Using a cashflow ladder in retirement?

OldScientist

GazzaBloom said:

bostonerimus said:

GazzaBloom said:

To put all this worry about 30-40 year retirement and having enough money into context, I have just learned today that a former colleague and friend of of mine has died at age 63...that's 8 years left for me should I suffer the same fate.

Retirement planning must be a balance between saving, sweating investment asset allocation and balancing fear of long term low returns, market crashes, too much exposure to market volatility, preservation of capital, etc, etc... and a sudden curtailment or derailment of plans.

This is why I have taken my DB pension at the earliest opportunity at age 55, with tax free lump sum and reduced annual payment so there can be some living today as no-one knows what tomorrow holds or how many tomorrows there will be. I would be happy to be 80 and living a modest life having not worked longer than I really wanted, travelled, bought a really nice guitar or two, relaxed and fixed up my house earlier in life, rather than having lived in fear of running out of money fretting this mortal coil and suddenly departing.

We must talk in averages and distributions when it comes to planning and predictions, hen you can make sensible assumptions. But that's all they are. Your colleague's death is a single event and while obviously sad and psychologically meaningful to you, it should have no effect on your planning. You could just as well be one of the people that forms the other end of the longevity distribution tails. Taking the DB pension is a good way to insure for your longevity. I did just the same and took my DB pension at 55

Agreed, I calculated that it would take 20+ years for taking the DP pension at 65 rather than 55 with lump sum and reduced payment before leaving it until 65 would would be more beneficial, that would put me at 85 before it before it became the more lucrative option. Will I be alive and need the extra money at 85?

To answer the first part of that question (as I know you know) - depending on your gender, age, wealth, lifestyle, and health, you have a chance of living to 85 of approximately 50% - whether you need the extra money at that point is only a decision that time and you will tell.

I also took my DB pension early which means like you and bostonerimus, I am lucky enough to have guaranteed income beyond the state pension to rely on. For those without such fall back positions (and whose essential spending is above that affordable on the state pension), then planning for a retirement duration to aged 100 might be considered fairly sensible, if conservative, particularly for a couple since a roughly 10% chance of one or other partner living to that age is currently predicted. Drop that by about 5 years or so (i.e. to 95) if you'd prefer a 25% chance of outliving your plan and another 5-10 (i.e. to 85-90) if you'd prefer a 50% chance.

Apologies to the OP - the above is definitely drifting off topic... so, to come back on topic, I would definitely have a look at McClung's "Living off your Money" to see what historical backtesting (US mostly, but UK results are also tabulated - although the limitations of the dataset he uses means that some of the worst periods for the UK are omitted) has made of various bucket and cash strategies (the relevant chapter, Chapter 3, is freely downloadable at http://livingoffyourmoney.com/wp-content/uploads/2016/05/LivingOffYourOwnMoney_eBook_FirstThreeChapters.pdf).

Thrugelmir

GazzaBloom said:

This is why I have taken my DB pension at the earliest opportunity at age 55, with tax free lump sum and reduced annual payment so there can be some living today as no-one knows what tomorrow holds or how many tomorrows there will be. 

Now that the black swan has flown in. I suspect there'll be many who won't be as bullish as they were previously. The value of a secure income is likely to return to the fore. 

MK62

Thrugelmir said:

GazzaBloom said:

This is why I have taken my DB pension at the earliest opportunity at age 55, with tax free lump sum and reduced annual payment so there can be some living today as no-one knows what tomorrow holds or how many tomorrows there will be. 

Now that the black swan has flown in. I suspect there'll be many who won't be as bullish as they were previously. The value of a secure income is likely to return to the fore. 

I don't think it's ever been far from people's thoughts when doing retirement planning......the issue for those who don't have a secure income though, is how to get one, and for those without a DB pension scheme, the options are rather limited. 

BritishInvestor

Prism said:

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.

"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."

Which period was this - the 1970s?

BritishInvestor

Thrugelmir said:

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.

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".

What are long dated Government bonds now yielding to maturity?  

I'm not sure that really addresses my question on whether the 60/40 portfolio is or isn't broken.

https://www.timelineapp.co/blog/no-qe-didnt-break-the-4-rule/

"According to Professor Elroy Dimson, UK bond investors lost half their wealth in real terms in the inflationary period from 1972 to 1974! In the period between 1914 and 1920, UK bonds lost over 60% in real terms over seven consecutive years. But the SWR framework would have held its own during this period."

The above may or may not happen in the future.

Thrugelmir

BritishInvestor said:

Thrugelmir said:

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.

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".

What are long dated Government bonds now yielding to maturity?  

I'm not sure that really addresses my question on whether the 60/40 portfolio is or isn't broken.

Is only a question of mathematics. Given that bond yields are fixed to maturity. The 60/40 being born out of the work of Harry Markowitz who introduced the concept of the Modern Portfolio Theory in 1952. The 60/40 portfolio was only optimal in the sense of basis of past performance predicting future returns. Hence my earlier abbrievated observation. 

BritishInvestor

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

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.

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".

What are long dated Government bonds now yielding to maturity?  

I'm not sure that really addresses my question on whether the 60/40 portfolio is or isn't broken.

Is only a question of mathematics. Given that bond yields are fixed to maturity. The 60/40 being born out of the work of Harry Markowitz who introduced the concept of the Modern Portfolio Theory in 1952. The 60/40 portfolio was only optimal in the sense of basis of past performance predicting future returns. Hence my earlier abbrievated observation. 

Ah, I'm using 60/40 more in the sense that it's a "sweet spot":

1. It's probably an allocation that most investors would be happy to stick with during times of volatility (or maybe 50/50).
2. The benefit of increasing equity (in SWR terms) tends to (typically) taper off as you go towards 100%.

rather than in reference to MPT.

Prism

BritishInvestor said:

Prism said:

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.

"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."

Which period was this - the 1970s?

Yes, that's the only period historically that really concerns me - pretty much every other time period except for earlier that century that I have few examples of, has been a fairly easy ride due to pretty fast recoveries and the benefit of a decent yield on bonds. In that time period in general cash outperformed bonds so having a small amount allocated to it as an alternative, with only a small downside to total return seems a reasonable way of playing it a bit safer.

Just to be clear, when I say cash I don't really mean cash. Except for near term income requirements which would be instant access I would use fixed term savings accounts - which technically are bonds with better yields.