If an SWR is just that, how come time of retirement can make so much difference?

GazzaBloom

NedS said:

GazzaBloom said:

michaels said:

I wonder for a US investor who has potentially seen a 25% fall in their pension pot if invested in US shares and bonds and almost 10% inflation whether this might be one of the worst one year performance hits ever, the point being that the historic data set is limited and the economy has been far from 'steady state' in the period so it is not really surprising that we will see 'out of range' events in the future.

That's an interesting point, if a US retiree is using a SWR and taking annual withdrawals, they would have taken an increased amount at the turn of the year not realising what was about to unfold. 2022 is a good year for withdrawal rules to be tested!

Does anyone drawing a DC pension sleep soundly at night? 

I'm using an income approach, so in theory I shouldn't care what the value of my pot is doing (was up, now down atm) as it's all just noise as long as the dividends keep rolling in. Doesn't stop me looking though!

What helps me sleep better at night is the knowledge that much of my income needs are met from other sources (SP/DB) so I am not dependent upon the performance of my DC pot.

My challenge is that I want to retire before our SPs kick in and so have a front end loaded drawdown for 9 years, poor early sequence of returns is by biggest fear as that is a proven portfolio killer based on back testing. I am hoping this current market decline/crash passes before I hang up the boots and the first 5 years or so are relatively calm.

NedS

GazzaBloom said:

NedS said:

GazzaBloom said:

michaels said:

I wonder for a US investor who has potentially seen a 25% fall in their pension pot if invested in US shares and bonds and almost 10% inflation whether this might be one of the worst one year performance hits ever, the point being that the historic data set is limited and the economy has been far from 'steady state' in the period so it is not really surprising that we will see 'out of range' events in the future.

That's an interesting point, if a US retiree is using a SWR and taking annual withdrawals, they would have taken an increased amount at the turn of the year not realising what was about to unfold. 2022 is a good year for withdrawal rules to be tested!

Does anyone drawing a DC pension sleep soundly at night? 

I'm using an income approach, so in theory I shouldn't care what the value of my pot is doing (was up, now down atm) as it's all just noise as long as the dividends keep rolling in. Doesn't stop me looking though!

What helps me sleep better at night is the knowledge that much of my income needs are met from other sources (SP/DB) so I am not dependent upon the performance of my DC pot.

My challenge is that I want to retire before our SPs kick in and so have a front end loaded drawdown for 9 years, poor early sequence of returns is by biggest fear as that is a proven portfolio killer based on back testing. I am hoping this current market decline/crash passes before I hang up the boots and the first 5 years or so are relatively calm.

Right, and I guess SOR risks are amplified when front loading drawdown, with the potential result that your fund may be seriously depleted by the time you get to SP age, maybe not offering the additional income you hoped for at that point.

I am using an income approach during this period (10 years between early retirement and SP/DBs) so that we do not need to sell any equity and can remain invested throughout. I have targeted high returns (around 6% currently) which will likely impact any growth I am likely to see. I'm not sure I'd be so comfortable selling equity right now to cover 6% withdraws. A plus is I don't need a cash buffer as I'm not looking to sell anything, so I don't have that added drag on my portfolio performance, although that's arguably less of a drag now you can get 4.5% return on individual gilts or in savings accounts.

The rise in interest rates, and hence the risk free rate, means there are some attractive yields available for income seekers right now. It's a buyers market for sure.

GazzaBloom

NedS said:

GazzaBloom said:

NedS said:

GazzaBloom said:

michaels said:

I wonder for a US investor who has potentially seen a 25% fall in their pension pot if invested in US shares and bonds and almost 10% inflation whether this might be one of the worst one year performance hits ever, the point being that the historic data set is limited and the economy has been far from 'steady state' in the period so it is not really surprising that we will see 'out of range' events in the future.

That's an interesting point, if a US retiree is using a SWR and taking annual withdrawals, they would have taken an increased amount at the turn of the year not realising what was about to unfold. 2022 is a good year for withdrawal rules to be tested!

Does anyone drawing a DC pension sleep soundly at night? 

I'm using an income approach, so in theory I shouldn't care what the value of my pot is doing (was up, now down atm) as it's all just noise as long as the dividends keep rolling in. Doesn't stop me looking though!

