Retirement (Decumulation) Specific Portfolio

NedS

bostonerimus said:

JohnWinder said:

Firstly, I don’t think it ought to be frowned upon if it’s part of a sensible plan. 

Secondly, what’s providing the dividends? If it’s unfortunately chosen blue chip good dividend payers like Kodak or General Electric, then things can go from golden to brown in a few short years. That how the pot runs down. If it’s dividends from a widely diversified holding, thats’ a horse of a different colour.

Thirdly, I suppose taking only dividends does avoid a SoR risk, but with the usual SoR thinking you worry about being forced to dispose of too much assets because prices are down but then recover; choosing Kodak or Enron, they never recover. That’s a different kettle of fish. You can eliminate a SoR risk by deciding to sell off the same x% or your portfolio each year, however much it’s fallen; the ‘cost’ is you have less to live on in the year of the crash, but SoR is a non-issue. In contrast, taking dividends only during the crash might mean they also are reduced as businesses have poorer earnings.

In de-cumulation, rebalancing can be done by selling which is what de-cumulation implies.

My US equity index funds produce between 2% and 3% in dividend distributions each year. Right now I'm just reinvesting those dividends and using the DB pension and rental income to live on. If I was using the equity funds for income I'd be taking the dividends and maybe using a Guyton-Klinger type algorithm if I needed to sell something to top up the income. All this would be controlled by actively modulating my budget.

I think this is probably the sweet spot. If a SWR of 3.5% or 4% is assumed, and diversified global equity markets naturally yield around 1.6%, it doesn't take a lot to get the natural yield above 2% when a fixed income portion of the portfolio is taken into consideration, meaning a retiree may only ever be selling 1.0-1.5% per year which doesn't seem hugely significant in terms of SoR risk.
I take a slightly different bucket approach, but the overall effect is similar. I have a bucket of income producing assets, currently yielding around 6.5% that provides the income I (will) require in retirement. The rest is invested in growth for the long term. I can move assets between the two buckets to rebalance depending on performance, accordingly. The net effect is I never need to sell assets to meet my income needs.

cfw1994

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.

Pretty sure those, like me, who stepped away around 2021 are slap bang in the middle of that SoR meagre retirement possibilities - the stars rarely align so poorly 🤣
However, I’m not sure those with more bonds have seen good results either…..

My view is to have 3-5yrs of monies in ‘cash’ accessible funds to try to glide over those rough times.   Mind you, none of us know if we are in a prolonged period of low returns with the high inflation…..

The good news is that none of us get out alive: scrimp and save (a bit) for the future, but live (a lot) for today 😎👍

JohnWinder

City of London IT and Merchants IT. They may not have the best long term total returns, but if they are paying 5% in dividends, increasing every year, that seems preferable to deciding when to sell capital from growth funds.

I see the appeal, but a couple of caveats for me. I think the increases, as very small as they are sometimes and achieved at least once by changing the accounting year or some similar sleight of hand lest it lose ‘dividend hero’ status, are nominal not real. So your spending needs increase with inflation but CTY provides only nominal increases I think, so you’ll still have to decide when to sell capital. Unless of course one has an over-generous holding of CTY, at which time I’d be thinking ‘this may not be giving the best total returns - bad’, and its fees are higher than I can pay elsewhere. But they’ve got a decent product and a great marketing angle.

billy2shots

Someone is going to need to help me out now regarding this threads recent pivot to dividends acting as some kind of cushion. 


City of London as an example (purely as it's used above). 

In the past 5 years it has lost ~5%. 

So if you had £50k in there 5 years ago earning 5% (4.84%) divi, then you would have been earning £2,500 in income. 

Today you would be earning £2,375. 

To meet your income requirements you would be forced to sell some holdings just to get income up to the level needed (we will ignore living on less that year as the same could be argued if growth funds dipped that year). 

Heaven forbid worse, the trust/ fund temporarily ceased paying the dividend at all. Then your left having to sell something that potentially doesn't grow very much if at all. 

