Retirement drawdown: Use cash buffer first or drawdown proportionally?

waveyjane

Is there a sequence risk consideration here? Unless you have a very safe withdrawal rate, selling assets in about the first 10 of a typical 30-40 year retirement has a disproportionately larger effect when markets are going down than if you sell them later in a falling market. If so, then does that change which scenario you'd choose? If most recessions last between 10-18 months, would B be the riskier option in the early years of drawdown? Maybe it depends on your withdrawal rate.

(Disclaimer as I've not read the entire thread, nor am I in retirement but planning in the next 12 months to be.)

Pat38493

waveyjane said:

Is there a sequence risk consideration here? Unless you have a very safe withdrawal rate, selling assets in about the first 10 of a typical 30-40 year retirement has a disproportionately larger effect when markets are going down than if you sell them later in a falling market. If so, then does that change which scenario you'd choose? If most recessions last between 10-18 months, would B be the riskier option in the early years of drawdown? Maybe it depends on your withdrawal rate.

(Disclaimer as I've not read the entire thread, nor am I in retirement but planning in the next 12 months to be.)

For sure yes - I guess that is why the OP is using this type of buffering / bucketing approach in order to provide options to protect against sequence risk, or at the least, to have some time to adjust expenses if sequence risk occurs as worst case scenarios.

Prism

waveyjane said:

Is there a sequence risk consideration here? Unless you have a very safe withdrawal rate, selling assets in about the first 10 of a typical 30-40 year retirement has a disproportionately larger effect when markets are going down than if you sell them later in a falling market. If so, then does that change which scenario you'd choose? If most recessions last between 10-18 months, would B be the riskier option in the early years of drawdown? Maybe it depends on your withdrawal rate.

(Disclaimer as I've not read the entire thread, nor am I in retirement but planning in the next 12 months to be.)

Most recessions and market downturns do only last a couple of years but if that is all that someone has to deal with during the early years of their retirement then it likely won't matter what strategy they pick as they will sail through it. The ones that really cause the problems are long term depressions, world wars, long and persistant inflation and huge property and equity bubbles (e.g Japan). In any of these examples, which will happen again, a 3 year cash buffer is unlikely to provide much help at all.

One more thought. The trinity study and basis of the 4% rule didn't use a cash buffer at all and survived much of this stuff over the last 120 years. Do we even need a cash buffer beyond the next few months spends?

Pat38493

Prism said:

waveyjane said:

Is there a sequence risk consideration here? Unless you have a very safe withdrawal rate, selling assets in about the first 10 of a typical 30-40 year retirement has a disproportionately larger effect when markets are going down than if you sell them later in a falling market. If so, then does that change which scenario you'd choose? If most recessions last between 10-18 months, would B be the riskier option in the early years of drawdown? Maybe it depends on your withdrawal rate.

(Disclaimer as I've not read the entire thread, nor am I in retirement but planning in the next 12 months to be.)

Most recessions and market downturns do only last a couple of years but if that is all that someone has to deal with during the early years of their retirement then it likely won't matter what strategy they pick as they will sail through it. The ones that really cause the problems are long term depressions, world wars, long and persistant inflation and huge property and equity bubbles (e.g Japan). In any of these examples, which will happen again, a 3 year cash buffer is unlikely to provide much help at all.

One more thought. The trinity study and basis of the 4% rule didn't use a cash buffer at all and survived much of this stuff over the last 120 years. Do we even need a cash buffer beyond the next few months spends?

There is a lot of debate about cash buffers and bucketing - in many ways it's more of a psychological benefit than a real one.  You only get a real benefit from it if you successfully alter your rebalancing timing or amounts to at least some extent to avoid losses that you otherwise would have incurred.  You could argue that this is market timing which we should not be attempting anyway.

This article is worth a read and some of the linked blogs
Is The Bucket Strategy A Cheap Gimmick? - The Retirement Manifesto

My takeaway was that the bucket strategy certainly won't provide you with a massive benefit in the long run, but if it helps you sleep at night that is already a good enough justification - probably I will use it at least to some extent.

NoMore

I can recommend the book Beyond the 4% rule by Abraham Okusanya (also the guy behind the popular timeline app).

He comes to the same conclusion that @Pat38493 does, that bucketing/cash buffers do not do anything and is more of a psychological blanket rather than an actual prevention of SORR. As Pat says if it helps you sleep at night then that is a valuable benefit to some.

GazzaBloom

This is excellent debate and sharing of ideas on a pertinent topic for those of us who are approaching the start od drawdown from a DC pot - much appreciated!

GazzaBloom

NoMore said:

I can recommend the book Beyond the 4% rule by Abraham Okusanya (also the guy behind the popular timeline app).

He comes to the same conclusion that @Pat38493 does, that bucketing/cash buffers do not do anything and is more of a psychological blanket rather than an actual prevention of SORR. As Pat says if it helps you sleep at night then that is a valuable benefit to some.

I use Timeline and agree with a lot of Abraham's thoughts and views but am always cautious of blindly following someone who professes drawdown strategies when they themselves are not in drawdown!

Paper testing and theories are one thing, cold hard experience of living through a plan is another thing entirely.

NoMore

GazzaBloom said:

NoMore said:

I can recommend the book Beyond the 4% rule by Abraham Okusanya (also the guy behind the popular timeline app).

He comes to the same conclusion that @Pat38493 does, that bucketing/cash buffers do not do anything and is more of a psychological blanket rather than an actual prevention of SORR. As Pat says if it helps you sleep at night then that is a valuable benefit to some.

I use Timeline and agree with a lot of Abraham's thoughts and views but am always cautious of blindly following someone who professes drawdown strategies when they themselves are not in drawdown!

Paper testing and theories are one thing, cold hard experience of living through a plan is another thing entirely.

Well Karsten Jeske of the Early Retirement Now - You can't afford not to retire early! is in drawdown and not using cash buffer/bucketing. He's the guy in Pats link arguing against them.

coastline

Does anybody want to analyse what they would have done over the last 5 years . I read many threads on SWR etc yet we don't get many real world examples. Use the simple portfolio below of global index and UK Gilt fund. Set an asset allocation. CPI is there on the chart as will be needed for annual increases. What I see straight away is the 2020 pandemic crash but it recovered quickly which is a bit unusual really. How is income to be withdrawn eg annually or monthly. ? If you'd taken your income annually then maybe the index would have recovered before any cash buffer was needed ?

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Bostonerimus1

I have a cash buffer for asset allocation and practicality. Right now getting 5% in a money market fund with zero risk is nice, even with inflation where it is and having cash on hand just makes living easier as I spend cash, and not index equity fund shares.

It’s true that Bengen didn’t use a cash buffer in his study, but we don’t have to stick with the OGs. 

There are two major factors in drawdown; how much; and where from. I’m not a fan of fixed  percentage plus inflation no matter what like Bengen, and prefer the feedback inherent in a Guyton Klinger sort of approach. I’m also fairly conservative when it comes to income generation so I like dividends and where appropriate annuities. I do also like growth and so I use broad index funds that will have a lot of large cap dividend type stocks and also some growth stocks. If I was relying on drawdown I might plan for 3.5% (with guardrails of maybe 4% and 3%) each year using dividends and interest and some capital gains. If in some years that didn’t work then I’d look to reduce spending before dipping into the cash buffer fund. The last resort would be eating into the capital that was generating the dividends.