Using a cashflow ladder in retirement?

bostonerimus

Linton said:

BritishInvestor said:

Prism said:

BritishInvestor said:

Prism said:

westv said:

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

Yes, in fact there are almost no studies that include cash. They all assume the downturn is protected by bonds. This is probably why you get quite a few questions on if/how much to have in a cash buffer and how to use it.

https://finalytiq.co.uk/wp-content/uploads/2017/02/FPA-Journal-December-1997-Conserving-Client-Portfolios-During-Retirement-Part-III.pdf

"As a final word, it is fair to conclude that cash is indeed "trash" in long-term investment portfolios, particularly when the client in seeking to maximize withdrawals."

Thanks. From chart 7 it looks like swapping some intermediate bonds (up to 50%) for cash doesn't change the withdrawal rate by much at all. In the current situation of cash typically returning more than bonds I would still likely do that. If we get back to being properly rewarded for the risk of bonds then maybe less cash. Besides, retirement cash isn't likely to be T-Bills or even instant access. Its more likely to be in savings accounts paying more interest. As some point the line between cash and bonds blurs.

" If we get back to being properly rewarded for the risk of bonds then maybe less cash."

But aren't you then getting into the realms of tactical asset allocation. For example, should large-cap growth shares also not be excluded given currently lofty valuations?

The difference between bonds and equity is that with (safe) bonds you know for certain, barring end of the world scenarios, what your total return will be from the day you bought until maturity.   So you are able to sensibly judge one outcome against another and make "tactical decisions" appropriate for your particular situation.

Equity comes with no guarantees so any tactical asset allocation must be pased on your guesses which, given a perfect market, could just as well turn out wrong.

As to asset allocation with equity: the important thing in my view is to avoid over-reliance on any one factor.

If you hold individual bonds the idea of maturity and a guaranteed return is obvious, it becomes far more nebulous in a bond fund with a wide range of maturities as your balance goes up and down

Prism

BritishInvestor said:

Prism said:

BritishInvestor said:

Prism said:

westv said:

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

Yes, in fact there are almost no studies that include cash. They all assume the downturn is protected by bonds. This is probably why you get quite a few questions on if/how much to have in a cash buffer and how to use it.

https://finalytiq.co.uk/wp-content/uploads/2017/02/FPA-Journal-December-1997-Conserving-Client-Portfolios-During-Retirement-Part-III.pdf

"As a final word, it is fair to conclude that cash is indeed "trash" in long-term investment portfolios, particularly when the client in seeking to maximize withdrawals."

Thanks. From chart 7 it looks like swapping some intermediate bonds (up to 50%) for cash doesn't change the withdrawal rate by much at all. In the current situation of cash typically returning more than bonds I would still likely do that. If we get back to being properly rewarded for the risk of bonds then maybe less cash. Besides, retirement cash isn't likely to be T-Bills or even instant access. Its more likely to be in savings accounts paying more interest. As some point the line between cash and bonds blurs.

" If we get back to being properly rewarded for the risk of bonds then maybe less cash."

But aren't you then getting into the realms of tactical asset allocation. For example, should large-cap growth shares also not be excluded given currently lofty valuations?

Possibly, but then we as retail investors are able to get access to far better deals for our cash than institutions can. Its very difficult to argue that a short duration bond fund can get the returns that we can using cash, while also being lower risk. Instant access savings pays better than money market funds. Fixed term savings accounts pay much better than short duration funds. I am aware that I am not comparing like for like, but when you can get a guaranteed return on your money with no chance of loss vs a lower yield bond fund with higher volatility then maybe a bit of both is the best approach.

