Ready made portfolios for generating an income in retirement

MK62

Ivkoto said:

You may find some answers in the video ⬇️▶️

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

There's a review of the paper that video refers to here....... https://earlyretirementnow.com/2024/02/12/100-percent-stocks-for-the-long-run/ ....different conclusions, so the viewer/reader would need to make up their own mind.

OldScientist

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?

I don't think anyone would suggest that a retiree should use their entire pension to purchase an annuity - even in the old days, only 75% was required. Where the SP and DB pensions do not cover a retiree's essential spending (however that is defined*), the shortfall can be covered an RPI protected annuity (which, I think we are in agreement, is the source of guaranteed inflation protected income with the highest payout rate). Having covered the essential spend in this way, the asset allocation in the portfolio and the income strategy used become less critical since it is only used for discretionary (and ad-hoc) income.

In other words, the OP's original question can only really be answered once their other sources of income and their required expenditure is known.

* It is interesting to note that the 'essential' lifestyle described at https://www.retirementlivingstandards.org.uk/ is about the same size as the full SP (slightly more for a single person and slightly less for a couple).

Triumph13

I'm a big fan of a cash buffer myself, but not when used for market timing.  When coupled with a fixed withdrawal percentage, I believe (though I admit I haven't run the simulations) that it should have a lot of power to lessen the pain of spending reductions in downturns.  My plan has always been to use it to mitigate 50% of any income reduction - so if markets fall 50% my income taken only falls 25%.  A one year cash buffer would get you through four years of such a 50% drop, which seems like a reasonable reward for the cost of holding it.

More generally though, I suspect most retirees would be best to buy annuities to cover most or all of their baseline spending, making them much better placed to withstand any fluctuations in income from drawdown portfolios.  That would mean that, rather than going for a single 'default portfolio', lots of people should actually be looking to split their funds between two or more different portfolios - a traditional 'lifestyling' one for annuity purchase and an ongoing one for drawdown.  Plus a 'lifestyle to cash' one if they are planning to use the TFLS to pay off their mortgage or bridge a short gap to SP.  You really need to have gone through that thought process before you have any chance of making a sensible decision on which 'default' option to pick, and I worry about the ability of people to get through it without guidance.

Bostonerimus1

Triumph13 said:

I'm a big fan of a cash buffer myself, but not when used for market timing.  When coupled with a fixed withdrawal percentage, I believe (though I admit I haven't run the simulations) that it should have a lot of power to lessen the pain of spending reductions in downturns.  My plan has always been to use it to mitigate 50% of any income reduction - so if markets fall 50% my income taken only falls 25%.  A one year cash buffer would get you through four years of such a 50% drop, which seems like a reasonable reward for the cost of holding it.

More generally though, I suspect most retirees would be best to buy annuities to cover most or all of their baseline spending, making them much better placed to withstand any fluctuations in income from drawdown portfolios.  That would mean that, rather than going for a single 'default portfolio', lots of people should actually be looking to split their funds between two or more different portfolios - a traditional 'lifestyling' one for annuity purchase and an ongoing one for drawdown.  Plus a 'lifestyle to cash' one if they are planning to use the TFLS to pay off their mortgage or bridge a short gap to SP.  You really need to have gone through that thought process before you have any chance of making a sensible decision on which 'default' option to pick, and I worry about the ability of people to get through it without guidance.

Studies show that long term results are better without cash buffers. Of course it's all a matter of degree and your own peace of mind and cash/MMFs serve practical spending and liquidity needs.

zagfles

Triumph13 said:

I'm a big fan of a cash buffer myself, but not when used for market timing.  When coupled with a fixed withdrawal percentage, I believe (though I admit I haven't run the simulations) that it should have a lot of power to lessen the pain of spending reductions in downturns.  My plan has always been to use it to mitigate 50% of any income reduction - so if markets fall 50% my income taken only falls 25%.  A one year cash buffer would get you through four years of such a 50% drop, which seems like a reasonable reward for the cost of holding it.

