Bucket drawdown strategy, what to put in medium term bucket?

Lostweekend

Hi to all you extremely helpful regulars.
I've been retired for a couple of years now and so far our spending has been taken from Mrs LW's P/T earnings, rental income and drawing down cash.  We have untouched SIPPs and ISAs.  I am 59 and my wife is 57, she will retire in 3 years with a DB income that just about replaces her current P/T earnings. We will receive full state pensions.
I am selling the rental at the moment.  It accounts for approx 35% of our investments, the rest is mainly global trackers and some cash/PBs. In effect the rental was the 'medium risk' part of the portfolio.
I want to utilise a version of the 3 bucket strategy.  1-5 years in cash & 10 years plus in global trackers; but what to do with the middle 6-10 years bucket?  All the articles etc. refer to bonds and bond funds for this, or wealth preservation funds. The global bond funds I currently have (just a little) have done terribly due to the fact that interest rates went up. I appreciate they might have a resurgence but what are other people using for their medium risk element?

leosayer

I used short-term gilt funds like iShares UK Gilt 0-5yr. The volatility is pretty low - they dropped around 7% in 2022 but hopefully should have a better long-term return than cash.

In spite of those drops, gilts are as close to a risk-free asset as you can get and I don't expect them to generate a real return - that's what equities are for.

I don't use the bucket method. I prefer to a number of years in cash and then a % split (currently 20/80) between short-term gilt fund and global equities index fund.

Lostweekend

Thank you @leosayer, I'll look at that fund

dunstonh

I want to utilise a version of the 3 bucket strategy.  1-5 years in cash & 10 years plus in global trackers; but what to do with the middle 6-10 years bucket? 

5 years cash is quite a long period.  2-3 years is more typical.   Especially if you are using income units which can replenish the cash.

The middle bucket often involves using short-term gilts/currency-hedged bonds and sticking to large-cap developed equities with a lower equity ratio compared to the long-term bucket.

Lostweekend

Thank you @dunstonh.  I was dithering on the length of the cash bucket.  

Are you referring to income units in bucket 2?  Also, are you referring to short term gilts funds or gilts themselves?  I. haven't yet owned any gilts funds and will be having to open a GIA for the first time (everything else is in SIPPs or ISAs) so I will have to get my head around income tax on these as well.

Linton

I do not agree with the waterfall approach whereby wealth flows from high to medium to low risk investments.  If that is what you are doing, I believe 2 buckets is enough.  Even with that I still think that simplistic operation of a waterfall model is not the best use of ones resources.

But I do run 3 buckets....

One of my 3  buckets is designed to generate ongoing high dividend/interest so the capital value is largely irrelevent.  It certainly can be regarded as significantly lower risk than the long term bucket although it is intended for the indefinite long term with very occasional top ups to ensure inflation matching.

The low risk bucket is a mixture of cash, PBs and low risk investments. At the moment the low risk investments are Wealth Protection funds but now that interest rates are higher bonds could well be more appropriate.  Note - actual bonds, not bond funds. It is intended that all expenditure is taken from the low risk bucket so there is no switching. All cash income is paid into the low risk bucket  - my current account being considered as just a part of the low risk bucket.

The growth bucket is 100 % equity with a 10+ year outlook and the aim of ensuring that the other portfolios increase with inflation over the long term.

zagfles

Low coupon gilts are quite useful in a GIA as there's no capital gains tax on gilts, you only pay tax on the interest. That's raw gilts rather than gilt funds (I can't really see the point of gilt funds, particularly in a GIA, usually higher charges and gains are taxable). 

Lostweekend

Thanks Linton.  I think I need to decide how I will draw cash from the buckets.  When SP kicks in (7 years for me, 9 for Mrs LW) we should be fine with the SP and wife's DB - although I need to plan for what happens if one of us dies - a possibility you mentioned in response to my post back in 2021!).

In the interim I was planning on in effect spending down and replenishing bucket 1. Initially the plan was just 2 buckets. Number 1 would be the cash equivalent of 7-9 years of spending. Bucket 2 was to be untouched to SP age and probably beyond so could be left to grow without worries because of the cash drawdown.  

I have now been thinking I should think of a medium term bucket, hence the question about what to put in.  I have only really bought global equity and global bond funds in the past so wealth preservation, high dividend and raw gilts are a whole new world to me.

Really appreciate your input.

Lostweekend

Thank you Zagfles.  I have been researching raw gilts.  I noted the capital gains benefits but it's taking me a while to understand the practicalities of actually buying in.  I think the current availability of highish interest rates on cash deposits has given me a bit of a disincentive to take this further. It will come to a head when the house sells in a few months. 

dunstonh

Are you referring to income units in bucket 2?  Also, are you referring to short term gilts funds or gilts themselves?  I. haven't yet owned any gilts funds and will be having to open a GIA for the first time (everything else is in SIPPs or ISAs) so I will have to get my head around income tax on these as well.

I use income units across the board.   

The shorter the term invested, the greater the preference for short-term gilts and short-term bonds.

I tend to run a cash float of 24 months, a short-term bucket for 3 years and the remainder in the standard portfolio  (plus any planned lump sum withdrawals would fall in the appropriate one).   Because I use income units, the cash float length tends to last closer to 4 years.   

I have looked at various bucketing strategies (and number of buckets), and there is insufficient data to say that any method is better than another.   However, research has shown that statistically, bucketing will reduce your long-term returns on the vast majority of occasions.    You don't use bucketing to make the most money.  You use it so smooth out the volatility and avoid cashing in units during most negative periods (ie. refloat the cash pot after positive periods but do not refloat during negative periods).

Linton

dunstonh said:

Are you referring to income units in bucket 2?  Also, are you referring to short term gilts funds or gilts themselves?  I. haven't yet owned any gilts funds and will be having to open a GIA for the first time (everything else is in SIPPs or ISAs) so I will have to get my head around income tax on these as well.

I use income units across the board.   

The shorter the term invested, the greater the preference for short-term gilts and short-term bonds.

I tend to run a cash float of 24 months, a short-term bucket for 3 years and the remainder in the standard portfolio  (plus any planned lump sum withdrawals would fall in the appropriate one).   Because I use income units, the cash float length tends to last closer to 4 years.   

I have looked at various bucketing strategies (and number of buckets), and there is insufficient data to say that any method is better than another.   However, research has shown that statistically, bucketing will reduce your long-term returns on the vast majority of occasions.    You don't use bucketing to make the most money.  You use it so smooth out the volatility and avoid cashing in units during most negative periods (ie. refloat the cash pot after positive periods but do not refloat during negative periods).

Interesting - I assume you are not retired and therefore your need for a steady income from your investments is less than would otherwise be the case.

I agree  bucketing is much less desirable if you are focussing on maximum long lerm return rather than maximum steady medium term income.  Though of course the more stable and secure the medium term income the higher you can push the risk in the long term bucket. 

Furthermore a large short term bucket  gives you more flexibility in your expenditure as large one-offs can generally be paid off without considering the possible long term effects.