Pension Funds and De-Risking

dunstonh

Remember that a three year cash buffer with income units on the funds would last longer than the three years.  

If you look back at the yields in the early 2000s, you would probably have managed 5-6 years on a three year cash buffer plus distributions.  less nowadays due to lower yields.

Thrugelmir

k6chris said:

dunstonh said:

95% of market falls recover within 3 years (actually much less than that).   So, a cash buffer avoids sales of units in the vast majority of negative periods.   You cannot cover all eventualities but you can take reasonable steps.

Genuine question, how and when do you replace that cash buffer? Thanks.

Generically speaking. Construct a portfolio that produces an element of income that can be retained in cash if so required. 

redpete

My company's pension scheme is managed by Scottish Widows.  The literature explains the Lifestyle options very clearly and at some stage the OP would have made the decision to go with the Lifestyle option (at the least defaulting to it by not choosing something else).  I'd expect the relevant investment guide to be available from the website - maybe via Tools and Information and My Library.

Not liking the Lifestyle option the OP is/was in is not a good idea for moving away from SW, there are plenty of funds available if you decide to choose your own portfolio - allbeit a more limited selection than somewhere like ii.

zagfles

dunstonh said:

Remember that a three year cash buffer with income units on the funds would last longer than the three years.  

If you look back at the yields in the early 2000s, you would probably have managed 5-6 years on a three year cash buffer plus distributions.  less nowadays due to lower yields.

So you're moving money out of equities (by not re-investing dividends) during a downturn?

zagfles

Prism said:

k6chris said:

dunstonh said:

95% of market falls recover within 3 years (actually much less than that).   So, a cash buffer avoids sales of units in the vast majority of negative periods.   You cannot cover all eventualities but you can take reasonable steps.

Genuine question, how and when do you replace that cash buffer? Thanks.

I did a simulation of a cash buffer with the 2000 crash and it was almost impossible to replace it at any time within the first 15 years. In fact the cash buffer with a high allocation of equities didn't really work at all as you ended up holding onto all of those equites to the very bottom in 2003, at which point the buffer was gone and then you started selling equites as they began to rise (just when it would have been ideal to hold onto them). Then 2008 hit and there was no cash buffer and this was the real crash.

All that time I imagine someone would have been constantly questioning their choices on what to use that year - cash or equities. Who knew that the best approach would have been to sell equities in 2000, 2001 and 2002 because it was in fact going to go even lower.

Of course someone with a 'proper' retirement allocation of bonds and equities wouldn likely have never needed the cash buffer as they would have sold some bonds.

Yes I did similar myself, downloaded some historical SORs and using a "cash buffer" made hardly any difference to outcomes, however the criteria was tweaked. Maybe someone here who favours it/uses it can point us at an analysis of using a cash buffer strategy and how it would have fared in a wide variety of historical and international markets, together with rules and critera for using it/refloating it?

k_man

zagfles said:

Prism said:

k6chris said:

dunstonh said:

95% of market falls recover within 3 years (actually much less than that).   So, a cash buffer avoids sales of units in the vast majority of negative periods.   You cannot cover all eventualities but you can take reasonable steps.

Genuine question, how and when do you replace that cash buffer? Thanks.

I did a simulation of a cash buffer with the 2000 crash and it was almost impossible to replace it at any time within the first 15 years. In fact the cash buffer with a high allocation of equities didn't really work at all as you ended up holding onto all of those equites to the very bottom in 2003, at which point the buffer was gone and then you started selling equites as they began to rise (just when it would have been ideal to hold onto them). Then 2008 hit and there was no cash buffer and this was the real crash.

All that time I imagine someone would have been constantly questioning their choices on what to use that year - cash or equities. Who knew that the best approach would have been to sell equities in 2000, 2001 and 2002 because it was in fact going to go even lower.

Of course someone with a 'proper' retirement allocation of bonds and equities wouldn likely have never needed the cash buffer as they would have sold some bonds.

Yes I did similar myself, downloaded some historical SORs and using a "cash buffer" made hardly any difference to outcomes, however the criteria was tweaked. Maybe someone here who favours it/uses it can point us at an analysis of using a cash buffer strategy and how it would have fared in a wide variety of historical and international markets, together with rules and critera for using it/refloating it?

Thanks to both you and @Prism for doing simulations/ analysis.
In your simulations, did a cash buffer make outcomes significantly worse?

I am trying to understand why the cash buffer isn't just considered part of the non equity part of the portfolio, that just happens to be outside of the pension wrapper.

coastline

The last two decades highlight the problems despite decent market returns. 2000 and 2008 onwards have resulted in 50% falls before recovery. Like other posters I looked at this a while ago and bookmarked a few.
From here you can set up various portfolios including a MSCI World Index fund and FTSE World Index fund.

 The backtesting tool for European index investors · Backtest (curvo.eu)

Three asset allocations set here 100% equity , 60/40 , and 40/60.It's US based but gives you an idea what can happen. From the OP's point of view it's clear 100% equity has created some scary moments. 
First two links are simple rule of thumb 4% annual SWR and other no withdrawals. Date is 2000-2022 highlighting the 3 year market crash in 2000-2003. At the right hand side of the heading Portfolio Analysis Results there's an arrow with a Link . That's how you create an address if anyone wants to post more data to the forum thread or bookmark their work. Change the various tabs to view drawdown etc.  Worth noting you can adjust inflation under the portfolio growth chart.

