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Ready made portfolios for generating an income in retirement
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Sorry, I have cheated and actually read the article. It uses an Indirect buffer approach and compares the % failures with simply drawing down directly from a single growth portfolio.Bostonerimus1 said:
US studies have shown that historically cash buffers do not improve survivability of a pension pot. It might be different for the UK.MK62 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.zagfles said:
If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.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.
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?
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.
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.
Of course, there are many ways to use cash in a portfolio, and so it's rather difficult to simulate them all......
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.The buffer approach is to set up a buffer with sufficient money to pay for n years inflation linked expenditure and replenished each year from growth only if the latter has increased in value. If the buffer is exhausted expenditure is taken directly from the growth investments.
Success is determined by whether the entire portfolio survives for the specified duration of the test period.I think this buffer approach is much like Prime Harvesting except that in the latter the bond allocation is essentially used as the buffer. Apologies if I have got this wrong.
There are many other ways of running an indirect withdrawal approach. The paper only considers one, so I cannot see it as evidence of any blanket statement about buffering.0 -
Agreed that the results of the study are limited and there needs to be more analysis. I have tended to take the middle course on most things so I feel everyone should have cash and a MMF, but it's the size of that allocation and how and when it is spent that matters.Linton said:
Sorry, I have cheated and actually read the article. It uses an Indirect buffer approach and compares the % failures with simply drawing down directly from a single growth portfolio.Bostonerimus1 said:
US studies have shown that historically cash buffers do not improve survivability of a pension pot. It might be different for the UK.MK62 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.zagfles said:
If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.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.
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?
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.
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.
Of course, there are many ways to use cash in a portfolio, and so it's rather difficult to simulate them all......
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.The buffer approach is to set up a buffer with sufficient money to pay for n years inflation linked expenditure and replenished each year from growth only if the latter has increased in value. If the buffer is exhausted expenditure is taken directly from the growth investments.
Success is determined by whether the entire portfolio survives for the specified duration of the test period.I think this buffer approach is much like Prime Harvesting except that in the latter the bond allocation is essentially used as the buffer. Apologies if I have got this wrong.
There are many other ways of running an indirect withdrawal approach. The paper only considers one, so I cannot see it as evidence of any blanket statement about buffering.And so we beat on, boats against the current, borne back ceaselessly into the past.0 -
It might be helpful for the op to give some details, age, how long he needs to bridge to Sp, what other income he may have, what his spends will be at retirement etc.
It sounds like you are looking for a simple way to draw income. At its simplest there are monthly paying dividend focused funds , rather than having to sell assets for income. It's not popular with those on here.2 -
The main difference with PH is it's a much longer term "buffer" strategy, if you want to call it that. Even in the worst bear markets it'd likely be over 10 years before you need to sell equities. The term I think is key - short term market timing is a mug's game, but longer term the market is more predictable - after all anyone invested in equities is long term timing the market - ie the assumption that over the long term equities will beat bonds/cash.Linton said:
Sorry, I have cheated and actually read the article. It uses an Indirect buffer approach and compares the % failures with simply drawing down directly from a single growth portfolio.Bostonerimus1 said:
US studies have shown that historically cash buffers do not improve survivability of a pension pot. It might be different for the UK.MK62 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.zagfles said:
If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.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.
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?
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.
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.
Of course, there are many ways to use cash in a portfolio, and so it's rather difficult to simulate them all......
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.The buffer approach is to set up a buffer with sufficient money to pay for n years inflation linked expenditure and replenished each year from growth only if the latter has increased in value. If the buffer is exhausted expenditure is taken directly from the growth investments.
Success is determined by whether the entire portfolio survives for the specified duration of the test period.I think this buffer approach is much like Prime Harvesting except that in the latter the bond allocation is essentially used as the buffer. Apologies if I have got this wrong.
There are many other ways of running an indirect withdrawal approach. The paper only considers one, so I cannot see it as evidence of any blanket statement about buffering.
