Retirement (Decumulation) Specific Portfolio

ex-pat_scot

pricedout_1 said:

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'?

I'm not quite yet at the decumulation point.
I know that the Vanguard products offer accumulation and divi options. Certainly it would be helpful to look at which would be better for txn fees, tax (if applicable), timings etc.
If necessary, I could move away from accumulation ETFs when I start to want to draw.

On another point, about whether 100% equities is a bit punchy: I'm 100% in equity tracker at the moment. I've not been worried over the past 15 years or so about the volatility. I do have the expectation of 2 x SPs and a small DB, which would give us as a  couple around £30,000 of risk free income at SPA, and which could be deferred (depending on market and cash requirements) to act as a later life guaranteed base income.

bostonerimus

During accumulation I was 60/40 and rebalanced through the ups and downs. Just before retirement I took some of my pot and bought into a DB plan when given the opportunity (others could buy an annuity) and upped by cash buffer from one year of spending to two. I have left my DC pension and other investments alone and now I'm 90/10 in cap weighted global equities. During accumulation I also paid off my mortgage and bought a rental property, also now paid off. State pensions will start in a few years. So my spending is covered by rent, DB pension and state pensions will be extra and I can stay aggressive with my DC pensions and other investments.

Linton

NoMore said:

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.

I agree that 100% equity is a rational choice if you do not have any plans to actually drawdown from the pot in the short/medium term.  If you need the money then it is rational to do what you can to ensure that it is available for the foreseeable future.  So you need to diversify.

However I dislike a simple 60/40 portfolio, particularly for a large portfolio that is essential for one's future well-being.  As said its purpose is usually seen as dampening volatility with the bond part being there as ballast to stop the ship rocking about too much in stormy weather.  This seems a tremendous waste of one's assets.  Especially as we have recently seen it is not guaranteed.

My own pension pot overall is about 55% equity, 33% bonds and 12% "other".  So not too different to 60/40.  However I do not hold any bond funds as pure ballast,  all serve some purpose in their own right such as income or to be used tactically by the Wealth Preservation funds.

My income to cover normal expenditure is about 25% from the pension pot and the rest SP and pre-2008 annuities.  However the annuities are fixed rate so will become progressively less important because of inflation.  This will need to be covered by taking higher %s from the pot either as interest or occasional lump sum transfers to cash

Albermarle

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).

Most (all?) providers offering a 'lifestyle' option have one for buying an annuity, and one more suitable for going into drawdown ( plus other options say for example for a short drawdown of 5 to 10 years ). The drawdown ones do not derisk as much as the annuity ones, but do still seem to be on the cautious side, with more of a 40/60 approach.
I suspect though that some who have been in a lifestyle fund for many years, will unwittingly still be in the annuity one, when it is not appropriate.

Regarding the backtesting, I am not an expert either, but have seen some where the end result is only marginally different with many different portfolios, as long as you have at least a minimum % of equities. As it is all based on US history anyway, probably not worthwhile dwelling too much on exact percentages.

billy2shots

Albermarle said:

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).

Most (all?) providers offering a 'lifestyle' option have one for buying an annuity, and one more suitable for going into drawdown ( plus other options say for example for a short drawdown of 5 to 10 years ). The drawdown ones do not derisk as much as the annuity ones, but do still seem to be on the cautious side, with more of a 40/60 approach.
I suspect though that some who have been in a lifestyle fund for many years, will unwittingly still be in the annuity one, when it is not appropriate.

Regarding the backtesting, I am not an expert either, but have seen some where the end result is only marginally different with many different portfolios, as long as you have at least a minimum % of equities. As it is all based on US history anyway, probably not worthwhile dwelling too much on exact percentages.

It is marginal and also time dependent. 

Over a 30 year retirement the difference between 100% equities Vs 60/40 is the difference between 100% success (all in) Vs 99% success (60/40). 

That gap widens as the retirement length increases. As someone looking to FIRE in their early to mid 40s, the difference starts to be noticeable. 

NoMore

ex-pat_scot said:

On another point, about whether 100% equities is a bit punchy: I'm 100% in equity tracker at the moment. I've not been worried over the past 15 years or so about the volatility. 

How you handle volatility in accumulation vs decumulation could be vastly different.

NedS

NoMore said:

ex-pat_scot said:

On another point, about whether 100% equities is a bit punchy: I'm 100% in equity tracker at the moment. I've not been worried over the past 15 years or so about the volatility. 

How you handle volatility in accumulation vs decumulation could be vastly different.

and may be driven by how dependent the person is on those assets in retirement. Given a large DB and SP, one may be better placed to absorb the volatility of a portfolio that is 100% equity whereas someone totally dependant upon a DC portfolio may take a very different view.

NoMore

NedS said:

NoMore said:

ex-pat_scot said:

On another point, about whether 100% equities is a bit punchy: I'm 100% in equity tracker at the moment. I've not been worried over the past 15 years or so about the volatility. 

How you handle volatility in accumulation vs decumulation could be vastly different.

and may be driven by how dependent the person is on those assets in retirement. Given a large DB and SP, one may be better placed to absorb the volatility of a portfolio that is 100% equity whereas someone totally dependant upon a DC portfolio may take a very different view.

Thanks, yes that's what I was talking about in my earlier post, in this thread.

ex-pat_scot

NedS said:

NoMore said:

ex-pat_scot said:

On another point, about whether 100% equities is a bit punchy: I'm 100% in equity tracker at the moment. I've not been worried over the past 15 years or so about the volatility. 

How you handle volatility in accumulation vs decumulation could be vastly different.

and may be driven by how dependent the person is on those assets in retirement. Given a large DB and SP, one may be better placed to absorb the volatility of a portfolio that is 100% equity whereas someone totally dependant upon a DC portfolio may take a very different view.

That's my cushion - I view the SP (x2) plus small DB as our fixed income floor. I'm guessing about £30k or so.
That allows us to turn up the SIPP / DC pot to the max 100% equities and still have an overall balanced approach.
It's not a precise science but short of catastrophe we will be somewhere on the "fine" to "marvellous" scale, and can dial up or back as needs and whims, and the vagaries of the market gods, dictate.

Mutton_Geoff

ex-pat_scot said:

That's my cushion - I view the SP (x2) plus small DB as our fixed income floor. I'm guessing about £30k or so.
That allows us to turn up the SIPP / DC pot to the max 100% equities and still have an overall balanced approach.
It's not a precise science but short of catastrophe we will be somewhere on the "fine" to "marvellous" scale, and can dial up or back as needs and whims, and the vagaries of the market gods, dictate.

Exactly my view as well. I have seen FAs and IFAs totally ignore my own SP forecast and large cash/ISA/PB balances when insisting a portion of my portfolio should be in bonds as stability. My personal preference is to use my DB & SP income as a backstop then ride the DC pot as it tracks my adventurous/risky asset mix with the needle moving between "Ford" and "Ferrari" on my spending scale.