More generally though, I suspect most retirees would be best to buy annuities to cover most or all of their baseline spending, making them much better placed to withstand any fluctuations in income from drawdown portfolios.  That would mean that, rather than going for a single 'default portfolio', lots of people should actually be looking to split their funds between two or more different portfolios - a traditional 'lifestyling' one for annuity purchase and an ongoing one for drawdown.  Plus a 'lifestyle to cash' one if they are planning to use the TFLS to pay off their mortgage or bridge a short gap to SP.  You really need to have gone through that thought process before you have any chance of making a sensible decision on which 'default' option to pick, and I worry about the ability of people to get through it without guidance.

If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.

Or are you saying your withdrawals are a percentage of the current pot value rather a percentage of the initial pot value? That is a very strange way of doing drawdown. If markets rose 50% would you draw 50% more? 

Bostonerimus1

zagfles said:

Triumph13 said:

I'm a big fan of a cash buffer myself, but not when used for market timing.  When coupled with a fixed withdrawal percentage, I believe (though I admit I haven't run the simulations) that it should have a lot of power to lessen the pain of spending reductions in downturns.  My plan has always been to use it to mitigate 50% of any income reduction - so if markets fall 50% my income taken only falls 25%.  A one year cash buffer would get you through four years of such a 50% drop, which seems like a reasonable reward for the cost of holding it.

More generally though, I suspect most retirees would be best to buy annuities to cover most or all of their baseline spending, making them much better placed to withstand any fluctuations in income from drawdown portfolios.  That would mean that, rather than going for a single 'default portfolio', lots of people should actually be looking to split their funds between two or more different portfolios - a traditional 'lifestyling' one for annuity purchase and an ongoing one for drawdown.  Plus a 'lifestyle to cash' one if they are planning to use the TFLS to pay off their mortgage or bridge a short gap to SP.  You really need to have gone through that thought process before you have any chance of making a sensible decision on which 'default' option to pick, and I worry about the ability of people to get through it without guidance.

If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.

Or are you saying your withdrawals are a percentage of the current pot value rather a percentage of the initial pot value? That is a very strange way of doing drawdown. If markets rose 50% would you draw 50% more? 

Prime Harvesting has you drawing 20% of equities when they are up by 20% which might cause tax issues and I'm not really excited about it and Guyton Klinger allows you to withdraw more in good times and reduced it in bad times. There's a vast array of ways to manage drawdown, some advocate spending bonds first while others take income weighted by the performance of the assets and some like cash buffers. Really I think it's navel gazing when compared to simply having a pot big enough to sensibly cover your expenses and a sensible asset allocation that might include equities, bonds, DBs and annuities and even some cash...and of course SP.

zagfles

Bostonerimus1 said:

zagfles said:

Triumph13 said:

I'm a big fan of a cash buffer myself, but not when used for market timing.  When coupled with a fixed withdrawal percentage, I believe (though I admit I haven't run the simulations) that it should have a lot of power to lessen the pain of spending reductions in downturns.  My plan has always been to use it to mitigate 50% of any income reduction - so if markets fall 50% my income taken only falls 25%.  A one year cash buffer would get you through four years of such a 50% drop, which seems like a reasonable reward for the cost of holding it.

More generally though, I suspect most retirees would be best to buy annuities to cover most or all of their baseline spending, making them much better placed to withstand any fluctuations in income from drawdown portfolios.  That would mean that, rather than going for a single 'default portfolio', lots of people should actually be looking to split their funds between two or more different portfolios - a traditional 'lifestyling' one for annuity purchase and an ongoing one for drawdown.  Plus a 'lifestyle to cash' one if they are planning to use the TFLS to pay off their mortgage or bridge a short gap to SP.  You really need to have gone through that thought process before you have any chance of making a sensible decision on which 'default' option to pick, and I worry about the ability of people to get through it without guidance.

If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.

Or are you saying your withdrawals are a percentage of the current pot value rather a percentage of the initial pot value? That is a very strange way of doing drawdown. If markets rose 50% would you draw 50% more? 