What helps me sleep better at night is the knowledge that much of my income needs are met from other sources (SP/DB) so I am not dependent upon the performance of my DC pot.

My challenge is that I want to retire before our SPs kick in and so have a front end loaded drawdown for 9 years, poor early sequence of returns is by biggest fear as that is a proven portfolio killer based on back testing. I am hoping this current market decline/crash passes before I hang up the boots and the first 5 years or so are relatively calm.

Right, and I guess SOR risks are amplified when front loading drawdown, with the potential result that your fund may be seriously depleted by the time you get to SP age, maybe not offering the additional income you hoped for at that point.

I am using an income approach during this period (10 years between early retirement and SP/DBs) so that we do not need to sell any equity and can remain invested throughout. I have targeted high returns (around 6% currently) which will likely impact any growth I am likely to see. I'm not sure I'd be so comfortable selling equity right now to cover 6% withdraws. A plus is I don't need a cash buffer as I'm not looking to sell anything, so I don't have that added drag on my portfolio performance, although that's arguably less of a drag now you can get 4.5% return on individual gilts or in savings accounts.

The rise in interest rates, and hence the risk free rate, means there are some attractive yields available for income seekers right now. It's a buyers market for sure.

Understood but doesn't data show that taking income from dividends vs selling off capital from accumulation fund stocks is no real advantage in terms of total returns? I'm sure it "feels" better emotionally though. Also, seeking out high dividend stocks or funds can lead to under diversification.

https://www.youtube.com/watch?v=4iNOtVtNKuU&t=19s

Audaxer

NedS said:

GazzaBloom said:

NedS said:

GazzaBloom said:

michaels said:

I wonder for a US investor who has potentially seen a 25% fall in their pension pot if invested in US shares and bonds and almost 10% inflation whether this might be one of the worst one year performance hits ever, the point being that the historic data set is limited and the economy has been far from 'steady state' in the period so it is not really surprising that we will see 'out of range' events in the future.

That's an interesting point, if a US retiree is using a SWR and taking annual withdrawals, they would have taken an increased amount at the turn of the year not realising what was about to unfold. 2022 is a good year for withdrawal rules to be tested!

Does anyone drawing a DC pension sleep soundly at night? 

I'm using an income approach, so in theory I shouldn't care what the value of my pot is doing (was up, now down atm) as it's all just noise as long as the dividends keep rolling in. Doesn't stop me looking though!

What helps me sleep better at night is the knowledge that much of my income needs are met from other sources (SP/DB) so I am not dependent upon the performance of my DC pot.

My challenge is that I want to retire before our SPs kick in and so have a front end loaded drawdown for 9 years, poor early sequence of returns is by biggest fear as that is a proven portfolio killer based on back testing. I am hoping this current market decline/crash passes before I hang up the boots and the first 5 years or so are relatively calm.

Right, and I guess SOR risks are amplified when front loading drawdown, with the potential result that your fund may be seriously depleted by the time you get to SP age, maybe not offering the additional income you hoped for at that point.

I am using an income approach during this period (10 years between early retirement and SP/DBs) so that we do not need to sell any equity and can remain invested throughout. I have targeted high returns (around 6% currently) which will likely impact any growth I am likely to see. I'm not sure I'd be so comfortable selling equity right now to cover 6% withdraws. A plus is I don't need a cash buffer as I'm not looking to sell anything, so I don't have that added drag on my portfolio performance, although that's arguably less of a drag now you can get 4.5% return on individual gilts or in savings accounts.

The rise in interest rates, and hence the risk free rate, means there are some attractive yields available for income seekers right now. It's a buyers market for sure.

I have a portfolio with income funds and ITs, but I'm getting nowhere near yields of 6%. Most are between 4.5% and 5% with a hope that the dividends will grow with inflation, or near inflation, each year. 

Renewable energy/infrastructure ITs are good income payers, and these IT values have dropped a lot in the last few days. It could therefore be a good buying opportunity at this time, or maybe not if values keep falling!

