My Decumulation Strategy - Please Criticise.

Pat38493

This is now getting serious and I am in the process of rebalancing my portfolio to prepare for pulling the trigger, with the help from this board and a few other very helpful sources for which I am grateful.

Between us we have a combination of DB and DC with spouse being 100% DB already in payment.  I am 55.5.

Originally I was planning to put my DB pension into payment at age 56 in line with my main planning scenarios, but I am now proposing a more flexible approach which seeks to balance SORR mitigations versus maximising upside potential versus maximising long term guaranteed income.

Even with putting the DB pension into payment at age 56, I estimate that from the time we are both 67 (I am younger) about 97% of our spending plan will be covered by guaranteed income.

My new flexible plan is as follows for probably the first 3-5 years:

• Carry at least 6-9 rolling months of cash at all times plus the value of any short term capital spend (which will mainly be inside pension wrappers at least after the first year).
• I have already ordered a new car and set money aside for caravan that we decided we want in retirement into separate pots (just bagged the car on 50% down and 0% finance over 3 years with 9K discount yipeee).
• As long as markets are performing well or at least reasonable, I will take ongoing spending from the pension after using any existing savings that are not in the pension part.  This will be mainly within the 20% band but might slip a little bit into 40% here and there in the first years due to having a car loan at 0% and mortgage still open.
• If there is a markets crash, I will pull the trigger on my DB pension with PCLS (commutation about 22 on the last quote).  I am assuming 6-9 months to put DB pension into payment hence the 6-9 months float.
• After market crash I will continue to draw from equity and bonds but I will revert to a VPW type approach, so broadly speaking I will sell the number of units I would have sold without the crash.  Using this plus the PCLS plus the DB pension being in payment, I estimate I could continue damage mitigation for 3-5 years.
• Non cash assets will be held in global equity and bond ETF accumulation trackers with about 70-80% in equities, using a cash flow ladder spreadsheet for 3 years and beyond.
• By the time I reach about 57-58, that is the crossover point where our guaranteed income at age 67 will be more than our current spend projection with my DB in payment.
• I have already overpaid the mortgage by about 65% but I am keeping the rest open pending to see what future interest rates are doing and ability to use PCLS to pay it off, and pending any tax regime changes – again I will take a flexible approach.

In any event, I foresee putting the DB pension into payment within maximum 4 to 5 years in order to have upside potential on the investments and avoid having “too much” non flexible income! (a first world problem if ever there was one).

All this is completely ignoring possible downsize as I am hoping to use any proceeds of that eventually to help the kids one way or another.

I have life insurance in place for early death of one or other spouse already but will need review after about 5 years as one of them is decreasing term.

What do you all think?

NoMore

• As long as markets are performing well or at least reasonable,

What's your definition of that ?

Pat38493

NoMore said:

• As long as markets are performing well or at least reasonable,

What's your definition of that ?

Funnily enough I was contemplating this as being an open point after I made the post - I need to have a definition of when I will decide a market crash has occurred.

This is actually a tricky one and I am open to ideas from those who know more about the typical pattern.

My plan obviously requires that I decide within a short time (let’s say one month) that a crash is occurring.

My first gambit - markets fell 20% or more within the space of a month or less?  How does that sound?  We should note that putting my DB pension into payment earlier is not really a big deal as my original plan was going to do that anyway - I am just seeking an opportunity to prolong it.

I’m open to other ideas though.

Linton

Pat38493 said:

NoMore said:

• As long as markets are performing well or at least reasonable,

What's your definition of that ?

Funnily enough I was contemplating this as being an open point after I made the post - I need to have a definition of when I will decide a market crash has occurred.

This is actually a tricky one and I am open to ideas from those who know more about the typical pattern.

My plan obviously requires that I decide within a short time (let’s say one month) that a crash is occurring.

My first gambit - markets fell 20% or more within the space of a month or less?  How does that sound?  We should note that putting my DB pension into payment earlier is not really a big deal as my original plan was going to do that anyway - I am just seeking an opportunity to prolong it.

I’m open to other ideas though.

Just as problematic is misjudging the end of a crash. If you get it wrong you cou lose the benefits of the recovery.

My answer based on nearly 20 years experience is to ensure that 5-10 years of essential or important expenditure is always taken from  safer investments. So you can ignore short term crashes in the riskier long term part of your portfolio with equanimity enabling you to use higher equity % than would otherwise be the case.

Pat38493

Linton said:

Pat38493 said:

NoMore said:

• As long as markets are performing well or at least reasonable,

What's your definition of that ?

Funnily enough I was contemplating this as being an open point after I made the post - I need to have a definition of when I will decide a market crash has occurred.

This is actually a tricky one and I am open to ideas from those who know more about the typical pattern.

My plan obviously requires that I decide within a short time (let’s say one month) that a crash is occurring.

My first gambit - markets fell 20% or more within the space of a month or less?  How does that sound?  We should note that putting my DB pension into payment earlier is not really a big deal as my original plan was going to do that anyway - I am just seeking an opportunity to prolong it.

I’m open to other ideas though.

Just as problematic is misjudging the end of a crash. If you get it wrong you cou lose the benefits of the recovery.

My answer based on nearly 20 years experience is to ensure that 5-10 years of essential or important expenditure is always taken from  safer investments. So you can ignore short term crashes in the riskier long term part of your portfolio with equanimity enabling you to use higher equity % than would otherwise be the case.

Yes but based on my approach outlined, I don’t really need to know when the crash ends - I have a finite cash amount and I will continue to take lower variable percent withdrawals, extending the period until either a) I run out of cash or b) the withdrawals naturally come back to the prior level as markets recover.  If I can do that for 3-5 years my pot should survive at least until SPA which is the #1 objective.

