SWR Come What May

NoMore

Linton said:

OldScientist said:

Linton said:

OldScientist said:

Linton said:

OldScientist said:

Linton said:

OldScientist said:

Linton said:

OldScientist said:

NoMore said:

jim8888 said:

NoMore said:

Its a deceptively simple answer to a extremely difficult problem, unfortunately you can't guarantee its the right answer.

I'm also pretty sure 90% (outside this thread/forum) misunderstand it and think it means 4% (or whatever SWR%) of your remaining portfolio every year not the correct method which is 4% of the initial portfolio and then adjust that number each year for inflation such that your spending power each year remains the same. 

Thanks for that clarification. I'd be in the 90% and I thought I knew about this stuff !

As I said its a common misconception, but if you did the 4% of remaining each year, your withdrawals could vary wildly depending on gains/losses. The SWR avoids this by setting a initial amount and then adjusting it for inflation. The idea is like a yearly wage its predictable what you will get, with a 4% of remaining you have no idea year to year what you will be withdrawing.

The predictability (or otherwise) of income is a critical point. Withdrawal strategies can broadly be divided into three categories
1) Inflation adjusted (of which constant inflation adjusted, i.e., SWR is the best known). From an income point of view, the advantage is that the income is known, but the disadvantage is that how long the income will last for is not.
2) Percentage of portfolio (e.g., constant percentage, bogleheads VPW or ABW, 1/N, possibly natural yield, etc.). The advantage is that, mathematically, income will be delivered for a lifetime, but the disadvantage is that real income will vary from year to year and, potentially, become small.
3) Hybrid methods, and there are loads, combine elements of inflation linked and percentage of portfolio methods (e.g., Guyton Klinger, Vanguard Dynamic, Carlson's endowment, Bengen’s floor and ceiling, etc.). Income is less variable than in the percentage of portfolio case (although can still get small in poor retirements) and there is less chance of portfolio exhaustion than in the inflation adjusted case.

However, whether you care about variability or failure in drawdown income depends on what fraction it forms of your spending (whether essential or the total of essential and discretionary).

For example

For a couple with two state pensions (£23k), and a combined pension pot of £150k (and an inflation adjusted income of ~£4.5k). If their state pensions cover their essential spending and at least some of their discretionary, then the drawdown income is just ‘icing on the cake’ and pretty well any withdrawal strategy could be adopted because variability or failure can easily be accommodated. I suspect a number of the denizens on these boards fall into this category.

However, for a couple with two state pensions (£23k), a combined pension pot of £800k (inflation adjusted income ~£24k), an essential spend of £40k, and a discretionary spend of a further £10k, things are a bit tricker since a portfolio failure would leave them with insufficient income to support their essential spend and percentage of portfolio methods might leave them short in some years. Playing around with different hybrid approaches might provide a solution, but there is always the possibility of failure. However, purchasing sufficient RPI protected income annuity to provide most or all of the essential spend (i.e., up to an additional £17k costing around £400-£450k for a joint life – even if payout rates fall back to 3%, this would still ‘only’ cost £560k) and then withdrawing the remaining pot using whatever method desired. Of course, an alternative approach might be to revise what is considered essential spending and what discretionary.

There is a 4th strategy.  Plan on taking what you need, invest for long term growth with a high global diversification, and ensure you have sufficient slack to last n years with zero equity growth.  Choose "n" and "need" on the basis of what you can afford and are prepared to accept in the knowledge that there is no investment based strategy that will work in all conceivable circumstances.

In my view the academic strategies are fine to boost the authors professional ratings, book sales, and earnings from the lecture circuit./  To be fair they may be helpful in giving you the confidence to jump.  But I find it difficult to believe that any but a very small number of people will put any of them into practice over the long term.

Does anyone here who has retired actually use an academic strategy? If so which one?

IMV, defining 'what you can afford' is one element of the withdrawal strategies.

In answer to your question, yes
1) Floor provided by an inflation protected DB pension (which will be added to once in receipt of the SP)
2) Portfolio withdrawals using a modified version of VPW (so withdrawals vary from year to year).
3) Inflation linked ladder (and life insurance) to cover the period before my OH gets their SP in the event of my death.

