Ready made portfolios for generating an income in retirement

Audaxer

zagfles said:

Linton said:

The pathways seem to be focussed on choosing a portfolio, but in my view that is a second level concern. The primary difficulty is rather one of financial management.

In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way.  Very little ongoing management is needed

Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor  market performance which can eat into the core investments you need to generate future income and meet future inflation.

Different people can deal with this issue in different ways. Some may believe that with Safe Withdrawal Rates they will be fine regardless, others will be happy to cut expenditure if required, and many others plan to hold a significant buffer to tide themselves over during the bad times. Portfolio allocations must be based on what approach to market volatility is chosen. Will this be specified by the Pathway providers?

But a short term (few years) cash buffer I think has been proved to be nothing more than a comfort blanket. 

If I was looking for income of say £4k per year rising with inflation from £112k, I'd rather have £100k invested with a £12k cash buffer, than have the whole £112k invested. If the whole was £112k invested, you would only need a drawdown rate of 3.57% rather than 4% for the same £4k per year. I think both strategies would probably work, but for cautious investors I think the cash buffer is a good option.

Linton

zagfles said:

Linton said:

The pathways seem to be focussed on choosing a portfolio, but in my view that is a second level concern. The primary difficulty is rather one of financial management.

In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way.  Very little ongoing management is needed

Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor  market performance which can eat into the core investments you need to generate future income and meet future inflation.

Different people can deal with this issue in different ways. Some may believe that with Safe Withdrawal Rates they will be fine regardless, others will be happy to cut expenditure if required, and many others plan to hold a significant buffer to tide themselves over during the bad times. Portfolio allocations must be based on what approach to market volatility is chosen. Will this be specified by the Pathway providers?

There is no difference between short term market timing during accumulation and decumulation. It's just the same to say "I won't invest this month because the markets are high" as saying "I won't sell this month because the markets are low". Short term market timing is generally a mugs game whenever it's done. Longer term strategies such as "prime harvesting" may have something in them. But a short term (few years) cash buffer I think has been proved to be nothing more than a comfort blanket. 

Of course, a downturn will always hit you harder the more you have, but that applies equally to late accumulation as early decumulation. There may be a problem if your choice of retirement date is affected eg by a bubble in late accumulation. 

I am unclear what your comments on switching in and out of buffers has to do with my point which was that you cannot sensibly chose a retirement portfolio unless you know what your drawdown strategy is.  My post did not advocate or condemn any particular drawdown strategy, but merely pointed out that there are several.

I personally do not support switching in and out of buffers because of the problems of market timing, but some people do. My own strategy is to take all spending money from a large buffer which is continually replenished by income from annuities, SP, and income funds. I would never take spending money from growth investments anyway so don’t need to change the approach during a crash.

It seems strange to derisk when approaching retirement but not to derisk to ensure coverage  of the next 5 years of spending requirements whilst in retirement.

what is your planned strategy or actual one if retired?

zagfles

Linton said:

zagfles said:

Linton said:

The pathways seem to be focussed on choosing a portfolio, but in my view that is a second level concern. The primary difficulty is rather one of financial management.

In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way.  Very little ongoing management is needed

Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor  market performance which can eat into the core investments you need to generate future income and meet future inflation.

Different people can deal with this issue in different ways. Some may believe that with Safe Withdrawal Rates they will be fine regardless, others will be happy to cut expenditure if required, and many others plan to hold a significant buffer to tide themselves over during the bad times. Portfolio allocations must be based on what approach to market volatility is chosen. Will this be specified by the Pathway providers?

There is no difference between short term market timing during accumulation and decumulation. It's just the same to say "I won't invest this month because the markets are high" as saying "I won't sell this month because the markets are low". Short term market timing is generally a mugs game whenever it's done. Longer term strategies such as "prime harvesting" may have something in them. But a short term (few years) cash buffer I think has been proved to be nothing more than a comfort blanket. 

Of course, a downturn will always hit you harder the more you have, but that applies equally to late accumulation as early decumulation. There may be a problem if your choice of retirement date is affected eg by a bubble in late accumulation. 