It also has researched sell tipping points, ie you don't just sell equities when they've gone up but when they're up 20% real terms. And unlike short term buffer strategies like the one linked above, it appears to generally deliver better results than a fixed asset allocation strategy. More here: Dynamic asset allocation and withdrawal in retirement - Monevator
I've not seen any evidence a short term cash buffer strategy is of any benefit (other than a comfort blanket), obviously the above article doesn't prove conclusively that none exist as the parameters could be tweaked, it's hard to prove a negative (like there's no teapot orbiting the Sun), but if evidence is that "something similar" doesn't work then surely that should be the working assumption unless something comes along to prove otherwise.
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Yes, the 20% gain before selling any equities stood out to me as most people would rebalance before that. In accumulation I had guardrails of +/-5% from my 60/40 asset allocation. In retirement I've taken the rising equity allocation path simply by doing nothing and after 10 years equities have outstripped bonds by so much that my bond allocation is less than 10% of my portfolio. Admittedly I sold most of my bonds in 2014 to buy into a workplace DB plan so you could argue that's really part of my bond/fixed income allocation.zagfles said:
The main difference with PH is it's a much longer term "buffer" strategy, if you want to call it that. Even in the worst bear markets it'd likely be over 10 years before you need to sell equities. The term I think is key - short term market timing is a mug's game, but longer term the market is more predictable - after all anyone invested in equities is long term timing the market - ie the assumption that over the long term equities will beat bonds/cash.Linton said:
Sorry, I have cheated and actually read the article. It uses an Indirect buffer approach and compares the % failures with simply drawing down directly from a single growth portfolio.Bostonerimus1 said:
US studies have shown that historically cash buffers do not improve survivability of a pension pot. It might be different for the UK.MK62 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.zagfles said:
If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.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.
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?
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.
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.
Of course, there are many ways to use cash in a portfolio, and so it's rather difficult to simulate them all......
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.The buffer approach is to set up a buffer with sufficient money to pay for n years inflation linked expenditure and replenished each year from growth only if the latter has increased in value. If the buffer is exhausted expenditure is taken directly from the growth investments.
Success is determined by whether the entire portfolio survives for the specified duration of the test period.I think this buffer approach is much like Prime Harvesting except that in the latter the bond allocation is essentially used as the buffer. Apologies if I have got this wrong.
There are many other ways of running an indirect withdrawal approach. The paper only considers one, so I cannot see it as evidence of any blanket statement about buffering.
It also has researched sell tipping points, ie you don't just sell equities when they've gone up but when they're up 20% real terms. And unlike short term buffer strategies like the one linked above, it appears to generally deliver better results than a fixed asset allocation strategy. More here: Dynamic asset allocation and withdrawal in retirement - Monevator
I've not seen any evidence a short term cash buffer strategy is of any benefit (other than a comfort blanket), obviously the above article doesn't prove conclusively that none exist as the parameters could be tweaked, it's hard to prove a negative (like there's no teapot orbiting the Sun), but if evidence is that "something similar" doesn't work then surely that should be the working assumption unless something comes along to prove otherwise.And so we beat on, boats against the current, borne back ceaselessly into the past.0 -
zagfles said:
The main difference with PH is it's a much longer term "buffer" strategy, if you want to call it that. Even in the worst bear markets it'd likely be over 10 years before you need to sell equities. The term I think is key - short term market timing is a mug's game, but longer term the market is more predictable - after all anyone invested in equities is long term timing the market - ie the assumption that over the long term equities will beat bonds/cash.Linton said:
Sorry, I have cheated and actually read the article. It uses an Indirect buffer approach and compares the % failures with simply drawing down directly from a single growth portfolio.Bostonerimus1 said:
US studies have shown that historically cash buffers do not improve survivability of a pension pot. It might be different for the UK.MK62 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.zagfles said:
If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.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.
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?
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.
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.
Of course, there are many ways to use cash in a portfolio, and so it's rather difficult to simulate them all......
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.The buffer approach is to set up a buffer with sufficient money to pay for n years inflation linked expenditure and replenished each year from growth only if the latter has increased in value. If the buffer is exhausted expenditure is taken directly from the growth investments.
Success is determined by whether the entire portfolio survives for the specified duration of the test period.I think this buffer approach is much like Prime Harvesting except that in the latter the bond allocation is essentially used as the buffer. Apologies if I have got this wrong.
There are many other ways of running an indirect withdrawal approach. The paper only considers one, so I cannot see it as evidence of any blanket statement about buffering.
