Best draw-down strategy: Growth or Income Portfolio?

Prism

Linton said:

MK62 said:

Sounds good on paper, but be aware that there might then be little difference to selling directly from bucket 3 to fund your withdrawal........pretty much the opposite of the bucket strategy's main aim.

Agreed, I would only do this as part of a major rebalance for strategic reasons or for a large one off expenditure. In my view it is pointless or even counter productive using the growth portfolio for ongoing expenditure as one of the objectives of the approach is to minimise cashing in the growth portfolio. Normal ongoing expenditure should be funded from external income and the income funds.

Maybe, but the concept of a steady inflation increasing yearly income based on selling a blend of equities (growth/income) and bonds, is the very foundation of the 4% SWR model which many people seem to focus on. The bucket model that you use is an alternative but doesn't seem anywhere near as written or spoken about. It certainly needs more work put into it than a simple yearly sell and rebalance regardless of market conditions.

Linton

Prism said:

Linton said:

MK62 said:

Sounds good on paper, but be aware that there might then be little difference to selling directly from bucket 3 to fund your withdrawal........pretty much the opposite of the bucket strategy's main aim.

Agreed, I would only do this as part of a major rebalance for strategic reasons or for a large one off expenditure. In my view it is pointless or even counter productive using the growth portfolio for ongoing expenditure as one of the objectives of the approach is to minimise cashing in the growth portfolio. Normal ongoing expenditure should be funded from external income and the income funds.

Maybe, but the concept of a steady inflation increasing yearly income based on selling a blend of equities (growth/income) and bonds, is the very foundation of the 4% SWR model which many people seem to focus on. The bucket model that you use is an alternative but doesn't seem anywhere near as written or spoken about. It certainly needs more work put into it than a simple yearly sell and rebalance regardless of market conditions.

The  key objective is to meet one’s needs for income  rather than having to follow a strict SWR drawdown regime.  The large cash and cautious investment tranche enables medium term flexibility without affecting one’s long term investments. So for example one can easily take an expensive holiday or buy a new car without worrying about selling long term investments when the market is down.

For me the SWR approach limits on one’s flexibility in spending  money how one wishes is wrong in principle.  A financial management scheme should make doing what one wants to do easy, rather than restricting one to doing things which fit into the rules of the scheme.  In particular the Guyton Klinger approach to dealing with crashes which requires that you immediately cut expenditure is totally unacceptable.

Prism

Linton said:

Prism said:

Linton said:

MK62 said:

Sounds good on paper, but be aware that there might then be little difference to selling directly from bucket 3 to fund your withdrawal........pretty much the opposite of the bucket strategy's main aim.

Agreed, I would only do this as part of a major rebalance for strategic reasons or for a large one off expenditure. In my view it is pointless or even counter productive using the growth portfolio for ongoing expenditure as one of the objectives of the approach is to minimise cashing in the growth portfolio. Normal ongoing expenditure should be funded from external income and the income funds.

Maybe, but the concept of a steady inflation increasing yearly income based on selling a blend of equities (growth/income) and bonds, is the very foundation of the 4% SWR model which many people seem to focus on. The bucket model that you use is an alternative but doesn't seem anywhere near as written or spoken about. It certainly needs more work put into it than a simple yearly sell and rebalance regardless of market conditions.

The  key objective is to meet one’s needs for income  rather than having to follow a strict SWR drawdown regime.  The large cash and cautious investment tranche enables medium term flexibility without affecting one’s long term investments. So for example one can easily take an expensive holiday or buy a new car without worrying about selling long term investments when the market is down.

For me the SWR approach limits on one’s flexibility in spending  money how one wishes is wrong in principle.  A financial management scheme should make doing what one wants to do easy, rather than restricting one to doing things which fit into the rules of the scheme.  In particular the Guyton Klinger approach to dealing with crashes which requires that you immediately cut expenditure is totally unacceptable.

