Variation on the Bucket Strategy

TSCati

I'm 58 and planning  to retire when I reach 60, in just over a year and half's time.  Both my wife and I have enough NI contributions to give a full state pension (under the current rules!), and my target monthly income in retirement is £3,000.

I'm currently looking at decumulation strategies and have come up with a variation on the Bucket Strategy which I'd appreciate some feedback on:

Bucket 1 - Cash

• Reason - Pay out monthly into current account (£3,000). Any annual surplus to be used for capital items
• Holding - 4 years' worth of cash (£200,000) plus income stream
• Account type - High interest accounts and premium bonds
• Strategy - Collection point from all income streams
• Annual rent (£10,000)
• Annual dividend income (£13,000)
• Annual interest income (£2,000)
• Pension fund sales (£31,500)

Bucket 2 - Income funds

• Reason - To top up Bucket 1
• Holding - Income funds and investment trusts
• Account type - ISAs
• Strategy - Do not sell
• Portfolio value = £300,000
• Annual dividend income = £12,000

Bucket 3 - Wealth preservation funds

• Reason - Low risk portfolio which keeps up with inflation
• Holding - Wealth preservation investment trusts and bond funds
• Account type - GIA moving to ISAs
• Strategy - Do not sell unless 2-year bear market
• Portfolio value = £100,000
• Annual dividend income = £1,000 

Bucket 4 - Long term growth and selling units

• Reason - Long term growth
• Holding - Global index funds and multi-asset funds (overall percentage 60% stocks/40% other)
• Account type - Pensions
• Strategy - Sell units each year using UFPLS
• Portfolio value = £900,000
• Drawdown 3.5% = £31,500

Bostonerimus1

Looks like the standard bucket categories. Why so much in cash? What's your overall asset allocation. Buckets are just a time way to organize a portfolio and cash flow, but they can obscure overall asset allocation.

TSCati

Bostonerimus1 said:

Why so much in cash? 

To limit the impact of sequence of return. When the markets are down, I'm planning to only withdraw up to the personal allowance from the pensions, and withdraw the remaining amount from the cash buffer.

Bostonerimus1 said:

What's your overall asset allocation. 

Bucket 1: Cash/premium bonds
Bucket 2: CTY, MYI, MRCH, VHYL, VUKEIII
Bucket 3: Currently CGT, PNL. A bond fund to be added.
Bucket 4: Currently Scottish Widows Pens Portfolio 3 and L&G Multi-Index (Risk Profile 5) Fund 3.  To be moved into Vanguard LifeStrategy 60 and HSBC Global Strategy Balanced Portfolio on retirement.

Not sure what the exact overall asset allocation is, but I'm hoping it's around the 60/40 mark.

LHW99

Do you need the wealth preservation bucket? - you say its for a 2-year bear market, but you are keeping 4 years in cash, and topping up from the income bucket.

Linton

TSCati said:

I'm 58 and planning  to retire when I reach 60, in just over a year and half's time.  Both my wife and I have enough NI contributions to give a full state pension (under the current rules!), and my target monthly income in retirement is £3,000.

I'm currently looking at decumulation strategies and have come up with a variation on the Bucket Strategy which I'd appreciate some feedback on:

Bucket 1 - Cash

• Reason - Pay out monthly into current account (£3,000). Any annual surplus to be used for capital items
• Holding - 4 years' worth of cash (£200,000) plus income stream
• Account type - High interest accounts and premium bonds
• Strategy - Collection point from all income streams
• Annual rent (£10,000)
• Annual dividend income (£13,000)
• Annual interest income (£2,000)
• Pension fund sales (£31,500)

Bucket 2 - Income funds

• Reason - To top up Bucket 1
• Holding - Income funds and investment trusts
• Account type - ISAs
• Strategy - Do not sell
• Portfolio value = £300,000
• Annual dividend income = £12,000

Bucket 3 - Wealth preservation funds

• Reason - Low risk portfolio which keeps up with inflation y portfolio is a similar structure
• Holding - Wealth preservation investment trusts and bond funds
• Account type - GIA moving to ISAs
• Strategy - Do not sell unless 2-year bear market
• Portfolio value = £100,000
• Annual dividend income = £1,000 

Bucket 4 - Long term growth and selling units

• Reason - Long term growth
• Holding - Global index funds and multi-asset funds (overall percentage 60% stocks/40% other)
• Account type - Pensions
• Strategy - Sell units each year using UFPLS
• Portfolio value = £900,000
• Drawdown 3.5% = £31,500

My portfolio is similar in structure, though about half the size. There are some differences in how it is managed.

You are targeting 4% on your income funds. My aim is 6%.  One won’t get much inflation matching taking 6% so the growth portfolio is used to top up the income portfolio.

This means that growth funds are primarily sold to buy income funds rather than converted to cash which reduces the effect of selling equity when prices are low. Also, income from dividends and interest should be less volatile than equity prices and so places fewer demands on the buffer.

I do hold WP funds but would like to get rid of them since I feel shorter dated bonds are now more appropriate. These non-equities are regarded as part of the cash buffer.

Bostonerimus1

TSCati said:

Bostonerimus1 said:

Why so much in cash? 

To limit the impact of sequence of return. When the markets are down, I'm planning to only withdraw up to the personal allowance from the pensions, and withdraw the remaining amount from the cash buffer.

Bostonerimus1 said:

What's your overall asset allocation. 

