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Ready made portfolios for generating an income in retirement

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  • Bostonerimus1
    Bostonerimus1 Posts: 1,409 Forumite
    1,000 Posts Second Anniversary Name Dropper
    zagfles 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. 
    Yes bad choice of word on my part, still you are selling 20% of your equities and buying bonds and my tax comment was wrong if this is all done inside your SIPP etc.
    And so we beat on, boats against the current, borne back ceaselessly into the past.
  • Bostonerimus1
    Bostonerimus1 Posts: 1,409 Forumite
    1,000 Posts Second Anniversary Name Dropper
    Linton 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.
    Yes GK assumes you can reduce your withdrawals which will be possible for the discretionary part of your budget. If the basics are covered by SP/DB/annuities then your DC withdrawals can be reduced by cutting out the booze, Sky subscriptions and foie gras. GK is usually sold as a way to increase your annual withdrawal above the 4% in the good years and indeed over your entire retirement.
    And so we beat on, boats against the current, borne back ceaselessly into the past.
  • Cus
    Cus Posts: 779 Forumite
    Sixth Anniversary 500 Posts Name Dropper
    On the calculators for GK, you can state a minimum allowed withdrawal, which, so long as the scenario analysis is 100% success and you accept that it's possible that the future could be outside the extremes of the past 120 years of data, then that's as good as an equivalent to a separate DB, annuity etc you could get.
  • Triumph13
    Triumph13 Posts: 1,966 Forumite
    Part of the Furniture 1,000 Posts Name Dropper I've been Money Tipped!
    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? 
    That's exactly what I mean, sell a fixed percentage of the portfolio.  It eliminates SORR, in return for accepting higher volatility on spending.  No market timing involved. The cash buffer then goes some way to smooth the volatility.

    If equities were up 50%, I would indeed draw 50% more than planned (or at least convert equities to cash within the wrapper) , all things being equal, on the grounds that if equities were fairly valued I'd have more than enough, if they were overvalued then I'd be better with cash.  I'd then use the excess to increase the cash buffer and potentially spread it over multiple years of increased spending. 

    Full disclosure, one of the reasons I can accept such high volatility is that SPs and some little DBs will eventually provide about half our income and are covered by cash in the meantime.
  • Bostonerimus1
    Bostonerimus1 Posts: 1,409 Forumite
    1,000 Posts Second Anniversary Name Dropper
    Triumph13 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? 
    That's exactly what I mean, sell a fixed percentage of the portfolio.  It eliminates SORR, in return for accepting higher volatility on spending.  No market timing involved. The cash buffer then goes some way to smooth the volatility.

    If equities were up 50%, I would indeed draw 50% more than planned (or at least convert equities to cash within the wrapper) , all things being equal, on the grounds that if equities were fairly valued I'd have more than enough, if they were overvalued then I'd be better with cash.  I'd then use the excess to increase the cash buffer and potentially spread it over multiple years of increased spending. 

    Full disclosure, one of the reasons I can accept such high volatility is that SPs and some little DBs will eventually provide about half our income and are covered by cash in the meantime.
    We are really talking about asset allocation with MMF really just being ultrashort bonds and maybe cash being zero duration fixed income. For what it's worth in most scenarios you'll do better the more equities you have up to maybe an 80/20 split when portfolio survivability starts to be impacted by sequence or returns risk early in drawdown. If your time horizon is more than 30 years then high equity percentages really start to pull ahead. So much of retirement asset allocation comes down to the feelings of the retiree rather than the results of the analysis which is why we see cash buffers resulting from a natural fear of volatility. 
    And so we beat on, boats against the current, borne back ceaselessly into the past.
  • Triumph13
    Triumph13 Posts: 1,966 Forumite
    Part of the Furniture 1,000 Posts Name Dropper I've been Money Tipped!
    Triumph13 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? 
    That's exactly what I mean, sell a fixed percentage of the portfolio.  It eliminates SORR, in return for accepting higher volatility on spending.  No market timing involved. The cash buffer then goes some way to smooth the volatility.

    If equities were up 50%, I would indeed draw 50% more than planned (or at least convert equities to cash within the wrapper) , all things being equal, on the grounds that if equities were fairly valued I'd have more than enough, if they were overvalued then I'd be better with cash.  I'd then use the excess to increase the cash buffer and potentially spread it over multiple years of increased spending. 

