My retirement portfolio...11 months from drawdown

GazzaBloom

MK62 said:

GazzaBloom said:

I don't fear market crashes, we've been through 2008, Covid and the 2022 inflation grind since I have been accumulating, I don't like them or enjoy them but am able to hold firm and not panic. Especially with 3-5 years worth of cash on hand.

.....and in the accumulation years market crashes are more of an opportunity than something to be feared. However, the decumulation phase is a different beast.......your cash buffer will help there if a such a crash occurs......your main issue right now is likely to be how to get to 3-5 years in cash......what to sell.....and when to sell it.

It's not an issue, it's in the plan. I should get to 3 years cash by all remaining salary sacrifice pension contributions going to 100% cash (currently £5,260 per month) and the accumulating 5.25% interest. According to my calcs, I will have £95K by April 2025 without selling anything. (yes, assuming rates remain at 5.25% but they will drop slowly, if they do indeed fall as widely expected so not a major impact)

I may sell some funds to add more if inclined at that point to move it up to 5 years worth, we'll see.

Cus

GazzaBloom said:

Cus said:

Sorry haven't read all the replies but if you have reached your number, then why would you want to risk the pot with high risk equities? Do you need more? 

How would you suggest the portfolio is restructured to keep up with inflation and provide through to age 95/100?

The way I see my portfolio, is this:

Cash - Short term - risk off covering a minimum of 3 years expenses if required (may extend to 5 years), will simply rebalance to a percentage f equities not dropped significantly in any one year, thereby increasing the amount of cash as a percentage. If equities crash 20%+ then I will not rebalance but draw from the cash only until equities start to recover. 

US & Global Equity funds - the meat of the portfolio to generate the total return growth to sustain retirement medium/long term, this capital needs to work hard and I expect the value to go up and down 10/20/30%+

Tech Fund - currently 18% or so, (will be less of portfolio percentage at point of commencing drawdown as the cash amount increases with contributions this year), this is in effect a legacy "bucket" that will never be touched (hopefully) and grow over the long term until death to pass on as inheritance. Expected to be very volatile and may drop 50%+ in the worst of scenarios but has hopefully 30+ years to do its thing.

For every year that goes by without a major market crash I step one year closer to state pensions and the 3-5 years worth of cash rolls forward a year. When our full SPs are in payment the drawdown from investment portfolio may drop to just 1%-2% of portfolio value. At that point we could switch portfolio around.

I don't fear market crashes, we've been through 2008, Covid and the 2022 inflation grind since I have been accumulating, I don't like them or enjoy them but am able to hold firm and not panic. Especially with 3-5 years worth of cash on hand.

There is also the consideration that I may want to work part time if I feel inclined for a few more years.  

I suppose the only true way to restructure the portfolio to protect for inflation until age 100 is to increase the portfolio size by working longer, and choose safe low risk investments.
No amount of spreadsheets, historical scenario analysis, modelling will really mean anything if the future produces a result not seen before.  US equities /tech could drop in price by 50% and stay there for 30 years for all we know.
However, we only have one life and if you are comfortable with your design then go for it. If everyone waited until they had enough saved for an annuity then we would all work longer in misery.
I guess I would just be absolutely sure your risk appetite is really where it needs to be, don't be seduced by 'the model says' thoughts and you would have to go through a major crash to see of it really holds. Best of luck

Bostonerimus1

The cash that the OP has will help to survive any down turns and mitigate sequence of returns risk, but 5% interest won't last...or will it? The Old Scientist suggests a term annuity or a Gilt bond ladder until the SPs start which I like, another ladder to consider is a saving account ladder lasting 10 years to lock in today's interest rates. 

The OP's heavy US concentration raises some exchange rate worries and US tech is volatile and I think they are taking on unnecessary risk and any projections for return from the tech sector don't rest on vast amounts of historical data. I would at least think about dividends as well as growth. Again it's about diversity and not concentrating your income sources.

Pat38493

GazzaBloom said:

@Pat38493 I see Timeline have released an update and made some updates to the Clients page. In doing so they appear to have removed the ability to delete plans from a client. I use a Test plan to model alternative scenarios/portfolios but it looks like we can keep adding new ones or rename existing but not delete them anymore.

I have reported it as a bug, unless you can see where plans can be deleted?

Yes I noticed.  I have generally avoided reporting things to Timeline in order not to draw attention to the fact that I am still using a demo 3 client version that is no longe available to new sign ups.  I would actually be prepared to pay a decent subscription to use Timeline planning but the option is not available for individual investors.  I understand that the Meaningful Money guy has been lobbying the owner to get such an option as it's available with Voyant Go.

Probably they will reintroduce the ability to delete scenarios soon enough - I think it was missing for a good while in the past before they put it in as well.

One other thing to add to Old Scientists point is that you will not be testing the 2000-2010 Dot com/banks scenario as it is too late to fall into the length of plan you will be simulating.