Thrugelmir

bostonerimus said:

Thrugelmir said:

bostonerimus said:

BritishInvestor said:

bostonerimus said:

Prism said:

BritishInvestor said:

Prism said:

westv said:

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

Yes, in fact there are almost no studies that include cash. They all assume the downturn is protected by bonds. This is probably why you get quite a few questions on if/how much to have in a cash buffer and how to use it.

https://finalytiq.co.uk/wp-content/uploads/2017/02/FPA-Journal-December-1997-Conserving-Client-Portfolios-During-Retirement-Part-III.pdf

"As a final word, it is fair to conclude that cash is indeed "trash" in long-term investment portfolios, particularly when the client in seeking to maximize withdrawals."

Thanks. From chart 7 it looks like swapping some intermediate bonds (up to 50%) for cash doesn't change the withdrawal rate by much at all. In the current situation of cash typically returning more than bonds I would still likely do that. If we get back to being properly rewarded for the risk of bonds then maybe less cash. Besides, retirement cash isn't likely to be T-Bills or even instant access. Its more likely to be in savings accounts paying more interest. As some point the line between cash and bonds blurs.

I've spent long hours looking at the results of such papers by the likes of Bengen, Pfau, Guyton etc and all the Monte Carlo simulations in the world don't change that everything depends on the stock/bond/inflation datasets you use. As the bond bubble started to deflate I took them out of my planning and bought into a DB pension and paid off the mortgage on a rental property. That allowed me to concentrate on equities with the rest of my money and ignore the uncertainty of the returns. Years ago when DB pensions and annuities were the rule the risk and uncertainty in the results was taken on by insurance companies and pension funds who, hopefully, could absorb it better than the individual. That's mostly gone now. When I started my planning I set out to avoid the uncertainty and possibility of running out of money as I liked the old way of doing things. As we get deeper into the current way of funding retirement where the individual is directly exposed to the risks of the market it will be interesting to see how things work out: will people spend their pot down sensibly and die skint, will they lose it well before they die or will they be passing on wealth to the next generation?

"it will be interesting to see how things work out: will people spend their pot down sensibly and die skint, will they lose it well before they die or will they be passing on wealth to the next generation?"

What's your guess?

 People on low salaries will find it hard and they will work longer. 

Fortunately thanks to the pension auto enrolment scheme (2012-2018). Some 10.2 million people started a new pension plan. Small steps create big outcomes. 

Yes, having to opt out rather than in is good. However, the employee is still directly exposed to the markets so the outcomes will be uncertain. When my Dad started working for ICI (remember them) in 1947 after he got out of the RAF he was a lowly electrical engineering tech and was auto enrolled into a non-contributory DB pension. I don't think we've really progressed much at all.

DB schemes weren't available to all in the private sector.  Likewise as Maxwell's use of the Mirror Pension Scheme as a private piggybank was shown to be. A considerable number of DB schemes weren't being run properly prior to the reforms that were imposed. Easy to look back with RTG's and gloss over all the things that weren't so good all those years ago.   

bostonerimus

Thrugelmir said:

bostonerimus said:

Thrugelmir said:

bostonerimus said:

BritishInvestor said:

bostonerimus said:

Prism said:

BritishInvestor said:

Prism said:

westv said:

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

Yes, in fact there are almost no studies that include cash. They all assume the downturn is protected by bonds. This is probably why you get quite a few questions on if/how much to have in a cash buffer and how to use it.

https://finalytiq.co.uk/wp-content/uploads/2017/02/FPA-Journal-December-1997-Conserving-Client-Portfolios-During-Retirement-Part-III.pdf

"As a final word, it is fair to conclude that cash is indeed "trash" in long-term investment portfolios, particularly when the client in seeking to maximize withdrawals."

Thanks. From chart 7 it looks like swapping some intermediate bonds (up to 50%) for cash doesn't change the withdrawal rate by much at all. In the current situation of cash typically returning more than bonds I would still likely do that. If we get back to being properly rewarded for the risk of bonds then maybe less cash. Besides, retirement cash isn't likely to be T-Bills or even instant access. Its more likely to be in savings accounts paying more interest. As some point the line between cash and bonds blurs.