I am unclear what your comments on switching in and out of buffers has to do with my point which was that you cannot sensibly chose a retirement portfolio unless you know what your drawdown strategy is.  My post did not advocate or condemn any particular drawdown strategy, but merely pointed out that there are several.

I was referring to your implication that you need to react to short term market movements during retirement but not accumulation, ie when you wrote "In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way. Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor market performance"

It seems strange to derisk when approaching retirement but not to derisk to ensure coverage  of the next 5 years of spending requirements whilst in retirement.

Eh? If you "derisk when approaching retirement" then you are already derisked when you enter retirement! 

what is your planned strategy or actual one if retired?

Probably prime harvesting. It certainly won't involve reacting to short market movements. But we do have a reasonable DB/state pension underpin. 

zagfles

Audaxer said:

zagfles said:

Linton said:

The pathways seem to be focussed on choosing a portfolio, but in my view that is a second level concern. The primary difficulty is rather one of financial management.

In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way.  Very little ongoing management is needed

Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor  market performance which can eat into the core investments you need to generate future income and meet future inflation.

Different people can deal with this issue in different ways. Some may believe that with Safe Withdrawal Rates they will be fine regardless, others will be happy to cut expenditure if required, and many others plan to hold a significant buffer to tide themselves over during the bad times. Portfolio allocations must be based on what approach to market volatility is chosen. Will this be specified by the Pathway providers?

But a short term (few years) cash buffer I think has been proved to be nothing more than a comfort blanket. 

If I was looking for income of say £4k per year rising with inflation from £112k, I'd rather have £100k invested with a £12k cash buffer, than have the whole £112k invested. If the whole was £112k invested, you would only need a drawdown rate of 3.57% rather than 4% for the same £4k per year. I think both strategies would probably work, but for cautious investors I think the cash buffer is a good option.

A cautious investor would probably be better off buying an annuity, can get an index linked annuity at 60 paying over 3.8% Annuity Rates: View Best Annuity Rates from the UK Market (hl.co.uk)  

Bostonerimus1

Just an observation, the Trinity/Bengen/SWR Monte Carlo studies don't take account of cash buffers they just look at the level of inflation indexed income that various percentages of US stocks and bonds might maintain for various time spans. The standard metric is a 95% success rate for 30 years. Yearly historical returns are chopped up and sampled to give a range for the portfolio returns and annual rebalancing is done. The result is a starting percentage of ~4% is the max, assuming historical inflation rates - the recent 10% inflation rate was a short term glitch in that matrix.

So the 4% rule does not include a cash buffer and simply applies the 4% inflation compounded withdrawal whatever the portfolio is doing. A cash buffer takes money out of your equity/bond portfolio and protects it from losses, but it also protects it from gains. A cash buffer is probably of more psychological benefit than actually improving the overall performance of your retirement portfolio. Here is a study that puts sone numbers to that. Be advised that this is an American publication and numbers will not be the same in the UK.

https://bpb-us-w2.wpmucdn.com/sites.udel.edu/dist/a/855/files/2020/08/Sustainable-Withdrawal-Rates.pdf

IMO a better way to improve portfolio survivability is to modulate spending using the 4% withdrawal rate as a max and apply a Guyton-Klinger type method that reacts to portfolio performance.

Linton

zagfles said:

Linton said:

zagfles said:

Linton said:

The pathways seem to be focussed on choosing a portfolio, but in my view that is a second level concern. The primary difficulty is rather one of financial management.

In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way.  Very little ongoing management is needed

Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor  market performance which can eat into the core investments you need to generate future income and meet future inflation.

Different people can deal with this issue in different ways. Some may believe that with Safe Withdrawal Rates they will be fine regardless, others will be happy to cut expenditure if required, and many others plan to hold a significant buffer to tide themselves over during the bad times. Portfolio allocations must be based on what approach to market volatility is chosen. Will this be specified by the Pathway providers?

There is no difference between short term market timing during accumulation and decumulation. It's just the same to say "I won't invest this month because the markets are high" as saying "I won't sell this month because the markets are low". Short term market timing is generally a mugs game whenever it's done. Longer term strategies such as "prime harvesting" may have something in them. But a short term (few years) cash buffer I think has been proved to be nothing more than a comfort blanket. 