The only way to partially test that in Timeline is to shorten your longevity timeframe and then you will at least know if the money ran out in that shorter timeframe.  From the ERN simultations that timeframe was almost as bad as the 1920s and 1970s in some ways.

Timeline can also be slightly flaky in the results - e.g. sometimes you "randomly" see a small shortfall on the cashflow chart in one or other year even though funds were available for no apparent reason, but it's usually only a few thousand.

OldScientist

GazzaBloom said:

OldScientist said:

GazzaBloom said:

I retire in December this year and commence drawdown in April 2025.

Mortgage & debt free.

I have a DB pension paying out £6,227 a year of which 50% will increase with CPI capped at 5%.

Age 57, I will be 58 when drawdown commences, wife already retired, age 54. We have full state pensions due at age 67.

We need £33,078 per year in today's money for base living expenses which includes a £12K discretionary amount for entertainment, UK travel, days out etc.

Current portfolio in addition to the DB pension is

My DC Pension (0.16% AMC):

Blackrock US Equity Index:               £164,893.82 (30.45% of portfolio)

HSBC Islamic Global Equity Index:   £166,531.93 (30.76% of portfolio)

Legal & General Global Tech Index:   £85,683.90 (15.83% of portfolio)

Cash:                                                  £36,396.23 (earning 5.25% interest) (6.72% of portfolio)

Wife’s DC pension (0.15% AMC):

Vanguard S&P 500 ETF:                    £61,800.28 (11.41% of portfolio)

S&S ISA:

Legal & General Global Tech Index:  £12,893.63 (2.38% of portfolio)

Cash ISA:                                          £13,235.30 (earning 2.65%) (2.44% of portfolio)

Total:                                                 £541,435.09

Remaining contributions before drawdown starts is £42,082 cash into my DC pension and £2,000 into the cash ISA. We should be 83% equities funds / 17% cash or thereabouts at drawdown, or I will rebalance to around that.

Timeline and FiCalc shows 100% success rate when back tested using some 5% adjustment dynamic spending rules for first 15 years. I have added some one-off large purchases on a new car & home improvements into these as well but they are discretionary and not urgent.

I have a high risk tolerance and the heavy weighting to US stocks is intentional. Don't like or want bonds so a barbell of equity index funds and cash is my preferred position.

Anyone have any thoughts on this position, noting the above preferences? 

Congratulations on getting to the homeward stretch! Retirement is definitely a lovely a great place to be (over 4 years for me)...

Two comments:

Comment 1
Noting that from what you've said your total expenditure is £33k consisting of a 'core' expenditure of about £21k and your 'discretionary' about £12k.

Guaranteed income.
You'll have £6k now (assuming you take the Db pension immediately, while 50% is capped at 5% CPI, is the other 50% fully index linked?)
9 years after retirement you will have in real terms £11.5k+£6k=£17.5k (assuming the CPI cap is not triggered and state pension continues to rise by inflation)
12 years after retirement you will have in real terms £11.5k+£11.5k+6k=£29k

In other words, after 12 years all your core expenditure will be covered (so the portfolio will only be needed for part of your discretionary expenditure).
From 9-12 years, you have just over 80% of your core expenditure covered and just over 50% of your total expenditure.
In the first 9 years, you have about 30% of your core expenditure covered and just under 20% of your total.

It is those first 9 years where the portfolio will need to supply at least 21k-6k=15k+discretionary where there is considerable market risk. For example, in the event of a 50% drop in portfolio value that then persists (i.e. something not quite as bad as the 'Japan scenario') would leave you drawing at least 6% of your portfolio balance for those 9 years. I also note that under the Japan scenario, GK would drop your portfolio income by 5% each year (plus whatever foregoing inflation adjustment when the portfolio first dropped), i.e., potentially by 45% over 9 years assuming the portfolio was not exhausted (I note that backtesting in Timeline and FIcalc will not test this scenario since it hasn't, yet(?) occurred in quite that way in the US, UK, or with an international portfolio). 

Two potential solutions:
1) Notwithstanding your aversion to bonds (I assume more to bond funds rather than bonds held to maturity) construction of an inflation linked gilt ladder to provide £10k per year for 9 years starting in a year's time would currently cost about £90k (https://lategenxer.streamlit.app/Gilt_Ladder ) with an 11% payout rate.

2) A term annuity to cover the same period (preferably RPI protected). You'd have to find out what payout rates are available.


Comment 2
Not pleasant to think about, but have you modelled the outcomes if one of you dies early (you'll lose at least one state pension and, potentially, the DB pension, but core expenditure will be more than half)?

Some great points there and a few things to consider. thanks. What's the real likelihood of a 50% drop in year 1 that persists for a decade? That's pretty doomsday...but still a possibility.

50% on my DB pension is payable to spouse  but yes, losing that 2nd SP is something to mull over, one of us going before the other early doors isn't a nice thing to think about.

