What Drawdown Strategy Would You Do?

GSP

Linton said:

GSP said:

Linton said:

A sensible option in my view is to use more than one strategy to improve reliability of income by diversification.  I use a 4 pots approach.  One of the pots is for income funds from which I take the natural income to cover day to day expenss..  In parallel the other 3 pots are cash, growth and lower risk investments.  One-off major expenses and possibly shortfalls in day to day income are taken from cash.  The 3 non-income pots are rebalanced once a year.

One advantage of this type of approach is that there is no reason to get spooked by whatever the market does.  Income funds dont stop producing income just because the markets fall and say 5 years cash and 5 years low risk investments mean that there is 10 years for the far more volatile growth pot to recover from a major event.

This is really useful, thanks Linton.
Your first paragraph sounds more or less what my new IFA was suggesting as an option.
I wonder if a fixed term annuity for 3 years where no income is taken but guarantees 15% could form part of a mix perhaps?

Yes your second paragraph sounds really good as well as I’m waiting for another collapse of sorts we have been ‘promised’ by some commentators.

Since the 2008 crash annuities have only been worth considering in the past few months.  I think they now have a place but it  has been too short a time to have thought through what that place is.  Certainly when one reaches say an age of around 85 they seem to be very attractive.  Earlier, I dont know.

I can't support you in "waiting for another collapse".  "Some commentators" have no more insight into the future than anyone else and I suspect their predictions are driven more by the number of readers/viewers they can attract rather than a desire to help investors navigate the market's rises and falls.  After all, if they really knew the future the last things they should do is to tell everyone else.  On the other hand if their income is determined by their audience share....

Better in my view to try to develop a strategy that can cope reasonably well with whatever happens barring "the end of the world as we know it" scenarios and then accept events with little more than a shrug of he shoulders.

Yes quite Linton, at present the fixed term annuity seems worth adding in somewhere to be determined at this time. 

GSP

OldMusicGuy said:

I've just taken out an RPI linked annuity with part of my DC pot as rates were so good it was a great opportunity to get some secure income as a base in addition to SP (I have no DB pensions). I have left the rest invested slightly more aggressively than I previously had it so that this will provide funds we can use as needed later in life. I don't plan to touch this for 10 to 15 years at least.

Annuities are definitely worth considering at present IMO as part of your retirement strategy but it depends on your circumstances and risk appetite. 

Thanks OMG.
I think annuities, fixed term or until death need weaving in there somewhere.

GSP

JohnWinder said:

There is a series of posts by a very smart man who discusses different withdrawal strategies, looking at how they would have fared under past conditions and how they might do in future. There’s a lot of material, but it’s coherent, and you can dip in and out as you wish: https://earlyretirementnow.com/safe-withdrawal-rate-series/
You’ll come out a lot better informed on the other side.

Thanks John.

JohnWinder

….it was also suggested that the fund could be split into 3 pots. One where we had 5 years cash, next to another which had more stable investments (whatever they are lately!) and a third pot for high risk equities. I think the idea was if/as/when the equities had reached a certain performance level, money ‘made’ would then be passed into the middle pot with more ‘stable’ investments, and when numbers reached a certain point funds would then top up the cash pot.

Yes, the ‘bucket’ strategy, or ‘a’ bucket strategy. You might have seen the earlyretirementnow blog do a big post on this yesterday. To enrich you understanding on this, there’s a discussion started yesterday on ‘buckets’ at https://www.bogleheads.org/forum/viewtopic.php?t=395958

gm0

McClung does say what he thinks are the better approaches based on his test results.  "Best" is a flexible concept. The analogy is squeezing a balloon.  Squeeze and optimise a bit here - causes a bit of a bulge there.  Method comparisons can be arithmetically valid for whatever historic market envelope or simulation - and show slightly different income extraction efficiency, income variability and depletion risk behaviour - but no major free lunch is on offer.  I picked cap and collar EM from his finalists as a view on sustainable income calculation but for other valid tax planning reasons won't actually use it to set income exactly.  More a tracking index or a set of runway landing lights.