I've spent long hours looking at the results of such papers by the likes of Bengen, Pfau, Guyton etc and all the Monte Carlo simulations in the world don't change that everything depends on the stock/bond/inflation datasets you use. As the bond bubble started to deflate I took them out of my planning and bought into a DB pension and paid off the mortgage on a rental property. That allowed me to concentrate on equities with the rest of my money and ignore the uncertainty of the returns. Years ago when DB pensions and annuities were the rule the risk and uncertainty in the results was taken on by insurance companies and pension funds who, hopefully, could absorb it better than the individual. That's mostly gone now. When I started my planning I set out to avoid the uncertainty and possibility of running out of money as I liked the old way of doing things. As we get deeper into the current way of funding retirement where the individual is directly exposed to the risks of the market it will be interesting to see how things work out: will people spend their pot down sensibly and die skint, will they lose it well before they die or will they be passing on wealth to the next generation?

"it will be interesting to see how things work out: will people spend their pot down sensibly and die skint, will they lose it well before they die or will they be passing on wealth to the next generation?"

What's your guess?

 People on low salaries will find it hard and they will work longer. 

Fortunately thanks to the pension auto enrolment scheme (2012-2018). Some 10.2 million people started a new pension plan. Small steps create big outcomes. 

Yes, having to opt out rather than in is good. However, the employee is still directly exposed to the markets so the outcomes will be uncertain. When my Dad started working for ICI (remember them) in 1947 after he got out of the RAF he was a lowly electrical engineering tech and was auto enrolled into a non-contributory DB pension. I don't think we've really progressed much at all.

DB schemes weren't available to all in the private sector.  Likewise as Maxwell's use of the Mirror Pension Scheme as a private piggybank was shown to be. A considerable number of DB schemes weren't being run properly prior to the reforms that were imposed. Easy to look back with RTG's and gloss over all the things that weren't so good all those years ago.   

Sure lots of abuse, but the failures of regulation should not detract from the positives. I'm yet to be convinced that exposing the retiree directly to the markets is a good thing for anyone other than the financial services companies.

GazzaBloom

Prism said:

BritishInvestor said:

Prism said:

BritishInvestor said:

Prism said:

westv said:

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

Yes, in fact there are almost no studies that include cash. They all assume the downturn is protected by bonds. This is probably why you get quite a few questions on if/how much to have in a cash buffer and how to use it.

https://finalytiq.co.uk/wp-content/uploads/2017/02/FPA-Journal-December-1997-Conserving-Client-Portfolios-During-Retirement-Part-III.pdf

"As a final word, it is fair to conclude that cash is indeed "trash" in long-term investment portfolios, particularly when the client in seeking to maximize withdrawals."

Thanks. From chart 7 it looks like swapping some intermediate bonds (up to 50%) for cash doesn't change the withdrawal rate by much at all. In the current situation of cash typically returning more than bonds I would still likely do that. If we get back to being properly rewarded for the risk of bonds then maybe less cash. Besides, retirement cash isn't likely to be T-Bills or even instant access. Its more likely to be in savings accounts paying more interest. As some point the line between cash and bonds blurs.

" If we get back to being properly rewarded for the risk of bonds then maybe less cash."

But aren't you then getting into the realms of tactical asset allocation. For example, should large-cap growth shares also not be excluded given currently lofty valuations?

Possibly, but then we as retail investors are able to get access to far better deals for our cash than institutions can. Its very difficult to argue that a short duration bond fund can get the returns that we can using cash, while also being lower risk. Instant access savings pays better than money market funds. Fixed term savings accounts pay much better than short duration funds. I am aware that I am not comparing like for like, but when you can get a guaranteed return on your money with no chance of loss vs a lower yield bond fund with higher volatility then maybe a bit of both is the best approach.

I am maximising use of salary sacrifice for my pension savings and am planning building up some cash inside the DC wrapper ahead of retirement. As far as I can see there is no interest paid on cash held that way, there are some cash instrument funds available but the returns are fractions of a percent and there is a fund charge to pay. That's why I am waiting to build up the cash pot until just before retirement so it doesn't sit there too long being eroded by inflation before being used.

