Retirement drawdown: Use cash buffer first or drawdown proportionally?

GazzaBloom

LHW99 said:

With regard to option B, I would probably not do monthly sales / withdrawals, but make a single once per year withdrawal to the buffer account. This annual withdrawal would take into account (some of) the performance of the drawdown portfolio over the past 12 months, so could be less if there was no growth, more if things are doing well.

Having said that, I think you would need at least a proportion of your income requirements covered by SP / small DB / annuity. If you were relying on withdrawals at a certain level to fund your whole living costs this scheme wouldn't work well.

Agreed - but I don't want to complicate this example with that, note that I mention drawdown requirements from the DC pot not total living costs.

If you take Option B and rebalance prior to taking the next year's drawdown that is in effect the same as taking less from the growth assets

Pat38493

GazzaBloom said:

Pat38493 said:

I was watching a video recently which pretty much described approach A.  

"look for profits in the longer term buckets at time of re balancing".  If there aren't any, consider deferring the rebalancing.

The approach was not to make subjective judgments on whether "markets are down" but to look at your own profits in your funds at that time.

Also take a pragmatic approach - if you defer something, you don't necessarily have to defer it for a whole year you could decide to delay the re balancing by a quarter or whatever.

If you just rigidly apply the same rule every time at the same frequency, you might as well just buy a single fund that matches your overall mix as you'll probably get the same long term result.

Sounds sensible @Pat38493, do you have a link to the vid?

No because it was actually part of the Meaningful money meaningful academy retirement planning training that you actually need to pay for.  However I think he has explained pretty much the same stuff in some of his podcasts and youtube videos.  Search on Meaningful Money.

He always stresses that you can adapt it to your own needs but he was demonstrating something along the lines
Bucket 1 - first 2 years cash.
Bucket 2 - years 3-5 invested one notch below your typical risk level
Bucket 3 - years 6-10 invested at your normal risk appetite.
Bucket 4 - years 11+ invested one notch above your normal risk appetite.

Actually he calls it cash flow ladder, but it's basically the same as buckets.

He said that normally in his company they put buckets 3 and 4 each into a single fund with the required mix.  One of the videos also goes into some details about how to screen funds on Morningstar.

Bucket 2 should be a split bucket with separate funds for bonds and equities so you can choose which one to draw from.

This is of course just an example but he said they use this approach with a lot of their clients.  He has also said that when you are dealing with hundreds of clients, simplicity is important but obviously if you only have yourself to worry about you can make it a bit more complicated e.g. by having multiple funds in the longer term buckets or whatever, but he seems dubious about how much difference this could really make unless you are some kind of investing genius.

I need to watch some of the videos again because what he hasn't really explained, or I didn't follow, is how you calculate how much you should put in buckets 3 versus bucket 4, given that you obviously won't have enough real terms cash to cover your entire retirement horizon.  This is especially the case if you have very front heavy withdrawals where from 67 onwards, most of your needs are covered by guaranteed sources.

The course also includes access to Voyant Go so you can probably use that to figure out starting bucket sizes.

GazzaBloom

Pat38493 said:

GazzaBloom said:

Pat38493 said:

I was watching a video recently which pretty much described approach A.  

"look for profits in the longer term buckets at time of re balancing".  If there aren't any, consider deferring the rebalancing.

The approach was not to make subjective judgments on whether "markets are down" but to look at your own profits in your funds at that time.

Also take a pragmatic approach - if you defer something, you don't necessarily have to defer it for a whole year you could decide to delay the re balancing by a quarter or whatever.

If you just rigidly apply the same rule every time at the same frequency, you might as well just buy a single fund that matches your overall mix as you'll probably get the same long term result.

Sounds sensible @Pat38493, do you have a link to the vid?

No because it was actually part of the Meaningful money meaningful academy retirement planning training that you actually need to pay for.  However I think he has explained pretty much the same stuff in some of his podcasts and youtube videos.  Search on Meaningful Money.

He always stresses that you can adapt it to your own needs but he was demonstrating something along the lines
Bucket 1 - first 2 years cash.
Bucket 2 - years 3-5 invested one notch below your typical risk level
Bucket 3 - years 6-10 invested at your normal risk appetite.
Bucket 4 - years 11+ invested one notch above your normal risk appetite.

Actually he calls it cash flow ladder, but it's basically the same as buckets.

He said that normally in his company they put buckets 3 and 4 each into a single fund with the required mix.  One of the videos also goes into some details about how to screen funds on Morningstar.