It also has researched sell tipping points, ie you don't just sell equities when they've gone up but when they're up 20% real terms. And unlike short term buffer strategies like the one linked above, it appears to generally deliver better results than a fixed asset allocation strategy. More here: Dynamic asset allocation and withdrawal in retirement - Monevator
I've not seen any evidence a short term cash buffer strategy is of any benefit (other than a comfort blanket), obviously the above article doesn't prove conclusively that none exist as the parameters could be tweaked, it's hard to prove a negative (like there's no teapot orbiting the Sun), but if evidence is that "something similar" doesn't work then surely that should be the working assumption unless something comes along to prove otherwise.
A comfort blanket may well be useful. In a major equity crash, or even a medium duration down turn what do you do? Cut your drawdown? Or do you carry on drawing down at the same rate regardless, confident from your use of SWR that there is no real risk? A comfort blanket reduces the need for you to make a difficult decision for a while by which time it may not be necessary.
An indirect strategy need not be short term. I agree that short term buffer strategies are less than ideal since they are still dependent on at some point on making frequent ongoing short term transfers out of equity.
The objective driving my strategy is to keep the equity investments servicing the long term and shield them from meeting short term needs for drawdown, and to shield the ability to spend one's money how and when one wishes from short term changes in investment returns. To that end, like PH, one avoids taking income directly from growth investment but, unlike PH and the short term buffer approaches it also provides an integrated approach to handling one-offs by holding a large amount of stable investments. I am using the term "indirect" to indicate it's a strategy far broader than a simple cash buffer and to avoid criticism from those who leap to wrong conclusions on hearing the word "buffer.
Removing the need for the equity tranche to provide for short term cash needs enables one to use 100% equity for long term growth and simply ride the volatility. Like PH it does have the benefit of getting the 40% overall non-equity to do something useful. However PH relies on using a random selection of bonds. Are they really the best tools for the job? Is 60/40 allocation really the most appropriate.0 -
Personally if I was using a strategy that has been well researched and backtested in different historic market conditions including major equity crashes and prolonged bear markets, a crash on the scale of anything we've seen in the past wouldn't phase me. I'd keep calm and carry on. Why research a strategy and then panic when something happens which the strategy has been proved to cope with.Linton said:zagfles said:
The main difference with PH is it's a much longer term "buffer" strategy, if you want to call it that. Even in the worst bear markets it'd likely be over 10 years before you need to sell equities. The term I think is key - short term market timing is a mug's game, but longer term the market is more predictable - after all anyone invested in equities is long term timing the market - ie the assumption that over the long term equities will beat bonds/cash.Linton said:
Sorry, I have cheated and actually read the article. It uses an Indirect buffer approach and compares the % failures with simply drawing down directly from a single growth portfolio.Bostonerimus1 said:
US studies have shown that historically cash buffers do not improve survivability of a pension pot. It might be different for the UK.MK62 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.zagfles said:
If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.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.
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?
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.
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.
Of course, there are many ways to use cash in a portfolio, and so it's rather difficult to simulate them all......
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.The buffer approach is to set up a buffer with sufficient money to pay for n years inflation linked expenditure and replenished each year from growth only if the latter has increased in value. If the buffer is exhausted expenditure is taken directly from the growth investments.
Success is determined by whether the entire portfolio survives for the specified duration of the test period.I think this buffer approach is much like Prime Harvesting except that in the latter the bond allocation is essentially used as the buffer. Apologies if I have got this wrong.
There are many other ways of running an indirect withdrawal approach. The paper only considers one, so I cannot see it as evidence of any blanket statement about buffering.
It also has researched sell tipping points, ie you don't just sell equities when they've gone up but when they're up 20% real terms. And unlike short term buffer strategies like the one linked above, it appears to generally deliver better results than a fixed asset allocation strategy. More here: Dynamic asset allocation and withdrawal in retirement - Monevator
I've not seen any evidence a short term cash buffer strategy is of any benefit (other than a comfort blanket), obviously the above article doesn't prove conclusively that none exist as the parameters could be tweaked, it's hard to prove a negative (like there's no teapot orbiting the Sun), but if evidence is that "something similar" doesn't work then surely that should be the working assumption unless something comes along to prove otherwise.