Linton

bostonerimus said:

Linton said:

BritishInvestor said:

Prism said:

BritishInvestor said:

Prism said:

westv said:

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

Yes, in fact there are almost no studies that include cash. They all assume the downturn is protected by bonds. This is probably why you get quite a few questions on if/how much to have in a cash buffer and how to use it.

https://finalytiq.co.uk/wp-content/uploads/2017/02/FPA-Journal-December-1997-Conserving-Client-Portfolios-During-Retirement-Part-III.pdf

"As a final word, it is fair to conclude that cash is indeed "trash" in long-term investment portfolios, particularly when the client in seeking to maximize withdrawals."

Thanks. From chart 7 it looks like swapping some intermediate bonds (up to 50%) for cash doesn't change the withdrawal rate by much at all. In the current situation of cash typically returning more than bonds I would still likely do that. If we get back to being properly rewarded for the risk of bonds then maybe less cash. Besides, retirement cash isn't likely to be T-Bills or even instant access. Its more likely to be in savings accounts paying more interest. As some point the line between cash and bonds blurs.

" If we get back to being properly rewarded for the risk of bonds then maybe less cash."

But aren't you then getting into the realms of tactical asset allocation. For example, should large-cap growth shares also not be excluded given currently lofty valuations?

The difference between bonds and equity is that with (safe) bonds you know for certain, barring end of the world scenarios, what your total return will be from the day you bought until maturity.   So you are able to sensibly judge one outcome against another and make "tactical decisions" appropriate for your particular situation.

Equity comes with no guarantees so any tactical asset allocation must be pased on your guesses which, given a perfect market, could just as well turn out wrong.

As to asset allocation with equity: the important thing in my view is to avoid over-reliance on any one factor.

If you hold individual bonds the idea of maturity and a guaranteed return is obvious, it becomes far more nebulous in a bond fund with a wide range of maturities as your balance goes up and down

Agreed, which is why I would never buy a general bond index fund. It removes one of the main reasons for investing in bonds in the first place. Better to either use cash or an active fund whose objective matches yours.

BritishInvestor

Linton said:

BritishInvestor said:

Prism said:

BritishInvestor said:

Prism said:

westv said:

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

Yes, in fact there are almost no studies that include cash. They all assume the downturn is protected by bonds. This is probably why you get quite a few questions on if/how much to have in a cash buffer and how to use it.

https://finalytiq.co.uk/wp-content/uploads/2017/02/FPA-Journal-December-1997-Conserving-Client-Portfolios-During-Retirement-Part-III.pdf

"As a final word, it is fair to conclude that cash is indeed "trash" in long-term investment portfolios, particularly when the client in seeking to maximize withdrawals."

Thanks. From chart 7 it looks like swapping some intermediate bonds (up to 50%) for cash doesn't change the withdrawal rate by much at all. In the current situation of cash typically returning more than bonds I would still likely do that. If we get back to being properly rewarded for the risk of bonds then maybe less cash. Besides, retirement cash isn't likely to be T-Bills or even instant access. Its more likely to be in savings accounts paying more interest. As some point the line between cash and bonds blurs.

" If we get back to being properly rewarded for the risk of bonds then maybe less cash."

But aren't you then getting into the realms of tactical asset allocation. For example, should large-cap growth shares also not be excluded given currently lofty valuations?

The difference between bonds and equity is that with (safe) bonds you know for certain, barring end of the world scenarios, what your total return will be from the day you bought until maturity.   So you are able to sensibly judge one outcome against another and make "tactical decisions" appropriate for your particular situation.

Equity comes with no guarantees so any tactical asset allocation must be pased on your guesses which, given a perfect market, could just as well turn out wrong.

As to asset allocation with equity: the important thing in my view is to avoid over-reliance on any one factor.

Yes, I agree, but it's still a form of "fiddling".