I wouldn't follow that part of Guyton Klinger either, which can only be avoided by taking a lower withdrawal rate in the first place. However the bucket or pot approach isn't immune to cuts either. Nobody can fully plan for an income strategy that meets future income requirement when you don't know what that will be. What will be the cost to heat a house or pay the bills or insure a car in 5 years time? We can estimate but that is all. Will income paying funds and shares increase their dividends to account for such things - very unlikely going on the examples from the past few years where some trusts have barely increased their payments at all. Just enough to keep the hero status.

In some ways, a simple invest and ignore SWR stategy is the simple option. That is the original premise of it. x%, increase by inflation, ignore the noise. Go live your life.

Pat38493

The bucket approach is mainly a psychological thing that makes it easier to visualise and understand how you are managing your risk.

If you are rebalancing based on percentages, it will give pretty much the same result as just having one fund with the same mix - at least there won’t be any difference that you can tell in advance.

In reality the bucket approach only gives a real long term advantage if you can time the markets to deploy your bucket and stop equity withdrawals at the right time, and then start them back up again at the right time.  As we all know, timing the markets it tricky.

I think that ERN did a lot of testing around this on historical data and could not find any reliable rule for starting and stopping re-balancing that would have given a consistently better result (and without cheating by predicting the future).

However I think that IFAs probably put a lot of store in the psychological benefits of this type of approach as it helps clients to sleep well at night if they have a big cash bucket.

QrizB

Pat38493 said:

However I think that IFAs probably put a lot of store in the psychological benefits of this type of approach as it helps clients to sleep well at night if they have a big cash bucket.

I can imagine people being more likely to look at their cash bucket in a bear market and thinking "I'm glad I've got this" rather than in a bull market and thinking "why is my cash not growing like my equities"!

Linton

Pat38493 said:

The bucket approach is mainly a psychological thing that makes it easier to visualise and understand how you are managing your risk.

If you are rebalancing based on percentages, it will give pretty much the same result as just having one fund with the same mix - at least there won’t be any difference that you can tell in advance.

In reality the bucket approach only gives a real long term advantage if you can time the markets to deploy your bucket and stop equity withdrawals at the right time, and then start them back up again at the right time.  As we all know, timing the markets it tricky.

I think that ERN did a lot of testing around this on historical data and could not find any reliable rule for starting and stopping re-balancing that would have given a consistently better result (and without cheating by predicting the future).

However I think that IFAs probably put a lot of store in the psychological benefits of this type of approach as it helps clients to sleep well at night if they have a big cash bucket.

I do not rebalance based on %s of top level assets. The fact that it happens to stay around 60/40 is purely incidental and was never planned. The income portfolio is thwe size it needs to be to deliver the amount of ongoing income I require.  If the income becomes insufficient then I increase the size of the income portfolio  from the growth portfolio at the annual review. This will probably be necessary from time to time since about 40% of my ongoing income comes from fixed annuities.

The cash/cautious investment portfolio again stays pretty constant.  There is enough there to pay for an expensive holiday or two without any urgency in replacing the money.  I may not bother since at the moment income exceeds ongoing needs and the cash component is slowly increasing.



The approach I advocate is very different from the simplistic waterfall buffer approach you seem to be assuming.  In that model in the event of a crash you have to make a decision when to switch your ongoing income source from the investment portfolio to the buffer and when to switch back again.  Clearly this is market timing which we all agree is undesirable.

The key feature of my approach is that one never switches sources of ongoing income.  Money is flowing continuously from the external sources and the income portfolio to cash for expenditure.  The expectation is that the amount of income generated will be reasonably stable even though capital values may be volatile..  In the unlikely event that  iincome generation were to be interrupted there is suifficient near to cash to last out for a considerable time.  If there isn't we are probably all doomed anyway.



Overall the returns should be much the same as a 60/40 tracker.  I have said before that, at least for equity, provided you are well diversified the returns will be much the same no matter what the underlying investments are.

