Retirement (Decumulation) Specific Portfolio

pricedout_1

Just curious as to what changes people have made to their portfolio once in retirement as compared to what was invested in before retirement in the accumulation phase?

The big pension providers (and investment managers) seem to still go or "60% global equities / 40% global bonds" (or what ever variation they currently favour such as 70/30 etc) and then switch over to mostly bonds at retirement to reduce risk (at lot o good that did this year!!)

What I'm interested in is what people are actually invested in retirement. I believe many in the UK opt for a home bias UK Equity Income portfolio (maybe combined with bonds to reduce risk). Has anyone here remained in, for example, a standard globally diversified accumulation fund and shunned bonds? (And then just sold down accumulation units based on growth in the fund in order to pay themselves the retirement 'salary';?)

billy2shots

When I run the figures through the retirement planning software (daily, at 40 I can't wait to get out) a higher holding (even 100%) of equities always has the best chance of lasting through retirement. 

Bond holding supposedly smooths the downs but doesn't provide a more financially secure drawdown on the whole. 

Cash has always been seen as a drag. However for an early retirement I'm toying with 3 years essential cash (bills covered) and the rest of my funds in globally diversified trackers. 

100% equities will be the most volatile but time and time again it's showing the greatest chance of surviving drawdown and also generating the biggest left over pot to pass on (if sticking to original drawdown plan). 

ex-pat_scot

pricedout_1 said:

The big pension providers (and investment managers) seem to still go or "60% global equities / 40% global bonds" (or what ever variation they currently favour such as 70/30 etc) and then switch over to mostly bonds at retirement to reduce risk (at lot o good that did this year!!)

The "lifestyling" approach, which is to move gradually towards safer assets on a 15 year glide path before a fixed retirement date, is largely obsolete. It was designed to prepare for a purchase of annuity on retirement, which required a lump sum.
Nowadays, unless (a) you know your end date (b) you want an annuity, then your funds will be crystallised on regular (monthly?) tranches until you expire. As such, only the portion nearing crystallisation need to be de-risked, and the remaining assets will be required to be continued to be invested for the medium or long term.

If I recall, there is an optimum portfolio mix that optimises the 30 year outcome when back tested against market data - it's not necessarily 100% equities.

My own approach, as I believe I do not have any insights or "edge" on the market, is to go for 100% global diversified ETF equity trackers, using the lowest cost option available (my GPPP provider does not offer Vanguard).

bownyboy

Me and the wife's portfolio is the same in retirement as accumulation which is approximately 80% equities (FTSE Global All Cap), 10% Bonds (Global Bond Index) and 10% Cash.

We will spend down cash for a year and then review the performance of the markets and decide if we take from the equities portion or further from bond / cash. 

We will apply a variable percentage rate withdrawal with guardrails. I found the book 'Beyond The 4% Rule: The science of retirement portfolios that last a lifetime' a great read that details the different options for withdrawal and their pros and cons.

Linton

Having been retired now since 2005 (early retirement!) my experience has led me to a very different approach.....

100% equity is high risk and could lead to too many sleepless nights.  How would you cope with a 40-50% equity crash that took perhaps 5 years to recover?  It may lead to higher very long term returns but is that important?  Is your primary aim to die rich?  Mine is to live as comfortably as I can whilst alive with minimal financial worries.

So the objective is to provide all the income needed for day to day expenses as securely as practicable for as long as I live .  More risk could be acceptable for expenditure beyond that level.

 Ideally an inflation linked annuity would be a sensible option but unfortunately they are too expensive.  Fixed annuities have been poor value since the 2008 crash but are now returning to levels that may be worth considering.  But they dont provide a complete answer because of inflation.

Such considerations lead to planning for 3 timescales:...
a) Short term, say 5 years where income is guaranteed.
b) Medium term, say 5-12 years where some risk can be taken
c) Long term, 12 years+ to provide inflation matching

Rather than trying to devise an asset allocation that simultaneously meets all these requirements my wealth is divided into 4 separate tranches or pots:

1) Cash for major planned one-off expences, emergencies and short term failures of the income investments - PBs and current accounts
2) Diversified income investments, dividends and interest to provide fairly stable monthly income with minimum management - INC funds and ITs
3) Wealth preservation for medium term protection- specialist funds/ITs
4) Diversified long term Growth - 100 % equity

Each pot has a simple objective and so can be satisfied with a relatively simple focussed portfolio.  There is no need to worry about overall % equity etc - the overall allocations are what they need to be to meet the objectives. Over time it will make sense to gradually reduce the size of the growth pot matching the reduction in the number of years for which one needs to plan.