NedS

Audaxer said:

NedS said:

GazzaBloom said:

NedS said:

GazzaBloom said:

michaels said:

I wonder for a US investor who has potentially seen a 25% fall in their pension pot if invested in US shares and bonds and almost 10% inflation whether this might be one of the worst one year performance hits ever, the point being that the historic data set is limited and the economy has been far from 'steady state' in the period so it is not really surprising that we will see 'out of range' events in the future.

That's an interesting point, if a US retiree is using a SWR and taking annual withdrawals, they would have taken an increased amount at the turn of the year not realising what was about to unfold. 2022 is a good year for withdrawal rules to be tested!

Does anyone drawing a DC pension sleep soundly at night? 

I'm using an income approach, so in theory I shouldn't care what the value of my pot is doing (was up, now down atm) as it's all just noise as long as the dividends keep rolling in. Doesn't stop me looking though!

What helps me sleep better at night is the knowledge that much of my income needs are met from other sources (SP/DB) so I am not dependent upon the performance of my DC pot.

My challenge is that I want to retire before our SPs kick in and so have a front end loaded drawdown for 9 years, poor early sequence of returns is by biggest fear as that is a proven portfolio killer based on back testing. I am hoping this current market decline/crash passes before I hang up the boots and the first 5 years or so are relatively calm.

Right, and I guess SOR risks are amplified when front loading drawdown, with the potential result that your fund may be seriously depleted by the time you get to SP age, maybe not offering the additional income you hoped for at that point.

I am using an income approach during this period (10 years between early retirement and SP/DBs) so that we do not need to sell any equity and can remain invested throughout. I have targeted high returns (around 6% currently) which will likely impact any growth I am likely to see. I'm not sure I'd be so comfortable selling equity right now to cover 6% withdraws. A plus is I don't need a cash buffer as I'm not looking to sell anything, so I don't have that added drag on my portfolio performance, although that's arguably less of a drag now you can get 4.5% return on individual gilts or in savings accounts.

The rise in interest rates, and hence the risk free rate, means there are some attractive yields available for income seekers right now. It's a buyers market for sure.

I have a portfolio with income funds and ITs, but I'm getting nowhere near yields of 6%. Most are between 4.5% and 5% with a hope that the dividends will grow with inflation, or near inflation, each year. 

Renewable energy/infrastructure ITs are good income payers, and these IT values have dropped a lot in the last few days. It could therefore be a good buying opportunity at this time, or maybe not if values keep falling!

Why are you taking risk on equities yielding 4.5% when you can get those same returns risk free from a UK gilt?

I deliberately targeted yields of 5% plus. My trusty spreadsheet tells me my current portfolio is on a 6.75% forward yield based on current prices (which as high as it sounds, is probably not high enough given the current risk free rate, meaning equity probably has further to fall)

I bought BATS a year ago back when it was on a yield of 8.5% (that's worked out really well so far!). I also bought most of the solar/wind/battery funds 12-18 months ago on attractive valuations and high yields (5-7%) - that had worked out very well until 2 weeks ago, with gains of around 30% whereas now I'm pretty much back where I started, although still paying out 5-7% per year in dividends.

I built a position in CTY during Covid at knock down prices which is now paying me 5.6% yield on my purchase price. I've also bought HFEL (currently on a 9.1% yield) which to date has merely covered a loss in capital with it's dividend. Property funds have been a nightmare for me, losing lots recently, but again are now on very high yields as a result. Not sure I'm brave enough to double down. Credit markets are looking particularly attractive now, with floating rate credit paying around 10% so that's where I shall be looking to add in the current crisis. I am also looking to open positions in L&G (9.5% yield) and NG (6% yield) on current price weakness. These are cash generative businesses that have grown their dividends, plus L&G behaves like a leveraged FTSE100 tracker so is a great buy at the depths of a crash (my trigger finger is getting twitchy though at current prices - lets see how much further they fall)

The one thing I have learned as an income investor is that price is king - if you buy at the right price you lock in great dividend yields and hopefully limit downside (e,g, BATS at 2540p last year). I have spent the last 2.5 years patiently building my portfolio and am around another 2 years away from retirement so for now all income is being reinvested. I see current market conditions as a great opportunity to top up holding or open new long term positions.