Prime Harvesting has you drawing 20% of equities when they are up by 20% which might cause tax issues and I'm not really excited about it and Guyton Klinger allows you to withdraw more in good times and reduced it in bad times. There's a vast array of ways to manage drawdown, some advocate spending bonds first while others take income weighted by the performance of the assets and some like cash buffers. Really I think it's navel gazing when compared to simply having a pot big enough to sensibly cover your expenses and a sensible asset allocation that might include equities, bonds, DBs and annuities and even some cash...and of course SP.

It does not. It has you selling them and buying bonds, not drawing them. Your draw is unaffected. 

Linton

Bostonerimus1 said:

Triumph13 said:

I'm a big fan of a cash buffer myself, but not when used for market timing.  When coupled with a fixed withdrawal percentage, I believe (though I admit I haven't run the simulations) that it should have a lot of power to lessen the pain of spending reductions in downturns.  My plan has always been to use it to mitigate 50% of any income reduction - so if markets fall 50% my income taken only falls 25%.  A one year cash buffer would get you through four years of such a 50% drop, which seems like a reasonable reward for the cost of holding it.

More generally though, I suspect most retirees would be best to buy annuities to cover most or all of their baseline spending, making them much better placed to withstand any fluctuations in income from drawdown portfolios.  That would mean that, rather than going for a single 'default portfolio', lots of people should actually be looking to split their funds between two or more different portfolios - a traditional 'lifestyling' one for annuity purchase and an ongoing one for drawdown.  Plus a 'lifestyle to cash' one if they are planning to use the TFLS to pay off their mortgage or bridge a short gap to SP.  You really need to have gone through that thought process before you have any chance of making a sensible decision on which 'default' option to pick, and I worry about the ability of people to get through it without guidance.

Studies show that long term results are better without cash buffers. Of course it's all a matter of degree and your own peace of mind and cash/MMFs serve practical spending and liquidity needs.

The examples I have seen, from memory,  just included cash as a third asset class alongside equity and bonds.  There are different things one can do with a tranche of cash. How you use it is an mportant factor.

Linton

Bostonerimus1 said:

zagfles said:

Triumph13 said:

I'm a big fan of a cash buffer myself, but not when used for market timing.  When coupled with a fixed withdrawal percentage, I believe (though I admit I haven't run the simulations) that it should have a lot of power to lessen the pain of spending reductions in downturns.  My plan has always been to use it to mitigate 50% of any income reduction - so if markets fall 50% my income taken only falls 25%.  A one year cash buffer would get you through four years of such a 50% drop, which seems like a reasonable reward for the cost of holding it.

More generally though, I suspect most retirees would be best to buy annuities to cover most or all of their baseline spending, making them much better placed to withstand any fluctuations in income from drawdown portfolios.  That would mean that, rather than going for a single 'default portfolio', lots of people should actually be looking to split their funds between two or more different portfolios - a traditional 'lifestyling' one for annuity purchase and an ongoing one for drawdown.  Plus a 'lifestyle to cash' one if they are planning to use the TFLS to pay off their mortgage or bridge a short gap to SP.  You really need to have gone through that thought process before you have any chance of making a sensible decision on which 'default' option to pick, and I worry about the ability of people to get through it without guidance.

If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.

Or are you saying your withdrawals are a percentage of the current pot value rather a percentage of the initial pot value? That is a very strange way of doing drawdown. If markets rose 50% would you draw 50% more? 

Prime Harvesting has you drawing 20% of equities when they are up by 20% which might cause tax issues and I'm not really excited about it and Guyton Klinger allows you to withdraw more in good times and reduced it in bad times. There's a vast array of ways to manage drawdown, some advocate spending bonds first while others take income weighted by the performance of the assets and some like cash buffers. Really I think it's navel gazing when compared to simply having a pot big enough to sensibly cover your expenses and a sensible asset allocation that might include equities, bonds, DBs and annuities and even some cash...and of course SP.

