Investing in bonds in drawndown

Linton

plumb1_2 said:

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

Typical multi-asset funds are the HSBC Global Strategy series where you can choose from 5 risk levels each of which are available as "Sustainable" if that is what you want.  Blackrock have a very similar range of funds with I think 3 risk levels, again with a Sustainable/ethical option.  Generally ethical funds incur some performance penalty because in investing it seems "the devil has the best tunes".

The other well-known funds in the same sort of area are the Vanguard Life Strategy ones.  However some of us have a  technically-based dislike of these.  But in practice there should not be a great difference in outcome.

plumb1_2

Thanks I was looking at HSBC funds last week, so will take a look at black rock too.
I was having a look on fidelity, as vanguard are limited to their own funds. Plus need to checkout platform fee and fund fees.

OldScientist

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?

If I'm not misunderstanding, you have an income requirement of £32k

Your guaranteed inflation adjusted income is about £20k (state pension - later this year, so you are 66 or so) and rental income of no more than £7k (I think rental income has generally followed inflation in the past) with the rest from an annuity. Is the annuity income inflation protected?

You then have an income shortfall of £5k that needs to be satisfied by spending your savings and investments

On the savings and investment sides you have
DC pots of £330k
Non-pension pots of £200k (mixture of cash and investments)

However, you will spend about £60k of this soon, leaving about £470k to fund the income shortfall over the next 35 years or so (there's a good chance one or other of you will live to be 100).

Assuming I have correctly understood the information you have given then:

As a fraction of your total portfolio (including cash and DC pots), you shortfall is about 1.1% (i.e. 100*5/470). Historically, UK investments have supported about 2.5% of the initial portfolio over 35 years if the amount is adjusted for inflation each year (i.e., you would take £5000 this year, if inflation continues at 10%, you'd take £5500 next year, etc.). Obviously, there will be a bit of tax taken from any withdrawals from the DC pots which means the withdrawals would actually need to be larger.

For spending a relatively small fraction of the portfolio, the actual allocation and mechanics of withdrawal is not going to be too critical, so an overall allocation containing anywhere from 30% to 70% equities with the remainder in bonds and cash, is likely to be good enough. For example, choosing an allocation of 50% stocks you could have £235k in an equity tracker, say 30% to bonds (e.g £140k in a global bond tracker) and the rest (20%, 94k) in cash/PB.

Albermarle

I was having a look on fidelity, as vanguard are limited to their own funds. Plus need to checkout platform fee and fund fees.

Fidelity platform fee is 0.35%, dropping to 0.2% if you have more than £250K on the platform.

Fidelity also have a low multi asset fund range . Here is an example Fidelity Investment Funds IV - Fidelity Multi Asset Allocator Strategic Fund W Accumulation Key Statistics | GB00B99P9349 | Fidelity

However you do not have buy just Fidelity funds on the Fidelity platform, you can also buy the other ones already mentioned.

This is worth a read.

Best multi-asset funds - Monevator