Investing in bonds in drawndown

plumb1_2

Hi, all
i am retiring soon and looking to do a drawdown, one of my pots is £240k. If I take the £60k tfls and then keep the £180k invested.
Ive looking at 70/30 or 60/40 funds mainly vanguard. With all the stories of large falls in bond values worried a little about their future growth potential in a fund. I am not to adverse to risk as I have a 100% equity in an isa. But I would like to just have steady growth for this pot. And worked out would only need to take 3.5% out of it per year. Hopefully not withdrawing in the first year.
I also have a sipp with £50k plus in a money market fund, paying appropriately 4% , but not keeping up with inflation.

what are peoples opinions about having bonds in a drawdown, and what would be a realistic growth on a 60/40,70/30 etc funds.

dunstonh

With all the stories of large falls in bond values worried a little about their future growth potential in a fund. 

Would you have felt the same way if they had say, gone up every year for 10 years?

I am not to adverse to risk as I have a 100% equity in an isa. But I would like to just have steady growth for this pot. 

Its not going to happen.  investing has zig zags.  You can largely control the level of volatility 95% of the time but it will zigzag.  And someone who is 100% equity needs to be aware that a 50% drop is likely to happen in the medium term and potentially 90% in extremely rare events.

And worked out would only need to take 3.5% out of it per year. Hopefully not withdrawing in the first year.

3.5% would work on a yielding strategy or a bucketing strategy but you would typically look to include bonds to get the higher yield.  Especially now yields have improved.

what are peoples opinions about having bonds in a drawdown, and what would be a realistic growth on a 60/40,70/30 etc funds.

Its all about how much volatility you can handle (i.e. your behaviour) and what risks you can afford to take.

You have £240k.  What strategy are you planning to use?  yield, total return, bucketing, cash float  etc?

This will dictate how you should invest.  For example, yield is about providing sufficient income and you shouldn't have to worry about unit prices going up and down.  Bucketing allows you to segment the risk based on time invested.  i.e. x years of income in cash followed by x years of income in short term, y  number of years income in medium term and the rest in long term.   i.e. money not being spent for 20+ years can be invested in a way that money needed in 4 years time cannot be.

Once you know the strategy, then you look at the investments to meet it.

Linton

You should only hold bonds in drawdown or under any other circumstances if they help meet the objectives of the portfolio.    This is particularly important for a retirement drawdown portfolio since its successful management is key to your well-being for the rest of your life.

So as Diunstonh says you need to have decided your drawdown strategy.  Gven this the role. if any, of bonds should be clear.

Possible strategies include
1) One pot with a variable drawdown depending on economic circumstances.
2) "Buckets" where you separately hold:
 - sufficient cash for the short term, say 5 years,
 - cautious investments for the medium term, say a further 5 years
 - 100% equity for the long term to provide inflation cover
3) Generating income from dividends and interest

or possibly some mixture of (1)-(3).

One other point  - you say one if your pots is £240K which impiles you have others.  I think you should look at your wealth and required income as a whole and not be too constrained by how that wealth happens to be distributed at the moment.  The im-portant decision is how the required income is to be generated, the allocation of particular investments to particular pots is a secondary concern.

JohnWinder

Vanguard makes some guesses, sorry, projections on growth of funds: ‘between 6.1% and 8.1% per year on average over the next decade (for global stocks)’ and ‘UK bond returns of 4.7%-5.7% per year on average over the next decade’. https://www.vanguardinvestor.co.uk/articles/latest-thoughts/markets-economy/3-things-to-know-about-the-global-economy-and-global-markets-in-2023

You can assign those returns according to your 60/40 mix etc, for an overall return.

‘what are peoples opinions about having bonds in a drawdown,’

I guess you mean bond funds. A large majority of investors would have bond funds in their retirement account, so they seem to be ‘ok’.

Well recommended is Hale’s book Smarter Investing. I found it useful for ‘hand holding’ when I was agonising over questions like yours. You might find the same, looking over some of your recent posts.

