Retirement (Decumulation) Specific Portfolio

Audaxer

ex-pat_scot said:

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.

In addition to the DB and SPs, do you also hold a cash pot for large spend items that come up from time to time, like change of car, new boiler, roof repairs or any unexpected large spend items?

bostonerimus

100% equity will allow some people to have the most generous retirement, while others who retire at a different time might run into sequence of return issues and have a very meager retirement as a result. So are you willing to gamble on which category you'll fall into? Cautiousness might lead you to follow a less aggressive road and diversify away from 100% equity.

DT2001

I thought we were close to decumulation phase (OH still enjoying work so retirement deferred) about 3 years ago and looked at asset mixes. I thought, originally, that I would end up with an increasing equity % as more ‘guaranteed’ income came online (DB and SP). Then more recently my preference was an income generating portfolio to preserve capital (and allow excess income in good years to be passed on utilising IHT relief) and a cash pot to bridge expected higher expenditure in the early years.
Having read a number of threads I do not think our psychology will change so I am sure we will find it too difficult to spend all our income! Now I think the key is generating enough not maximising income, using a simple plan which is easy to follow as we get older.

bostonerimus

DT2001 said:

I thought we were close to decumulation phase (OH still enjoying work so retirement deferred) about 3 years ago and looked at asset mixes. I thought, originally, that I would end up with an increasing equity % as more ‘guaranteed’ income came online (DB and SP). Then more recently my preference was an income generating portfolio to preserve capital (and allow excess income in good years to be passed on utilising IHT relief) and a cash pot to bridge expected higher expenditure in the early years.
Having read a number of threads I do not think our psychology will change so I am sure we will find it too difficult to spend all our income! Now I think the key is generating enough not maximising income, using a simple plan which is easy to follow as we get older.

I cover spending from "guaranteed" sources ie. DB and SPs along with rental income. So the checks come in each month. If managing the rental becomes a burden I'll just sell to release the capital. I have basically forgotten about my DC pension and other investments and just leave them invested in a very simple cap weighted global equity portfolio that I haven't touched for the last 7 years. I like to keep things simple and not worrying about the direction of the stock and bond markets makes retirement a lot more enjoyable.

L9XSS

bostonerimus said:

DT2001 said:

I thought we were close to decumulation phase (OH still enjoying work so retirement deferred) about 3 years ago and looked at asset mixes. I thought, originally, that I would end up with an increasing equity % as more ‘guaranteed’ income came online (DB and SP). Then more recently my preference was an income generating portfolio to preserve capital (and allow excess income in good years to be passed on utilising IHT relief) and a cash pot to bridge expected higher expenditure in the early years.
Having read a number of threads I do not think our psychology will change so I am sure we will find it too difficult to spend all our income! Now I think the key is generating enough not maximising income, using a simple plan which is easy to follow as we get older.

I cover spending from "guaranteed" sources ie. DB and SPs along with rental income. So the checks come in each month. If managing the rental becomes a burden I'll just sell to release the capital. I have basically forgotten about my DC pension and other investments and just leave them invested in a very simple cap weighted global equity portfolio that I haven't touched for the last 7 years. I like to keep things simple and not worrying about the direction of the stock and bond markets makes retirement a lot more enjoyable.

Your probably in the “sweet spot” by having a mix of DB, SP, property rental and DC pension pot. I’m in a similar position but without the rental property, though my DB pension is “the main lever” for providing a good income from 60 years of age. To that extent my DC pot which will be close to 200k in 4 years time will not be needed to deliver 30 years of withdrawal at 3.5% but can be used as and when required, be it cash reserve etc etc.

JohnWinder

‘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.

Firstly, ‘toying with 3 years of cash’ is antithetical to 100% equities having the best chance, since the cash should be in equites. So you have doubts about 100% equities, and so do I.
Secondly, 'when you run the figures…. ' In god we trust, others bring data. Data, please, because firecalc shows me that 100% equities has failed earlier and more spectacularly than 70/30.

‘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.’

True enough, except it’s not largely obsolete because what remains after annuity purchasing went out of fashion, is that when you’re a long way from retirement you have less money to lose (than later) if you act recklessly in a market crash as well as having many years left of income from personal labour to make up for market catastrophes. Closer to retirement you have few if any years of working life income, and your portfolio is bigger and thus more frightening to watch being trashed by an equities' crisis. They’re good reasons to de-risk using ‘life-staging’.