I would not be changing my investment strategy in terms of bond/equity mix.  

The judgement about when to activate DB might need to be enhanced with some either or so
- Major market crash starts or
- Nominal returns negative at annual review or
- Two years in a row where nominal returns are positive but target returns of inflation +2% are not achieved.

obviously no such rule will give a perfect result in hindsight but having some kind of rule seems better than just putting a finger in the air.

I guess what I am proposing is a mish mash of the Boggleheads VPW approach and cash flow modelling. 

FIREmenow

Will lots of people be triggering their DB pensions in a crash? Wondering if 6-9 months to access your lump sum is realistic? Would be interesting to know what has happened in the past, especially if unreduced early retirement is offered as part of redundancies.

I wouldn't feel comfortable with so little rolling cash with a mortgage and car finance. 

Reading about seasoned retired investors not having enough cash available in the 2008 crash and not knowing when it would bottom out has stayed with me.

Pat38493

FIREmenow said:

Will lots of people be triggering their DB pensions in a crash? Wondering if 6-9 months to access your lump sum is realistic? Would be interesting to know what has happened in the past, especially if unreduced early retirement is offered as part of redundancies.

I wouldn't feel comfortable with so little rolling cash with a mortgage and car finance. 

Reading about seasoned retired investors not having enough cash available in the 2008 crash and not knowing when it would bottom out has stayed with me.

Good question - my DB administrator says you can request a quote from 6 months before proposed benefit date, which they usually supplied within 4-6 weeks so far, and then you have to return the forms by 3 months before the date.  So they appear to be working to a 4-6 month target.  

Car finance is on 0% over 3 years.  

MK62

If you stress test your plan with various market "crash" scenarios, you'll soon get an idea of the level of downturn your main plan can cope with, and at least an idea of the level of downturn beyond which you'd then need to take mitigating action.

kempiejon

I was investing in the financial crisis of 2008. I was focused on the UK at the time and although my memory is sketchy I checked some spreadsheets and it looks like I lost around 50% of value from a high in Summer 2007 to trough Spring 2009. By about 2013 my investment had totally recovered but by spring 2011 it was looking OK again. I continued to invest throughout. Covid investments fell a similar amount that was around 2 years peak to trough. I'm doing my sums based on holding 3 years of vital spending as premium bonds, cash, fixed interest with rolling redemption dates and a smidge in gold sovereigns. As I approach state pension age I will dial back the hold as SP is going to replace part of that safe cash holding.
With that strategy I do not hold a percentage in cash/bonds but an absolute amount. Of course I can cut my coat according to my cloth. Cheap, free credit has never been a problem for me so I could squeeze another 12 months or more before selling distress assets.

Pat38493

kempiejon said:

I was investing in the financial crisis of 2008. I was focused on the UK at the time and although my memory is sketchy I checked some spreadsheets and it looks like I lost around 50% of value from a high in Summer 2007 to trough Spring 2009. By about 2013 my investment had totally recovered but by spring 2011 it was looking OK again. I continued to invest throughout. Covid investments fell a similar amount that was around 2 years peak to trough. I'm doing my sums based on holding 3 years of vital spending as premium bonds, cash, fixed interest with rolling redemption dates and a smidge in gold sovereigns. As I approach state pension age I will dial back the hold as SP is going to replace part of that safe cash holding.
With that strategy I do not hold a percentage in cash/bonds but an absolute amount. Of course I can cut my coat according to my cloth. Cheap, free credit has never been a problem for me so I could squeeze another 12 months or more before selling distress assets.

Thanks for the hints.  

Those examples tend to illustrate the concerns I have with blanket statements like - have a 2 year cash bucket and if markets are bad just stop withdrawing until the market gets better.  There were quite a few times in the past including the examples you quote, where this would have led to your cash bucket running out exactly at the bottom of the market.  I'm also not convinced about the idea of just a larger bucket as the ERN blogs all seemed to indicate that this won't help much unless you have 7-10 years which will kill you on the lost growth.

This is why I thought to have the option of moving to a VPW type strategy where I would still have a smaller cash bucket, but still make reduced withdrawals in absolute terms from the portfolio.  This also means I am not trying to time the market and guess when it will start to recover as it will be driven by VPW until it goes above a certain limit.

I also have plenty of scope to cut spending if really needed as my spend plan includes a lot of leisure and luxury stuff.  My absolute requirement after year 3 is less than half of my planned spend.

So if growth in in excess of what's needed, I would draw up to the 20% tax limit in the first years and only more if needed for spending plan.  If not, I would use VPW and supplement with cash/PCLS/reduced withdrawals.

Also the rule I mentioned about deciding when to put the DB into payment could be made more conservative.  For example:
- Put DB pension into payment as soon as the returns in any one annual review are less than target (much more likely to happen than my proposal above).

According to all the software and modelling I've done, including stress testing using Timeline, my plan should work with about 4% chance of having to take a small spend 5% reduction after the first 5 years.

The only thing that sometimes makes me feel uncomfortable is that my spending is very front loaded - a big chunk of my spend is in the first 3 years as I have a few outgoings that will continue for the next 2-3 years.  However if both Timeline and Voyant Go and various spreadsheets say it's viable, maybe I am just too worried about it.

NoMore

Are you not just starting to overthink all this, you said that at age 56, putting the DB pension into payment will cover 97% of your expenses, you also say you have plenty of scope to cut spending if really needed as your spend plan includes a lot of leisure and luxury stuff.  

So just put the DB pension into payment and don't worry so much about market performance.

It seems to me you are just trying to get a perfect plan, which is impossible, just use a plan that appears to work very well simply and easily.