Anyone in high equity allocation whilst retired?

OldScientist

Pat38493 said:

OldScientist said:

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

Your first 4 points are difficult to argue with.

Your point I have taken the liberty of placing in bold is, IMV a critical one. Assuming other sources of income (e.g., state pension and DB pension) are insufficient to maintain an acceptable standard of living then there are several methods of reducing the coupling of portfolio income from market fluctuations
1) RPI annuities (which as you say are inflexible, but currently allow a strong baseline of income).
2) Inflation linked gilt ladders. As for annuities, with, potentially, more flexibility.
3) Increase the quantity of fixed income in the portfolio since, provided the duration is selected carefully*, this is likely to decrease volatility.
4) Use a 'smoothed' percentage of portfolio withdrawal method (Vanguard dynamic, Carlson's endowment, Guyton-Klinger, etc.)
5) Try to implement a dynamic asset allocation strategy (of which cash buffers and buckets are examples) -  McClung's free chapter (see https://livingoffyourmoney.com/wp-content/uploads/2016/05/LivingOffYourOwnMoney_eBook_FirstThreeChapters.pdf ) looks at a bucket strategy.

*Historical back testing has shown that 'intermediate' duration bond funds form a useful compromise since they have lower volatility than longer duration bonds and, generally, higher returns than short duration fixed income (inc 'cash'). 'Intermediate' duration falls around the 5 year mark (although it is slightly lower for US than the UK).

When you say intermedidate duration bonds, if it's in a fund do you mean "effective maturity" or "effective duration"?

I am holding some global bond funds "Vanguard Global Bond Index Fund GBP Hedged" and also the ETF version of that fund in a different account.  It says:
Effective Maturity 8.43
Effective duration 6.37

I am not sure what the difference is beetween them, but if duration as you discuss above is the same things, is 6.3 years too long then?

In terms of long-term (100 year or so) annualised returns, for UK gilts there was a fairly flat region between 5 and 15 years, so there is not that much difference in returns between a duration of 6.3 compared to 5 (or 10 or 15 - although the volatility will be higher at higher durations) - however, the duration of the global bond fund (which I hold too) can change over time (as yields change and as governments and corporations issue bonds of different durations) and therefore it is worth keeping an eye on (pre-2022, low yields meant that the duration was higher than it is now).

GazzaBloom

Pat38493 said:

GazzaBloom said:

I retired at the end of last year and switched from around a 80% equity portfolio to a rising equity glidepath strategy to start retirement. 8 years of inflated annual living expenses plus known one off spends (new car etc.) was put in cash/MMF and will be drawn first over the first 8 years. The percentage split between equities and cash is arbitrary, it was determined by the required cash allocation to last 8 years, but, came out at 45% cash and 55% equities.

Obviously the percentage allocation will change over time as the cash is consumed and the equity portion rises in percentage, ultimately putting us at 100% equities when our state pensions start paying out in 8 years time.

When modelled, this strategy shows a greater resilience to early sequence of returns risk than a fixed percentage allocation that is rebalanced annually, in the worst returns scenarios with only a modest sacrifice of end of life remaining balance. in the best returns scenarios.

We have around 30% fixed income from other sources in addition to the invested/cash portfolio.

Interesting that you are finding that an 8 year cash bucket is working for you.  I think from memory you have a pretty front loaded bridging strategy like me?

If I play around with back testing, my probability of success is very similar no matter whether I pick anything bettween 20 to 80% equities or so.  If I tried to model an 8 to 10 years cash bucket my probability of success is goes from 95% to zero, but that may be because Timeline has a 0% return on cash in their model I think.

However I also look closely at when the first failure occurs, since my spending  in years 1 to 11 is much more heavily reliant on investments.  

Because most of my withdrawals are in the first 11 years, I get some pretty interesting results.

Overall mix of equities 15% bonds 85%, gives a success rate of 96%, but almost all the failures are before state pension age, with the earliest at age 65.  3% chance of running out of money before SP age.

On the other hand, using overall allocations of around 70% equities, I have a slightly lower overall chance of plan success at 93%, but only 1% chance of running out before SP age, with the first failurre near the end of when I am 66 years old.

Point being, carrying a large amount of cash (and to a lesser extent bonds) exposes you to inflation risk.  Unsurprisingly the first failure in my plan is 1915 - a year which was followed by quite a few years of double digit inflation.

I use a money market fund for the cash (Blackrock Sterling Liquidity), as you say using "cash" inside Timeline shows a zero return, which is not correct.