I'm obviously missing the magic somewhere. 

Linton

billy2shots said:

Someone is going to need to help me out now regarding this threads recent pivot to dividends acting as some kind of cushion. 


City of London as an example (purely as it's used above). 

In the past 5 years it has lost ~5%. 

So if you had £50k in there 5 years ago earning 5% (4.84%) divi, then you would have been earning £2,500 in income. 

Today you would be earning £2,375. 

To meet your income requirements you would be forced to sell some holdings just to get income up to the level needed (we will ignore living on less that year as the same could be argued if growth funds dipped that year). 

Heaven forbid worse, the trust/ fund temporarily ceased paying the dividend at all. Then your left having to sell something that potentially doesn't grow very much if at all. 

I'm obviously missing the magic somewhere. 

Yes, the Yield is a backward looking figure calculated from past dividends divided by current price. Actual dividends are always announced as x pence per share. COL has increased the dividend in £ terms every year for decades and it is extremely unlikely to break the record next time around. It manages its investments to achieve that as an objective.  The yield figures change frequently because the price changes, not because the dividends change.

Income investors are primarily interested in the dividend in £ terms and are not affected as the price varies. Generally dividends in £ terms are much more stable than prices.  That is their major advantage. Companies will only cut the dividend if forced to, shareholders don’t like it and the directors want to keep their jobs.

bostonerimus

JohnWinder said:

City of London IT and Merchants IT. They may not have the best long term total returns, but if they are paying 5% in dividends, increasing every year, that seems preferable to deciding when to sell capital from growth funds.

I see the appeal, but a couple of caveats for me. I think the increases, as very small as they are sometimes and achieved at least once by changing the accounting year or some similar sleight of hand lest it lose ‘dividend hero’ status, are nominal not real. So your spending needs increase with inflation but CTY provides only nominal increases I think, so you’ll still have to decide when to sell capital. Unless of course one has an over-generous holding of CTY, at which time I’d be thinking ‘this may not be giving the best total returns - bad’, and its fees are higher than I can pay elsewhere. But they’ve got a decent product and a great marketing angle.

Agreed, inflation is the fly in the ointment for most retirees. Dividends sometimes go up with inflation, but they might not. To keep up with inflation using dividends you really need the stock price to increase, and so we are back to growth (I now always hear that in my head in the voice of Liz Truss...). Almost any plan that has dividends in it also needs to include, capital gains or selling of principal to keep up with inflation. With ITs that's often all baked in. 

Linton

bostonerimus said:

JohnWinder said:

City of London IT and Merchants IT. They may not have the best long term total returns, but if they are paying 5% in dividends, increasing every year, that seems preferable to deciding when to sell capital from growth funds.

I see the appeal, but a couple of caveats for me. I think the increases, as very small as they are sometimes and achieved at least once by changing the accounting year or some similar sleight of hand lest it lose ‘dividend hero’ status, are nominal not real. So your spending needs increase with inflation but CTY provides only nominal increases I think, so you’ll still have to decide when to sell capital. Unless of course one has an over-generous holding of CTY, at which time I’d be thinking ‘this may not be giving the best total returns - bad’, and its fees are higher than I can pay elsewhere. But they’ve got a decent product and a great marketing angle.

Agreed, inflation is the fly in the ointment for most retirees. Dividends sometimes go up with inflation, but they might not. To keep up with inflation using dividends you really need the stock price to increase, and so we are back to growth (I now always hear that in my head in the voice of Liz Truss...). Almost any plan that has dividends in it also needs to include, capital gains or selling of principal to keep up with inflation. With ITs that's often all baked in. 

Very broadly over time dividends should increase with inflation. A company’s income and its costs would  be expected to rise with inflation and therefore so should its profits.  But yes you do need some growth in the background. However this can be focussed on the long term and should not affect meeting your short and medium term needs.