I don't know whether 1) counts as an 'academic' strategy, but had I not had a DB pension, I would have built as sufficient flooring using an annuity instead (does buying an annuity count as an 'academic' strategy?).

I am solely referring to long term strategies intended to manage drawdown from volatile investments. If you can meet your needs without it that is fine but its not what I am discussing..

As a basic principle I would argue against any strategy that imposes variable expenditure over time depending on the then current economic circumstances.  So that would rule out VPW (Variable % withdrawal) unless one had a sufficiently large buffer to cover the difficult times. 

Just to be clear, are you arguing for constant inflation adjusted withdrawals (i.e., some form of SWR) then, since any other type would introduce variable real expenditure?

The 'buffer' can come from guaranteed income (whether SP, DB pension, RPI annuity, Edit: or inflation linked gilt ladder) - i.e., a 'floor and upside' approach.

I am not arguing for constant inflation linked withdrawals.  That sounds too prescriptive. The aim is to be able to spend what one wants to spend when one wants to spend it.

What I am arguing for in other threads is a large lower risk buffer from which all income is taken.  The buffer is fed by interest/dividends from income funds,by annuities/SP and if necessary by lump sums from a growth portfolio.  So withdrawal from growth funds is a strategic decision, not a regular feed.

By decoupling expenditure from sale of growth funds one can take a medium term approach.with minimal disruption from isolated crashes and thus no need to slash expnditure at short notice.

Thank you for clarifying. If I now understand correctly, you are using a 'cash' buffer to smooth short term variations in your income.

I note that research (pesky academics and finance people!) results are mixed,

https://www.financialplanningassociation.org/article/journal/SEP13-benefits-cash-reserve-strategy-retirement-distribution-planning suggests that a one year cash buffer improves retirement outcomes once (US) taxes and transaction costs are accounted for.

The results at  https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/ suggests that replacing bonds with cash can improve portfolio longevity in the worst historical cases but at the cost of reduced legacy in the best.

While https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/ (and the underlying research at https://bpb-us-w2.wpmucdn.com/sites.udel.edu/dist/a/855/files/2020/08/Sustainable-Withdrawal-Rates.pdf ) suggests that the return drag of a large cash buffer outweighs any positive effect of the underlying market timing.

I do note that, as far as I can tell, in each case cash returns are modelled as those of 3 month bills. This is probably a reasonably proxy although at times rates on easy access accounts will be higher than this and at other times a lower. However, a rolling ladder of 1 year fixed rate accounts will probably tend to do better.

However, the psychological effect has to be acknowledged since the cash buffer may help reduce panic in large market downturns.

For me, the nice thing about this thread is that it illustrates that there isn't one 'magic' solution to retirement planning!

I think you will find that the academic studies model a very different management approach. If you just have a one-year buffer you really are doing little more than withdrawing a year early.  A year is rather short time period if you are trying to avoid the problems of taking a steady income from volatile equity.

One common criticism of low risk buffer approaches is that they require timing decisions as to when to start and stop using the buffer.  What I am proposing is that you never switch - expenditure always comes from the buffer.

I won't find that because you are mistaken. For example, middle one of those studies uses a variety of methods and the last (https://bpb-us-w2.wpmucdn.com/sites.udel.edu/dist/a/855/files/2020/08/Sustainable-Withdrawal-Rates.pdf ) uses buffers of 1, 2, 3, and 4 years. From the results, it is clear that a 3 or 4 year buffer is better than a 1 year one, but is generally still worse than not using a buffer at all.

You do have timing decisions when filling the buffer - i.e. when should equities be used to refill the buffer? Of course, it is entirely possible that the buffer becomes exhausted if equities are 'down' for an extended period of time. However, I note that how likely this is depends on what fraction of your overall expenditure is coming from the portfolio rather than guaranteed income.

'Floor and upside' where enough flooring is built (state pension, DB pension, RPI annuities, inflation linked gilt ladders) to cover a significant proportion of income requirements (e.g., one might aim to cover essential spending)  removes market risk and volatility from that income stream. This has two effects, firstly that the income from the portfolio can be more volatile (because discretionary expenditure can be variable) and secondly, if desired, more risk can be taken with the remaining portfolio.

