Partial Drawdown - investment flexibility for remaining funds

gm0

A key DIY drawdown decision is "how much SORR buffer shall I keep in cash or near cash" assets and what "other" contingencies do I have.  Plenty of threads on the subject and on correction shapes and timelines for markets to recover (to nominal or real). 

There is no perfect answer.  But there will likely be cash (or near cash equivalents) inside the pension wrapper and outside. 
Inside IHT exempt. Outside more options for dispersal for protected deposit fixed interest but inside the estate.

Some of each. No "perfect" pre-packaged solution exists.  Not sure it really could.

As a simple example you may wish (a good number but not all DIY do this) to have 12 months income ready to go and rebalance and trade a minimal amount or not at all outside of rebalancing. This buffer may partly refill by itself if INC fund units are chosen

As said upthread sticking to a long term asset allocation and ignoring short term volatility is enabled by some cash around as part of buffering sequence risk - because you are a deaccumulator - who does not wish to become a forced seller - this month - or this year - or next year.   Someone with significant IHT issues already might keep a 2nd 12 months income inside the pension in minimal risk assets.  And someone without those issues might be more open to that 2nd year of "cash" being outside the pension with more flexibility.  Neither of them is wrong.

Your conclusions on what constitutes a sensible frequency to do rebalancing and fund reviews affect this.
Could be more than 18mo, Or yearly, Or 6mo, 3mo.  People have studied this rebalancing frequency question starting with annual as a default and as I recall it the impact of more frequent than annual rebalancing is "quite small" and backtests -ve and +ve in different periods so is of little help in any case for a lot of portfolio choices.  Just pick a non-extreme and convenient timetable for you.

Of course a more aggressive frequent trader would perhaps be more open to using short duration treasuries - US TIPS and such instead of "cash" or money market funds for the "minimal risk" element and also to making income available "just in time" every month. Avoiding some inflation and lost returns erosion of buffer cash theoretically. It is a small amount of work which you either relish and can tie in with more active trading activities or if you don't have that hobby - you won't want to fiddle with the pension every month.

DaveO

@gm0 I think you have hit the nail on the head regarding my concern when you mention not wanting to be a forced seller.

If you don’t have to force sell then it becomes easier to accept the pension portfolio losing value when the market contracts or if part of the portfolio, be that equities  or bonds, tanks compared to other investments within it.

I could avoid force selling now if I retired tomorrow and not touch the pension pot for a year. I am sure there are plenty of people who could not do this but also might not think to do it even if they could.  That is once they start drawing a regular income from their pension it might never cross their minds to stop doing so and sell the premium bonds!

zagfles

You could look at dynamic asset allocation strategies like Prime Harvesting, see https://monevator.com/dynamic-asset-allocation-and-withdrawal-in-retirement/

Long discussion here https://forums.moneysavingexpert.com/discussion/6340443/rebalancing-in-bear-market-de-cumulation/p1

JohnWinder

The question is, how reactive are the providers to changes in the market?    Most packaged solutions I have seen have at least some exposure to bonds and currently bond values all seem to be heading south (probably due to rising interest rates). 

You don’t need to worry about rising interest rates and bond fund prices if you follow a sensible investment plan (skip to the last para for what’s sensible, because the rest has been said many times recently and you’ve probably already read it).

A bond price has to fall when the interest rate relevant to it rises, (eg a 5 yr bond, govt guaranteed etc) as people sell those bonds to buy the new higher paying one. And it happens to all the bonds in a bond fund, but remember all the different bonds have different interest rates and not all rates will move the same amount as the 5 yr govt guaranteed rate. So it’s possible to see a bond fund’s value barely move despite a rise in the overnight cash rate set by the central bank. Here’s an example of a bond fund’s value increasing as the cash rate rose

 Here is the Fed Funds rate from 6/1/2004 through 9/30/2004, and a bond fund’s value during that time.  https://www.bogleheads.org/forum/viewtopic.php?p=6657139#p6657139

So the future is not necessarily ‘interest rates up, funds down’. Nonetheless, we are seeing falls in bond funds now, and this has and now should be followed by upward pressure on fund values because as each month passes some old low interest bonds in the fund mature and are replaced by newer higher interest bonds. Isn’t that what you’d want as an investor in a bond fund, for it to be holding higher rather than lower interest bonds? Indeed, for someone planning their retirement portfolio, with presumably at least 20 years more of spending needs, you’d be praying interest rates rose now and filled your fund with high yielding low risk bonds.