The key diffence is not the level of returns but rather that the underlying investments are chosen and sized to meet objectives.  Compare that with a traditional 60/40 index fund.  What is the 40% bonds for?  Why is it 40%?  Why that particular allocation of bond maturitiues.  It is all pretty arbitrary.

gm0

If OP feels the need to dig further into this bucketing/what to sell, access methods, rebalancing then the voluminous ERN blog as mentioned up thread is a good place to look. 

Or the excellent value Michael McClung book "Living off your money".

Which can usefully instruct you as to the magnitude of the differences (i.e. does it matter) and also the "can I be bothered" factor

Having a plan that you chose and believe is sensible for good reasons - which you will then follow in adversity and turbulence is better than having no plan - if the absence of a plan means your confidence will be more affected by the media coverage and volatility (short term portfolio revaluation).   Not succumbing to panic is something the DIY investor has to figure out on their own.

I also find an investment statement - written down - useful as it reminds me why I did what I did - and it is easy when following the subject and markets ongoing to forget what your prior thought process was leading to specific portfolio choices.

MK62

Linton said:

Pat38493 said:

The bucket approach is mainly a psychological thing that makes it easier to visualise and understand how you are managing your risk.

If you are rebalancing based on percentages, it will give pretty much the same result as just having one fund with the same mix - at least there won’t be any difference that you can tell in advance.

In reality the bucket approach only gives a real long term advantage if you can time the markets to deploy your bucket and stop equity withdrawals at the right time, and then start them back up again at the right time.  As we all know, timing the markets it tricky.

I think that ERN did a lot of testing around this on historical data and could not find any reliable rule for starting and stopping re-balancing that would have given a consistently better result (and without cheating by predicting the future).

However I think that IFAs probably put a lot of store in the psychological benefits of this type of approach as it helps clients to sleep well at night if they have a big cash bucket.

I do not rebalance based on %s of top level assets. The fact that it happens to stay around 60/40 is purely incidental and was never planned. The income portfolio is thwe size it needs to be to deliver the amount of ongoing income I require.  If the income becomes insufficient then I increase the size of the income portfolio  from the growth portfolio at the annual review. This will probably be necessary from time to time since about 40% of my ongoing income comes from fixed annuities.

The cash/cautious investment portfolio again stays pretty constant.  There is enough there to pay for an expensive holiday or two without any urgency in replacing the money.  I may not bother since at the moment income exceeds ongoing needs and the cash component is slowly increasing.



The approach I advocate is very different from the simplistic waterfall buffer approach you seem to be assuming.  In that model in the event of a crash you have to make a decision when to switch your ongoing income source from the investment portfolio to the buffer and when to switch back again.  Clearly this is market timing which we all agree is undesirable.

The key feature of my approach is that one never switches sources of ongoing income.  Money is flowing continuously from the external sources and the income portfolio to cash for expenditure.  The expectation is that the amount of income generated will be reasonably stable even though capital values may be volatile..  In the unlikely event that  iincome generation were to be interrupted there is suifficient near to cash to last out for a considerable time.  If there isn't we are probably all doomed anyway.



Overall the returns should be much the same as a 60/40 tracker.  I have said before that, at least for equity, provided you are well diversified the returns will be much the same no matter what the underlying investments are.

The key diffence is not the level of returns but rather that the underlying investments are chosen and sized to meet objectives.  Compare that with a traditional 60/40 index fund.  What is the 40% bonds for?  Why is it 40%?  Why that particular allocation of bond maturitiues.  It is all pretty arbitrary.

This approach is fine if your overall portfolio is large enough to then allow your income bucket to be large enough to supply sufficient income (or close to)......but for many that would likely mean the income bucket taking up the majority of their portfolio. Of course, in the end it's going to come down to overall portfolio size vs annual income requirements....it always does.