For example, a couple aged 67yo with essential income requirements of £24k (i.e., around 'minimum' in PLSA terms) would have that largely covered by the state pension. If desired they could build more income flooring using an annuity (currently about 3.9% payout rate for a joint life RPI, 100% beneficiary) and/or use pretty well any drawdown method they like.

In bad retirements, they will lose some of their discretionary expenditure, while in good retirements they will have more to spend or build up their legacy (to be fair, in good retirements it doesn't really matter what people do).

Personally, 'floor and upside' is what I planned and have implemented in the 5 years I've been retired. But, as I implied earlier, each to their own!

In my case the buffer is refilled by SP, annuities and ongoing interest and dividends from income funds.  Apart from the TFLS's used in the initial setup I have so far found it unnecessary to sell equities to raise cash. The growth equities exist purely for matching inflation by adding to the income funds, not for immediate expenditure.

The object of the exercise is to entirely decouple selling volatile equity investments from ongoing expenditure.  I am unaware of any academic investigation into such a strategy.



 

When initially setting all this up how did you determine how much to be in each tranche/pot/bucket to give you your desired income ? That’s the bit I’m missing in your strategy. 

Linton

NoMore said:

Linton said:

OldScientist said:

Linton said:

OldScientist said:

Linton said:

OldScientist said:

Linton said:

OldScientist said:

Linton said:

OldScientist said:

NoMore said:

jim8888 said:

NoMore said:

Its a deceptively simple answer to a extremely difficult problem, unfortunately you can't guarantee its the right answer.

I'm also pretty sure 90% (outside this thread/forum) misunderstand it and think it means 4% (or whatever SWR%) of your remaining portfolio every year not the correct method which is 4% of the initial portfolio and then adjust that number each year for inflation such that your spending power each year remains the same. 

Thanks for that clarification. I'd be in the 90% and I thought I knew about this stuff !

As I said its a common misconception, but if you did the 4% of remaining each year, your withdrawals could vary wildly depending on gains/losses. The SWR avoids this by setting a initial amount and then adjusting it for inflation. The idea is like a yearly wage its predictable what you will get, with a 4% of remaining you have no idea year to year what you will be withdrawing.

The predictability (or otherwise) of income is a critical point. Withdrawal strategies can broadly be divided into three categories
1) Inflation adjusted (of which constant inflation adjusted, i.e., SWR is the best known). From an income point of view, the advantage is that the income is known, but the disadvantage is that how long the income will last for is not.
2) Percentage of portfolio (e.g., constant percentage, bogleheads VPW or ABW, 1/N, possibly natural yield, etc.). The advantage is that, mathematically, income will be delivered for a lifetime, but the disadvantage is that real income will vary from year to year and, potentially, become small.
3) Hybrid methods, and there are loads, combine elements of inflation linked and percentage of portfolio methods (e.g., Guyton Klinger, Vanguard Dynamic, Carlson's endowment, Bengen’s floor and ceiling, etc.). Income is less variable than in the percentage of portfolio case (although can still get small in poor retirements) and there is less chance of portfolio exhaustion than in the inflation adjusted case.

However, whether you care about variability or failure in drawdown income depends on what fraction it forms of your spending (whether essential or the total of essential and discretionary).

For example

For a couple with two state pensions (£23k), and a combined pension pot of £150k (and an inflation adjusted income of ~£4.5k). If their state pensions cover their essential spending and at least some of their discretionary, then the drawdown income is just ‘icing on the cake’ and pretty well any withdrawal strategy could be adopted because variability or failure can easily be accommodated. I suspect a number of the denizens on these boards fall into this category.

However, for a couple with two state pensions (£23k), a combined pension pot of £800k (inflation adjusted income ~£24k), an essential spend of £40k, and a discretionary spend of a further £10k, things are a bit tricker since a portfolio failure would leave them with insufficient income to support their essential spend and percentage of portfolio methods might leave them short in some years. Playing around with different hybrid approaches might provide a solution, but there is always the possibility of failure. However, purchasing sufficient RPI protected income annuity to provide most or all of the essential spend (i.e., up to an additional £17k costing around £400-£450k for a joint life – even if payout rates fall back to 3%, this would still ‘only’ cost £560k) and then withdrawing the remaining pot using whatever method desired. Of course, an alternative approach might be to revise what is considered essential spending and what discretionary.