Audaxer

I am retired and have more invested now, and it is more diversified, than when I was working because I have learned more about investing since retiring.

I now have an active income portfolio of equity income ITs and funds (UK, Global and Asian) a couple of bond funds, a property IT and a growth IT. Overall it provides dividend income of around 3.5% per year. I also have a couple of medium risk multi asset funds of passives with 60% equity. The income portfolio has performed best this year, but that hasn't been the case in previous years, but I still like the relative security of a steady stream of dividends from equity income funds and ITs.

pricedout_1

@billy2shots .... I can't remember the source now, but I remember a very credible source saying the same thing. The numbers have been crunched on this issue and they found that remaining in 100% equities came out top every time in terms of portolio longevity/size in retirement.

It begs the question..... is the 60/40 portfolio relevant anymore (apart maybe from derisking portfolios closer to, or in the early phase of retirement)? (what is this stupid rule on MSE forums about replies being over a certain length?

pricedout_1

ex-pat_scot said:

pricedout_1 said:

The big pension providers (and investment managers) seem to still go or "60% global equities / 40% global bonds" (or what ever variation they currently favour such as 70/30 etc) and then switch over to mostly bonds at retirement to reduce risk (at lot o good that did this year!!)

The "lifestyling" approach, which is to move gradually towards safer assets on a 15 year glide path before a fixed retirement date, is largely obsolete. It was designed to prepare for a purchase of annuity on retirement, which required a lump sum.
Nowadays, unless (a) you know your end date (b) you want an annuity, then your funds will be crystallised on regular (monthly?) tranches until you expire. As such, only the portion nearing crystallisation need to be de-risked, and the remaining assets will be required to be continued to be invested for the medium or long term.

If I recall, there is an optimum portfolio mix that optimises the 30 year outcome when back tested against market data - it's not necessarily 100% equities.

My own approach, as I believe I do not have any insights or "edge" on the market, is to go for 100% global diversified ETF equity trackers, using the lowest cost option available (my GPPP provider does not offer Vanguard).

Thanks. So presumably you have accumulation etfs and then sell down any accumulation units to pay your retirement 'salary'?

NoMore

Yes, rationally 100% equities is the best choice, however very very few people are rational. When your in the middle of a large and long drop in equities (which will happen at some point, due to the large volatility inherent in 100% equities), most people would find it hard not to do something and move out of 100% because they are worried about running out of money, despite the rational choice they made at the start that 100% was correct. 

That's what the 60/40 portfolio is for, it (ideally) dampens down the volatility at the expense of some long term gain.

My plan is for my drawdown portfolio to be 100% equities but that's not the whole picture, as I have a DB pension that will cover my essential expenses and some excess income. So in reality I don't need to reduce volatility because I am not 100% reliant on equities for my income in retirement.

I like Lintons approach for those who have no form of secured income for retirement and instead rely upon a pot to drawdown from.

pricedout_1

Audaxer said:

I am retired and have more invested now, and it is more diversified, than when I was working because I have learned more about investing since retiring.

I now have an active income portfolio of equity income ITs and funds (UK, Global and Asian) a couple of bond funds, a property IT and a growth IT. Overall it provides dividend income of around 3.5% per year. I also have a couple of medium risk multi asset funds of passives with 60% equity. The income portfolio has performed best this year, but that hasn't been the case in previous years, but I still like the relative security of a steady stream of dividends from equity income funds and ITs.

Thanks. Out of interest, do you rebalance between the portfolio's? So for example when growth recovers you will once again have the option of selling some of that portfolio down to boost your income portfolio, but, do you actually do that in your retirement investment strategy?

Also, when it comes to funds such as equity income IT's, is there a reason you use these over equivalent lower cost etf's?

Audaxer

Even with DB pensions to cover essential spend, I think if investments are 100% equities, most retirees would ideally want a fairly decent cash holding to access for large spend items, some which may be unexpected.