Anyone in high equity allocation whilst retired?

Pat38493

MK62 said:

michaels said:

I go with the maths/history (facts) approach that a 'cash buffer' is very much an artificial psychological prop rather than a serious de-risking strategy.

....but this isn't really supported by the facts, which actually show that in drawdown a cash buffer reduces the plan failure rate compared to a 100% equity portfolio........admittedly at the cost of a lower average final balance.

So it really depends what your main priority is.......however, a cash buffer is arguably of less use if a variable withdrawal is acceptable.

I think that depends on which study you are looking at and the parameters and assumptions - I've seen studies which found the opposite as well.

Linton

Pat38493 said:

MK62 said:

michaels said:

I go with the maths/history (facts) approach that a 'cash buffer' is very much an artificial psychological prop rather than a serious de-risking strategy.

....but this isn't really supported by the facts, which actually show that in drawdown a cash buffer reduces the plan failure rate compared to a 100% equity portfolio........admittedly at the cost of a lower average final balance.

So it really depends what your main priority is.......however, a cash buffer is arguably of less use if a variable withdrawal is acceptable.

I think that depends on which study you are looking at and the parameters and assumptions - I've seen studies which found the opposite as well.

The studies I have seen simply model a portfolio of say 10% cash and 90% equity.  That is very different to managing the components separately, taking money from the cash only when required to by specified rules.

MK62

Most of the studies I've read focus on which approach has, on average, given the highest income/residual pot value......I don't think it's in dispute that this is 100% equity......rather than which approach has, on average, produced the lowest failure rates, and that is not 100% equity.
Of course, the parameters you use and the assumptions you make can all make a difference.....but we are talking "on average" here......we can't know what those will turn out to be in reality, so we have to make "reasonable" assumptions and use "reasonable" parameters. That usually starts with a 4-5% initial withdrawal rate, index linked for 25-30 yrs and then work from there. 

If you can accept variable income, then a buffer is arguably unnecessary.......you simply adjust your annual withdrawal in line with your pot value......but many reliant on the drawdown pot for income cannot, or are unwilling to, accept perhaps a 30--40% drop in income, should their pot value plummet to that degree, so some way of mitigating such a drop is necessary, and one way is to use a cash buffer....its not the only way though.

Pat38493

MK62 said:

Most of the studies I've read focus on which approach has, on average, given the highest income/residual pot value......I don't think it's in dispute that this is 100% equity......rather than which approach has, on average, produced the lowest failure rates, and that is not 100% equity.
Of course, the parameters you use and the assumptions you make can all make a difference.....but we are talking "on average" here......we can't know what those will turn out to be in reality, so we have to make "reasonable" assumptions and use "reasonable" parameters. That usually starts with a 4-5% initial withdrawal rate, index linked for 25-30 yrs and then work from there. 

If you can accept variable income, then a buffer is arguably unnecessary.......you simply adjust your annual withdrawal in line with your pot value......but many reliant on the drawdown pot for income cannot, or are unwilling to, accept perhaps a 30--40% drop in income, should their pot value plummet to that degree, so some way of mitigating such a drop is necessary, and one way is to use a cash buffer....its not the only way though.

The challenge is not really about the mix of equity vs non equity - I think most studies found that 100% equity portfolio had a higher failure rate (if it fails at all in any mix).

It's more about the assumption that having a cash "bucket" always gives a lower failure rate - there are some pretty clever studies I've seen which challenged whether this was really true (unless you distort the study by deciding how to deploy the cash bucket with hindsight).

As discussed on various other threads, having a cash bucket which is systematically rebalanced doesn't give consistently better failure rates.  Beyond that, it's a question of whether you can deploy the cash bucket (and top it up again) at the right times, which involves some level of market timing decisions.

However many financial advisers still follow this strategy, not necessarily because they believe it gives lower failure rates, but because it allows their clients to sleep better at night.  If you don't have one, you may find yourself looking at a scary low balance after 5 years, with the historical data showing that you will be fine.

DT2001

As Linton says it depends on your objectives in retirement. If a secure income is paramount then a lower equity/bonds/cash mix or an annuity would be a better option.  I think having the ability to be flexible with your expenditure is key to being able to cope with a poor sequence of returns early in retirement. I have played with the idea of taking a fixed % of the portfolio and topping up from the cash buffer. I also added an IF function so that a poor sequence meant only part of the ‘shortfall’ was covered. Once we are both drawing SP less than 50% of our guesstimated expenditure will be from investments - a 30% total drop in the markets in the first 3 years would see a less than 10% reduction in total income.
A long slow recovery would mean more adjustments along the line but then in that situation most strategies would probably be struggling. 

The one final tweak I have considered is calculating my drawdown 1/4ly which will help smooth the ups and downs.

kempiejon

So I have 3 income figures, based on my actual spends so there is subsistance, average, indulgent. My current equity pot has been returning a bit above my average income for a few years, gives me confidence that full time permanent employment is optional. I doubt I could have got to that level of return without high percentage of equity.
The cash pot of about 3 years average spending can be used should my income flow be interrupted by equity stumbles. 
I am now investing slowly into some fixed interest alongside my cash pot, laddering a few gilts, perfs and corporate bonds.
In high times hopefully I'll convert some profit into indulgent spends and more equities, I can always scale back to below average spend and dip into my cash but too long or moving to subsistance level of income and my plan will need modification.
If I had twice the pot size I could have walked from permanent FT work ages ago and probably have more bonds in the portfolio.

michaels

MK62 said:

michaels said:

I go with the maths/history (facts) approach that a 'cash buffer' is very much an artificial psychological prop rather than a serious de-risking strategy.