    Full disclosure, one of the reasons I can accept such high volatility is that SPs and some little DBs will eventually provide about half our income and are covered by cash in the meantime.
    We are really talking about asset allocation with MMF really just being ultrashort bonds and maybe cash being zero duration fixed income. For what it's worth in most scenarios you'll do better the more equities you have up to maybe an 80/20 split when portfolio survivability starts to be impacted by sequence or returns risk early in drawdown. If your time horizon is more than 30 years then high equity percentages really start to pull ahead. So much of retirement asset allocation comes down to the feelings of the retiree rather than the results of the analysis which is why we see cash buffers resulting from a natural fear of volatility. 
    You could look at it that way, but that's not the way I designed it or use it.  For me, there is a very clear separation between my fixed income (and associated bridging funds), my drawdown portfolio and my cash as they have different purposes and timescales.  The drawdown portfolio is intended to have a time horizon of more like 70 years than 30 as I want to pass it on to my kids.  It is therefore close to 100% equities.  No portfolio survivability issues because of the fixed percentage approach, just a matter of keeping drawing percentage at or below average real returns over time to preserve the value.   I'm lucky that I can afford to have the income from it be volatile, but a cash buffer to dilute / delay the volatility is still appreciated.

    Other people will have different situations and different priorities, but for those lucky enough to have more than their basic needs, I do think a multiple pot approach can be a lot easier to get your head around than trying to think of it as a single asset allocation and planning for how to change that over time.
  • Bostonerimus1
    Bostonerimus1 Posts: 1,409 Forumite
    1,000 Posts Second Anniversary Name Dropper
    Triumph13 said:
    Triumph13 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? 
    That's exactly what I mean, sell a fixed percentage of the portfolio.  It eliminates SORR, in return for accepting higher volatility on spending.  No market timing involved. The cash buffer then goes some way to smooth the volatility.

    If equities were up 50%, I would indeed draw 50% more than planned (or at least convert equities to cash within the wrapper) , all things being equal, on the grounds that if equities were fairly valued I'd have more than enough, if they were overvalued then I'd be better with cash.  I'd then use the excess to increase the cash buffer and potentially spread it over multiple years of increased spending. 

    Full disclosure, one of the reasons I can accept such high volatility is that SPs and some little DBs will eventually provide about half our income and are covered by cash in the meantime.
    We are really talking about asset allocation with MMF really just being ultrashort bonds and maybe cash being zero duration fixed income. For what it's worth in most scenarios you'll do better the more equities you have up to maybe an 80/20 split when portfolio survivability starts to be impacted by sequence or returns risk early in drawdown. If your time horizon is more than 30 years then high equity percentages really start to pull ahead. So much of retirement asset allocation comes down to the feelings of the retiree rather than the results of the analysis which is why we see cash buffers resulting from a natural fear of volatility. 
    You could look at it that way, but that's not the way I designed it or use it.  For me, there is a very clear separation between my fixed income (and associated bridging funds), my drawdown portfolio and my cash as they have different purposes and timescales.  The drawdown portfolio is intended to have a time horizon of more like 70 years than 30 as I want to pass it on to my kids.  It is therefore close to 100% equities.  No portfolio survivability issues because of the fixed percentage approach, just a matter of keeping drawing percentage at or below average real returns over time to preserve the value.   I'm lucky that I can afford to have the income from it be volatile, but a cash buffer to dilute / delay the volatility is still appreciated.

    Other people will have different situations and different priorities, but for those lucky enough to have more than their basic needs, I do think a multiple pot approach can be a lot easier to get your head around than trying to think of it as a single asset allocation and planning for how to change that over time.
    I understand the desire to dampen volatility with cash. I'm just saying that for most people reserving cash to dampen volatility leads to a greater failure rate ie. there's more chance you'll run out of money by giving up the market gains. Now if MMF continue to return 5% that last statement won't be correct.
    And so we beat on, boats against the current, borne back ceaselessly into the past.
  • Triumph13
    Triumph13 Posts: 1,966 Forumite
    Part of the Furniture 1,000 Posts Name Dropper I've been Money Tipped!
    Triumph13 said:
    Triumph13 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? 
    That's exactly what I mean, sell a fixed percentage of the portfolio.  It eliminates SORR, in return for accepting higher volatility on spending.  No market timing involved. The cash buffer then goes some way to smooth the volatility.

    If equities were up 50%, I would indeed draw 50% more than planned (or at least convert equities to cash within the wrapper) , all things being equal, on the grounds that if equities were fairly valued I'd have more than enough, if they were overvalued then I'd be better with cash.  I'd then use the excess to increase the cash buffer and potentially spread it over multiple years of increased spending. 