There is a 4th strategy.  Plan on taking what you need, invest for long term growth with a high global diversification, and ensure you have sufficient slack to last n years with zero equity growth.  Choose "n" and "need" on the basis of what you can afford and are prepared to accept in the knowledge that there is no investment based strategy that will work in all conceivable circumstances.

In my view the academic strategies are fine to boost the authors professional ratings, book sales, and earnings from the lecture circuit./  To be fair they may be helpful in giving you the confidence to jump.  But I find it difficult to believe that any but a very small number of people will put any of them into practice over the long term.

Does anyone here who has retired actually use an academic strategy? If so which one?

IMV, defining 'what you can afford' is one element of the withdrawal strategies.

In answer to your question, yes
1) Floor provided by an inflation protected DB pension (which will be added to once in receipt of the SP)
2) Portfolio withdrawals using a modified version of VPW (so withdrawals vary from year to year).
3) Inflation linked ladder (and life insurance) to cover the period before my OH gets their SP in the event of my death.

I don't know whether 1) counts as an 'academic' strategy, but had I not had a DB pension, I would have built as sufficient flooring using an annuity instead (does buying an annuity count as an 'academic' strategy?).

I am solely referring to long term strategies intended to manage drawdown from volatile investments. If you can meet your needs without it that is fine but its not what I am discussing..

As a basic principle I would argue against any strategy that imposes variable expenditure over time depending on the then current economic circumstances.  So that would rule out VPW (Variable % withdrawal) unless one had a sufficiently large buffer to cover the difficult times. 

Just to be clear, are you arguing for constant inflation adjusted withdrawals (i.e., some form of SWR) then, since any other type would introduce variable real expenditure?

The 'buffer' can come from guaranteed income (whether SP, DB pension, RPI annuity, Edit: or inflation linked gilt ladder) - i.e., a 'floor and upside' approach.

I am not arguing for constant inflation linked withdrawals.  That sounds too prescriptive. The aim is to be able to spend what one wants to spend when one wants to spend it.

What I am arguing for in other threads is a large lower risk buffer from which all income is taken.  The buffer is fed by interest/dividends from income funds,by annuities/SP and if necessary by lump sums from a growth portfolio.  So withdrawal from growth funds is a strategic decision, not a regular feed.

By decoupling expenditure from sale of growth funds one can take a medium term approach.with minimal disruption from isolated crashes and thus no need to slash expnditure at short notice.

Thank you for clarifying. If I now understand correctly, you are using a 'cash' buffer to smooth short term variations in your income.

I note that research (pesky academics and finance people!) results are mixed,

https://www.financialplanningassociation.org/article/journal/SEP13-benefits-cash-reserve-strategy-retirement-distribution-planning suggests that a one year cash buffer improves retirement outcomes once (US) taxes and transaction costs are accounted for.

The results at  https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/ suggests that replacing bonds with cash can improve portfolio longevity in the worst historical cases but at the cost of reduced legacy in the best.

While https://www.kitces.com/blog/research-reveals-cash-reserve-strategies-dont-work-unless-youre-a-good-market-timer/ (and the underlying research at https://bpb-us-w2.wpmucdn.com/sites.udel.edu/dist/a/855/files/2020/08/Sustainable-Withdrawal-Rates.pdf ) suggests that the return drag of a large cash buffer outweighs any positive effect of the underlying market timing.

I do note that, as far as I can tell, in each case cash returns are modelled as those of 3 month bills. This is probably a reasonably proxy although at times rates on easy access accounts will be higher than this and at other times a lower. However, a rolling ladder of 1 year fixed rate accounts will probably tend to do better.

However, the psychological effect has to be acknowledged since the cash buffer may help reduce panic in large market downturns.

For me, the nice thing about this thread is that it illustrates that there isn't one 'magic' solution to retirement planning!