@GSP - I agree with the general point Linton makes about "more than one" approach to address different obstacles to a drawdown plan - SORR pre SP etc.  Longevity.  Here is why/how I approach it.

For all the preparatory reading done - I am still a retail customer not a professional in the investment and trading business.  And a novice at that.  Entering any new field as an enthusiastic amateur it pays to remember that I don't know what I don't know. 

The investing sector seems full of hidden complexities and deliberate obfuscations via jargon and accumulated product design cunning, history and regulation.  Actors with their own profit goals.  Many players - custodians, rsp/market makers, exchanges. fund managers, retail pension platforms, settlement, advisers, dfms, fx traders etc.  Money sticks to fingers everywhere you look.  Often less than transparently - you find more subtle examples when you start peeling the onion. 

Complex systems surprise and display emergent behaviours. Often when something goes wrong.  This is a well observed property of complex systems in general. It does not surprise me that there are plenty of places for the little retail customer to be last to know or last in a processing queue, to have their price moved, their returns shaved or the system unexpectedly under stress moving to their disadvantage.   Approaches that require *competitively* timely access to information and rapid defined actions in all market circumstances to remain safe seem less obvious for the small retail investor.  Design with the grain of being last to know and slowest to be able to act - not against it. Not knocking retail tools and day trading for those that like it on its own terms - but that is a different activity to pension planning for drawdown.

A guiding principle quite near the top of my investment statement

"Not all eggs in a single basket" 

Captures the idea that I don't trust any single product, investment approach, or market participant with ALL of my money.  No single point of failure for the whole pot to the extent reasonably possible.  It's not possible to guarantee this or that it will stay where you put it when companies re-contract settlement, custody, IT etc. But you can work on it to a degree.

I applied the risk *impact* reduction implied by this idea - a redundancy of eggs in multiple baskets  at most levels of the drawdown stack.

If any one of these zones of less than fully understood complexity causes an unexpected issue - it can only do it to some of the eggs - to part of the portfolio.  This is the win.

It comes at the cost of added complexity (more complex to rebalance in multiple pots) and there is a cost premium to redundancy compared with a fully cost optimised consolidated approach.  But that is about it for negatives

Underyling equities stock list - *actual* assets held and performance of these by sector or geo and tilts and regions and global currency evolution.  All that is largely untouched by these actions. 

All the variability of legal and operational crap wrapped round it now has a sharply reduced ability to hurt me. A probability expert would correctly suggest that I have increased the probability of being hit by something random due to the larger attack surface offered up by multiple choices of platform, fund manager etc..  So a bit more likely.  A lot less impactful.

- Multiple Investment platforms
- Retention of protection hedging via insured funds (for the most part 2/3 100% full, 1/3 SIPP)
- Multiple Fund management providers used
- Multiple Fund types - both regular funds and uk reporting ETFs are used
- Acc/Inc units - one portion is built for acc drawdown, the other for inc
- My equity selections (and diversification extensions small, em and tilts) are built up differently
- Index tracker core but also using a managed packaged managed multi-asset fund for part alongside
- A cheap ethical global developed tracker for the long term untouched pot

Linton

gm0 said:

McClung does say what he thinks are the better approaches based on his test results.  "Best" is a flexible concept. The analogy is squeezing a balloon.  Squeeze and optimise a bit here - causes a bit of a bulge there.  Method comparisons can be arithmetically valid for whatever historic market envelope or simulation - and show slightly different income extraction efficiency, income variability and depletion risk behaviour - but no major free lunch is on offer.  I picked cap and collar EM from his finalists as a view on sustainable income calculation but for other valid tax planning reasons won't actually use it to set income exactly.  More a tracking index or a set of runway landing lights.

@GSP - I agree with the general point Linton makes about "more than one" approach to address different obstacles to a drawdown plan - SORR pre SP etc.  Longevity.  Here is why/how I approach it.

For all the preparatory reading done - I am still a retail customer not a professional in the investment and trading business.  And a novice at that.  Entering any new field as an enthusiastic amateur it pays to remember that I don't know what I don't know. 