Audaxer

NedS said:

Audaxer said:

NedS said:

GazzaBloom said:

NedS said:

GazzaBloom said:

michaels said:

I wonder for a US investor who has potentially seen a 25% fall in their pension pot if invested in US shares and bonds and almost 10% inflation whether this might be one of the worst one year performance hits ever, the point being that the historic data set is limited and the economy has been far from 'steady state' in the period so it is not really surprising that we will see 'out of range' events in the future.

That's an interesting point, if a US retiree is using a SWR and taking annual withdrawals, they would have taken an increased amount at the turn of the year not realising what was about to unfold. 2022 is a good year for withdrawal rules to be tested!

Does anyone drawing a DC pension sleep soundly at night? 

I'm using an income approach, so in theory I shouldn't care what the value of my pot is doing (was up, now down atm) as it's all just noise as long as the dividends keep rolling in. Doesn't stop me looking though!

What helps me sleep better at night is the knowledge that much of my income needs are met from other sources (SP/DB) so I am not dependent upon the performance of my DC pot.

My challenge is that I want to retire before our SPs kick in and so have a front end loaded drawdown for 9 years, poor early sequence of returns is by biggest fear as that is a proven portfolio killer based on back testing. I am hoping this current market decline/crash passes before I hang up the boots and the first 5 years or so are relatively calm.

Right, and I guess SOR risks are amplified when front loading drawdown, with the potential result that your fund may be seriously depleted by the time you get to SP age, maybe not offering the additional income you hoped for at that point.

I am using an income approach during this period (10 years between early retirement and SP/DBs) so that we do not need to sell any equity and can remain invested throughout. I have targeted high returns (around 6% currently) which will likely impact any growth I am likely to see. I'm not sure I'd be so comfortable selling equity right now to cover 6% withdraws. A plus is I don't need a cash buffer as I'm not looking to sell anything, so I don't have that added drag on my portfolio performance, although that's arguably less of a drag now you can get 4.5% return on individual gilts or in savings accounts.

The rise in interest rates, and hence the risk free rate, means there are some attractive yields available for income seekers right now. It's a buyers market for sure.

I have a portfolio with income funds and ITs, but I'm getting nowhere near yields of 6%. Most are between 4.5% and 5% with a hope that the dividends will grow with inflation, or near inflation, each year. 

Renewable energy/infrastructure ITs are good income payers, and these IT values have dropped a lot in the last few days. It could therefore be a good buying opportunity at this time, or maybe not if values keep falling!

Why are you taking risk on equities yielding 4.5% when you can get those same returns risk free from a UK gilt?

I deliberately targeted yields of 5% plus. My trusty spreadsheet tells me my current portfolio is on a 6.75% forward yield based on current prices (which as high as it sounds, is probably not high enough given the current risk free rate, meaning equity probably has further to fall)

I bought BATS a year ago back when it was on a yield of 8.5% (that's worked out really well so far!). I also bought most of the solar/wind/battery funds 12-18 months ago on attractive valuations and high yields (5-7%) - that had worked out very well until 2 weeks ago, with gains of around 30% whereas now I'm pretty much back where I started, although still paying out 5-7% per year in dividends.

I built a position in CTY during Covid at knock down prices which is now paying me 5.6% yield on my purchase price. I've also bought HFEL (currently on a 9.1% yield) which to date has merely covered a loss in capital with it's dividend. Property funds have been a nightmare for me, losing lots recently, but again are now on very high yields as a result. Not sure I'm brave enough to double down. Credit markets are looking particularly attractive now, with floating rate credit paying around 10% so that's where I shall be looking to add in the current crisis. I am also looking to open positions in L&G (9.5% yield) and NG (6% yield) on current price weakness. These are cash generative businesses that have grown their dividends, plus L&G behaves like a leveraged FTSE100 tracker so is a great buy at the depths of a crash (my trigger finger is getting twitchy though at current prices - lets see how much further they fall)

The one thing I have learned as an income investor is that price is king - if you buy at the right price you lock in great dividend yields and hopefully limit downside (e,g, BATS at 2540p last year). I have spent the last 2.5 years patiently building my portfolio and am around another 2 years away from retirement so for now all income is being reinvested. I see current market conditions as a great opportunity to top up holding or open new long term positions.

Interesting to see these high yields. You have done well buying at low prices.