Bucket 2 should be a split bucket with separate funds for bonds and equities so you can choose which one to draw from.

This is of course just an example but he said they use this approach with a lot of their clients.  He has also said that when you are dealing with hundreds of clients, simplicity is important but obviously if you only have yourself to worry about you can make it a bit more complicated e.g. by having multiple funds in the longer term buckets or whatever, but he seems dubious about how much difference this could really make unless you are some kind of investing genius.

I need to watch some of the videos again because what he hasn't really explained, or I didn't follow, is how you calculate how much you should put in buckets 3 versus bucket 4, given that you obviously won't have enough real terms cash to cover your entire retirement horizon.  This is especially the case if you have very front heavy withdrawals where from 67 onwards, most of your needs are covered by guaranteed sources.

The course also includes access to Voyant Go so you can probably use that to figure out starting bucket sizes.

Thanks - how do you find Voyant to use? is it drastically different or better than Timeline?

GazzaBloom

Linton said:

Long term is mainly inflation over the long term rather event that happens in the long term.

A significant part of the strategic adjustment is to move money from growth into income shares so it does not matter much when in the economic cycle that is done.  Also the large buffer gives flexibility on timing.  Moving money from growth into the buffer should never be a major emergency action.

OK makes sense. Having the "income" mid term portion of a portfolio is what I am missing. However, to have a middle income generating "bucket" that would be able to generate enough dividends/interest each year to cover a year's worth of cash drawdown would mean the overall pot would need to be very large

Pat38493

GazzaBloom said:

Pat38493 said:

GazzaBloom said:

Pat38493 said:

I was watching a video recently which pretty much described approach A.  

"look for profits in the longer term buckets at time of re balancing".  If there aren't any, consider deferring the rebalancing.

The approach was not to make subjective judgments on whether "markets are down" but to look at your own profits in your funds at that time.

Also take a pragmatic approach - if you defer something, you don't necessarily have to defer it for a whole year you could decide to delay the re balancing by a quarter or whatever.

If you just rigidly apply the same rule every time at the same frequency, you might as well just buy a single fund that matches your overall mix as you'll probably get the same long term result.

Sounds sensible @Pat38493, do you have a link to the vid?

No because it was actually part of the Meaningful money meaningful academy retirement planning training that you actually need to pay for.  However I think he has explained pretty much the same stuff in some of his podcasts and youtube videos.  Search on Meaningful Money.

He always stresses that you can adapt it to your own needs but he was demonstrating something along the lines
Bucket 1 - first 2 years cash.
Bucket 2 - years 3-5 invested one notch below your typical risk level
Bucket 3 - years 6-10 invested at your normal risk appetite.
Bucket 4 - years 11+ invested one notch above your normal risk appetite.

Actually he calls it cash flow ladder, but it's basically the same as buckets.

He said that normally in his company they put buckets 3 and 4 each into a single fund with the required mix.  One of the videos also goes into some details about how to screen funds on Morningstar.

Bucket 2 should be a split bucket with separate funds for bonds and equities so you can choose which one to draw from.

This is of course just an example but he said they use this approach with a lot of their clients.  He has also said that when you are dealing with hundreds of clients, simplicity is important but obviously if you only have yourself to worry about you can make it a bit more complicated e.g. by having multiple funds in the longer term buckets or whatever, but he seems dubious about how much difference this could really make unless you are some kind of investing genius.

I need to watch some of the videos again because what he hasn't really explained, or I didn't follow, is how you calculate how much you should put in buckets 3 versus bucket 4, given that you obviously won't have enough real terms cash to cover your entire retirement horizon.  This is especially the case if you have very front heavy withdrawals where from 67 onwards, most of your needs are covered by guaranteed sources.

The course also includes access to Voyant Go so you can probably use that to figure out starting bucket sizes.

Thanks - how do you find Voyant to use? is it drastically different or better than Timeline?

It's quite similar but it has more functionality around programming DB pensions and various other asset types that are not directly in TimeLine, including inheritance tax and so on.  It also has guided scenarios to help you with for example "what if I downsize the house".  You can program all the details of your DB pension around commutation rates, early retirement reductions  and the NRA and it will attempt to estimate the new amounts.

It has a kind of visual timeline where you can drag and drop "events" and all of the things that are triggered by those events will move and recalculate accordingly.

BUT.... Voyant works on straight line modelling so it does not generally include historical stress testing in the main modelling.  There is a historic stress test function included but it's not nearly as good as Timeline.  I believe that Meaningful Money uses Timeline as well internally as he mentioned it in a recent podcast.  They seem to recommend using conservative growth rates like 2% above inflation throughout as it's a straight line tool on the main views.  You can program different growth rates or even investment mixes into each investment if you want to, but always keeping in mind it's working mainly on straight line extrapolation.