I guess the point I am trying to make is why introduce complexity/fiddling when there is little evidence to suggest that the plain vanilla, periodically rebalanced, 60/40 portfolio is"broken".

Prism

BritishInvestor said:

Linton said:

BritishInvestor said:

Prism said:

BritishInvestor said:

Prism said:

westv said:

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

Yes, in fact there are almost no studies that include cash. They all assume the downturn is protected by bonds. This is probably why you get quite a few questions on if/how much to have in a cash buffer and how to use it.

https://finalytiq.co.uk/wp-content/uploads/2017/02/FPA-Journal-December-1997-Conserving-Client-Portfolios-During-Retirement-Part-III.pdf

"As a final word, it is fair to conclude that cash is indeed "trash" in long-term investment portfolios, particularly when the client in seeking to maximize withdrawals."

Thanks. From chart 7 it looks like swapping some intermediate bonds (up to 50%) for cash doesn't change the withdrawal rate by much at all. In the current situation of cash typically returning more than bonds I would still likely do that. If we get back to being properly rewarded for the risk of bonds then maybe less cash. Besides, retirement cash isn't likely to be T-Bills or even instant access. Its more likely to be in savings accounts paying more interest. As some point the line between cash and bonds blurs.

" If we get back to being properly rewarded for the risk of bonds then maybe less cash."

But aren't you then getting into the realms of tactical asset allocation. For example, should large-cap growth shares also not be excluded given currently lofty valuations?

The difference between bonds and equity is that with (safe) bonds you know for certain, barring end of the world scenarios, what your total return will be from the day you bought until maturity.   So you are able to sensibly judge one outcome against another and make "tactical decisions" appropriate for your particular situation.

Equity comes with no guarantees so any tactical asset allocation must be pased on your guesses which, given a perfect market, could just as well turn out wrong.

As to asset allocation with equity: the important thing in my view is to avoid over-reliance on any one factor.

Yes, I agree, but it's still a form of "fiddling".

I guess the point I am trying to make is why introduce complexity/fiddling when there is little evidence to suggest that the plain vanilla, periodically rebalanced, 60/40 portfolio is"broken".

For me it is because the last time that the 60/40 (or 50/50) almost broke was under similar circumstances that we are currently seeing - a gradual shift from falling interest rates and steady inflation to rising interest rates and rising inflation. Obviously I have no idea how similar this will be and I can't imagine that we will be seeing 10%+ interest rates this time around but there seems to be a relatively simple tweak to make, which is supported by that link you posted above, which is swap some of the bond holding for cash or at least low duration savings/bonds. It will likely perform slightly worse than bonds if interest rates level off but surely it reduces the risk a little. Working on the assumption that retail investors can get better than cash interest rates most of the time.

bostonerimus

Linton said:

bostonerimus said:

Linton said:

BritishInvestor said:

Prism said:

BritishInvestor said:

Prism said:

westv said:

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

Yes, in fact there are almost no studies that include cash. They all assume the downturn is protected by bonds. This is probably why you get quite a few questions on if/how much to have in a cash buffer and how to use it.

https://finalytiq.co.uk/wp-content/uploads/2017/02/FPA-Journal-December-1997-Conserving-Client-Portfolios-During-Retirement-Part-III.pdf

"As a final word, it is fair to conclude that cash is indeed "trash" in long-term investment portfolios, particularly when the client in seeking to maximize withdrawals."

Thanks. From chart 7 it looks like swapping some intermediate bonds (up to 50%) for cash doesn't change the withdrawal rate by much at all. In the current situation of cash typically returning more than bonds I would still likely do that. If we get back to being properly rewarded for the risk of bonds then maybe less cash. Besides, retirement cash isn't likely to be T-Bills or even instant access. Its more likely to be in savings accounts paying more interest. As some point the line between cash and bonds blurs.

" If we get back to being properly rewarded for the risk of bonds then maybe less cash."

But aren't you then getting into the realms of tactical asset allocation. For example, should large-cap growth shares also not be excluded given currently lofty valuations?