I think you will find that the academic studies model a very different management approach. If you just have a one-year buffer you really are doing little more than withdrawing a year early.  A year is rather short time period if you are trying to avoid the problems of taking a steady income from volatile equity.

One common criticism of low risk buffer approaches is that they require timing decisions as to when to start and stop using the buffer.  What I am proposing is that you never switch - expenditure always comes from the buffer.

I won't find that because you are mistaken. For example, middle one of those studies uses a variety of methods and the last (https://bpb-us-w2.wpmucdn.com/sites.udel.edu/dist/a/855/files/2020/08/Sustainable-Withdrawal-Rates.pdf ) uses buffers of 1, 2, 3, and 4 years. From the results, it is clear that a 3 or 4 year buffer is better than a 1 year one, but is generally still worse than not using a buffer at all.

You do have timing decisions when filling the buffer - i.e. when should equities be used to refill the buffer? Of course, it is entirely possible that the buffer becomes exhausted if equities are 'down' for an extended period of time. However, I note that how likely this is depends on what fraction of your overall expenditure is coming from the portfolio rather than guaranteed income.

'Floor and upside' where enough flooring is built (state pension, DB pension, RPI annuities, inflation linked gilt ladders) to cover a significant proportion of income requirements (e.g., one might aim to cover essential spending)  removes market risk and volatility from that income stream. This has two effects, firstly that the income from the portfolio can be more volatile (because discretionary expenditure can be variable) and secondly, if desired, more risk can be taken with the remaining portfolio.

For example, a couple aged 67yo with essential income requirements of £24k (i.e., around 'minimum' in PLSA terms) would have that largely covered by the state pension. If desired they could build more income flooring using an annuity (currently about 3.9% payout rate for a joint life RPI, 100% beneficiary) and/or use pretty well any drawdown method they like.

In bad retirements, they will lose some of their discretionary expenditure, while in good retirements they will have more to spend or build up their legacy (to be fair, in good retirements it doesn't really matter what people do).

Personally, 'floor and upside' is what I planned and have implemented in the 5 years I've been retired. But, as I implied earlier, each to their own!

In my case the buffer is refilled by SP, annuities and ongoing interest and dividends from income funds.  Apart from the TFLS's used in the initial setup I have so far found it unnecessary to sell equities to raise cash. The growth equities exist purely for matching inflation by adding to the income funds, not for immediate expenditure.

The object of the exercise is to entirely decouple selling volatile equity investments from ongoing expenditure.  I am unaware of any academic investigation into such a strategy.



 

When initially setting all this up how did you determine how much to be in each tranche/pot/bucket to give you your desired income ? That’s the bit I’m missing in your strategy. 

When we retired circumstances were very different to now.  Drawdown was effectively unavailable with annuities being the only practial option for someone without a DB pension.  Online personal investing was in its infancy - in the UK very few people beyond the very wealthy would have had any experience of living off investments.   Savings were normally held in ISAs.

As an early adopter I already had an S&S ISA income portfolio as HYPs (High Yeld Portfolios) were fashionable in the world of online investment geeks and I had also bought a couple of fixed annuities. Other unused pension funds were combined into flexi-access drawdown soon after it became available.

From that starting point the components of my strategy crystalised out.  The HYP became the income portfolio, there was a large amount of ISA cash supplemented by WP funds for the buffer and the rest was put into highly diversified ACC equity funds.

I would like to say it was planned but that would be a rationalisation after the event. It would not have been possible at the time I retired.

As of right now the allocations are:

WP Funds+cash:28%
Income funds 32%
Growth funds: 40%

The income funds currently generate enough income to cover about 1/3rd of normal expenditure, the rest being provided by SP and annuities.  A lot more could be generated as the Growth funds are increasing significantly over time and the WP/cash is also increasing because of excess income .  However a higher income is not needed at the moment.

Triumph13

MK62 said:

westv said:

Linton said:

Moonwolf said:

Once people start using large cash buffers to protect against variability do annuities become more attractive?

I'm holding a bit of cash but my DC is mostly equities.  This is because I have enough DB to cover everything I need and then some.  If I didn't have my DB but had a bigger and big enough DC pot I would definitely be thinking of using an annuity rather than cash.