The only gilts I currently have are as part of a few bond funds, and multi asset funds with low yields. Although equities carry more risk, I would rather hold an equity income IT with a yield of 4.5% and a history of increasing its dividend every year, with the prospect of capital growth in the long term, rather than a 4.5% gilt.

Yields have increased to nearly 6% on some renewable energy and infrastructure ITs after the falls in value this week, and they are now trading at discounts for the first time in ages. Are you tempted to invest in any of these ITs at the current prices?

NedS

Audaxer said:

Yields have increased to nearly 6% on some renewable energy and infrastructure ITs after the falls in value this week, and they are now trading at discounts for the first time in ages. Are you tempted to invest in any of these ITs at the current prices?

It's hard to price these funds at present. For most funds, we are currently working off NAVs from 30/6/2022, before the government-induced current crisis. We need to understand what impact current events may have on those NAVs.

Firstly, there is rising inflation, which is largely positive as much of the income is inflation-linked, and this has partially driven up NAVs over the last 12 months, so is probably already priced in (assuming we do not see a further large unexpected rise in inflation). And that has given rise to rising interest rates which in turn increase the risk free rate and discount rates driving down NAV, hence the large re-ratings in the last week or so. Most funds will publish details of their sensitivities to increasing/decreasing inflation and/or interest rates, but typically a 1% increase in interest rates may cause a 5-6% drop in NAV. Obviously any funds now priced at a significant discount have some protection built in, but NAVs will likely fall from 30/6/2022 values to reflect the above.

Then we have energy price increases. Different funds have differing exposures to this. Some funds generate a large percentage of their revenue from CfD's, ROCs, FiT's etc, and/or sell their future generation in advance using PPA's (Power Purchase Agreements) whereby they will enter into fixed price contracts to sell their future power generation now using the forward energy pricing curve. This gives them excellent visibility of future earnings but also gives them less ability to take advantage of the currently high power prices. Other funds (e.g, UKW) are far more exposed to current pricing and are/were better placed to leverage the current higher power prices as they were not already locked in to longer term arrangements. They also have most to lose under the government's newly proposed energy price caps. So fears could be overplayed for funds that derive most of their income from CfD's or ROCs, and have already signed PPA's for the next 1-2 years - it's difficult to see how any price cap could apply retrospectively to a contract price that has already agreed for the next 1-2 years. Once you've sorted all that lot out, you can begin to make a judgement if current share prices are cheap / oversold due to current events.

The solar funds (BSIF, FSFL, NESF) are paying ~7% dividends at current prices, and those dividends should remain reasonably well covered by earnings, and they shouldn't be massively impacted by any Government price cap as much of their future income is already locked in. At ~20% discounts to NAV, much of the bad news may already be priced in and there is scope for capital gain if the NAV does not reduce significantly and the discount narrows once stability returns. If I didn't already have significant holdings, I may be tempted at current prices if I were looking for income. I'm happy to continue to hold and continue to receive my dividend income, the main reason I purchased them. If prices dip further, I may add a little more, but at the moment my game plan is to buy credit/debt funds in this crisis rather than to significantly add to my already substantial holdings in renewables.

I'm less convinced by UKW as I think they are potentially far more exposed to the government's renewables price cap, which if set too low could seriously impact their future cash flows and have a large negative impact on NAV. At a 10% discount, I am not convinced the current risks are completely priced in and I see a disparity with the solar funds trading on 20% discounts which are less exposed IMHO. A lot will depend how high/low the government sets the cap, but I would be far happier paying 130p than 140p given the current uncertainty.

I don't hold any of the "infrastructure" ITs (e.g, TRIG, HICL etc)

DT2001

OldScientist said:

NedS said:

Given many global equity funds are yielding around 2% (e.g, VEVE), and 4-4.5% is available from gilts, a balanced portfolio may give you much of the income you need from yield and you may only need to realise a small proportion of income from selling units. If 3% of your 3.5% SWR is coming from yield, you shouldn't need to sell much.

The problem with the natural yield approach is inflation - what might be 3.5% this year, will, in the absence of capital growth (which will be absent for bonds since the coupons are being spent), in real-terms be worth 3.15% next year (with current 10% inflation) and so on.

