Variation on the Bucket Strategy

Linton

TSCati said:

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?
 

The purpose of holding non cash in the buffer is to provide inflation matching for money earmarked for the 5-10 year time frame, particularly one-off expenditure.  I do not aim for above inflation returns - that is the job of the growth fund.

Before the rise in interest rate WP funds were the only game in town with the reasonable possibility of matching long term inflation with low volatility.  Capital Gearing lost its way for a while though Troy Trojan performed in line with expectations. Currently short duration MM funds and gilts bought near to par can do the job with less volatility.   

OldScientist

I note that you have included £10k rental income in your list (which implies a rental property too!).

If your estimate of £3k per month is correct (and that is probably something you need to check) then once the state pension kicks in you will have

State pension £21.5k
Rental income £10k (assuming broadly index linked - a big assumption)

Covering, neglecting tax, almost all of your required expenditure.

At 60 years old, a joint life (100% survivor benefit) lifetime annuity with RPI protection to cover the missing £5k can  currently be bought for about £150k (payout rates are about 3.4%).

The 7 years before the state pension would need roughly another £150k (depends on inflation and interest rates)

After that, you could probably operate the remaining portfolio in any fashion you like and it will provide you with enough to cover ad-hoc spending and tax for a lifetime.

Linton

TSCati said:

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? 

It depends what you mean by risk.  Comparing the risk in the income and growth portfolios is meaningless since they do very different jobs.  The aim is to keep all short/medium term risk low.

Overall the risk of significant falls in income in £ terms from the income portfolio is relatively low since the portfolio is highly diversified being invested globally in funds covering equity income, corporate bonds, higher risk national bonds, infrastructure funds, REITS and any other reasonable high dividend/interest area I can find .  The capital values can be volatile but that doesn't matter since I would never sell a fund unless it stopped producing useful income.

The growth portfolio is only risky in the short/medium term.  So it makes sense to avoid having to sell funds for cash, given a significant  amount of cash and low risk non-cash is held in the buffer.  Selling to invest in other equity funds or corporate bond funds should be less of a concern since their prices should be correlated with those used for income.

TSCati

Linton said:

Before the rise in interest rate WP funds were the only game in town with the reasonable possibility of matching long term inflation with low volatility.  Capital Gearing lost its way for a while though Troy Trojan performed in line with expectations. Currently short duration MM funds and gilts bought near to par can do the job with less volatility.   

That makes sense, thank you.

TSCati

OldScientist said:

I note that you have included £10k rental income in your list (which implies a rental property too!).

If your estimate of £3k per month is correct (and that is probably something you need to check) then once the state pension kicks in you will have

State pension £21.5k
Rental income £10k (assuming broadly index linked - a big assumption)

Covering, neglecting tax, almost all of your required expenditure.

At 60 years old, a joint life (100% survivor benefit) lifetime annuity with RPI protection to cover the missing £5k can  currently be bought for about £150k (payout rates are about 3.4%).

The 7 years before the state pension would need roughly another £150k (depends on inflation and interest rates)

After that, you could probably operate the remaining portfolio in any fashion you like and it will provide you with enough to cover ad-hoc spending and tax for a lifetime.

Thank you @OldScientist. Yes, I'm currently tracking annual spends to check the £3k!

Not really considered the annuity - certainly worth thinking about.

TSCati

Linton said:

Overall the risk of significant falls in income in £ terms from the income portfolio is relatively low since the portfolio is highly diversified being invested globally in funds covering equity income, corporate bonds, higher risk national bonds, infrastructure funds, REITS and any other reasonable high dividend/interest area I can find .  The capital values can be volatile but that doesn't matter since I would never sell a fund unless it stopped producing useful income.

The growth portfolio is only risky in the short/medium term.  So it makes sense to avoid having to sell funds for cash, given a significant  amount of cash and low risk non-cash is held in the buffer.  Selling to invest in other equity funds or corporate bond funds should be less of a concern since their prices should be correlated with those used for income.

So the risk here is inflation, and this is why you're increasing your income portfolio each year by selling growth funds?

Linton said:

The growth portfolio is only risky in the short/medium term.  So it makes sense to avoid having to sell funds for cash, given a significant  amount of cash and low risk non-cash is held in the buffer.  Selling to invest in other equity funds or corporate bond funds should be less of a concern since their prices should be correlated with those used for income.

Understood.  Thank you.

Bostonerimus1

Linton said:

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.