Lastly, it takes a little time for rising interest rate to flow through to fill bond funds with high paying bonds, and the time it takes depends on how long term or short term the bonds in the fund are. For an ‘average’ maturity fund, it might take 7 years for the full benefit of this year’s interest rate rises to have their maximum impact. 

What’s sensible? You should match your spending needs horizon (when, how much, how often?) to your portfolio’s returns horizon; it’s called duration matching, and it protects you against exactly what you’re concerned about. So, some people hold some cash for spending in the next year or two because there are almost no investments which have such a short horizon of returns with safety as cash does (equities certainly don’t, and longer term bonds don’t either to a lesser degree). For spending money 15 years away a 10 year bond fund is very suitable.

And that will be why fund managers are not piling out of bonds, because they have a place if they’re used sensibly.

zagfles

I must admit bond prices confuse me, particularly permanent ones with no redemption date. For instance this one from Barclays, 9%, with a price not much over nominal and a running yield of 8.362% https://www.hl.co.uk/shares/shares-search-results/b/barclays-bank-plc-9-permanent-int-bonds

Why is the yield so high? Can't believe there's much risk of capital loss unless either interest rates approach 9% (unlikely I'd say?) or Barclays are at risk of failure (surely "too big to fail" and would be bailed out if required??)

So why the high yield? I'm sure I'm missing something...

 

JohnWinder

Must be credit risk in part. Today’s headline: 

‘UK’s largest lenders no longer ‘too big to fail’, says Bank of England’

‘ It also determined that shareholders and investors rather than taxpayers would be first in line to cover banks’ losses and ensure they have enough capital to operate.’
The 5% buy/sell spread isn’t appealing either. If they’re ‘permanent’ and the bank won’t take them back, then they’re a bit like shares n’est pas. And how much of their face value are you losing to inflation each year; at least with a dated bond there’s a limit to how long that agony goes on for.
 Otherwise, no idea.

Linton

zagfles said:

I must admit bond prices confuse me, particularly permanent ones with no redemption date. For instance this one from Barclays, 9%, with a price not much over nominal and a running yield of 8.362% https://www.hl.co.uk/shares/shares-search-results/b/barclays-bank-plc-9-permanent-int-bonds

Why is the yield so high? Can't believe there's much risk of capital loss unless either interest rates approach 9% (unlikely I'd say?) or Barclays are at risk of failure (surely "too big to fail" and would be bailed out if required??)

So why the high yield? I'm sure I'm missing something...

 

PiBs have serious downsides. See

https://www.bsa.org.uk/information/consumer-factsheets/general/what-are-pibs#:~:text=Permanent Interest Bearing Shares (PIBS,with other rates of interest.

zagfles

Linton said:

zagfles said:

I must admit bond prices confuse me, particularly permanent ones with no redemption date. For instance this one from Barclays, 9%, with a price not much over nominal and a running yield of 8.362% https://www.hl.co.uk/shares/shares-search-results/b/barclays-bank-plc-9-permanent-int-bonds

Why is the yield so high? Can't believe there's much risk of capital loss unless either interest rates approach 9% (unlikely I'd say?) or Barclays are at risk of failure (surely "too big to fail" and would be bailed out if required??)

So why the high yield? I'm sure I'm missing something...

 

PiBs have serious downsides. See

https://www.bsa.org.uk/information/consumer-factsheets/general/what-are-pibs#:~:text=Permanent Interest Bearing Shares (PIBS,with other rates of interest.

They're not the same are they? That seems to be specifically about PIBS issued by building societies who can't raise normal share capital, so PIBS look more like shares than bonds. Whereas Barclays is a bank and has never been a building society, and the link above was to a PIBB rather than a PIBS, ie Bond rather than Share. Or are they in fact similar? Can Barclays refuse to pay the interest in similar circumstances to PIBS?