Abraham Okusanya backtested this approach with UK data (the results are at https://finalytiq.co.uk/natural-yield-totally-bonkers-retirement-income-strategy/). While I disagree with his use of the word 'bonkers' since the income from natural yield is no more variable than that for any other percentage of portfolio approach, it would require a retiree to have a significant amount of their essential spending covered by guaranteed income such as the state pension, DB pension and/or RPI-linked annuity or, as he says, to have a sufficiently large portfolio such that even in the lean years it still provides sufficient income to live off.

I have copied and pasted (below) a response to your linked article and having read some of your other posts see that you are well researched and wondered what your take was? My MIL has an income based portfolio (built to utilise the IHT relief of passing on excess income) and although it has only been in existence for 5/6 years it seems to have produced steady returns whilst the capital value fluctuates.

If one can combine some fixed income (maybe through fixed term annuities), DB and SP you can generate steady but unspectacular returns whilst protecting yourself against SORR?

This article is incorrect, both in theory and in explanation.
The practice is not about yield producing, but stable yield producing, which is where an intelligent adviser starts research. Running back tested portfolios from 1900 is a pointless exercise, and bears no relevance to anyone alive today, or their parents.

Investing for long term rising income is the hardest task for an investment manager to undertake, however we do have the luxury of a swathe of long term divi producers to help out. Since Procter & Gamble produced their first divi in (I think) 1897, they haven’t skipped one, and in the last 60 years it has risen every year. Closer to home, City investment trust was the first animal over the 50 year hurdle of consecutive rises, and this year should see Bankers and Alliance Trust join them, Caledonia next year. These are not one hit wonders, and they all have competent revenue reserves to back up their payments. 

the leading reliable investment trusts had an average payout increase over the 15 years from Jan 2000 of over 6% per year – that’s the annual increase, not the yield.

Yield to cost.
An investor receives an income that is his/her yield to his/her cost. Yield to current share price is only relevant to today’s purchaser. (Read anything Buffet, Malkiel or Ellis have ever written on divi investing).

Example:
Murray International. A purchaser in Jan 2000 bought a share with an existing 3.18% yield. An investor buying in 2014 was buying into a 4.38% yield. However the 2000 investor’s 2014 yield was 9%. The share price paid in Jan 2000 was £5, the divi received in 2014 was 45p. The focus on current yield is maintained by those in the markets trying to encourage trading, and the luxury that an adviser has is to evaluate the investment, and income, for the individual client and their own, personal, unique portfolio.

City of London’s divi in 2000 was 7.18p, and in 2016 was 15.9p. Share prices were £2.42 and £3.79 respectively, meaning the 2000 investor last year had a yield to cost of 6.57% – and capital growth of 56% which we are ignoring.

It’s important not to take investment theory designed for institutional mandates and apply them to retail clients – the two cashflows are entirely different, not least because on retail we have the luxury of finite drawdown periods, and a known investment timescale. David Swensen, in his time at Yale, did point out that investing in ‘alternatives’ was very relevant to long term investing for them, in fact a key ingredient, only because the endowment’s time horizon was 150 years.

“a natural yield portfolio will specifically overweight high-yield assets…”
Not true. High yield necessarily means ‘higher than the mean’, which to us simply means pushing the edge of the envelope, and that is anathema to long term income investing. The focus is not on high yield it is on consistent yield. Proven sustainability is key, and that can be researched and assessed via the published accounts, this year, last year, the year before….

When anyone in our back office team starts to get bogged down in the ‘science’ of investing I tape a pencil to the top of their computer screen – better than a pen in space.

The income investment equivalent of the Russian pencil is the London listed investment trust. If you can buy City of London today on a 4.2% yield, and with annual growth of over 5% over the last 16 years, which part of the objective is not being met?

More importantly, which of the two methods do you fully understand, and which of the two will the client understand?

[Deleted User]

IMHO SWR is mathematical nonsense because it assumes a constant withdrawal  from a highly variable pot. It’s counterproductive but heart-warming therefore popular. 

westv

Deleted_User said:

IMHO SWR is mathematical nonsense because it assumes a constant withdrawal  from a highly variable pot. It’s counterproductive but heart-warming therefore popular. 

It's a guide. Unless anybody can see into the future that's all we have. A guide to how much we might be able to withdraw.