Ready made portfolios for generating an income in retirement

Linton

mark55man said:

Dazza1902 said:

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.

So I think @Dazza1902 has a point.  The fascinating conversations about SWR GK PH etc answer the meta question about techniques to make a pot of money last (and the evidence of success in different techniques).  But I think the OP might have been after an understanding of specific income oriented funds.  Some of the options have been discussed - annuities, bond ladders etc.  Funds that seem to be missing are Income (or income and growth) oriented investment trusts, also high yield bond funds, or indeed fixed interest bonds.  I understand that high yield carries risks to total return and income volatility as yields dwindle for investors who just want an Annuity like (lite?) experience. 

In my case I have an adequate DB to cover my essentials so just want a flexible income but as high as possible especially early prior to state pension age.  Alternatively, on the lemon fool website they have decades long threads about construction and management of high yield portfolios (and equally long arguments about the merits of dividends vs total return)

I dont see dwindling yields or volatility as particular risks for income investing.  Broadly, income in £ terms is pretty consistent, much more so than capital values.    So an income investor can largely ignore changes in yield as these are more due to changes in capital value than in generated income.  All income investments to some extent follow bonds in their dependence on the prevailing market interest rates.

I also dont see income investment as an alternative to total return, or vice versa.  But rather you need both capital growth and income but should use them in different ways.  Capital growth is appropriate for meeting long term requirements such as matching inflation whereas income returns are better used to satisfy short/medium term needs such as covering ongoing expenses.

zagfles

gm0 said:

Triumph13 said:

MK62 said:

Linton said:

zagfles said:

Linton said:

Bostonerimus1 said:

MK62 said:

Bostonerimus1 said:

Triumph13 said:

Bostonerimus1 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.

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.

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.

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.

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......

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 wayout too

Errr. not really - this idea depends - a lot - on the comparator you choose to feel good about it. 

A good way to characterise dollar cost averaging positively is during accumulation.  Which is clearly a fine thing for saving up a pension month by month over decades.  Dips are your friend.  But it is the transfer of wealth from the selller of dips to the buyer of them.  The benefit for the buyer which most acknowledge is real -  of buying through volatility is not magic.  It comes from somewhere.  And the somewhere it comes from is the selling of cheaper units of the same funds during said volatility by the (forced) seller for income or any other deaccumulator of growth assets of that class.

And you could write that in reverse for drawdown. Bubbles/spikes are your friend. You may miss out on bubbles if you sell periodically. Attempting to short term time the market by avoiding selling during dips is no different to trying to avoid buying during bubbles.

But on average, the longer in the market the better, so buying as soon as you can and selling just before you need the income is more likely to get the best results unless you really believe you know better than the market. 

zagfles

Triumph13 said:

gm0 said:

Triumph13 said:

MK62 said:

Linton said:

zagfles said:

Linton said:

Bostonerimus1 said:

MK62 said:

Bostonerimus1 said:

Triumph13 said:

Bostonerimus1 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.

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.

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.

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.

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......

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 wayout too

Errr. not really - this idea depends - a lot - on the comparator you choose to feel good about it. 

A good way to characterise dollar cost averaging positively is during accumulation.  Which is clearly a fine thing for saving up a pension month by month over decades.  Dips are your friend.  But it is the transfer of wealth from the selller of dips to the buyer of them.  The benefit for the buyer which most acknowledge is real -  of buying through volatility is not magic.  It comes from somewhere.  And the somewhere it comes from is the selling of cheaper units of the same funds during said volatility by the (forced) seller for income or any other deaccumulator of growth assets of that class.

Clearly selling a large chunk in a dip could well be a panic response and signficantly worse than just selling regularly month by month.  So if you make *that* the comparator.  Monthly selling drip drip drip looks fine.

Nonetheless - my own preference is for selling funds only at rebalancing i.e. once in 12-18 months.  So the impact of short term volatility in terms of selling prices achieved between rebalancings is precisely zero.  I don't mind having some cash for income - as I intend to hold some sequence risk in cash/short gilts/MMF anyway.  So income will always be coming from "not equities" sources.

This is superior *for my purposes* - to the platform auto selling equities to cash month by month on a fixed day and getting market best execution.   Flash crash - oh dear.   Volatility dip like 2020 - oh dear.  

So income comes from buffer.  Controlled rebalancing timing, manual trades.  Equity sales happen where they happen at all at my choice of timing.  And using limit orders.

