH is past the age of 75 his portfolio can grow without risk of tax consequences. In the meantime we have no idea how the markets will perform. We would rather  increase drawdown and pay IHT than miss any intermittent market rises if not sufficiently exposed to equities. 


"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

But we are not reducing overall equity. We have replaced bonds with WP/cash. The target is still 80/20 equities/other. Currently high cash to meet front loading drawdown so 79% equities (OH) and 74% (me).


"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)

But we don't foresee needing a higher withdrawal rate whilst we are both alive. If our income requirement changes then I will review the strategy. The survivor may need to up the withdrawal rate to compensate for the loss of guaranteed income on first death. They may not.


"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?

Because the high volatility of a reasonable chunk of our portfolio won't affect our income. in other words, we can afford to take the risk. If the portfolio tanks we leave less (IHT-free) for the next generation. If it doesn't then we have options to spend more, gift more, or bequeath more.


"The inverse performance of equities and bond seems to be a thing of the past."
According to whom? 
Plenty of discussion on this forum, and elsewhere, in recent years on QE's effect on bond prices/behaviour, and knock-on impact on annuities.


Certainly bonds provided a buffer during COVID. 
So did cash. 

BritishInvestor

DairyQueen said:

Each to their own. We use RIT Capital Partners (decades-long track record). Reasonable capital growth is their first priority but they invest with a view to limiting downside, so volatility is reduced. Plus, they add more diversification as their assets include private equity.

It might be best to discuss one point at a time to avoid thread confusion.

I'm not sure if the fund is this one.

https://www.ritcap.com/sites/default/files/RIT Capital Partners - January 2022 Factsheet - FINAL.pdf

But if so, it's had a greater drawdown vs a global equity tracker year to date.

I'm not sure if PE can be considered the best way to diversify - returns can be replicated using tilts to small-cap value and some leverage which may well suffer during downturns. And then you have fees to contend with. 

https://alphaarchitect.com/2021/06/22/private-equity-is-there-anything-special-there/

(Please note I'm not trying to have a dig).

dunstonh

WP is also shorthand for With Profits.  That has caused confusion in the past.

coyrls

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."

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?

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 Mr DQ needs to shovel money out of his SIPP to keep below LTA and is also limited by the HRT threshold, surely it makes sense for him to postpone his state pension to create the opportunity to shovel even more out while staying below the HRT threshold.  If he is close to the LTA now and is only going to withdraw at below 2% a year, I would say that there is a good chance he will be over the LTA at 75.

DairyQueen

coyrls said:

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."

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?

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 Mr DQ needs to shovel money out of his SIPP to keep below LTA and is also limited by the HRT threshold, surely it makes sense for him to postpone his state pension to create the opportunity to shovel even more out while staying below the HRT threshold.  If he is close to the LTA now and is only going to withdraw at below 2% a year, I would say that there is a good chance he will be over the LTA at 75.

Thanks for mentioning. Yes, we have considered deferring. It's still a possibility.

GazzaBloom

Interesting article here on the Timeline Blogs about the use of cash buffers looking at impact over the long term. The hypothesis here, tested using historical data, suggests use of a "Good Buffer" portfolio and rebalancing as optimal:

"Good Buffer: this portfolio consists of a 60/30/10 in global equity, bond and cash. Withdrawals are only ever taken from cash, which is replenished if the cash allocation drops below 2%. The portfolio is rebalanced if the equity allocation is more than 10% up or down from the original allocation. This approach draws on earlier research (Okusanya, 2018 referenced above) which shows that implementing a cash buffer by reducing ONLY the bond allocation is a more effective strategy."

https://www.timelineapp.co/blog/cash-buffers-sustainable-withdrawal-and-bear-markets/

BritishInvestor

GazzaBloom said:

Interesting article here on the Timeline Blogs about the use of cash buffers looking at impact over the long term. The hypothesis here, tested using historical data, suggests use of a "Good Buffer" portfolio and rebalancing as optimal:

"Good Buffer: this portfolio consists of a 60/30/10 in global equity, bond and cash. Withdrawals are only ever taken from cash, which is replenished if the cash allocation drops below 2%. The portfolio is rebalanced if the equity allocation is more than 10% up or down from the original allocation. This approach draws on earlier research (Okusanya, 2018 referenced above) which shows that implementing a cash buffer by reducing ONLY the bond allocation is a more effective strategy."

https://www.timelineapp.co/blog/cash-buffers-sustainable-withdrawal-and-bear-markets/

Yep, Abraham crunches data and looks at the actual evidence, which is surprisingly rare.

GazzaBloom

BritishInvestor said:

GazzaBloom said:

Interesting article here on the Timeline Blogs about the use of cash buffers looking at impact over the long term. The hypothesis here, tested using historical data, suggests use of a "Good Buffer" portfolio and rebalancing as optimal:

"Good Buffer: this portfolio consists of a 60/30/10 in global equity, bond and cash. Withdrawals are only ever taken from cash, which is replenished if the cash allocation drops below 2%. The portfolio is rebalanced if the equity allocation is more than 10% up or down from the original allocation. This approach draws on earlier research (Okusanya, 2018 referenced above) which shows that implementing a cash buffer by reducing ONLY the bond allocation is a more effective strategy."

https://www.timelineapp.co/blog/cash-buffers-sustainable-withdrawal-and-bear-markets/

Yep, Abraham crunches data and looks at the actual evidence, which is surprisingly rare.

Ho do you interpret this point:

Withdrawals are only ever taken from cash, which is replenished if the cash allocation drops below 2%"

Below 2% of what? 2% of the total remaining portfolio at any point in time?

dunstonh

Cash is important on drawdown but setting an explicit cash amount i.e. 10% or 2% or whatever is not necessarily the best way.   Someone with a draw rate of 1% needs a different amount in cash from someone with a draw rate of 5%.  Hence x number of months worth is probably a better way.  Although its more difficult to model on software where a fixed percentage is better.

westv

Presumably if a cash made that much difference then it would have been part of the original "4% studies".