Preparing portfolio for retirement

tigerspill

tacpot12 said:

When I retired, the principle change I had to make was to switch from accumulations funds to funds paying an income, as I wanted to drawn down the natural yield rather that sell assets. However, by asset allocation didn't change at all. I still have a diversified portfolio with about 25% in bonds and 60% in equities and 5% in commercial property; two thirds of the equities are UK-based. The 'funds' are a mixture of Investment Trusts (IT) and EFTs, with a heavy bias to towards ITs. 

I retired at 53, and used savings to get me to 55, when I could start drawing down. I made the above change at 54 to allow 12 months of income to accumulate in my SIPP (a) to provide the theory, and (b) to have a cash buffer in case the income dropped at all. I left about 10% of my SIPP invested in accumulation funds, as I didn't need to convert all the assets to produce the income I needed and I wanted to try to increase the potential for the portfolio to gain in capital value over the rest of my life. From my perspective, even at age 55, I was investing for a 40+ year period (my parents are in their late eighties).  

I've been pleased with the approach; even over the pandemic, the income never really fell and I have now reinvested about a third of the cash buffer to increase my income to address the unexpected inflation, rather than selling any of my accumulation funds. 

This is interesting as I regularly go the dilema of whether to move from acc funds to inc.  I have stuck with acc currently as that is what I have.
What made you opt for moving to income funds?

tigerspill

Linton said:

The next tranch is a well diversified income portfolio targetted at a 6% return on initial cost.  The funds are globally diversified and produce dividends from equity income funds and fixed income from higher risk bonds, reits, infrastructure etc.  Since in the short/medium term dividends and fixed interest are much more stable in £ terms than capital value, equity crashes can again be largely ignored.

Thanks for this.  Would be happy to list what income investment you are using to achieve this?  

I like the idea of having some funds that are not subject to the fluctuation of the unit price.

Linton

Aged said:

Linton said:

My strategy is to put aside 40-50% of liquid assets as a 100% equity portfolio primarily intended to cover long term inflation for the rest of the portfolio. It is based on an investment timeframe of >10 years and so short/medium term crashes can be largely ignored.

The next tranch is a well diversified income portfolio targetted at a 6% return on initial cost.  The funds are globally diversified and produce dividends from equity income funds and fixed income from higher risk bonds, reits, infrastructure etc.  Since in the short/medium term dividends and fixed interest are much more stable in £ terms than capital value, equity crashes can again be largely ignored.

Finally there is a 20% of liquid assets tranch intended as a buffer and to provide easily available cash for major one-off expenses.  It is based on zero low risk PBs and low risk Wealth Preservation funds where of course again equity volatility is not a concern..  WP funds were essential whilst interest rates were low.  Since they have risen significantly I am considering moving to individual short/medium term gilts (bond funds are not a satisfactory alternative), but have not yet decided how best to do that.

Thanks for the detailed reply Linton! Your approach makes lots of sense and you obviously know what you are doing. I'm not quite so experienced or confident, so keeping things as simple as possible seems like the best way forward for me to stop me from stressing over my finances. I am a very cautious investor by nature, but I realise that some risk is required in order to achieve growth and I'm OK with that. 

I have been considering gilts but my current platform does not accommodate them. I am however thinking of changing platforms so gilts could become an option for me in the near future. I will hang on to my holdings in WP funds for a while yet in the hope that they will prove their worth. 

When you speak of 'higher risk bonds' in your middle tranche, do you mean individual bonds, or corporate bond funds?

I mean funds based on corporate bonds or other forms of commercial fixed interest.  Here one is investing for a guaranteed stable income and as with dividend investments the capital value is relatively unimportant.

Gilt bond funds have the disadvantage that although one normally buys gilts to provide long term capital security that benefit only applies if you hold them to maturity at which point the capital value is absolutely guaranteed.  Between issue and maturity the price can be quite volatile.  When you sell a medium or long term bond fund most of the underlying holdings will be some way from maturity.

In any case buying approrpriate individual corporate bonds is much more difficult than buying gilt bonds as there is a much smaller range on the open market.

Aged

nicknameless said:

OP I think you are talking about comfort with volatility not risk of running out of money.

Hi. No I actually do worry about running out of money. Or I did until recently, when I carried out a fairly basic exercise which satisfied me that barring complete world catastophes, I should be OK!

JohnWinder

funds that are not subject to the fluctuation of the unit price.

That's the definition of zero risk, by the usual measure of volatility. What other than cash has zero risk?

nicknameless

Aged said:

nicknameless said:

OP I think you are talking about comfort with volatility not risk of running out of money.

Hi. No I actually do worry about running out of money. Or I did until recently, when I carried out a fairly basic exercise which satisfied me that barring complete world catastophes, I should be OK!

Not sure you've understood me.  You talked about not wanting to take too much risk in your OP.  Risk of what?

Volatility does not necessarily equal risk if the risk you are talking about is lesser returns and therefore longevity of funds you are spending from.

Aged

nicknameless said:

Aged said:

nicknameless said:

OP I think you are talking about comfort with volatility not risk of running out of money.

Hi. No I actually do worry about running out of money. Or I did until recently, when I carried out a fairly basic exercise which satisfied me that barring complete world catastophes, I should be OK!

Not sure you've understood me.  You talked about not wanting to take too much risk in your OP.  Risk of what?

Volatility does not necessarily equal risk if the risk you are talking about is lesser returns and therefore longevity of funds you are spending from.

When I spoke of not wanting to take too much 'risk', I meant in the general sense of the word ie higher risk investments generate higher returns / lower risk investments result in lower returns. I understand what volatility is and I'm happy to live with that over the longer term, but I'm looking for a bit more security for the part of my portfolio that used to be in bonds, which felt relatively safe until it wasn't!