You can sign up to a 1 month demo of Voyant with your email address by the way, but after that you'd pay through the nose unless you get it via one of these re-sellers.

Bostonerimus1

My approach at retirement was to start with one year's spending as cash in the bank and have three years in money market funds. That's the extent of my bucket strategy. The plan was to have my rental income and eventually DB pension deposited to the cash spending account and then at the end of the year to replenish the cash if necessary. The source of that replenishment would depend on current circumstances, but in order of preference it would be dividends and interest; then from capital gains; next the money market buffer and finally sales of equities and bonds etc. After 10 years retirement I find myself in the enviable position of having more than I need from rental income and DB pension and I am doing a few hours of work a week for the company of an old colleague and so I can actually take money from the cash account to invest.

Pat38493

Bostonerimus1 said:

My approach at retirement was to start with one year's spending as cash in the bank and have three years in money market funds. That's the extent of my bucket strategy. The plan was to have my rental income and eventually DB pension deposited to the cash spending account and then at the end of the year to replenish the cash if necessary. The source of that replenishment would depend on current circumstances, but in order of preference it would be dividends and interest; then from capital gains; next the money market buffer and finally sales of equities and bonds etc. After 10 years retirement I find myself in the enviable position of having more than I need from rental income and DB pension and I am doing a few hours of work a week for the company of an old colleague and so I can actually take money from the cash account to invest.

This is an unintended side effect of having a system which makes people save up individual DC pension pots to fund a large part of their retirement - anyone who actually takes the trouble understand these things and has the financial means to do so, will likely save up a lot more than they actually end up needing in the long run to protect themselves against the worst case.

This probably has a significant impact on economies with huge amounts of capital tied up in these pension funds, especially with more and more people going to tracker funds where the investors do not care a hoot about which individual company they are investing in.

Qyburn

GazzaBloom said:

Scenario A: Commence monthly drawdown in year 1 from all cash then if other portfolio assets have grown at the end of year 1 top it back up to the full 3 years buffer and start again, and, if the other assets had declined, leave them alone to recover and use another years cash from  year 2 expenses?

In Scenario A - what happens if there is an extended market downturn and you get into using the final year 3 cash?

I'm considering a slight variation in Scenario A. In a decline I would reduce amount taken from the investments rather than stoping altogether. Maybe a standard percentage of current value, meaning when (if) they do well I draw more to replenish the cash buffer.

Extended market down turn, ultimately anyone in drawdown might have to cut back if it's really extended. But let's say a drop of 50% one year. I would take only 1/2 as much meaning my cash buffer is now only 2.5 years instead of three. A second year still at 50% I still have 2 years buffer. Four years with investments sitting at 50% takes my buffer down to one year.

But I have protection as well with something like 75% of our desired income covered by SP and DB, so the possibility of having to cut back isn't so horrific.

I'm not fully set on this strategy, so looking forward to seeing other comments.

Albermarle

Pat38493 said:

Bostonerimus1 said:

My approach at retirement was to start with one year's spending as cash in the bank and have three years in money market funds. That's the extent of my bucket strategy. The plan was to have my rental income and eventually DB pension deposited to the cash spending account and then at the end of the year to replenish the cash if necessary. The source of that replenishment would depend on current circumstances, but in order of preference it would be dividends and interest; then from capital gains; next the money market buffer and finally sales of equities and bonds etc. After 10 years retirement I find myself in the enviable position of having more than I need from rental income and DB pension and I am doing a few hours of work a week for the company of an old colleague and so I can actually take money from the cash account to invest.

This is an unintended side effect of having a system which makes people save up individual DC pension pots to fund a large part of their retirement - anyone who actually takes the trouble understand these things and has the financial means to do so, will likely save up a lot more than they actually end up needing in the long run to protect themselves against the worst case.

This probably has a significant impact on economies with huge amounts of capital tied up in these pension funds, especially with more and more people going to tracker funds where the investors do not care a hoot about which individual company they are investing in.

That will apply to many posters on here and similarly minded folk. However the large majority will have nowhere near enough, so will be 'forced' to spend what they have relatively quickly, or will just do that anyway as they are that way inclined/have little understanding.

SVaz

Do people not replenish their cash buffer with income from funds?
That’s my plan, although once at SP age we will only need to draw 1.5% of our pots,  the average dividend income being 2%.