My current spreadsheets multiply cash by .98 each year on the assumption that I lose in real terms against inflation.  Although annuities are often compare to SWR of 3%, 3.5% or 4%, that assumes equity growth, try that against a cash rich portfolio is the SWR worse? 

Annuities certainly are worth considering now that the rates are reasonable.  However the problem is their complete lack of flexibility.  How do you handle large one-off expenditure. Save up for 10 years?

Presumably there would also be a reasonable sized TFLS which might be used for one off outgoings - or partly used. 

Then that effectively becomes a cash buffer....

Which gets us back to the fundamental issue that even those saying they couldn't possibly cope with a varying income are still going to have varying levels of expenditure because of big one-off expenses...

MK62

Triumph13 said:

MK62 said:

westv said:

Linton said:

Moonwolf said:

Once people start using large cash buffers to protect against variability do annuities become more attractive?

I'm holding a bit of cash but my DC is mostly equities.  This is because I have enough DB to cover everything I need and then some.  If I didn't have my DB but had a bigger and big enough DC pot I would definitely be thinking of using an annuity rather than cash.

My current spreadsheets multiply cash by .98 each year on the assumption that I lose in real terms against inflation.  Although annuities are often compare to SWR of 3%, 3.5% or 4%, that assumes equity growth, try that against a cash rich portfolio is the SWR worse? 

Annuities certainly are worth considering now that the rates are reasonable.  However the problem is their complete lack of flexibility.  How do you handle large one-off expenditure. Save up for 10 years?

Presumably there would also be a reasonable sized TFLS which might be used for one off outgoings - or partly used. 

Then that effectively becomes a cash buffer....

Which gets us back to the fundamental issue that even those saying they couldn't possibly cope with a varying income are still going to have varying levels of expenditure because of big one-off expenses...

Not necessarily, once you decouple income from spending.......though fair enough, there's only so far you can push that.

Sarahspangles

Triumph13 said:

Then that effectively becomes a cash buffer....

Which gets us back to the fundamental issue that even those saying they couldn't possibly cope with a varying income are still going to have varying levels of expenditure because of big one-off expenses...

With a guaranteed income pensioners can get loans. It’s admittedly not a cheap way to finance something. Or I suppose equity release would also count. Funding care through a council charge on your property works in a similar way.

Linton

Triumph13 said:y

MK62 said:

westv said:

Linton said:

Moonwolf said:

Once people start using large cash buffers to protect against variability do annuities become more attractive?

I'm holding a bit of cash but my DC is mostly equities.  This is because I have enough DB to cover everything I need and then some.  If I didn't have my DB but had a bigger and big enough DC pot I would definitely be thinking of using an annuity rather than cash.

My current spreadsheets multiply cash by .98 each year on the assumption that I lose in real terms against inflation.  Although annuities are often compare to SWR of 3%, 3.5% or 4%, that assumes equity growth, try that against a cash rich portfolio is the SWR worse? 

Annuities certainly are worth considering now that the rates are reasonable.  However the problem is their complete lack of flexibility.  How do you handle large one-off expenditure. Save up for 10 years?

Presumably there would also be a reasonable sized TFLS which might be used for one off outgoings - or partly used. 

Then that effectively becomes a cash buffer....

Which gets us back to the fundamental issue that even those saying they couldn't possibly cope with a varying income are still going to have varying levels of expenditure because of big one-off expenses...

One is likely to want varying expenditure in some circumstances such as one off purchases. The money management system should be able to provide for it when required. What is unacceptable is being forced to implement varying expenditure on normal day to day items because the short term rules  prevent you taking the income you need.

A buffering approach lets you ignore the short term volatility so you only need to concern yourself with the long term.

Triumph13

Linton said:

Triumph13 said:y

MK62 said:

westv said:

Linton said:

Moonwolf said:

Once people start using large cash buffers to protect against variability do annuities become more attractive?

I'm holding a bit of cash but my DC is mostly equities.  This is because I have enough DB to cover everything I need and then some.  If I didn't have my DB but had a bigger and big enough DC pot I would definitely be thinking of using an annuity rather than cash.