A comfort blanket may well be useful. In a major equity crash, or even a medium duration down turn what do you do? Cut your drawdown? Or do you carry on drawing down at the same rate regardless, confident from your use of SWR that there is no real risk? A comfort blanket reduces the need for you to make a difficult decision for a while by which time it may not be necessary.
But if I was using a comfort blanket with no proven real protective effect I might panic and turn the heating down and eat dog food.
Obviously there's always a risk that the future will be completely different to the past. Who knows, there might be a 30 year bear market a bit like in Japan from 1990, if that were to happen globally no investment portfolio containing significant equities would do well. But some would fare better than others.1 -
Linton said:zagfles said:
The main difference with PH is it's a much longer term "buffer" strategy, if you want to call it that. Even in the worst bear markets it'd likely be over 10 years before you need to sell equities. The term I think is key - short term market timing is a mug's game, but longer term the market is more predictable - after all anyone invested in equities is long term timing the market - ie the assumption that over the long term equities will beat bonds/cash.Linton said:
Sorry, I have cheated and actually read the article. It uses an Indirect buffer approach and compares the % failures with simply drawing down directly from a single growth portfolio.Bostonerimus1 said:
US studies have shown that historically cash buffers do not improve survivability of a pension pot. It might be different for the UK.MK62 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.zagfles said:
If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.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.
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?
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.
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.
Of course, there are many ways to use cash in a portfolio, and so it's rather difficult to simulate them all......
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.The buffer approach is to set up a buffer with sufficient money to pay for n years inflation linked expenditure and replenished each year from growth only if the latter has increased in value. If the buffer is exhausted expenditure is taken directly from the growth investments.
Success is determined by whether the entire portfolio survives for the specified duration of the test period.I think this buffer approach is much like Prime Harvesting except that in the latter the bond allocation is essentially used as the buffer. Apologies if I have got this wrong.
There are many other ways of running an indirect withdrawal approach. The paper only considers one, so I cannot see it as evidence of any blanket statement about buffering.
It also has researched sell tipping points, ie you don't just sell equities when they've gone up but when they're up 20% real terms. And unlike short term buffer strategies like the one linked above, it appears to generally deliver better results than a fixed asset allocation strategy. More here: Dynamic asset allocation and withdrawal in retirement - Monevator
I've not seen any evidence a short term cash buffer strategy is of any benefit (other than a comfort blanket), obviously the above article doesn't prove conclusively that none exist as the parameters could be tweaked, it's hard to prove a negative (like there's no teapot orbiting the Sun), but if evidence is that "something similar" doesn't work then surely that should be the working assumption unless something comes along to prove otherwise.
A comfort blanket may well be useful. In a major equity crash, or even a medium duration down turn what do you do? Cut your drawdown? Or do you carry on drawing down at the same rate regardless, confident from your use of SWR that there is no real risk? A comfort blanket reduces the need for you to make a difficult decision for a while by which time it may not be necessary.
An indirect strategy need not be short term. I agree that short term buffer strategies are less than ideal since they are still dependent on at some point on making frequent ongoing short term transfers out of equity.
The objective driving my strategy is to keep the equity investments servicing the long term and shield them from meeting short term needs for drawdown, and to shield the ability to spend one's money how and when one wishes from short term changes in investment returns. To that end, like PH, one avoids taking income directly from growth investment but, unlike PH and the short term buffer approaches it also provides an integrated approach to handling one-offs by holding a large amount of stable investments. I am using the term "indirect" to indicate it's a strategy far broader than a simple cash buffer and to avoid criticism from those who leap to wrong conclusions on hearing the word "buffer.
Removing the need for the equity tranche to provide for short term cash needs enables one to use 100% equity for long term growth and simply ride the volatility. Like PH it does have the benefit of getting the 40% overall non-equity to do something useful. However PH relies on using a random selection of bonds. Are they really the best tools for the job? Is 60/40 allocation really the most appropriate.
At some point you're going to have to sell parts of that equity tranche to replenish your short/medium term pots......it can't stay in the "long term growth" pot forever......