Of course, a downturn will always hit you harder the more you have, but that applies equally to late accumulation as early decumulation. There may be a problem if your choice of retirement date is affected eg by a bubble in late accumulation. 

I am unclear what your comments on switching in and out of buffers has to do with my point which was that you cannot sensibly chose a retirement portfolio unless you know what your drawdown strategy is.  My post did not advocate or condemn any particular drawdown strategy, but merely pointed out that there are several.

I was referring to your implication that you need to react to short term market movements during retirement but not accumulation, ie when you wrote "In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way. Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor market performance"

It seems strange to derisk when approaching retirement but not to derisk to ensure coverage  of the next 5 years of spending requirements whilst in retirement.

Eh? If you "derisk when approaching retirement" then you are already derisked when you enter retirement! 

what is your planned strategy or actual one if retired?

Probably prime harvesting. It certainly won't involve reacting to short market movements. But we do have a reasonable DB/state pension underpin. 

Eh? If you "derisk when approaching retirement" then you are already derisked when you enter retirement! 

Good point! The answer is long term strategy and short term tactics:

- If you are going to jump into retirement with no viable Plan B you want to ensure you start with your finances in a good state.
- If you have to spend say £60k over the next 3 years you may be happier to have it in cash (or close to)  now.

I am advocating investing based on matching liabilities. Which leads on to questioning the 60/40  approach. If you aren’t going to touch 50% of your pot for 20 years why not invest that money at 100% equity?

 The answer may end up with an overall allocation  of 60/40. However using liability matching tells you why that particular allocation and also tells you how to allocate the 40% rather than just use an arbitrary set of bonds of various types, nationalities and maturity dates.

Which leads back to the original  point of how can a retirement pathway work if the pathway is not linked into a corresponding financial management strategy.

Linton

zagfles said:

Audaxer said:

zagfles said:

Linton said:

The pathways seem to be focussed on choosing a portfolio, but in my view that is a second level concern. The primary difficulty is rather one of financial management.

In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way.  Very little ongoing management is needed

Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor  market performance which can eat into the core investments you need to generate future income and meet future inflation.

Different people can deal with this issue in different ways. Some may believe that with Safe Withdrawal Rates they will be fine regardless, others will be happy to cut expenditure if required, and many others plan to hold a significant buffer to tide themselves over during the bad times. Portfolio allocations must be based on what approach to market volatility is chosen. Will this be specified by the Pathway providers?

But a short term (few years) cash buffer I think has been proved to be nothing more than a comfort blanket. 

If I was looking for income of say £4k per year rising with inflation from £112k, I'd rather have £100k invested with a £12k cash buffer, than have the whole £112k invested. If the whole was £112k invested, you would only need a drawdown rate of 3.57% rather than 4% for the same £4k per year. I think both strategies would probably work, but for cautious investors I think the cash buffer is a good option.

A cautious investor would probably be better off buying an annuity, can get an index linked annuity at 60 paying over 3.8% Annuity Rates: View Best Annuity Rates from the UK Market (hl.co.uk)  

If your sole concern was maximum guaranteed annual income you should use an annuity. The downside is total loss of flexibility.  If you want a bucket list ticking one-off holiday or to replace your leaking roof do you want to save up spare income from the annuity for 10 years first?

zagfles

Linton said:

zagfles said:

Linton said:

zagfles said:

Linton said:

The pathways seem to be focussed on choosing a portfolio, but in my view that is a second level concern. The primary difficulty is rather one of financial management.

In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way.  Very little ongoing management is needed

Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor  market performance which can eat into the core investments you need to generate future income and meet future inflation.

Different people can deal with this issue in different ways. Some may believe that with Safe Withdrawal Rates they will be fine regardless, others will be happy to cut expenditure if required, and many others plan to hold a significant buffer to tide themselves over during the bad times. Portfolio allocations must be based on what approach to market volatility is chosen. Will this be specified by the Pathway providers?

There is no difference between short term market timing during accumulation and decumulation. It's just the same to say "I won't invest this month because the markets are high" as saying "I won't sell this month because the markets are low". Short term market timing is generally a mugs game whenever it's done. Longer term strategies such as "prime harvesting" may have something in them. But a short term (few years) cash buffer I think has been proved to be nothing more than a comfort blanket. 