NedS

CTY is certainly an interesting case. Looking at the last 10 years (Jan 2013 - Jan 2023), the share price has risen 29% which is pretty much in line with inflation (BoE says £100 in 2013 would be worth £128.60 in Nov 2022) and in addition has continued to pay out it's dividend quarterly at 3.52p in 2013, rising to 5p in Jan 2023. This is a 42% increase in dividend income, so income growth has been above inflation, which is to be expected from an income fund.

So as a retirement strategy, of you invested £100k in CTY 10 years ago, you'd now have £129k in assets that have risen in line with inflation and an income that has risen above inflation over the last 10 years, and you've sold no assets at any time. Overall return, if dividends were reinvested, 100.8%

Is it the best strategy out there? Maybe not - a total return strategy invested in FTSE World index would have given a total return of 208% over the same 10 year period, but it's beyond my capabilities to calculate how that would compare with CTY had you been selling shares quarterly to match CTY's dividend income. That said, CTY has trounced global equity over the last 1-2 years proving every strategy has it's day.

One of the aspects often overlooked and difficult to value with CTY is the history of annually rising dividends. The board have openly stated they will pretty much do everything in their power to ensure the dividend continues to rise each year. Sure, rises may currently lag inflation (but that's against the long term trend witnessed above), and is understandable given events over the last 3 years where many dividends were slashed or stopped completely. Seeing how CTY has weathered the Covid storm and come through the other side unscathed has given me confidence that it deserves a place in my income portfolio as a core holding.

Audaxer

billy2shots said:

Someone is going to need to help me out now regarding this threads recent pivot to dividends acting as some kind of cushion. 


City of London as an example (purely as it's used above). 

In the past 5 years it has lost ~5%. 

So if you had £50k in there 5 years ago earning 5% (4.84%) divi, then you would have been earning £2,500 in income. 

Today you would be earning £2,375. 

To meet your income requirements you would be forced to sell some holdings just to get income up to the level needed (we will ignore living on less that year as the same could be argued if growth funds dipped that year). 

Heaven forbid worse, the trust/ fund temporarily ceased paying the dividend at all. Then your left having to sell something that potentially doesn't grow very much if at all. 

I'm obviously missing the magic somewhere. 

If you invested £50k in City of London IT 5 years ago, and you received dividends of £2,500 in the first year, you would definitely have received a larger amount in dividends in each subsequent year, irrespective of what happened with the share price.

The historic yield is important at the time you buy the shares because the lower the share price the higher the yield. If for example you had invested the £50k in CTY near to the end of March 2020, when the share price had fallen by about 33%, the yield at that time was around 6.8%, meaning your dividends in that first year would be around £3,400, and will still have increased in each subsequent year.

Nebulous2

billy2shots said:

JohnWinder said:

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%), 

Using FI Calc. Matching equity and bond fees at 0.5% it shows the following. 

40 year retirement.
£900k starting pot

£29,375 drawdown each year

100% equities= 100% chance of success (lasting the full 40 years) 

3 out of 112 'nearly fails' (final pot size less than 35% of the original pot size)

58.4% chance of a large pot at the end of 40 years (greater than 300% of the starting pot). 

Vs

70% equities 30% bonds= 99.11% chance of success (lasting the full 40 years) 

1 fail

3 'nearly fails'

31.25% chance of a 'large end pot'

Vs the much talked about 60/40


60% equities, 40% bonds = 98.21% chance of success (lasting the full 40 years) 

2 fails

7 nearly fails

23.21% chance of a 'large end pot'

Reducing the same example to a 30 year retirement with 100% equities Vs 70/30  gives identical success rates (100%) and 'nearly fail' rates (2/122). 

A big difference in pot size left over 46.72% chance of a 'large end pot' for 100% equities Vs 29.51% for the 70/30

The famous 60/40 over 30 years keeps the same 100% success rate but adds an additional ' nearly fail' making that 3/122. 
It also drops the chance of a large pot to 17.21%

I don't have a horse in this race, but how is that £29,375 indexed? 

Would you increase your withdrawals by CPI each year? 

From the outside looking in - that doesn't seem a lot for a 900k pot. That would mean a withdrawal of £35k at the LTA.