0 -
Which is another reason I favour selling a fixed percentage of equities every year. I benefitted from dollar cost averaging on the way in, now I benefit from something similar on the way out tooMK62 said:Linton said:zagfles said:
The main difference with PH is it's a much longer term "buffer" strategy, if you want to call it that. Even in the worst bear markets it'd likely be over 10 years before you need to sell equities. The term I think is key - short term market timing is a mug's game, but longer term the market is more predictable - after all anyone invested in equities is long term timing the market - ie the assumption that over the long term equities will beat bonds/cash.Linton said:
Sorry, I have cheated and actually read the article. It uses an Indirect buffer approach and compares the % failures with simply drawing down directly from a single growth portfolio.Bostonerimus1 said:
US studies have shown that historically cash buffers do not improve survivability of a pension pot. It might be different for the UK.MK62 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.zagfles said:
If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.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.
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?
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.
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.
Of course, there are many ways to use cash in a portfolio, and so it's rather difficult to simulate them all......
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.The buffer approach is to set up a buffer with sufficient money to pay for n years inflation linked expenditure and replenished each year from growth only if the latter has increased in value. If the buffer is exhausted expenditure is taken directly from the growth investments.
Success is determined by whether the entire portfolio survives for the specified duration of the test period.I think this buffer approach is much like Prime Harvesting except that in the latter the bond allocation is essentially used as the buffer. Apologies if I have got this wrong.
There are many other ways of running an indirect withdrawal approach. The paper only considers one, so I cannot see it as evidence of any blanket statement about buffering.
It also has researched sell tipping points, ie you don't just sell equities when they've gone up but when they're up 20% real terms. And unlike short term buffer strategies like the one linked above, it appears to generally deliver better results than a fixed asset allocation strategy. More here: Dynamic asset allocation and withdrawal in retirement - Monevator
I've not seen any evidence a short term cash buffer strategy is of any benefit (other than a comfort blanket), obviously the above article doesn't prove conclusively that none exist as the parameters could be tweaked, it's hard to prove a negative (like there's no teapot orbiting the Sun), but if evidence is that "something similar" doesn't work then surely that should be the working assumption unless something comes along to prove otherwise.
A comfort blanket may well be useful. In a major equity crash, or even a medium duration down turn what do you do? Cut your drawdown? Or do you carry on drawing down at the same rate regardless, confident from your use of SWR that there is no real risk? A comfort blanket reduces the need for you to make a difficult decision for a while by which time it may not be necessary.
An indirect strategy need not be short term. I agree that short term buffer strategies are less than ideal since they are still dependent on at some point on making frequent ongoing short term transfers out of equity.
The objective driving my strategy is to keep the equity investments servicing the long term and shield them from meeting short term needs for drawdown, and to shield the ability to spend one's money how and when one wishes from short term changes in investment returns. To that end, like PH, one avoids taking income directly from growth investment but, unlike PH and the short term buffer approaches it also provides an integrated approach to handling one-offs by holding a large amount of stable investments. I am using the term "indirect" to indicate it's a strategy far broader than a simple cash buffer and to avoid criticism from those who leap to wrong conclusions on hearing the word "buffer.
Removing the need for the equity tranche to provide for short term cash needs enables one to use 100% equity for long term growth and simply ride the volatility. Like PH it does have the benefit of getting the 40% overall non-equity to do something useful. However PH relies on using a random selection of bonds. Are they really the best tools for the job? Is 60/40 allocation really the most appropriate.
At some point you're going to have to sell parts of that equity tranche to replenish your short/medium term pots......it can't stay in the "long term growth" pot forever......
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One point about the 2020financial calculator is that it using the return data from the Barclay's equity gilt study. The bonds in that study are undated (e.g., Consols) before about 1960, 20 year maturities until 1980 or so, and 15 year maturity after that. In other words, the bonds being simulated are far longer maturity than usually held during retirement.MK62 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.Bostonerimus1 said:
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.Triumph13 said:
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.zagfles said:
If you use a cash buffer to avoid selling equities when the market is "low", then that is market timing.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.
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?
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.
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.
Of course, there are many ways to use cash in a portfolio, and so it's rather difficult to simulate them all......
The effect of gilt maturity on SWR in the UK can be found at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4742456 and for percentage of portfolio withdrawals at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4827947
For full disclosure, I am the author of those two papers.
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