The investing sector seems full of hidden complexities and deliberate obfuscations via jargon and accumulated product design cunning, history and regulation.  Actors with their own profit goals.  Many players - custodians, rsp/market makers, exchanges. fund managers, retail pension platforms, settlement, advisers, dfms, fx traders etc.  Money sticks to fingers everywhere you look.  Often less than transparently - you find more subtle examples when you start peeling the onion. 

Complex systems surprise and display emergent behaviours. Often when something goes wrong.  This is a well observed property of complex systems in general. It does not surprise me that there are plenty of places for the little retail customer to be last to know or last in a processing queue, to have their price moved, their returns shaved or the system unexpectedly under stress moving to their disadvantage.   Approaches that require *competitively* timely access to information and rapid defined actions in all market circumstances to remain safe seem less obvious for the small retail investor.  Design with the grain of being last to know and slowest to be able to act - not against it. Not knocking retail tools and day trading for those that like it on its own terms - but that is a different activity to pension planning for drawdown.

A guiding principle quite near the top of my investment statement

"Not all eggs in a single basket" 

Captures the idea that I don't trust any single product, investment approach, or market participant with ALL of my money.  No single point of failure for the whole pot to the extent reasonably possible.  It's not possible to guarantee this or that it will stay where you put it when companies re-contract settlement, custody, IT etc. But you can work on it to a degree.

I applied the risk *impact* reduction implied by this idea - a redundancy of eggs in multiple baskets  at most levels of the drawdown stack.

If any one of these zones of less than fully understood complexity causes an unexpected issue - it can only do it to some of the eggs - to part of the portfolio.  This is the win.

It comes at the cost of added complexity (more complex to rebalance in multiple pots) and there is a cost premium to redundancy compared with a fully cost optimised consolidated approach.  But that is about it for negatives

Underyling equities stock list - *actual* assets held and performance of these by sector or geo and tilts and regions and global currency evolution.  All that is largely untouched by these actions. 

All the variability of legal and operational crap wrapped round it now has a sharply reduced ability to hurt me. A probability expert would correctly suggest that I have increased the probability of being hit by something random due to the larger attack surface offered up by multiple choices of platform, fund manager etc..  So a bit more likely.  A lot less impactful.

- Multiple Investment platforms
- Retention of protection hedging via insured funds (for the most part 2/3 100% full, 1/3 SIPP)
- Multiple Fund management providers used
- Multiple Fund types - both regular funds and uk reporting ETFs are used
- Acc/Inc units - one portion is built for acc drawdown, the other for inc
- My equity selections (and diversification extensions small, em and tilts) are built up differently
- Index tracker core but also using a managed packaged managed multi-asset fund for part alongside
- A cheap ethical global developed tracker for the long term untouched pot

Thanks for the name-check. Obviously I agree very much with and adopt your basic principles of maximum diversification as far as reasonably practicable, Looking at investments on the basis of the underlying stocks and having separate sets of funds for different purposes.  There is a further principle that this should be done with minimum funds and pots since any beyond those absolutely necessary adds to the management compexity.

There does need to be an overall strategy and one for each pot.  For exampIe specific tilts are a matter of a pot strategy, it does not make sense to hold countervailing ones for diversification.  I have found that a simple core/satellite approach  is inadequate since some aspects of the core are too large to be adjusted by small satellites so prefer a patchwork approach where each geographic area, sector, and company size is covered by a minimal set of focussed funds.

There are some risks that you simply accept.    At some stage you are in an "end of the world as we know it" scenario which is not going to be withstood by your investment portfolio.  I would tend to put a mainstream fund manager going bust in a way that results in permanent loss of investments in that category and do not see the need for insured mainstream funds.   Of course one is very likely to hold funds from multiple managers but it is not a matter of specific concern.

Perhaps you could be clearer against what risk you are providing specific protection. It idoes not seem obvious for example what risk is mitigated by having both ETFs and regular funds.  There is the danger that any constraints in choice of funds beyond those necessary to follow the guiding strategy make it more difficult to build the patchwork with minimum funds. 

gm0

Yes - Occam/Einstein applied - As simple as possible but no simpler. I agree in general with the idea to only add complexity where there is a *tangible* benefit - be it return seeking, cost reduction or a form of beneficial risk or risk impact reduction. Allowing that the idea does no other harm. Views on what is material to bother with and complexity in aggregate - will vary. 