Yes there seems to be a lot of duplication in the OP's portfolio and I think a fun weekend spent going over the asset allocations would be useful. What is a bit puzzling to me is the inclusion of bonds in the growth bucket, I'd be all in on equities there, and also the choice to use so many investment trusts. That might be just a personal preference for some more active management, but there should be some considered reason for each holding and thinking about that should also be part of that "fun weekend". I don't use a bucket strategy myself, but I think there is room for some simplification and maybe some cost savings in the OP's implementation. FYI if I was thinking in a "bucket strategy" way I'd use cash a few index funds. Here are some examples, admittedly from a US perspective, but there are many UK appropriate index fund alternatives for the US ones mentioned.

https://www.morningstar.com/portfolios/tax-deferred-retirement-bucket-portfolios-minimalist-investors

I'm in a similar situation to the OP, a small income need relative to portfolio size, and my approach to income generation from my largely equity index portfolio is to simply sweep the dividends into a spending account. I get the impression that the OP is a little more risk averse than me so this approach might not be right for them, but it's good to remember the old standby of dividends from equities in any plan rather than just hiding them inside some "income fund", part of most equity funds' growth is reinvested dividends.

Bostonerimus1

TSCati said:

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? 

You don't have to be bound by the ISA and pension account boundaries when creating a bucket strategy or asset allocation. Those boundaries obviously become relevant for taxation and withdrawal strategies.

TSCati

Bostonerimus1 said:

Yes there seems to be a lot of duplication in the OP's portfolio and I think a fun weekend spent going over the asset allocations would be useful. What is a bit puzzling to me is the inclusion of bonds in the growth bucket, I'd be all in on equities there, and also the choice to use so many investment trusts. That might be just a personal preference for some more active management, but there should be some considered reason for each holding and thinking about that should also be part of that "fun weekend". I don't use a bucket strategy myself, but I think there is room for some simplification and maybe some cost savings in the OP's implementation. FYI if I was thinking in a "bucket strategy" way I'd use cash a few index funds. Here are some examples, admittedly from a US perspective, but there are many UK appropriate index fund alternatives for the US ones mentioned.

https://www.morningstar.com/portfolios/tax-deferred-retirement-bucket-portfolios-minimalist-investors

I'm in a similar situation to the OP, a small income need relative to portfolio size, and my approach to income generation from my largely equity index portfolio is to simply sweep the dividends into a spending account. I get the impression that the OP is a little more risk averse than me so this approach might not be right for them, but it's good to remember the old standby of dividends from equities in any plan rather than just hiding them inside some "income fund", part of most equity funds' growth is reinvested dividends.

I think I probably am more risk adverse than you @Bostonerimus1.  I'm not looking for significant growth from my growth funds - I don't think I need it.  What I need is to be able to sleep at night, and the inclusion of a significant proportion of bonds (and other non-equity elements) will hopefully allow that.

I've learnt a lot from this forum over the last few years, thanks to the folk who provide comments and discuss scenarios. I'm grateful for the comments on this post and the feedback will certainly help improve my portfolio going forward.  Thank you.

FIREDreamer

TSCati said:

Bostonerimus1 said:

Yes there seems to be a lot of duplication in the OP's portfolio and I think a fun weekend spent going over the asset allocations would be useful. What is a bit puzzling to me is the inclusion of bonds in the growth bucket, I'd be all in on equities there, and also the choice to use so many investment trusts. That might be just a personal preference for some more active management, but there should be some considered reason for each holding and thinking about that should also be part of that "fun weekend". I don't use a bucket strategy myself, but I think there is room for some simplification and maybe some cost savings in the OP's implementation. FYI if I was thinking in a "bucket strategy" way I'd use cash a few index funds. Here are some examples, admittedly from a US perspective, but there are many UK appropriate index fund alternatives for the US ones mentioned.

https://www.morningstar.com/portfolios/tax-deferred-retirement-bucket-portfolios-minimalist-investors

I'm in a similar situation to the OP, a small income need relative to portfolio size, and my approach to income generation from my largely equity index portfolio is to simply sweep the dividends into a spending account. I get the impression that the OP is a little more risk averse than me so this approach might not be right for them, but it's good to remember the old standby of dividends from equities in any plan rather than just hiding them inside some "income fund", part of most equity funds' growth is reinvested dividends.

I think I probably am more risk adverse than you @Bostonerimus1.  I'm not looking for significant growth from my growth funds - I don't think I need it.  What I need is to be able to sleep at night, and the inclusion of a significant proportion of bonds (and other non-equity elements) will hopefully allow that.

I've learnt a lot from this forum over the last few years, thanks to the folk who provide comments and discuss scenarios. I'm grateful for the comments on this post and the feedback will certainly help improve my portfolio going forward.  Thank you.

Try not to be too much of a Robin Hood Cymraeg though!

Pob lwc.