Backtest Portfolio Asset Class Allocation (portfoliovisualizer.com)

Backtest Portfolio Asset Class Allocation (portfoliovisualizer.com)

Similar set up for 2007-2022.

Backtest Portfolio Asset Class Allocation (portfoliovisualizer.com)

Backtest Portfolio Asset Class Allocation (portfoliovisualizer.com)

Simple 80/20 cash returns.

Backtest Portfolio Asset Class Allocation (portfoliovisualizer.com)

Taking a natural income should make the cash buffer last that bit longer. Even now you'd be half way there on the 4% SWR.

United States Government Bond 10Y - 2022 Data - 1912-2021 Historical - 2023 Forecast (tradingeconomics.com)

iShares MSCI World ETF (URTH) Dividend Yield | Seeking Alpha

bostonerimus

k_man said:

zagfles said:

Prism said:

k6chris said:

dunstonh said:

95% of market falls recover within 3 years (actually much less than that).   So, a cash buffer avoids sales of units in the vast majority of negative periods.   You cannot cover all eventualities but you can take reasonable steps.

Genuine question, how and when do you replace that cash buffer? Thanks.

I did a simulation of a cash buffer with the 2000 crash and it was almost impossible to replace it at any time within the first 15 years. In fact the cash buffer with a high allocation of equities didn't really work at all as you ended up holding onto all of those equites to the very bottom in 2003, at which point the buffer was gone and then you started selling equites as they began to rise (just when it would have been ideal to hold onto them). Then 2008 hit and there was no cash buffer and this was the real crash.

All that time I imagine someone would have been constantly questioning their choices on what to use that year - cash or equities. Who knew that the best approach would have been to sell equities in 2000, 2001 and 2002 because it was in fact going to go even lower.

Of course someone with a 'proper' retirement allocation of bonds and equities wouldn likely have never needed the cash buffer as they would have sold some bonds.

Yes I did similar myself, downloaded some historical SORs and using a "cash buffer" made hardly any difference to outcomes, however the criteria was tweaked. Maybe someone here who favours it/uses it can point us at an analysis of using a cash buffer strategy and how it would have fared in a wide variety of historical and international markets, together with rules and critera for using it/refloating it?

Thanks to both you and @Prism for doing simulations/ analysis.
In your simulations, did a cash buffer make outcomes significantly worse?

I am trying to understand why the cash buffer isn't just considered part of the non equity part of the portfolio, that just happens to be outside of the pension wrapper.

Cash should be part of everyone's portfolio, if only for the practicalities of cash flow and immediate emergencies.

bostonerimus

zagfles said:

Prism said:

k6chris said:

dunstonh said:

95% of market falls recover within 3 years (actually much less than that).   So, a cash buffer avoids sales of units in the vast majority of negative periods.   You cannot cover all eventualities but you can take reasonable steps.

Genuine question, how and when do you replace that cash buffer? Thanks.

I did a simulation of a cash buffer with the 2000 crash and it was almost impossible to replace it at any time within the first 15 years. In fact the cash buffer with a high allocation of equities didn't really work at all as you ended up holding onto all of those equites to the very bottom in 2003, at which point the buffer was gone and then you started selling equites as they began to rise (just when it would have been ideal to hold onto them). Then 2008 hit and there was no cash buffer and this was the real crash.

All that time I imagine someone would have been constantly questioning their choices on what to use that year - cash or equities. Who knew that the best approach would have been to sell equities in 2000, 2001 and 2002 because it was in fact going to go even lower.

Of course someone with a 'proper' retirement allocation of bonds and equities wouldn likely have never needed the cash buffer as they would have sold some bonds.

Yes I did similar myself, downloaded some historical SORs and using a "cash buffer" made hardly any difference to outcomes, however the criteria was tweaked. Maybe someone here who favours it/uses it can point us at an analysis of using a cash buffer strategy and how it would have fared in a wide variety of historical and international markets, together with rules and critera for using it/refloating it?

Here is such a study, make of it what you will.

https://www.financialplanningassociation.org/article/journal/SEP13-benefits-cash-reserve-strategy-retirement-distribution-planning

dunstonh

I am trying to understand why the cash buffer isn't just considered part of the non equity part of the portfolio, that just happens to be outside of the pension wrapper.

It is if you want it to be.   

Some people can view their portfolios holistically. Some cannot.   Remember there are no rules on this.  It is about working the best way to suit you and your circumstances.    

If you had to buy something in 1, 2 or 3 years time and you posted here to ask whether you should invest your money or use cash savings then virtually everyone would say you shouldn't invest the money as it is too risky.      Or if you are already invested, then you should de-risk periodically to cash before the withdrawal is due.     This is because the risk of loss in the short term is too great.
 
Yet when it comes to income, you have a few here saying that you should be invested right up to the point of withdrawal.