In the end, there is no perfect solution to this.....and no one size fits all. Every plan has pros and cons of course, but when you consider we are trying to plan for unknown longevity, unknown future inflation, unknown future investment returns and unknown future currency exchange rates, it then seems to me that regular re-evaluation and flexibility are key factors to any plan going forward.

Pat38493

MK62 said:

Linton said:

Pat38493 said:

The bucket approach is mainly a psychological thing that makes it easier to visualise and understand how you are managing your risk.

If you are rebalancing based on percentages, it will give pretty much the same result as just having one fund with the same mix - at least there won’t be any difference that you can tell in advance.

In reality the bucket approach only gives a real long term advantage if you can time the markets to deploy your bucket and stop equity withdrawals at the right time, and then start them back up again at the right time.  As we all know, timing the markets it tricky.

I think that ERN did a lot of testing around this on historical data and could not find any reliable rule for starting and stopping re-balancing that would have given a consistently better result (and without cheating by predicting the future).

However I think that IFAs probably put a lot of store in the psychological benefits of this type of approach as it helps clients to sleep well at night if they have a big cash bucket.

I do not rebalance based on %s of top level assets. The fact that it happens to stay around 60/40 is purely incidental and was never planned. The income portfolio is thwe size it needs to be to deliver the amount of ongoing income I require.  If the income becomes insufficient then I increase the size of the income portfolio  from the growth portfolio at the annual review. This will probably be necessary from time to time since about 40% of my ongoing income comes from fixed annuities.

The cash/cautious investment portfolio again stays pretty constant.  There is enough there to pay for an expensive holiday or two without any urgency in replacing the money.  I may not bother since at the moment income exceeds ongoing needs and the cash component is slowly increasing.



The approach I advocate is very different from the simplistic waterfall buffer approach you seem to be assuming.  In that model in the event of a crash you have to make a decision when to switch your ongoing income source from the investment portfolio to the buffer and when to switch back again.  Clearly this is market timing which we all agree is undesirable.

The key feature of my approach is that one never switches sources of ongoing income.  Money is flowing continuously from the external sources and the income portfolio to cash for expenditure.  The expectation is that the amount of income generated will be reasonably stable even though capital values may be volatile..  In the unlikely event that  iincome generation were to be interrupted there is suifficient near to cash to last out for a considerable time.  If there isn't we are probably all doomed anyway.



Overall the returns should be much the same as a 60/40 tracker.  I have said before that, at least for equity, provided you are well diversified the returns will be much the same no matter what the underlying investments are.

The key diffence is not the level of returns but rather that the underlying investments are chosen and sized to meet objectives.  Compare that with a traditional 60/40 index fund.  What is the 40% bonds for?  Why is it 40%?  Why that particular allocation of bond maturitiues.  It is all pretty arbitrary.

This approach is fine if your overall portfolio is large enough to then allow your income bucket to be large enough to supply sufficient income (or close to)......but for many that would likely mean the income bucket taking up the majority of their portfolio. Of course, in the end it's going to come down to overall portfolio size vs annual income requirements....it always does.

In the end, there is no perfect solution to this.....and no one size fits all. Every plan has pros and cons of course, but when you consider we are trying to plan for unknown longevity, unknown future inflation, unknown future investment returns and unknown future currency exchange rates, it then seems to me that regular re-evaluation and flexibility are key factors to any plan going forward.

This is my feeling - I suspect that Linton has a lot more money than he really needs, or to put another way, could have stopped working earlier, especially as I think also using worst case growth rates combined with a very cautious approach to maintaining income.

If I understood correctly, the income portion is already performing above expectations which kind of supports my point.

This is a nice problem to have, but if like me you are trying to balance wanting to retire as early as possible against having a fund that is sufficient, it's probably overkill for me as it will result in me working several extra years in order to achieve a level of protection that I don't think I need.  

As with many things in life, the last 0.1% of guaranteed success if the by far most expensive one to achieve.