Scot_39

plumb1_2 said:

Hi, all
i am retiring soon and looking to do a drawdown, one of my pots is £240k. If I take the £60k tfls and then keep the £180k invested.
Ive looking at 70/30 or 60/40 funds mainly vanguard. With all the stories of large falls in bond values worried a little about their future growth potential in a fund. I am not to adverse to risk as I have a 100% equity in an isa. But I would like to just have steady growth for this pot. And worked out would only need to take 3.5% out of it per year. Hopefully not withdrawing in the first year.
I also have a sipp with £50k plus in a money market fund, paying appropriately 4% , but not keeping up with inflation.

what are peoples opinions about having bonds in a drawdown, and what would be a realistic growth on a 60/40,70/30 etc funds.

The biggest disturbance to the bond market in last 12+ months - is the rapid rise in market interest rates vs "coupon" rates (or the rise in inflation if talking UK RPI linked).

US FED has already put a temporary hold on further increases in it's last statement / outlook (now at 5-5.25% iirc).

But UK still predicted by some to have some headroom left for further rises to c5% this year.

So potential further falls in old gilt transient valuations - but likely improved coupon rates on new etc.

So it's a complex mix in most large bond funds - and depends heavily on if looking for capital growth or income.

If you had bought into individual bonds - just before emergency rates being brought in - you would have made huge returns - if sold out as market rates plummeted in 09/10.

The current situation - to some extent just the flip side of the same market coin.

Funnny bankers were happy to profit then - but not so happy when US banks collapse now - by their same manipulation and gambling on their transient valuations of what was arguably meant to be a stable asset if held to maturity.

plumb1_2

Linton said:

You should only hold bonds in drawdown or under any other circumstances if they help meet the objectives of the portfolio.    This is particularly important for a retirement drawdown portfolio since its successful management is key to your well-being for the rest of your life.

So as Diunstonh says you need to have decided your drawdown strategy.  Gven this the role. if any, of bonds should be clear.

Possible strategies include
1) One pot with a variable drawdown depending on economic circumstances.
2) "Buckets" where you separately hold:
 - sufficient cash for the short term, say 5 years,
 - cautious investments for the medium term, say a further 5 years
 - 100% equity for the long term to provide inflation cover
3) Generating income from dividends and interest

or possibly some mixture of (1)-(3).

One other point  - you say one if your pots is £240K which impiles you have others.  I think you should look at your wealth and required income as a whole and not be too constrained by how that wealth happens to be distributed at the moment.  The im-portant decision is how the required income is to be generated, the allocation of particular investments to particular pots is a secondary concern.

Yes I do other DC pots, pots = £330k, 
will have 2 SP between us ( later this year),  plus small annuity, plus rental income, so about 27k. Able to live comfortably on £32k, so a shortfall of £5k.
Have about £200 k  in mixture  cash isa,  ss isa,pb and cash. So not reliant on taking an income for the moment from pension pots, but I guess I’ll have to to start topping up savings it gradually reduces. So enough to cover for 5 yr plus.  
It want the £60k tfls to cover 2 large purchases.
So I looking to invest the rest into middle risk investments hopefully 6% gains p/a.

Hoping I can do this myself without paying a ifa, but struggling with choices of investments funds, I am well aware of rises and falls and ok with that, as I should have enough liquid funds to cover any dips? That’s why I was thinking of bond/ equity fund rather than passive index tracker.?

Maybe I do need a ifa?

dunstonh

It want the £60k tfls to cover 2 large purchases.

May be better to use cash savings than pension.
i.e. estate planning and having the TFC available to use later with your income rather than lost upfront (results in greater TFC over your lifetime)

Hoping I can do this myself without paying a ifa, but struggling with choices of investments funds, I am well aware of rises and falls and ok with that, as I should have enough liquid funds to cover any dips? That’s why I was thinking of bond/ equity fund rather than passive index tracker.?

