What is the optimal ratio of equities to bonds for an investment that requires a 5% annual drawdown?

tebbins

aroominyork said:

tebbins said:

The particular equities in CGT and PAT, though including a variety of global trackers in various weights, are focused on real estate and arguably shouldn't be counted towards the equity allocation of a portfolio.

That's debatable and I'm not sure the fund managers would agree. The CGT factsheet has an asset of 'funds/equities' which includes the property holdings.

I agree very debatable, if using a set equity + bonds allocation, CGTs equities certainly couldn't count as bonds, if using a more flexible or less simplistic target portfolio, you could certainly count the property/real estate weighting as a seperate category from 'standard' equity.
Very debatable but worth considering.

Octopussy91

Deleted_User said:

Octopussy91 said:

Unfortunately the products in question are both a particular kind of offshore investment bond with withdrawals set at 5% until the death of the holder.  There is nothing I can do to reduce the withdrawal rate.  Surrender is also not an option.

So what happens to the 5% withdrawn each year? Is it being reinvested, but in a different tax wrapper? If so, then the 5% withdrawal is irrelevant to how you should invest. If a 70:30 portfolio suits you, then you can invest like that inside the product, and the same way with all the money that's been withdrawn from the product.

And don't worry about whether the value inside the product is doing well enough by itself. Look at the whole picture. It doesn't matter if investment value inside the product declines but that is compensated for by the investments outside growing.

Unfortunately the 5% is being used as income to cover the living costs of a retiree.  It all gets spent.

Octopussy91

Deleted_User said:

Octopussy91 said:

Unfortunately the 5% is being used as income to cover the living costs of a retiree.  It all gets spent.

Right. So the earlier replies, suggesting that 5% is a high draw rate, and that you will need a high percentage of equities to have a decent chance of it working out well, are relevant.

How does this bond calculate the 5% to pay out? If the investment value falls, does it keep paying out the same amount (which would now be now more than 5% of the investment value), or does it pay out 5% of the reduced value? The risks are slightly different in each case (eventually running out of capital inside the bond, or an immediate reduction in income paid out).

It os 5% of the original investment value.  So, if the original investment was £100,000, the withdrawal would be fixed at £5,000 per annum.  Increases or decreases in the investment value do not affect it.

masonic

Octopussy91 said:

Deleted_User said:

Octopussy91 said:

Unfortunately the 5% is being used as income to cover the living costs of a retiree.  It all gets spent.

Right. So the earlier replies, suggesting that 5% is a high draw rate, and that you will need a high percentage of equities to have a decent chance of it working out well, are relevant.

How does this bond calculate the 5% to pay out? If the investment value falls, does it keep paying out the same amount (which would now be now more than 5% of the investment value), or does it pay out 5% of the reduced value? The risks are slightly different in each case (eventually running out of capital inside the bond, or an immediate reduction in income paid out).

It os 5% of the original investment value.  So, if the original investment was £100,000, the withdrawal would be fixed at £5,000 per annum.  Increases or decreases in the investment value do not affect it.

A fixed £5k pa withdrawal from a starting portfolio of £100k could be considered a safe withdrawal from a portfolio of anywhere from 20% to 100% equities, but at 3% inflation, you'll only be getting about £2k in today's money after 30 years. If the money is all needed to cover living costs of a retiree, then every year the £5k will cover less and less of those costs. A level draw-down of this type is not suitable for long periods of time unless the starting amount is far in excess of the actual amount needed each year. You've held for nearly 20 years already, and over that time the value of your investment has fallen in real terms to about £80k per £100k invested in the first case and to £45k per £100k invested in the second case, but the amount you are withdrawing has halved in real terms.

The percentage equities selected will have almost no bearing on the outcome (>95% chance of the money not running out over 30 years from this point, whatever you pick). Higher risk just means (probably) more left when the retiree dies. What happens to the money then?