‘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.

I agree, but there’s a lot of unstated assumptions there, eg you need to draw down from it. For someone who’ll never need to draw from a part or all of their portfolio because it’s headed for the next generation, 100% equities for that part is very likely optimum. Otherwise, maybe not.

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

That’s got great appeal, and is the most persuasive account of that approach I can recall, particularly not needing to guess the equity/bond mix. But one is still guessing how much to put in each tranche, or guessing how long ‘medium term’ is.  And to the extent that it relies on active funds and investment trusts, it’s probably not the lowest cost. But, as always, how big is the difference (in the outcome because of costs)?  Because we’re talking about a retirement portfolio, perhaps 25-30 years ought to be considered. After 25 years, with 4.75% growth/year, a £100k portfolio would have more than tripled in value, but missed out on another 19% growth if the costs were 0.75%year greater. Costs matter over the longer period (assumption: one's portfolio is not abundant).

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.’

In god we trust…..data, please.

‘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).

Data, please. And what is the ‘success’ measure, because if it’s how soon you run out of money I don’t think that’s what firecalc comes up with as it shows 100% equities emptied the portfolio earlier than the 60/40 did with 4%/year withdrawal in the few worst 30 year periods?

billy2shots

bostonerimus said:

100% equity will allow some people to have the most generous retirement, while others who retire at a different time might run into sequence of return issues and have a very meager retirement as a result. So are you willing to gamble on which category you'll fall into? Cautiousness might lead you to follow a less aggressive road and diversify away from 100% equity.

Again, that's not what historic patterns show us. 

Over a 30 and 40 year retirement, the odds of the pot lasting are better with 100% equities. This back testing takes into account retiring during the worst years in history. 

Granted the difference is marginal, growing as the retirement length increases but it is there. 

History doesn't predict the future etc. 


I see this very much similar to the age old debate. 
Pay off mortgage Vs invest. 

One is statistically better the other psychologically better. 

No right or wrong. 

JohnWinder

Again, that's not what historic patterns show us.

I think we’d all benefit from seeing your data on this because it will enhance our understanding. The firecalc data indicates something different, with 70/30 having a lower failure rate (by 1.7%), fewer 30 year periods failing (7 rather than 9 out of 122), and a later time for first failure (by 1 year). So not really much difference by those measures between 100/0 and 70/30. But a lot more 100/0 portfolios finished up with >£3M. I’ll guess your data showing 100/0 is safer shows the difference in failing to be quite small, but we need see it.

Albermarle

True enough, except it’s not largely obsolete because what remains after annuity purchasing went out of fashion, is that when you’re a long way from retirement you have less money to lose (than later) if you act recklessly in a market crash as well as having many years left of income from personal labour to make up for market catastrophes. Closer to retirement you have few if any years of working life income, and your portfolio is bigger and thus more frightening to watch being trashed by an equities' crisis. They’re good reasons to de-risk using ‘life-staging

The issue is more that a life staging aimed at an annuity purchase, derisks almost down to only cash/gilts.

This is too much derisking for someone planning to drawdown. We see posts on here where someone planning to drawdown, has lost a lot of pot value in 2022, because they were in the wrong life staging strategy. Either from history/ignorance/lack of pro activity from the pension provider.

How much to derisk approaching retirement/drawdown  is clearly open to debate, but zero equities would not be a good answer. 

bostonerimus

billy2shots said:

bostonerimus said:

100% equity will allow some people to have the most generous retirement, while others who retire at a different time might run into sequence of return issues and have a very meager retirement as a result. So are you willing to gamble on which category you'll fall into? Cautiousness might lead you to follow a less aggressive road and diversify away from 100% equity.

Again, that's not what historic patterns show us. 

Over a 30 and 40 year retirement, the odds of the pot lasting are better with 100% equities. This back testing takes into account retiring during the worst years in history. 

Granted the difference is marginal, growing as the retirement length increases but it is there. 

History doesn't predict the future etc. 


I see this very much similar to the age old debate. 
Pay off mortgage Vs invest. 

One is statistically better the other psychologically better. 

No right or wrong. 

On average you are correct and all equity portfolios will support the highest withdrawal levels. But there will be particular scenarios where sequence of return problems decimate an all equity portfolio and a more conservative portfolio with some bonds would survive. We are dealing with the tail of the distribution and improbable events. Taken to the limit you could simply buy an annuity.