But what strategy?
You seem to have some objectives but no mention of structure.     You are looking at solutions before deciding on what drawdown strategy is best.

JohnWinder

‘That’s why I was thinking of bond/ equity fund rather than passive index tracker.?’

A bond/equity fund might be an active fund or a fund following some appropriate indexes for stocks and bonds. A passive index tracker, think about it, is tracking an index which could be a stock index or a bond index or a real estate index or a commodities futures index. You’re writing about a wide range of alternatives. Maybe you mean that, but if you’re inviting comment it makes it tricky.

Linton

plumb1_2 said:

Linton said:

You should only hold bonds in drawdown or under any other circumstances if they help meet the objectives of the portfolio.    This is particularly important for a retirement drawdown portfolio since its successful management is key to your well-being for the rest of your life.

So as Diunstonh says you need to have decided your drawdown strategy.  Gven this the role. if any, of bonds should be clear.

Possible strategies include
1) One pot with a variable drawdown depending on economic circumstances.
2) "Buckets" where you separately hold:
 - sufficient cash for the short term, say 5 years,
 - cautious investments for the medium term, say a further 5 years
 - 100% equity for the long term to provide inflation cover
3) Generating income from dividends and interest

or possibly some mixture of (1)-(3).

One other point  - you say one if your pots is £240K which impiles you have others.  I think you should look at your wealth and required income as a whole and not be too constrained by how that wealth happens to be distributed at the moment.  The im-portant decision is how the required income is to be generated, the allocation of particular investments to particular pots is a secondary concern.

Yes I do other DC pots, pots = £330k, 
will have 2 SP between us ( later this year),  plus small annuity, plus rental income, so about 27k. Able to live comfortably on £32k, so a shortfall of £5k.
Have about £200 k  in mixture  cash isa,  ss isa,pb and cash. So not reliant on taking an income for the moment from pension pots, but I guess I’ll have to to start topping up savings it gradually reduces. So enough to cover for 5 yr plus.  
It want the £60k tfls to cover 2 large purchases.
So I looking to invest the rest into middle risk investments hopefully 6% gains p/a.

Hoping I can do this myself without paying a ifa, but struggling with choices of investments funds, I am well aware of rises and falls and ok with that, as I should have enough liquid funds to cover any dips? That’s why I was thinking of bond/ equity fund rather than passive index tracker.?

Maybe I do need a ifa?

A quick plan to demonstrate the specification of a strategy and using it to determine an appropriate level of  bond exposure.  You can change the figures and complicate it if necessry.

Look at it top-down.  You need £5K/year, inflation linked, from your investments/sdavings.  If my understanding is correct you have £330K in DC pots and £200K in assorted holdings.  So call it £500K in total.  If you are retiring before your State Pension age you now need to deduct the temporary extra income required off your total as a separate pot and keep it in cash or very cautious investments.

You haven't told us your age so let's assume that the total pre SP age expenditure amounts to £200K.  That leaves you with £300K to provide £5K/year which at 1.667 % is a very undemanding level of drawdown.  So after SPA you could do something like.....

a) Leave £50K increasing with inflation) in cash to cover the £5K/year for some years plus major one-offs.  This will avoid excess worry during periods of poor or negative returns.
b) Invest £100K in fairly cautious investments (<50% equity).  A fairly cautious multi-asset fund could be appropriate.
c) Invest £150K in 100% equity for the long term.  Since you wont be requiringt this for perhaps 10 years 100% equity should not worry you.

Then every year rebalance unless there have been poor returns from the 100% equity tranch.

plumb1_2

dunstonh said:

It want the £60k tfls to cover 2 large purchases.

May be better to use cash savings than pension.
i.e. estate planning and having the TFC available to use later with your income rather than lost upfront (results in greater TFC over your lifetime)

Hoping I can do this myself without paying a ifa, but struggling with choices of investments funds, I am well aware of rises and falls and ok with that, as I should have enough liquid funds to cover any dips? That’s why I was thinking of bond/ equity fund rather than passive index tracker.?