Of course, a downturn will always hit you harder the more you have, but that applies equally to late accumulation as early decumulation. There may be a problem if your choice of retirement date is affected eg by a bubble in late accumulation. 

I am unclear what your comments on switching in and out of buffers has to do with my point which was that you cannot sensibly chose a retirement portfolio unless you know what your drawdown strategy is.  My post did not advocate or condemn any particular drawdown strategy, but merely pointed out that there are several.

I was referring to your implication that you need to react to short term market movements during retirement but not accumulation, ie when you wrote "In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way. Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor market performance"

It seems strange to derisk when approaching retirement but not to derisk to ensure coverage  of the next 5 years of spending requirements whilst in retirement.

Eh? If you "derisk when approaching retirement" then you are already derisked when you enter retirement! 

what is your planned strategy or actual one if retired?

Probably prime harvesting. It certainly won't involve reacting to short market movements. But we do have a reasonable DB/state pension underpin. 

Eh? If you "derisk when approaching retirement" then you are already derisked when you enter retirement! 

Good point! The answer is long term strategy and short term tactics:

- If you are going to jump into retirement with no viable Plan B you want to ensure you start with your finances in a good state.
- If you have to spend say £60k over the next 3 years you may be happier to have it in cash (or close to)  now.

I am advocating investing based on matching liabilities. Which leads on to questioning the 60/40  approach. If you aren’t going to touch 50% of your pot for 20 years why not invest that money at 100% equity?

 The answer may end up with an overall allocation  of 60/40. However using liability matching tells you why that particular allocation and also tells you how to allocate the 40% rather than just use an arbitrary set of bonds of various types, nationalities and maturity dates.

Which leads back to the original  point of how can a retirement pathway work if the pathway is not linked into a corresponding financial management strategy.

If you want liability matching then buy an annuity. Or for more short term, construct a gilts ladder, I've done one for pre SPA "replacement" income. You could do a mix if it makes you happy. 

Ivkoto

You may find some answers in the video ⬇️▶️

https://youtu.be/G8yuYYPfEqY?si=zWJxIzqR56caYMui

zagfles

Linton said:

zagfles said:

Audaxer said:

zagfles said:

Linton said:

The pathways seem to be focussed on choosing a portfolio, but in my view that is a second level concern. The primary difficulty is rather one of financial management.

In the accumulation phase it is easy. You choose a portfolio, any well diversified equity based one will do, and you simply drip feed a sensible amount for a few decades ignoring whatever happens on the way.  Very little ongoing management is needed

Retirement investing is very different because you need to be thinking about the short/ medium term with issues like how much to withdraw during a period of poor  market performance which can eat into the core investments you need to generate future income and meet future inflation.

Different people can deal with this issue in different ways. Some may believe that with Safe Withdrawal Rates they will be fine regardless, others will be happy to cut expenditure if required, and many others plan to hold a significant buffer to tide themselves over during the bad times. Portfolio allocations must be based on what approach to market volatility is chosen. Will this be specified by the Pathway providers?

But a short term (few years) cash buffer I think has been proved to be nothing more than a comfort blanket. 

If I was looking for income of say £4k per year rising with inflation from £112k, I'd rather have £100k invested with a £12k cash buffer, than have the whole £112k invested. If the whole was £112k invested, you would only need a drawdown rate of 3.57% rather than 4% for the same £4k per year. I think both strategies would probably work, but for cautious investors I think the cash buffer is a good option.

A cautious investor would probably be better off buying an annuity, can get an index linked annuity at 60 paying over 3.8% Annuity Rates: View Best Annuity Rates from the UK Market (hl.co.uk)  

If your sole concern was maximum guaranteed annual income you should use an annuity. The downside is total loss of flexibility.  If you want a bucket list ticking one-off holiday or to replace your leaking roof do you want to save up spare income from the annuity for 10 years first?

The same way as you did during your working life. Have a "rainy day" or "world cruise" savings fund. You don't have to spend your entire wealth on an annuity. You seem to be confusing the idea of having a "cash buffer" as a market timing mechanism with having rainy day savings, which clearly everyone should have if possible.