You choose the set and forget mechanism you like - if you are a set and forget drawdown investor.  Or you manage things more actively.  There is no "best" as such - only best for your goals and preferences and the risks you attempt to mitigate and those you carry

The comparator is to someone selling fixed dollar amounts of stocks at a regular interval - whatever that interval may be.  Because I'm selling fixed portfolio percentages, over time a larger proportion of my cash will end up coming from times when markets were high than when markets were low.  It's as simple as that.

I've been thinking about your strategy and it's probably quite a good way to maximise the value of your pension if you're happy with a highly volatile income, eg someone who has the basics covered by state pension & DBs.

The problem with SWR type strategies is they aim to provide a fixed income for life in most market conditions and as such there's a high likelihood that it will overperform leaving you with large amount unspent when you finally meet your maker. So that's really a "fail" in that you haven't received the full value of your pension. 

Do you intend to increase the % of the pot you withdraw gradually over the years? For instance if you start by withdrawing 4%, your income is going to fall in real terms if your investments don't return 4% over inflation, which is unlikely long term, and if you carry on at 4% for ever you'll always be leaving 96% of your pot. 

Triumph13

I'm very lucky to both have more money than I planned (thanks to my one day a week job) and kids that I like and trust.  I can therefore afford to plan to end up with them inheriting large amounts and not see that as a failure.  I plan to stick with my 3.5% fixed percentage from near 100% global equity funds and would hope that that would beat inflation over the long term.  If I didn't have kids then I might be looking at a rising percentage as we aged, but I'm not sure it would be worth it for the stress of worrying if my life expectancy assumptions were accurate.

You are spot on that having the basics covered by DB and SP makes this kind of approach much easier - I would strongly suggest that most people at least consider annuitisation to get to that point as it takes a lot of the pressure off, whatever drawdown approach you take.  It also greatly decreases volatility - to the extent that I don't really worry about the volatility any more.  Certainly not as much as I would worry about SORR.  The use of a cash buffer to further smooth volatility is more about short term planning horizons - I want to know what holidays I can afford next year in time to book them

OldScientist

Triumph13 said:

I'm very lucky to both have more money than I planned (thanks to my one day a week job) and kids that I like and trust.  I can therefore afford to plan to end up with them inheriting large amounts and not see that as a failure.  I plan to stick with my 3.5% fixed percentage from near 100% global equity funds and would hope that that would beat inflation over the long term.  If I didn't have kids then I might be looking at a rising percentage as we aged, but I'm not sure it would be worth it for the stress of worrying if my life expectancy assumptions were accurate.

You are spot on that having the basics covered by DB and SP makes this kind of approach much easier - I would strongly suggest that most people at least consider annuitisation to get to that point as it takes a lot of the pressure off, whatever drawdown approach you take.  It also greatly decreases volatility - to the extent that I don't really worry about the volatility any more.  Certainly not as much as I would worry about SORR.  The use of a cash buffer to further smooth volatility is more about short term planning horizons - I want to know what holidays I can afford next year in time to book them

I fully agree with the approach you outline. Securing 'essential' (or 'core') spending (however that is defined by the individual) with guaranteed income sources (SP, DB pension, RPI annuity, and inflation linked gilt ladder), is the key to then allowing dynamic withdrawals (constant percentage, VPW, 1/N, natural yield* etc.) from the equity and bond portfolio because the variability in portfolio income becomes less critical. Compared to SWR, the 'success' of such withdrawal strategies will be much less dependent on the initial withdrawal and, therefore, much less worrisome in the longer term. As a bonus, a percentage of portfolio approach (whether fixed or rising) is about as simple as one can get.

FWIW, we have accidentally followed (i.e., with no real planning until a few years before retirement) the strategy of building a floor of guaranteed income (DB pension and SP pension in due course) that covers all of our essential spending and most of our discretionary. Our portfolio withdrawals follow a modified version of bogleheads VPW.

* To stay vaguely on topic, I think the OP was possibly after a natural yield all in one portfolio. Apart from 'inc' versions of the usual suspects (e.g., Vanguard lifestrategy funds), I'm not sure that any exist. A two passive fund equivalent with a global high dividend fund (e.g., VHYL) and an investment grade bond fund might do the job.

Hoenir

Triumph13 said:

I plan to stick with my 3.5% fixed percentage

Inflation over the years will erode the buying power of a fixed amount. Inflation and market performance bear no direct correlations in the short to medium term. . 