Bucket 1: Cash/premium bonds
Bucket 2: CTY, MYI, MRCH, VHYL, VUKEIII
Bucket 3: Currently CGT, PNL. A bond fund to be added.
Bucket 4: Currently Scottish Widows Pens Portfolio 3 and L&G Multi-Index (Risk Profile 5) Fund 3.  To be moved into Vanguard LifeStrategy 60 and HSBC Global Strategy Balanced Portfolio on retirement.

Not sure what the exact overall asset allocation is, but I'm hoping it's around the 60/40 mark.

The compartmentalization inherent in Bucket Strategies often leads to the overall asset allocation being hidden. I think it would be good for you to sit down and work that out. I would also consider if a small annuity might fit into your plans. Whatever you do the size of your portfolio is large compared to your stated income requirement so you have a lot of options.

Another couple of observations: having a large cash allocation does not necessarily improve the survivability of a retirement portfolio and might be a drag on overall safe withdrawal amounts if done to excess; you could have a far simpler portfolio of a couple of equity index funds or a single equity multi-asset fund like VLS100 and the dividends of 2% or 3% would generate your 36k/year from your 1.5M portfolio. That last point isn't a retirement portfolio recommendation just a thought as I think people sometimes over complicate things. I wonder if anyone has done a bucket strategy with something like a money market fund, VLS20, VLS60 and VLS100?

You are already in a comfortable position and when SP starts you will be in an even better position. Well done.

Linton

Bostonerimus1 said:

TSCati said:

Bostonerimus1 said:

Why so much in cash? 

To limit the impact of sequence of return. When the markets are down, I'm planning to only withdraw up to the personal allowance from the pensions, and withdraw the remaining amount from the cash buffer.

Bostonerimus1 said:

What's your overall asset allocation. 

Bucket 1: Cash/premium bonds
Bucket 2: CTY, MYI, MRCH, VHYL, VUKEIII
Bucket 3: Currently CGT, PNL. A bond fund to be added.
Bucket 4: Currently Scottish Widows Pens Portfolio 3 and L&G Multi-Index (Risk Profile 5) Fund 3.  To be moved into Vanguard LifeStrategy 60 and HSBC Global Strategy Balanced Portfolio on retirement.

Not sure what the exact overall asset allocation is, but I'm hoping it's around the 60/40 mark.

The compartmentalization inherent in Bucket Strategies often leads to the overall asset allocation being hidden. I think it would be good for you to sit down and work that out. I would also consider if a small annuity might fit into your plans. Whatever you do the size of your portfolio is large compared to your stated income requirement so you have a lot of options.

Another couple of observations: having a large cash allocation does not necessarily improve the survivability of a retirement portfolio and might be a drag on overall safe withdrawal amounts if done to excess; you could have a far simpler portfolio of a couple of equity index funds or a single equity multi-asset fund like VLS100 and the dividends of 2% or 3% would generate your 36k/year from your 1.5M portfolio. That last point isn't a retirement portfolio recommendation just a thought as I think people sometimes over complicate things. I wonder if anyone has done a bucket strategy with something like a money market fund, VLS20, VLS60 and VLS100?

You are already in a comfortable position and when SP starts you will be in an even better position. Well done.

With a bucket strategy, as with any other strategy, overall asset allocation should be understood. Morningstar can provide the details for each bucket and the total figures accumulated with a simple spread sheet.

However a VLS100/Short term MM fund portfolio does not seem as particularly relevant since the presence of an income bucket implies that different types of equity are managed separately. Something that is impossible with a single equity tracker.

ISTM that the OPs income and growth portfolios may be too similar in allocation to justify their separate existence. Furthermore both the income and growth portfolios are used to provide similar % income. Perhaps more focus on the objectives of each bucket could be useful.


I agree that the OP could usefully consider covering most or all  essential ongoing expenditure is covered with guaranteed income. Though this may be the case now with 2X SPs which do not seem to be included in the overall analysis.

TSCati

LHW99 said:

Do you need the wealth preservation bucket? - you say its for a 2-year bear market, but you are keeping 4 years in cash, and topping up from the income bucket.

Fair point. Probably don't need both the wealth preservation bucket and the 4 years cash. Which to get rid of through? I think I feel more comfortable keeping the cash, even though it will be eroded by inflation over the years.

TSCati

Linton said:

This means that growth funds are primarily sold to buy income funds rather than converted to cash which reduces the effect of selling equity when prices are low. Also, income from dividends and interest should be less volatile than equity prices and so places fewer demands on the buffer.

Thanks @Linton. This makes sense. I will consider amending my strategy accordingly. 

Linton said:

I do hold WP funds but would like to get rid of them since I feel shorter dated bonds are now more appropriate. These non-equities are regarded as part of the cash buffer.

Are you able to expand a little on that?
 

TSCati

Bostonerimus1 said:

The compartmentalization inherent in Bucket Strategies often leads to the overall asset allocation being hidden. I think it would be good for you to sit down and work that out. 

Linton said:

With a bucket strategy, as with any other strategy, overall asset allocation should be understood. Morningstar can provide the details for each bucket and the total figures accumulated with a simple spread sheet.

Thanks both. I'll take some time over the weekend to assess my overall asset allocation.

TSCati

Linton said:

ISTM that the OPs income and growth portfolios may be too similar in allocation to justify their separate existence. Furthermore both the income and growth portfolios are used to provide similar % income. Perhaps more focus on the objectives of each bucket could be useful.

The income portfolio sits in two ISAs whilst the growth portfolio sits in two pensions - it seems sensible to me keep them separate?  I do like the idea of increasing the income portfolio each year by selling units from the growth portfolio.  However, which would you consider to be lower risk - the various trusts and funds in the income portfolio, or the 60/40 funds in the growth portfolio?