My current spreadsheets multiply cash by .98 each year on the assumption that I lose in real terms against inflation.  Although annuities are often compare to SWR of 3%, 3.5% or 4%, that assumes equity growth, try that against a cash rich portfolio is the SWR worse? 

Annuities certainly are worth considering now that the rates are reasonable.  However the problem is their complete lack of flexibility.  How do you handle large one-off expenditure. Save up for 10 years?

Presumably there would also be a reasonable sized TFLS which might be used for one off outgoings - or partly used. 

Then that effectively becomes a cash buffer....

Which gets us back to the fundamental issue that even those saying they couldn't possibly cope with a varying income are still going to have varying levels of expenditure because of big one-off expenses...

One is likely to want varying expenditure in some circumstances such as one off purchases. The money management system should be able to provide for it when required. What is unacceptable is being forced to implement varying expenditure on normal day to day items because the short term rules  prevent you taking the income you need.

A buffering approach lets you ignore the short term volatility so you only need to concern yourself with the long term.

The real buffer that I think we both have, is having more assets than we need for the income we desire.  You deal with that by accepting drag from buffers and the inherent risk of market timing on your growth assets, because you know you have the slack to get away with that approach.  I accept a variable income because I have enough slack that I'm confident the income won't drop low enough to seriously inconvenience me - helped by having a DB/SP floor that covers core spending.  

At the end of the day, the key is having the slack that you are not having to sweat every ounce of income from your assets.  After that, it doesn't particularly matter too much whether that slack is in investments (low SWR), cash (big buffers) or income (larger than needed).  Pick the option that suits.  

MK62

Triumph13 said:

MK62 said:

westv said:

Linton said:

Moonwolf said:

Once people start using large cash buffers to protect against variability do annuities become more attractive?

I'm holding a bit of cash but my DC is mostly equities.  This is because I have enough DB to cover everything I need and then some.  If I didn't have my DB but had a bigger and big enough DC pot I would definitely be thinking of using an annuity rather than cash.

My current spreadsheets multiply cash by .98 each year on the assumption that I lose in real terms against inflation.  Although annuities are often compare to SWR of 3%, 3.5% or 4%, that assumes equity growth, try that against a cash rich portfolio is the SWR worse? 

Annuities certainly are worth considering now that the rates are reasonable.  However the problem is their complete lack of flexibility.  How do you handle large one-off expenditure. Save up for 10 years?

Presumably there would also be a reasonable sized TFLS which might be used for one off outgoings - or partly used. 

Then that effectively becomes a cash buffer....

Which gets us back to the fundamental issue that even those saying they couldn't possibly cope with a varying income are still going to have varying levels of expenditure because of big one-off expenses...

BTW......it's not so much that I couldn't possibly cope with a varying income.....of course I could, and might have to.......rather that, to me, it's very undesirable. For clarity, by "variation" here, I'm talking about a forced material reduction in general annual spending.
If you operate your cash buffer as a true buffer, rather than a "standby" pot, then the amount going in can vary each year, while the amount coming out remains relatively constant (in real terms).....with the level of cash in the buffer varying accordingly. This is what I, and I'm assuming Linton too, mean by decoupling income from spending. Obviously though, you can only operate for so long with less going in than coming out......so in good years you may be putting more in than comes out. Such is the tradeoff......
For one off items I have a few "pots" outside of this, which are topped up each year from the general spending withdrawals.....I don't envisage anything happening which these pots can't handle, but if something comes out of left field, then I'll deal with it if, as, and when it happens.

Time4T_Accounts

A very interesting and informative discussion - thank you, all.

It struck me that, as a way of triangulating one’s own assessment of one’s SWR, that an annuity calculator (such as on Moneyhelper’s website) might provide a useful perspective as it might provide a more personalised longevity calculator than that of ONS.

Uncomfortable food for thought was that my own calculation (at age 66) suggested a withdrawal rate of almost 5% …

MK62

TBH, 5% seems like it might be in the ballpark for a 66yo with average life expectancy........though obviously this depends on the portfolio in question.......