I have never understood how Guyton Klinger would actually work in practice. How do you cut your expenditure to an extent and timeframe that would make any difference? Most expenditure is pretty fixed, eg taxes, utility bills food etc or allocated well in advance. Unless you have a buffer that cuts in when Guyton Klinger decreases your income. But you don’t like buffers.

OldScientist

Linton said:

Bostonerimus1 said:

zagfles said:

Triumph13 said:

I'm a big fan of a cash buffer myself, but not when used for market timing.  When coupled with a fixed withdrawal percentage, I believe (though I admit I haven't run the simulations) that it should have a lot of power to lessen the pain of spending reductions in downturns.  My plan has always been to use it to mitigate 50% of any income reduction - so if markets fall 50% my income taken only falls 25%.  A one year cash buffer would get you through four years of such a 50% drop, which seems like a reasonable reward for the cost of holding it.

More generally though, I suspect most retirees would be best to buy annuities to cover most or all of their baseline spending, making them much better placed to withstand any fluctuations in income from drawdown portfolios.  That would mean that, rather than going for a single 'default portfolio', lots of people should actually be looking to split their funds between two or more different portfolios - a traditional 'lifestyling' one for annuity purchase and an ongoing one for drawdown.  Plus a 'lifestyle to cash' one if they are planning to use the TFLS to pay off their mortgage or bridge a short gap to SP.  You really need to have gone through that thought process before you have any chance of making a sensible decision on which 'default' option to pick, and I worry about the ability of people to get through it without guidance.

If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.

Or are you saying your withdrawals are a percentage of the current pot value rather a percentage of the initial pot value? That is a very strange way of doing drawdown. If markets rose 50% would you draw 50% more? 

Prime Harvesting has you drawing 20% of equities when they are up by 20% which might cause tax issues and I'm not really excited about it and Guyton Klinger allows you to withdraw more in good times and reduced it in bad times. There's a vast array of ways to manage drawdown, some advocate spending bonds first while others take income weighted by the performance of the assets and some like cash buffers. Really I think it's navel gazing when compared to simply having a pot big enough to sensibly cover your expenses and a sensible asset allocation that might include equities, bonds, DBs and annuities and even some cash...and of course SP.

I have never understood how Guyton Klinger would actually work in practice. How do you cut your expenditure to an extent and timeframe that would make any difference? Most expenditure is pretty fixed, eg taxes, utility bills food etc or allocated well in advance. Unless you have a buffer that cuts in when Guyton Klinger decreases your income. But you don’t like buffers.

Guyton Klinger like any variable withdrawal strategy (and there are lots) can only be suitable provided the retiree has enough guaranteed income (e.g. SP, DB pension, RPI annuity) to cover their essential spend during lean years. For most people in the UK (but not necessarily those on these boards) the SP will be enough for this (through necessity if not choice). Of course, if the overall expenditure consists of essential + discretionary, the relative sizes of those two categories will vary from retiree to retiree and will make an enormous difference to retirement planning (again, for most people, essential will be larger than discretionary). One approach is to plan such that reductions in portfolio withdrawals only affects discretionary expenditure (sometimes known as 'floor and upside' or 'safety first').

With the portfolio, the choice of withdrawal strategy lies broadly between
1) constant inflation adjusted withdrawals (i.e., SWR). By definition the income is constant until the portfolio runs out. Whether this will happen before or after the retiree no longer has a need for their portfolio is unknown and unknowable at the start of retirement.
2) Percentage of portfolio withdrawals where x% of the current value of the portfolio is withdrawn (x can be constant or increasing as in Bogleheads VPW or the US RMDs or variable as in natural yield) regardless of the purchasing power. The real income is variable (and changes instantly with changes in portfolio size) but the portfolio cannot run out of money.
3) Hybrid methods (e.g., Guyton Klinger, Carlson's Endowment, Vanguard dynamic, etc.) which restrict the the amount of variability in the withdrawals but can, therefore, run out of money (with more chance for percentage of portfolio withdrawals but less than SWR).