The difference between bonds and equity is that with (safe) bonds you know for certain, barring end of the world scenarios, what your total return will be from the day you bought until maturity.   So you are able to sensibly judge one outcome against another and make "tactical decisions" appropriate for your particular situation.

Equity comes with no guarantees so any tactical asset allocation must be pased on your guesses which, given a perfect market, could just as well turn out wrong.

As to asset allocation with equity: the important thing in my view is to avoid over-reliance on any one factor.

If you hold individual bonds the idea of maturity and a guaranteed return is obvious, it becomes far more nebulous in a bond fund with a wide range of maturities as your balance goes up and down

Agreed, which is why I would never buy a general bond index fund. It removes one of the main reasons for investing in bonds in the first place. Better to either use cash or an active fund whose objective matches yours.

Yes, good observations. I used bond index funds in the long bond bull market and more by luck than good judgement sold them all when I bought into my DB pension plan. My only bonds now are in the actively managed US Vanguard Wellesley income fund. Bond maturity selection is one area where the UK has a hole in the market. In the US Blackrock offers "Target Date Maturity" bond funds so all the bonds mature in the same year and you can easily build a diverse bond ladder.

Prism

bostonerimus said:

Linton said:

bostonerimus said:

Linton said:

BritishInvestor said:

Prism said:

BritishInvestor said:

Prism said:

westv said:

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

Yes, in fact there are almost no studies that include cash. They all assume the downturn is protected by bonds. This is probably why you get quite a few questions on if/how much to have in a cash buffer and how to use it.

https://finalytiq.co.uk/wp-content/uploads/2017/02/FPA-Journal-December-1997-Conserving-Client-Portfolios-During-Retirement-Part-III.pdf

"As a final word, it is fair to conclude that cash is indeed "trash" in long-term investment portfolios, particularly when the client in seeking to maximize withdrawals."

Thanks. From chart 7 it looks like swapping some intermediate bonds (up to 50%) for cash doesn't change the withdrawal rate by much at all. In the current situation of cash typically returning more than bonds I would still likely do that. If we get back to being properly rewarded for the risk of bonds then maybe less cash. Besides, retirement cash isn't likely to be T-Bills or even instant access. Its more likely to be in savings accounts paying more interest. As some point the line between cash and bonds blurs.

" If we get back to being properly rewarded for the risk of bonds then maybe less cash."

But aren't you then getting into the realms of tactical asset allocation. For example, should large-cap growth shares also not be excluded given currently lofty valuations?

The difference between bonds and equity is that with (safe) bonds you know for certain, barring end of the world scenarios, what your total return will be from the day you bought until maturity.   So you are able to sensibly judge one outcome against another and make "tactical decisions" appropriate for your particular situation.

Equity comes with no guarantees so any tactical asset allocation must be pased on your guesses which, given a perfect market, could just as well turn out wrong.

As to asset allocation with equity: the important thing in my view is to avoid over-reliance on any one factor.

If you hold individual bonds the idea of maturity and a guaranteed return is obvious, it becomes far more nebulous in a bond fund with a wide range of maturities as your balance goes up and down

Agreed, which is why I would never buy a general bond index fund. It removes one of the main reasons for investing in bonds in the first place. Better to either use cash or an active fund whose objective matches yours.

Yes, good observations. I used bond index funds in the long bond bull market and more by luck than good judgement sold them all when I bought into my DB pension plan. My only bonds now are in the actively managed US Vanguard Wellesley income fund. Bond maturity selection is one area where the UK has a hole in the market. In the US Blackrock offers "Target Date Maturity" bond funds so all the bonds mature in the same year and you can easily build a diverse bond ladder.

Its a shame that those kind of funds are missing in the UK. There is also very in the way of intermediate duration funds. Most government index funds are either 0-5 years or 13+ years with little in the middle.

Bank savings accounts get you to about 5 years however with pretty decent yields compared to standard bonds or gilts.