Linton

Hoenir said:

Triumph13 said:

I plan to stick with my 3.5% fixed percentage

Inflation over the years will erode the buying power of a fixed amount. Inflation and market performance bear no direct correlations in the short to medium term. . 

The key point is that Triumph13 is withdrawing a fixed %, not a fixed amount.  So with a suitably sized buffer or lower, lower risk postfolio steady, inflation adjusted expenditure can be sustained. Over the medium/long term the growth investments should increase by more than inflation as does the % drawdown and so cover any increasing expenditure.
 
My rather different strategy also aims to decouple pension pot drawdown and day to day (or even year to year) expenditure.  This ISTM is the ideal situation.  You then just need annual, or less frequent, monitoring of the buffer.  Say good-bye to SWRs and Guyton-Klinger and separate rules for financial management for one-offs.

Bostonerimus1

OldScientist said:

Triumph13 said:

I'm very lucky to both have more money than I planned (thanks to my one day a week job) and kids that I like and trust.  I can therefore afford to plan to end up with them inheriting large amounts and not see that as a failure.  I plan to stick with my 3.5% fixed percentage from near 100% global equity funds and would hope that that would beat inflation over the long term.  If I didn't have kids then I might be looking at a rising percentage as we aged, but I'm not sure it would be worth it for the stress of worrying if my life expectancy assumptions were accurate.

You are spot on that having the basics covered by DB and SP makes this kind of approach much easier - I would strongly suggest that most people at least consider annuitisation to get to that point as it takes a lot of the pressure off, whatever drawdown approach you take.  It also greatly decreases volatility - to the extent that I don't really worry about the volatility any more.  Certainly not as much as I would worry about SORR.  The use of a cash buffer to further smooth volatility is more about short term planning horizons - I want to know what holidays I can afford next year in time to book them

I fully agree with the approach you outline. Securing 'essential' (or 'core') spending (however that is defined by the individual) with guaranteed income sources (SP, DB pension, RPI annuity, and inflation linked gilt ladder), is the key to then allowing dynamic withdrawals (constant percentage, VPW, 1/N, natural yield* etc.) from the equity and bond portfolio because the variability in portfolio income becomes less critical. Compared to SWR, the 'success' of such withdrawal strategies will be much less dependent on the initial withdrawal and, therefore, much less worrisome in the longer term. As a bonus, a percentage of portfolio approach (whether fixed or rising) is about as simple as one can get.

FWIW, we have accidentally followed (i.e., with no real planning until a few years before retirement) the strategy of building a floor of guaranteed income (DB pension and SP pension in due course) that covers all of our essential spending and most of our discretionary. Our portfolio withdrawals follow a modified version of bogleheads VPW.

* To stay vaguely on topic, I think the OP was possibly after a natural yield all in one portfolio. Apart from 'inc' versions of the usual suspects (e.g., Vanguard lifestrategy funds), I'm not sure that any exist. A two passive fund equivalent with a global high dividend fund (e.g., VHYL) and an investment grade bond fund might do the job.

For a long time annuities have been forgotten, obviously because of low interest rates and hence low payout rates. In the US, the home of the DC pension, there is ample positive retirement income research that includes annuities along with Social Security (the equivalent of UK SP) as an income foundation. However, through the market gains of the last 50 years there has always been a bias towards a Total Return stock and bond approach. That saw some revision after 2008, but annuities still aren't popular in the US. I put that down to the relatively generous US social security payments many people get, a perception that annuities are complicated, having to use a large amount of your savings and dominant brokerage companies like Vanguard, Fidelity etc being in the business of getting fees from the funds they sell rather than annuities. There are some hold outs for annuities like MetLife and one of the biggest is the Teachers Insurance and Annuity Association (TIAA), but they are quite niche and not many individuals pursue them.

Another source of income that requires some forward planning is the purchase of an income property. Once the mortgage is paid off the rent becomes an income source largely decoupled from the markets and if your own mortgage is also paid off then the need for income is greatly reduced, taking pressure off your invested portfolio and maybe making it possible to generate income from a combination of rental, annuity, state pensions, dividends and interest and leaving the portfolio to compound it's capital gains.

