Variation on the Bucket Strategy

OldScientist

Just to echo the mixed approach to annuitisation. My earlier (very rough) calculation (page 2 of the thread) indicated that £150k would secure the post-SP shortfall in required income of £5k or so using a joint life RPI annuity and a further £150k either as a fixed term annuity or set aside in a ladder of fixed rate cash accounts (or, more complex, in a ladder of inflation linked gilts) would roughly cover the shortfall in income before state pension. A guarantee period can be added to the lifetime annuity to provide income for legacy purposes should both annuitants die young (or, alternatively, term life insurance). For a joint annuity, a 20 year guarantee doesn't make a lot of difference to the payout rate and, hence, premium.

Your remaining £1.2 million could then remain invested to supply a) adhoc spending needs, and b) a legacy. Since your main income needs would be covered, your portfolio could then be managed more simply (I note that published backtesting of the bucket strategy, e.g., McClung's book Living off your money, the relevant chapter is available for free download, is not particularly favourable, although cash buffers can add some benefits for those completely dependent on their portfolio income).

For a risk averse person, annuities are a good approach and have the benefit of being relatively simple to manage (in the event of cognitive decline). They do come with some risks, insurance company risk (which is largely covered by the FSCS) and government default (unlikely, but not impossible) - the latter of which would have other effects on the UK population.

Bostonerimus1

OldScientist said:

Just to echo the mixed approach to annuitisation. My earlier (very rough) calculation (page 2 of the thread) indicated that £150k would secure the post-SP shortfall in required income of £5k or so using a joint life RPI annuity and a further £150k either as a fixed term annuity or set aside in a ladder of fixed rate cash accounts (or, more complex, in a ladder of inflation linked gilts) would roughly cover the shortfall in income before state pension. A guarantee period can be added to the lifetime annuity to provide income for legacy purposes should both annuitants die young (or, alternatively, term life insurance). For a joint annuity, a 20 year guarantee doesn't make a lot of difference to the payout rate and, hence, premium.

Your remaining £1.2 million could then remain invested to supply a) adhoc spending needs, and b) a legacy. Since your main income needs would be covered, your portfolio could then be managed more simply (I note that published backtesting of the bucket strategy, e.g., McClung's book Living off your money, the relevant chapter is available for free download, is not particularly favourable, although cash buffers can add some benefits for those completely dependent on their portfolio income).

For a risk averse person, annuities are a good approach and have the benefit of being relatively simple to manage (in the event of cognitive decline). They do come with some risks, insurance company risk (which is largely covered by the FSCS) and government default (unlikely, but not impossible) - the latter of which would have other effects on the UK population.

Or the OP has the luxury of looking at things from another perspective. As their pot is large relative to the income they need they can take more risk and have a larger equity allocation than many people as losses won't change the amount they can safely withdraw. If they did get an annuity it could just replace some fixed income in a bucket strategy. I think the OP needs to tidy their portfolio up a bit, get a handle on it's overall asset allocation and think more conventionally about the type of investments in each bucket.

NedS

I agree, given the age, income requirements and amount of assets available, the OP is in a very strong position and can afford to take significant risk and consider their legacy after ensuring that their income needs have been adequately met.

I am a similar age to the OP, and see my own investment horizon as being 40 years plus any additional horizon of my beneficiaries (children) - so once my income needs have been met, the investment horizon is essentially unconstrained and thus it makes sense for any assets not required to meet near-term income to be fully invested in equities.

https://www.youtube.com/watch?v=PSWjdNqYFgM

Bostonerimus1

NedS said:

I agree, given the age, income requirements and amount of assets available, the OP is in a very strong position and can afford to take significant risk and consider their legacy after ensuring that their income needs have been adequately met.

I am a similar age to the OP, and see my own investment horizon as being 40 years plus any additional horizon of my beneficiaries (children) - so once my income needs have been met, the investment horizon is essentially unconstrained and thus it makes sense for any assets not required to meet near-term income to be fully invested in equities.

https://www.youtube.com/watch?v=PSWjdNqYFgM

That's where I am too. My income is covered by a DB pension and rental income and I'll have a surplus when SPs start. My portfolio is 90% global equities and I hopefully have a 30 or 40 year time horizon. I'm not really looking to generate income, more to grow the investments so there's more to pass on to my heirs and charities, but I will be taking some distributions for tax planning purposes and I'll probably spend some of that.

TSCati

****** UPDATE ******

After further consideration, I have decided to increase my monthly requirement to £3,500.  This is essentially my current take home pay less mortgage (which will be paid off before I retire).