....but this isn't really supported by the facts, which actually show that in drawdown a cash buffer reduces the plan failure rate compared to a 100% equity portfolio........admittedly at the cost of a lower average final balance.

So it really depends what your main priority is.......however, a cash buffer is arguably of less use if a variable withdrawal is acceptable.

I agree that a portfolio with a fixed proportion of equities and bonds has historically had a higher (no failure) safe withdrawal rate than one only consisting of equities.

But that is very different to some sort of portfolio where the proportion of equities and cash is allocated dynamically according to some measure of equity performance. 

Can you show the proportions and strategy that you have in mind that reliably delivers a higher SWR?

Linton

DT2001 said:

As Linton says it depends on your objectives in retirement. If a secure income is paramount then a lower equity/bonds/cash mix or an annuity would be a better option.  I think having the ability to be flexible with your expenditure is key to being able to cope with a poor sequence of returns early in retirement. I have played with the idea of taking a fixed % of the portfolio and topping up from the cash buffer. I also added an IF function so that a poor sequence meant only part of the ‘shortfall’ was covered. Once we are both drawing SP less than 50% of our guesstimated expenditure will be from investments - a 30% total drop in the markets in the first 3 years would see a less than 10% reduction in total income.
A long slow recovery would mean more adjustments along the line but then in that situation most strategies would probably be struggling. 

The one final tweak I have considered is calculating my drawdown 1/4ly which will help smooth the ups and downs.

I dont see how being flexible with your expenditure in the face of short term investment volatility can be implemented:....
1) Much expenditure is fixed over the medium term - eg utilities and council tax.  You cant temporarily stop paying them.

2) Economising on expenditure takes time to have a useful effect.  Just turning down the central heating by 1 deg  will have minimal short term effect.  Reducing the quality of the wine you buy is not the answer to a market crash. You will have become used to a particular standard of living, making a substantial change up or down in a short time frame would be difficult.

3) Some expenditure may be fixed months in advance.  eg a cruise may need to be booked a year in advance with a final major payment a few months before departure.  Do you cancel if the market falls in the meantime?

4) As with any policy of responding to short term events, timing is very difficult.  At what point in a market wobble do you change your expenditure?  Take recent events - would you have cut expenditure when Trump came into office or would you still be wondering whether to cut it now? Similarly how do you decide when things have returned to normal?  

In my view a retiree largely dependent on investment income has to decouple expenditure from the release of capital in the short/medium term.  This implies some form of buffering, particularly for large one-off expenditures, and/or some other sources of ongoing income than selling capital to cover ongoing fixed expenditure.

I dont think annuities are a satisfactory complete answer because of their inflexibility.

michaels

Linton said:

DT2001 said:

As Linton says it depends on your objectives in retirement. If a secure income is paramount then a lower equity/bonds/cash mix or an annuity would be a better option.  I think having the ability to be flexible with your expenditure is key to being able to cope with a poor sequence of returns early in retirement. I have played with the idea of taking a fixed % of the portfolio and topping up from the cash buffer. I also added an IF function so that a poor sequence meant only part of the ‘shortfall’ was covered. Once we are both drawing SP less than 50% of our guesstimated expenditure will be from investments - a 30% total drop in the markets in the first 3 years would see a less than 10% reduction in total income.
A long slow recovery would mean more adjustments along the line but then in that situation most strategies would probably be struggling. 

The one final tweak I have considered is calculating my drawdown 1/4ly which will help smooth the ups and downs.

I dont see how being flexible with your expenditure in the face of short term investment volatility can be implemented:....
1) Much expenditure is fixed over the medium term - eg utilities and council tax.  You cant temporarily stop paying them.

2) Economising on expenditure takes time to have a useful effect.  Just turning down the central heating by 1 deg  will have minimal short term effect.  Reducing the quality of the wine you buy is not the answer to a market crash. You will have become used to a particular standard of living, making a substantial change up or down in a short time frame would be difficult.

3) Some expenditure may be fixed months in advance.  eg a cruise may need to be booked a year in advance with a final major payment a few months before departure.  Do you cancel if the market falls in the meantime?

4) As with any policy of responding to short term events, timing is very difficult.  At what point in a market wobble do you change your expenditure?  Take recent events - would you have cut expenditure when Trump came into office or would you still be wondering whether to cut it now? Similarly how do you decide when things have returned to normal?  

In my view a retiree largely dependent on investment income has to decouple expenditure from the release of capital in the short/medium term.  This implies some form of buffering, particularly for large one-off expenditures, and/or some other sources of ongoing income than selling capital to cover ongoing fixed expenditure.

I don't think annuities are a satisfactory complete answer because of their inflexibility.

But once you have spent that buffer then either you have no buffer (which you have just said is necessary) or you have to sell equities to replenish it.

I am not saying it doesn't make sense to use some sort of variable allocation strategy, but I just think how this strategy operates needs to be clearly stated so it can be back tested.

Hoenir

michaels said:

I am not saying it doesn't make sense to use some sort of variable allocation strategy, but I just think how this strategy operates needs to be clearly stated so it can be back tested.

Therein lies the total uncertainty. How do you back test the future.  Investment returns come from undertaking risk. Post WW2 has been a remarkably stable period. Globalisation ( post 1990) has made many people very wealthy. China is no longer a country full of peasants though. Unlike the USA it has a long term vision that has invested heavily in major infrastructure projects and machine automation. China has fully automated container ports for example. While US Ports are hamstrung by unionised labour workforces. China is redefining capitalism. A more equitable version of where it's not a bun fight to grab the biggest share of the pie at the expense of everyone else.