Tangible doesn't always mean fully defined up front.  My complex systems risk management argument is hard to get across and abstract.  Will go again.  Dealing with incompletely understood things with unknowns and uncertainties and which display stigmergy/emergent behaviour is often like that.  Evaluating a proactive mitigation strategy for a partial unknown.  Perhaps like deciding whether and how many lanes of trees to cut creating wide fire breaks in a forest - for fires which may not burn any time soon. The cutting and breaks will limit impact and improve fire fighting / controllability and spread when it does. An imperfect example.  Or perhaps in large scale IT - the extent to which you allow your enterprise to become a technology mono-culture at much increased vulnerability to external attack in terms of risk impact vs how much multiple platform complexity and added cost of running that you tolerate.

I don't in practice constrain myself rigidly to follow these *secondary* product selection factors. Reality doesn't always co-operate with available choices. But where there is a choice - I do.  And I think I create some healthy separation and diversity across the whole.  At least as I see it.

As a relative novice I am mainly seeking to avoid DIY bear traps with logical incremental defensive steps that I have confidence in to setup and stick with. If my analysis about complexity and impact of unknown possibles holds then I have partially hedged an actual operational risk I face.  And if it doesn't apply becuase I am worrying about imagined things or events that fail to show up;  then I am really not that much worse off.  That's an asymmetry I can live with.  If nothing terrible happens.  Great.  Yet absence of evidence is not evidence of absence.

As to a single country geo based approach - I did not feel confident building up the world one country and/or sector at a time and managing overlaps ongoing. Too hard for me. Not yet.  I started with Global Developed market equities and added and tilted from there.  Some would argue passionately that the adding and tilting is already unneccessary added complexity and very probably self harm.  But for the reasons previously stated I recoil from any single strongly held conviction or solution and my research had led me to side with the pro "diversify within asset class" argument.

I'll address the "why etfs and funds" point.  I had done enough research not to be scared of holding UKFRS reporting ETFs in a pension wrapper. But not enough to feel I understood *exactly* all the differences in behaviours that can emerge from them in future crises or when trading them in stressed markets, or from tax treaties, witholding and FX and dividend roll up etc. 
Certainly not well understood enough to *only* use them.  I feel much the same way about investment trusts. 
Limit orders help me feel OK about control around the trading process.  I am not very faithful to the idea of "best execution".  Best for whom.

With ETFs I know some of the differences vs funds from book study.  But I very likely don't know others - lacking enough real world experience. I don't allow these differences (be they good or bad) vs a fund with similar things in it - a free range upon the whole of my portfolio.  Per design principle. 

The implication being that it doesn't matter what the differences or emergent behaviours in a future crisis *actually are* - or that I don't completely understand them - all that matters is that some exist.  The dilution of risk impact point stands unless I am imagining the fact that there are any legal tax and operational differences at all - which I really don't think is true. 

Diluting risk impact won't be better than picking the single right option (for that particular future crisis scenario) but it definitely won't be as bad as picking the wrong one for the whole.  It's just diversification of packaging alongside diversification of content.

I do use regional and single country for tilts.  VAPX, VERX, IKOR being current geographic examples to tilt up Asia ex Japan, Korea and Europe ex UK which were mildly active stances I chose last year.

The structural risk management argument and then cost management around my platform choice is the justification I use to blend in ETFs. I always look if I can fill a portfolio asset slot to be held at Fidelity with a UK reporting ETF first.  A sensible viable size liquid one at an OK cost for what you get.  And a workable jigsaw piece. If not then I buy something else. Fee cap for exchange traded makes it obvious - on that platform.  Other platforms would have differing pricing and appropriate strategies.