From the Morningstar website, I calculate the asset allocation of my original plan to be:

• Equites 57.9%
• Bonds 20.1%
• Cash 17.3%
• Other 4.7%

If I remove the WP bucket and transfer these assets to my income portfolio, the revised allocation would be:

• Equites 63.1%
• Bonds 19.0%
• Cash 16.0%
• Other 1.9%

The equites are made up of:

• UK 23.2%
• North America 22.2%
• Rest of world 17.7%

I think I'm comfortable with the revised allocation and will likely proceed on this basis.

The above allocations do not consider my rental property (no mortgage, not currently rented out), which will clearly skew these allocations. 

I do not anticipate reducing my cash buffer as I will probably use some of this to help the kids with buying their first homes - the first of which is likely in the next 18 months.

I'm currently not planning on purchasing an annuity, although I will keep mulling this matter over between now and my retirement.

I would appreciate any further feedback/comments on my proposed approach.

Bostonerimus1

My feed back is too much cash, too much UK equity and not enough US equity.

Linton

Are you still keeping to your original bucket strategy?  If you are, you need to assign an appropriate allocation to each bucket.  The overall picture is less important.

For example an income bucket is likely to have much more UK equity than US equity since the US does not produce high dividends.  On the other hand is you were lumping it all in a general "total return" approach then the UK is far too high.  Theproblem being not that the UK is necessarily a bad place to invest but rather that the FTSE sector allocations are "unusual".  In particular the near to zero allocated to Tech and the relatively large amount to drillers and miners.  

SImilar considerations apply to bonds.  The bonds you would naturally use for income are not those you would choose to diversify what is basically a growth portfolio.

FIREDreamer

Have a look at some of these portfolios …

https://portfoliocharts.com/portfolios/

TSCati

Linton said:

Are you still keeping to your original bucket strategy?  If you are, you need to assign an appropriate allocation to each bucket.  The overall picture is less important.

Still planning on using a bucket strategy but without my original WP bucket.  The more I look at it, my original growth bucket is actually a WP (or a loss limitation) bucket?

Current thoughts are:

Bucket 1, Cash 16.0% (some to be gifted to kids for house deposits)

Bucket 2, Income 33.7% (currently in ISAs and GIAs, to be transferred to only ISAs in due course)

Bucket 3, Loss limitation 50.3% (pensions)

The distribution in Buckets 2 and 3 are now proposed to be:

Bucket 2, Income:

• UK equities 57.7%
• North American equities 16.2%
• Rest of world equities 26.1%

Bucket 3, Loss limitation:

• UK equities 7.5%
• North American equities 33.2%
• Rest of world equities 17.5%
• Government bonds 17.0%
• Company bonds 20.6%
• Cash 0.5%
• Other 3.7%

I guess many will say that the above approach is too conservative and that I should aim for more growth in Bucket 3?

Maybe I should consider Vanguard LifeStrategy 80/HSBC Global Strategy Dynamic instead of the Vanguard LifeStrategy 60/HSBC Global Strategy Balanced that my current approach is based on?

I'm too risk adverse to go all-in on equities in Bucket 3!

Linton

TSCati said:

Linton said:

Are you still keeping to your original bucket strategy?  If you are, you need to assign an appropriate allocation to each bucket.  The overall picture is less important.

Still planning on using a bucket strategy but without my original WP bucket.  The more I look at it, my original growth bucket is actually a WP (or a loss limitation) bucket?

Current thoughts are:

Bucket 1, Cash 16.0% (some to be gifted to kids for house deposits)

Bucket 2, Income 33.7% (currently in ISAs and GIAs, to be transferred to only ISAs in due course)

Bucket 3, Loss limitation 50.3% (pensions)

The distribution in Buckets 2 and 3 are now proposed to be:

Bucket 2, Income:

• UK equities 57.7%
• North American equities 16.2%
• Rest of world equities 26.1%

Bucket 3, Loss limitation:

• UK equities 7.5%
• North American equities 33.2%
• Rest of world equities 17.5%
• Government bonds 17.0%
• Company bonds 20.6%
• Cash 0.5%
• Other 3.7%

I guess many will say that the above approach is too conservative and that I should aim for more growth in Bucket 3?

Maybe I should consider Vanguard LifeStrategy 80/HSBC Global Strategy Dynamic instead of the Vanguard LifeStrategy 60/HSBC Global Strategy Balanced that my current approach is based on?

I'm too risk adverse to go all-in on equities in Bucket 3!

US funds do not create much % income unless you go for "clever" ones that generate it through derivatives.  If you want equity income the Far East is pretty good as is Europe.

Company bonds which you have put into "Loss limitation" would in my view be better in "Income". The problem with corporate bonds is that their price is correlated with equity prices and so will fall in an equity crash.  Their capital value will be affected by interest rate changes as well, just like Gilts.  On the other hand their income in £ terms should be  pretty stable. So best to use them in an environment where their capital value is relatively unimportant.