    Full disclosure, one of the reasons I can accept such high volatility is that SPs and some little DBs will eventually provide about half our income and are covered by cash in the meantime.
    We are really talking about asset allocation with MMF really just being ultrashort bonds and maybe cash being zero duration fixed income. For what it's worth in most scenarios you'll do better the more equities you have up to maybe an 80/20 split when portfolio survivability starts to be impacted by sequence or returns risk early in drawdown. If your time horizon is more than 30 years then high equity percentages really start to pull ahead. So much of retirement asset allocation comes down to the feelings of the retiree rather than the results of the analysis which is why we see cash buffers resulting from a natural fear of volatility. 
    You could look at it that way, but that's not the way I designed it or use it.  For me, there is a very clear separation between my fixed income (and associated bridging funds), my drawdown portfolio and my cash as they have different purposes and timescales.  The drawdown portfolio is intended to have a time horizon of more like 70 years than 30 as I want to pass it on to my kids.  It is therefore close to 100% equities.  No portfolio survivability issues because of the fixed percentage approach, just a matter of keeping drawing percentage at or below average real returns over time to preserve the value.   I'm lucky that I can afford to have the income from it be volatile, but a cash buffer to dilute / delay the volatility is still appreciated.

    Other people will have different situations and different priorities, but for those lucky enough to have more than their basic needs, I do think a multiple pot approach can be a lot easier to get your head around than trying to think of it as a single asset allocation and planning for how to change that over time.
    I understand the desire to dampen volatility with cash. I'm just saying that for most people reserving cash to dampen volatility leads to a greater failure rate ie. there's more chance you'll run out of money by giving up the market gains. Now if MMF continue to return 5% that last statement won't be correct.
    The key point I'm making though, is that your last statement is only correct if you are using a SWR strategy and therefore using the cash buffer for market timing.  If you are on that approach, then I completely agree with you .  If you are using fixed percentage withdrawals though, there is no failure rate as such.  The cash buffer is a deliberate, up-front acceptance of a slightly lower average income, in return for quite a reasonable degree of reduction in income volatility.
  • MK62
    MK62 Posts: 1,741 Forumite
    Seventh Anniversary 1,000 Posts Name Dropper
    Triumph13 said:
    Triumph13 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? 
    That's exactly what I mean, sell a fixed percentage of the portfolio.  It eliminates SORR, in return for accepting higher volatility on spending.  No market timing involved. The cash buffer then goes some way to smooth the volatility.

    If equities were up 50%, I would indeed draw 50% more than planned (or at least convert equities to cash within the wrapper) , all things being equal, on the grounds that if equities were fairly valued I'd have more than enough, if they were overvalued then I'd be better with cash.  I'd then use the excess to increase the cash buffer and potentially spread it over multiple years of increased spending. 

    Full disclosure, one of the reasons I can accept such high volatility is that SPs and some little DBs will eventually provide about half our income and are covered by cash in the meantime.
    We are really talking about asset allocation with MMF really just being ultrashort bonds and maybe cash being zero duration fixed income. For what it's worth in most scenarios you'll do better the more equities you have up to maybe an 80/20 split when portfolio survivability starts to be impacted by sequence or returns risk early in drawdown. If your time horizon is more than 30 years then high equity percentages really start to pull ahead. So much of retirement asset allocation comes down to the feelings of the retiree rather than the results of the analysis which is why we see cash buffers resulting from a natural fear of volatility. 
    You could look at it that way, but that's not the way I designed it or use it.  For me, there is a very clear separation between my fixed income (and associated bridging funds), my drawdown portfolio and my cash as they have different purposes and timescales.  The drawdown portfolio is intended to have a time horizon of more like 70 years than 30 as I want to pass it on to my kids.  It is therefore close to 100% equities.  No portfolio survivability issues because of the fixed percentage approach, just a matter of keeping drawing percentage at or below average real returns over time to preserve the value.   I'm lucky that I can afford to have the income from it be volatile, but a cash buffer to dilute / delay the volatility is still appreciated.