But what strategy?
You seem to have some objectives but no mention of structure.     You are looking at solutions before deciding on what drawdown strategy is best.

Think iam out of my depth, regarding strategy etc. how much should I be looking at regards fees to a ifa. 

plumb1_2

Linton said:

plumb1_2 said:

Linton said:

You should only hold bonds in drawdown or under any other circumstances if they help meet the objectives of the portfolio.    This is particularly important for a retirement drawdown portfolio since its successful management is key to your well-being for the rest of your life.

So as Diunstonh says you need to have decided your drawdown strategy.  Gven this the role. if any, of bonds should be clear.

Possible strategies include
1) One pot with a variable drawdown depending on economic circumstances.
2) "Buckets" where you separately hold:
 - sufficient cash for the short term, say 5 years,
 - cautious investments for the medium term, say a further 5 years
 - 100% equity for the long term to provide inflation cover
3) Generating income from dividends and interest

or possibly some mixture of (1)-(3).

One other point  - you say one if your pots is £240K which impiles you have others.  I think you should look at your wealth and required income as a whole and not be too constrained by how that wealth happens to be distributed at the moment.  The im-portant decision is how the required income is to be generated, the allocation of particular investments to particular pots is a secondary concern.

Yes I do other DC pots, pots = £330k, 
will have 2 SP between us ( later this year),  plus small annuity, plus rental income, so about 27k. Able to live comfortably on £32k, so a shortfall of £5k.
Have about £200 k  in mixture  cash isa,  ss isa,pb and cash. So not reliant on taking an income for the moment from pension pots, but I guess I’ll have to to start topping up savings it gradually reduces. So enough to cover for 5 yr plus.  
It want the £60k tfls to cover 2 large purchases.
So I looking to invest the rest into middle risk investments hopefully 6% gains p/a.

Hoping I can do this myself without paying a ifa, but struggling with choices of investments funds, I am well aware of rises and falls and ok with that, as I should have enough liquid funds to cover any dips? That’s why I was thinking of bond/ equity fund rather than passive index tracker.?

Maybe I do need a ifa?

A quick plan to demonstrate the specification of a strategy and using it to determine an appropriate level of  bond exposure.  You can change the figures and complicate it if necessry.

Look at it top-down.  You need £5K/year, inflation linked, from your investments/sdavings.  If my understanding is correct you have £330K in DC pots and £200K in assorted holdings.  So call it £500K in total.  If you are retiring before your State Pension age you now need to deduct the temporary extra income required off your total as a separate pot and keep it in cash or very cautious investments.

You haven't told us your age so let's assume that the total pre SP age expenditure amounts to £200K.  That leaves you with £300K to provide £5K/year which at 1.667 % is a very undemanding level of drawdown.  So after SPA you could do something like.....

a) Leave £50K increasing with inflation) in cash to cover the £5K/year for some years plus major one-offs.  This will avoid excess worry during periods of poor or negative returns.
b) Invest £100K in fairly cautious investments (<50% equity).  A fairly cautious multi-asset fund could be appropriate.
c) Invest £150K in 100% equity for the long term.  Since you wont be requiringt this for perhaps 10 years 100% equity should not worry you.

Then every year rebalance unless there have been poor returns from the 100% equity tranch.

1st of all thanks for the reply, and in away I can understand

Age 65, Sp in 6 months qualifying for the full amount £203 , DW already gets her Sp plus small annuity.
a) we have about £60k in bank accounts, so this will cover 5 plus years after I get my Sp in 6 months
b) when you say cautious multi asset, could you give couple of examples, not looking for recommendations. So I could compare them with other such like funds.
c) I am ok with this, as I already have over £40k in vanguard 100% fund ss isa and can add £20k this year. And DW could open one. 

Ps I haven’t a clue how to do spreadsheets, strictly pen/paper