Dynamic spending rules for retirement drawdown pros/cons and alternatives?

Bianchiintenso

@GazzaBloom and @bowneyboy, I would be very interested in how you chose your 80-20 fund for retirement? Was it an 'off the peg' VLS or HSBC fund or something more self tailored? I am definitely leaning that way myself.

Bostonerimus1

GazzaBloom said:

bownyboy said:

sofm said:

Q for those planning to retire next year...  have you factored in/have any concerns about known issues between now and then?  I'm thinking of a) war in Ukraine, b) UK election, c) inflation.  Are you trusting the maths and modelling takes into account perceived risks, or just that the end of the CY2024 is long enough off for a, b and c to have completed/stabilised.

Yes these are things you cannot control - maybe I shouldn't worry unduly!

Well I 'retired' last April just as the war in Ukraine was kicking off and promptly watched our combined investments loose value over the year.

It was hard but what I learnt was our asset allocation was about right at 80% equities, 10% bonds and 10% cash.  

Come the end of October the long hot summer was over and I got offered a contract for 4 months which I decided to take as a) it was cold and wet and b) the income from this would provide another years worth of expenses.

So fast forward to March this year and I'm 'retired' again and the investments are now the highest they've been and we hopefully don't need to touch them until April next year. 

So I guess my point is don't sweat it too much. If you've run the numbers just go for it. James Shack has a great video on this topic here: https://www.youtube.com/watch?v=OuDCDp9Z9Y4

Sounds good, I love an 80/20 asset allocation, it feels right to me as well. I'm going to be 85/15 at the point of planned retirement but can see me moving to 80/20 or 75/25 over time.

A high equity allocation has done well in the past, but it will make your portfolio volatile and that can be an issue when you are making regular withdrawals; the specter of sequence of withdrawals risk is seen. So you need to have a holistic plan that includes a budget and sources of income separate from investments - sources like state pension and any annuities you might have purchased. 

As an example if I look at my invested assets I'm about 90/10 stocks to bonds, but I have a large cash buffer and also DB pension and rental income so that I'm well insulated from market down turns. If you are relying on withdrawals from volatile assets in your invested pension pot, then you need a plan to temporarily reduce or eliminate those withdrawals in bad times or a strong stomach and faith in you modelling to continue the withdrawals.

GazzaBloom

Bianchiintenso said:

@GazzaBloom and @bowneyboy, I would be very interested in how you chose your 80-20 fund for retirement? Was it an 'off the peg' VLS or HSBC fund or something more self tailored? I am definitely leaning that way myself.

Well we have been 100% equity index funds in accumulation for some years now, currently a mix of the HSBC Islamic Global Equity Index Fund, Blackrock US Equity Index Fund/S&P500 (Vanguard's VUSA) and the L&G Global Technology Index Fund Trust. As we get closer to retirement, we maintain 100% stocks but my new monthly accumulation pension contributions from January 2024 will be held as cash with a view to achieving an 85/15 mix at the point of retirement in 17 months. My pension with Aviva will pay BOE base rate on cash balances, so, 5% less 0.16% annual fees, soon to be 5.25% I guess.

I settled on 85/15 for 2 reasons, Warren Buffet's suggestion of a 90/10 portfolio on his passing and 15% will be 3 years of my living expenses held in cash or cash equivalents. I just don't think I quite have the guts for 100% equities in retirement, although I am fairly risk on and can tolerate significant drops, so the 15% is only to provide some sleep at night comfort and slightly soften the biggest drawdowns in a major equity market downturn. It will be at the expense of some growth.

We have full state pensions that start paying out 9 years after retirement and I have a DB pension already in payment that will provide around 18% of our drawdown needs.

We have some flexibility in our drawdown plans and can reduce up to 25%-30% in extreme situations. 

Over time, if we can get through the initial years without a bad a bad sequence of returns, I may soften the mix and even hold my nose and buy some bonds funds. 

Bostonerimus1

GazzaBloom said:

Bianchiintenso said:

@GazzaBloom and @bowneyboy, I would be very interested in how you chose your 80-20 fund for retirement? Was it an 'off the peg' VLS or HSBC fund or something more self tailored? I am definitely leaning that way myself.

Over time, if we can get through the initial years without a bad a bad sequence of returns, I may soften the mix and even hold my nose and buy some bonds funds. 

If you get through the initial years you are better placed to take more risk as you will have avoided sequence of returns problems at the worst of times and will have less time left to live. There has been some fairly convincing research that a rising equity allocation in retirement is a useful strategy, but that doesn't start with an 85/15 split. Still if you get past the first few years successfully I don't see a big argument for adding bonds unless you are betting on some falling interest rates or want to reduce risk to pass on money to heirs.

GazzaBloom

Bostonerimus1 said:

GazzaBloom said:

Bianchiintenso said:

@GazzaBloom and @bowneyboy, I would be very interested in how you chose your 80-20 fund for retirement? Was it an 'off the peg' VLS or HSBC fund or something more self tailored? I am definitely leaning that way myself.

Over time, if we can get through the initial years without a bad a bad sequence of returns, I may soften the mix and even hold my nose and buy some bonds funds. 

If you get through the initial years you are better placed to take more risk as you will have avoided sequence of returns problems at the worst of times and will have less time left to live. There has been some fairly convincing research that a rising equity allocation in retirement is a useful strategy, but that doesn't start with an 85/15 split. Still if you get past the first few years successfully I don't see a big argument for adding bonds unless you are betting on some falling interest rates or want to reduce risk to pass on money to heirs.

If we get past SORR and as state pensions kick in, we won't need to drawdown as much from DC pensions, potentially looking like around 1% of projected portfolio value annually, so could consider reducing risk as just won't need the extra returns of a large equity allocation. It's a way out so got to get there first.