    Other people will have different situations and different priorities, but for those lucky enough to have more than their basic needs, I do think a multiple pot approach can be a lot easier to get your head around than trying to think of it as a single asset allocation and planning for how to change that over time.
    I understand the desire to dampen volatility with cash. I'm just saying that for most people reserving cash to dampen volatility leads to a greater failure rate ie. there's more chance you'll run out of money by giving up the market gains.
    This isn't supported by my own historic simulations, or by online simulators, such as https://www.2020financial.co.uk/pension-drawdown-calculator/#calculator. The failure rate actually goes down a bit rather than up.......the average end balance is lower, granted, but that's a secondary concern, and is perhaps the price for that admittedly marginally lower failure rate. Also, many retirement plans front load early withdrawals pre SP/DB.....right at the time the portfolio is most vulnerable to a poor SOR.

    Of course, there are many ways to use cash in a portfolio, and so it's rather difficult to simulate them all......
  • Bostonerimus1
    Bostonerimus1 Posts: 1,409 Forumite
    1,000 Posts Second Anniversary Name Dropper
    edited 9 August 2024 at 2:39PM
    MK62 said:
    Triumph13 said:
    Triumph13 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? 
    That's exactly what I mean, sell a fixed percentage of the portfolio.  It eliminates SORR, in return for accepting higher volatility on spending.  No market timing involved. The cash buffer then goes some way to smooth the volatility.

    If equities were up 50%, I would indeed draw 50% more than planned (or at least convert equities to cash within the wrapper) , all things being equal, on the grounds that if equities were fairly valued I'd have more than enough, if they were overvalued then I'd be better with cash.  I'd then use the excess to increase the cash buffer and potentially spread it over multiple years of increased spending. 

    Full disclosure, one of the reasons I can accept such high volatility is that SPs and some little DBs will eventually provide about half our income and are covered by cash in the meantime.
    We are really talking about asset allocation with MMF really just being ultrashort bonds and maybe cash being zero duration fixed income. For what it's worth in most scenarios you'll do better the more equities you have up to maybe an 80/20 split when portfolio survivability starts to be impacted by sequence or returns risk early in drawdown. If your time horizon is more than 30 years then high equity percentages really start to pull ahead. So much of retirement asset allocation comes down to the feelings of the retiree rather than the results of the analysis which is why we see cash buffers resulting from a natural fear of volatility. 
    You could look at it that way, but that's not the way I designed it or use it.  For me, there is a very clear separation between my fixed income (and associated bridging funds), my drawdown portfolio and my cash as they have different purposes and timescales.  The drawdown portfolio is intended to have a time horizon of more like 70 years than 30 as I want to pass it on to my kids.  It is therefore close to 100% equities.  No portfolio survivability issues because of the fixed percentage approach, just a matter of keeping drawing percentage at or below average real returns over time to preserve the value.   I'm lucky that I can afford to have the income from it be volatile, but a cash buffer to dilute / delay the volatility is still appreciated.

    Other people will have different situations and different priorities, but for those lucky enough to have more than their basic needs, I do think a multiple pot approach can be a lot easier to get your head around than trying to think of it as a single asset allocation and planning for how to change that over time.
    I understand the desire to dampen volatility with cash. I'm just saying that for most people reserving cash to dampen volatility leads to a greater failure rate ie. there's more chance you'll run out of money by giving up the market gains.
    This isn't supported by my own historic simulations, or by online simulators, such as https://www.2020financial.co.uk/pension-drawdown-calculator/#calculator. The failure rate actually goes down a bit rather than up.......the average end balance is lower, granted, but that's a secondary concern, and is perhaps the price for that admittedly marginally lower failure rate. Also, many retirement plans front load early withdrawals pre SP/DB.....right at the time the portfolio is most vulnerable to a poor SOR.

    Of course, there are many ways to use cash in a portfolio, and so it's rather difficult to simulate them all......
    US studies have shown that historically cash buffers do not improve survivability of a pension pot. It might be different for the UK.

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

    Anyway, it's a matter of degree as everyone needs cash to spend and I do much the same as I've always done and keep a couple of years spending on hand for emergencies and liquidity.

    As a larger point we are talking about managing DC pensions for income here and it's not obvious that people will have enough to support their income needs or the skills to sensibly manage their pension pot. In the US the DC pension model has been around for a couple of generations now and half of US retirees do not have enough to retire, even with the more generous US equivalent of the UK's State Pension. Many people over 65 just keep working, so maybe there needs to be more of a focus on how to use a pension pot for older people who are still working. The self directed DC pension model has failed for many US retirees because of a combination of poor implementation by government, employers and employees. The certain winners have been the financial industry.
    And so we beat on, boats against the current, borne back ceaselessly into the past.
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