OldScientist

Bostonerimus1 said:

OldScientist said:

Triumph13 said:

I'm very lucky to both have more money than I planned (thanks to my one day a week job) and kids that I like and trust.  I can therefore afford to plan to end up with them inheriting large amounts and not see that as a failure.  I plan to stick with my 3.5% fixed percentage from near 100% global equity funds and would hope that that would beat inflation over the long term.  If I didn't have kids then I might be looking at a rising percentage as we aged, but I'm not sure it would be worth it for the stress of worrying if my life expectancy assumptions were accurate.

You are spot on that having the basics covered by DB and SP makes this kind of approach much easier - I would strongly suggest that most people at least consider annuitisation to get to that point as it takes a lot of the pressure off, whatever drawdown approach you take.  It also greatly decreases volatility - to the extent that I don't really worry about the volatility any more.  Certainly not as much as I would worry about SORR.  The use of a cash buffer to further smooth volatility is more about short term planning horizons - I want to know what holidays I can afford next year in time to book them

I fully agree with the approach you outline. Securing 'essential' (or 'core') spending (however that is defined by the individual) with guaranteed income sources (SP, DB pension, RPI annuity, and inflation linked gilt ladder), is the key to then allowing dynamic withdrawals (constant percentage, VPW, 1/N, natural yield* etc.) from the equity and bond portfolio because the variability in portfolio income becomes less critical. Compared to SWR, the 'success' of such withdrawal strategies will be much less dependent on the initial withdrawal and, therefore, much less worrisome in the longer term. As a bonus, a percentage of portfolio approach (whether fixed or rising) is about as simple as one can get.

FWIW, we have accidentally followed (i.e., with no real planning until a few years before retirement) the strategy of building a floor of guaranteed income (DB pension and SP pension in due course) that covers all of our essential spending and most of our discretionary. Our portfolio withdrawals follow a modified version of bogleheads VPW.

* To stay vaguely on topic, I think the OP was possibly after a natural yield all in one portfolio. Apart from 'inc' versions of the usual suspects (e.g., Vanguard lifestrategy funds), I'm not sure that any exist. A two passive fund equivalent with a global high dividend fund (e.g., VHYL) and an investment grade bond fund might do the job.

For a long time annuities have been forgotten, obviously because of low interest rates and hence low payout rates. In the US, the home of the DC pension, there is ample positive retirement income research that includes annuities along with Social Security (the equivalent of UK SP) as an income foundation. However, through the market gains of the last 50 years there has always been a bias towards a Total Return stock and bond approach. That saw some revision after 2008, but annuities still aren't popular in the US. I put that down to the relatively generous US social security payments many people get, a perception that annuities are complicated, having to use a large amount of your savings and dominant brokerage companies like Vanguard, Fidelity etc being in the business of getting fees from the funds they sell rather than annuities. There are some hold outs for annuities like MetLife and one of the biggest is the Teachers Insurance and Annuity Association (TIAA), but they are quite niche and not many individuals pursue them.

Another source of income that requires some forward planning is the purchase of an income property. Once the mortgage is paid off the rent becomes an income source largely decoupled from the markets and if your own mortgage is also paid off then the need for income is greatly reduced, taking pressure off your invested portfolio and maybe making it possible to generate income from a combination of rental, annuity, state pensions, dividends and interest and leaving the portfolio to compound it's capital gains.

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

2) Retirees whose overall income requirements would mean that their portfolio withdrawals would be a small fraction of their portfolio (less than, say, 2% - the exact figure can be argued over). This is probably a relatively small number of retirees (either very rich or very frugal).

Only those remaining could be in the market for an annuity. According to data at https://www.fca.org.uk/data/retirement-income-market-data-2022-23 , only about 8% of pension pots accessed for the first time were used to purchase an annuity.

Since we are veering rather OT, I'll probably leave it there!

NedS

OldScientist said:

I think the range of people for whom an annuity is a good option is probably quite limited. For example, the following would probably have little need of an annuity

1) Retirees whose essential expenditure is largely or wholly covered by existing guaranteed income (state pension and/or DB pension) and whose pension pot is around the UK average (roughly £80k). In practice this is probably most people.

Really? I have no idea how many people have access to a DB pension, nor it's average size, but I would guess that most people do not, thus leaving them with only a SP as guaranteed income which certainly does not cover essential expenditure, especially for those with substantial housing costs (considering around 2/3rd of people over 65 do not own their own home, and these are also most likely to be the people without additional DB (or any) pension provision).