Perhaps agree to disagree on insured funds.  Situational.  If I can have insured at or close to the price of not insured for the same underlying assets - why would I not do that.  I don't see a major value in opting out of it either.  As you say none of the DC protections (100% or 85k) is legally tested to destruction and verified in true adversity - so its a conceptual argument angels on pins. Red ticket, green ticket.  Pick move on and take the ride.  It's not a fund shopping criteria I used beyond building out what was available on my old pension provider platform - all insured but limited list.  For some existing schemes you can get the impression reading here that old = bad. (Which it can be on various dimensions - cost, admin speed, digital, no drawdown - but sometimes - the exact opposite - so looking before leaping is sensible guidance

Worked example on insured funds - I have a chunk of drawdown global developed equities with a UK >4% tilt applied in World ex + UK funds at 0.12% FM and 0.06% platform so 0.18% insured.  Another chunk ethical global at 0.06% FM, 0 platform (same provider).  Overall blends out to a tad below 0.12% for the global developed equities used in core portfolio. Insured. 
Are uninsured versions cheaper?.  Maybe S&P 500 at 0.09% a UK fund and build up from there. So towards 3 basis points can be scraped out.  Or for a one fund solution with fairly close assets uninsured say VEVE/VHVG ETF at 0.12% so essentially the same price for uninsured bar some trading and minor capped platform ETF fee differences £45.  So between zero and <3bp opportunity if prepared to restructure. Fairly cheap insurance as is.  We know it is unproven. People could logically jump either way based on their desired portfolio build structures and platforms and the costs. 

So overall:

Cost (drag) is something you can control.  Which I do but not to the ultimate degree. 

Adding diversification within asset class by adding extra stocks and geos and capital sizes is something you can control. Is it worthwhile - that's opinion.  We both seem to think it's a worthwhile technique in portfolio construction. Others disagree. Fine.

Insurance/Protection is arguably something which turns up or doesn't and not worth much of a chase but not to be run away from either

Some of the provider/product/wrapper/packaging factors I mentioned carry individually distinct if minor risks - IT failures and delayed access and such like - and are something you can control the spread of impact of to a degree
Is that worthwhile for the added complexity - again opinion. 

Definitely all in moderation.

jim8888

For me, looking at retirement, the first basic thing to try and ascertain was what was my annual budget going to be? I don't know your situation, but I couldn't believe how much I was spending on "unbudgeted" things on a monthly basis. I tracked every single bit of spend I had every month, including my own personal allowance, and then had to add a further 20% over the year to it for the things I still hadn't budgeted for! (This included stuff like car repairs, house repairs, holiday "overspends", impulse meals out, etc etc).
I did a lot of work looking at the best way to withdraw my pensions and none of it was time wasted. I didn't know much when I started, but after about a year I felt confident enough to embark on a plan. Much of that was down to the great advice I was given on these boards which, in effect, became my Virtual IFA. 

gm0

@jim8888 as an exercise I have been documenting my process in getting a plan together post fact. Capturing what in retrospect I felt were the most important Q's to address in sequence to shape a drawdown plan for me.  My kids may find it useful later if Dad isn't entirely viewed as a silly old geezer at that point. 

Right up front is your question about thinking through and splitting out desired annual and essential annual income

Which can be hard to estimate a long way ahead.  But as you indicate if you slice and dice current lifestyle spending - over a couple of years actuals from your bank cards.  Tease out "essential" from "desired". 

We all live very different lives with complex families and this surely varies a lot. 
A lot flows from it in quantifying risk capacity, views on guaranteed income/buffering and how hard the pot needs to work

billy2shots

Don't take this the wrong way but the terms 'simple' and 'don't overcomplicate ' have been used throughout the thread but they are just words. Actions need to follow. 

Your posting style is giving me vibes of the opposite of those terms mentioned above. 

It's good to have an understanding of various methods before meeting with IFAs but at the end of the day you are paying them good money to construct the best plan they can, given your circumstances. The most important thing is you trust them, you don't need to know the inside leg measurement of Guyton Clinger. 

If you want to take the blue pill then do so and save the IFA costs. 

Simplicity is still your friend. Whilst you may get your rocks off by drilling down in the details, a surviving partner may not. Leaving behind an overly complex strategy could turn out suboptimal in the grand scheme of things.