Historically the probability of a 50% drop is relatively low (according to https://monevator.com/bear-market-recovery/ there have been 5 UK bear markets with a nominal drop of more than 40%; the time to recovery varied but the longest was, in real terms 11 years). Pfau has a list of historical drops for various countries (and world index) at http://wpfau.blogspot.com/2014/01/greatest-hits.html?m=1 that makes gruesome reading.

Another stress test (possible in FIcalc, but not sure whether it is possible in Timeline) is to increase the investment fees by 1% or 2% - effectively, this simulates a reduction in historical real returns by the same amount (i.e., 1 or 2 percentage points) - this could be returns being lower, inflation being higher, or a combination of both.

FWIW, running your scenario in my own retirement planning program (UK based historical data) with a £560k portfolio, 80% stocks and 20% cash (MMF/bills), a 40 year planning horizon and a fixed overall target income of £33k (i.e., no flexibility) gave no failures (i.e., portfolio exhaustion) until I increased the 'fees' to 1%. After adding a 9-year ladder with income £10k (and removing £90k from the portfolio), there were no failures in the stress test until 'fees' reached 1.5%, so some improvement.

Not nice to contemplate at all - although our circumstances are different (possibly we have too much guaranteed income!), one thing I did add to our plan were two insurance policies on my life (one fixed term and one decreasing term) since losing 50% of my DB income would be a substantial hit for my OH before receipt of SP.

Pat38493

Bostonerimus1 said:

The cash that the OP has will help to survive any down turns and mitigate sequence of returns risk, but 5% interest won't last...or will it? The Old Scientist suggests a term annuity or a Gilt bond ladder until the SPs start which I like, another ladder to consider is a saving account ladder lasting 10 years to lock in today's interest rates. 

The OP's heavy US concentration raises some exchange rate worries and US tech is volatile and I think they are taking on unnecessary risk and any projections for return from the tech sector don't rest on vast amounts of historical data. I would at least think about dividends as well as growth. Again it's about diversity and not concentrating your income sources.

Well I guess only the OP can decide whether they are taking an unnecessary risk if the alternative was to work longer.  It might be that working longer caused so much stress that they died earlier, but most people would rather live on a reduced spending than not be here at all.  I was at a funeral this morning talking to someone who was forced retired ealrier than he wanted and he said that whilst he had just about enough theoretically to fund retirement, he had no trouble at all finding what I believe they call "side hustles" to get extra pocket money here and there if needed, especially when we are talking about retiring in mid 50s here.

Bostonerimus1

Pat38493 said:

Bostonerimus1 said:

The cash that the OP has will help to survive any down turns and mitigate sequence of returns risk, but 5% interest won't last...or will it? The Old Scientist suggests a term annuity or a Gilt bond ladder until the SPs start which I like, another ladder to consider is a saving account ladder lasting 10 years to lock in today's interest rates. 

The OP's heavy US concentration raises some exchange rate worries and US tech is volatile and I think they are taking on unnecessary risk and any projections for return from the tech sector don't rest on vast amounts of historical data. I would at least think about dividends as well as growth. Again it's about diversity and not concentrating your income sources.

Well I guess only the OP can decide whether they are taking an unnecessary risk if the alternative was to work longer.  It might be that working longer caused so much stress that they died earlier, but most people would rather live on a reduced spending than not be here at all.  I was at a funeral this morning talking to someone who was forced retired ealrier than he wanted and he said that whilst he had just about enough theoretically to fund retirement, he had no trouble at all finding what I believe they call "side hustles" to get extra pocket money here and there if needed, especially when we are talking about retiring in mid 50s here.

My thought was that the OP's portfolio is riskier than necessary to meet their retirement objectives and that by adding something like a fixed term annuity, saving account ladder or diversifying the equities they might be able to sleep a little better through the inevitable market down turns which is an important retirement planning parameter. 

GazzaBloom

Thanks all for the comments plenty to think about as I approach the next stage

GazzaBloom

Exodi said:

You're obviously aware but it's a very high US (and techn weighting) - nearly 82% of your overall portfolio.

Of course the US has performed extremely well for a long time (and long may it continue) but having all of your eggs in one basket could expose you to some pretty violent swings (but then, I think we'd all be suffering if Apple, Microsoft, Google, Amazon, etc dropped)!

Just a point of note that 40% of the S&P500 companies revenues are generated outside the US so my portfolio is more internationally diversified than your breakdown suggests. 

Bostonerimus1

GazzaBloom said:

Exodi said:

You're obviously aware but it's a very high US (and techn weighting) - nearly 82% of your overall portfolio.

Of course the US has performed extremely well for a long time (and long may it continue) but having all of your eggs in one basket could expose you to some pretty violent swings (but then, I think we'd all be suffering if Apple, Microsoft, Google, Amazon, etc dropped)!

Just a point of note that 40% of the S&P500 companies revenues are generated outside the US so my portfolio is more internationally diversified than your breakdown suggests. 

but you still have a high US bias and exchange rate fluctuations would worry me.