To make a the rising glide path work in Timeline I split the Cash (MMF) money from the equities as though they are 2 separate funds, in fact, also split further between crystallised and uncrystallised sums as I am straddling both worlds as I take lumps of TFLS annually for the first 4 years or so. I set the drawdown order to consume the cash first.

Pat38493

GazzaBloom said:

Pat38493 said:

GazzaBloom said:

I retired at the end of last year and switched from around a 80% equity portfolio to a rising equity glidepath strategy to start retirement. 8 years of inflated annual living expenses plus known one off spends (new car etc.) was put in cash/MMF and will be drawn first over the first 8 years. The percentage split between equities and cash is arbitrary, it was determined by the required cash allocation to last 8 years, but, came out at 45% cash and 55% equities.

Obviously the percentage allocation will change over time as the cash is consumed and the equity portion rises in percentage, ultimately putting us at 100% equities when our state pensions start paying out in 8 years time.

When modelled, this strategy shows a greater resilience to early sequence of returns risk than a fixed percentage allocation that is rebalanced annually, in the worst returns scenarios with only a modest sacrifice of end of life remaining balance. in the best returns scenarios.

We have around 30% fixed income from other sources in addition to the invested/cash portfolio.

Interesting that you are finding that an 8 year cash bucket is working for you.  I think from memory you have a pretty front loaded bridging strategy like me?

If I play around with back testing, my probability of success is very similar no matter whether I pick anything bettween 20 to 80% equities or so.  If I tried to model an 8 to 10 years cash bucket my probability of success is goes from 95% to zero, but that may be because Timeline has a 0% return on cash in their model I think.

However I also look closely at when the first failure occurs, since my spending  in years 1 to 11 is much more heavily reliant on investments.  

Because most of my withdrawals are in the first 11 years, I get some pretty interesting results.

Overall mix of equities 15% bonds 85%, gives a success rate of 96%, but almost all the failures are before state pension age, with the earliest at age 65.  3% chance of running out of money before SP age.

On the other hand, using overall allocations of around 70% equities, I have a slightly lower overall chance of plan success at 93%, but only 1% chance of running out before SP age, with the first failurre near the end of when I am 66 years old.

Point being, carrying a large amount of cash (and to a lesser extent bonds) exposes you to inflation risk.  Unsurprisingly the first failure in my plan is 1915 - a year which was followed by quite a few years of double digit inflation.

I use a money market fund for the cash (Blackrock Sterling Liquidity), as you say using "cash" inside Timeline shows a zero return, which is not correct.

To make a the rising glide path work in Timeline I split the Cash (MMF) money from the equities as though they are 2 separate funds, in fact, also split further between crystallised and uncrystallised sums as I am straddling both worlds as I take lumps of TFLS annually for the first 4 years or so. I set the drawdown order to consume the cash first.

I think we have touched on this before in a different thread, but do you think you will need to alter your strategy a bit if we start to see cash returns significantly below inflation like we had for quite a few years until 2022 or so?  An 8 year cash bucket might work fine if cash returns are at, or close to, inflation levels, but might run into issue if cash returns are a lot less than inflation.

Also keeping in mind that as far as I can tell, Timeline takes your actual fund and then splits it into a bunch of predetermined categories like "Global Equities" and so on.  The closest one to MMF in Timeline will probably put it to "UK Treasury Bills" and I'm not sure that is actually the same as an MMF, as it shows a mean return of 4.79%.  I suspect that is significantly higher than the real long term return for a short term money market fund (albeit that in the last couple of years it might have been that good).

DT2001

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

As I have said previously all our essential expenditure is covered by guaranteed income and some of our discretionary payments.
With travel (which is a major part of our discretionary spending) we tend to book and pay as we organise it ourselves. So if, as I contemplated, drawing quarterly a fixed % we would then only spend if we had the funds. Self employment with highly variable cash flow means we have ‘practiced’ this methodology. A 10/20% drop in a quarters income would not be a concern.

MK62

michaels said:

MK62 said:

michaels 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 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?

Again, that's the issue......it's not about having a higher income using one method or the other......it's about having the same income with a lower plan failure rate.
If you compare Bill, with a £100k equity portfolio, and Ben with an £85k equity portfolio and a £15k cash buffer, for example, then it's not about Ben somehow being able to have a higher income than Bill because he is using a cash buffer......it's about whether Ben can have the same income as Bill, but with a lower chance of plan failure......on average.

If the income level desired is £2000pa (ie 2%), then it's highly likely that neither Bill nor Ben will suffer plan failure.......but if you push that to say £4500pa, what then?
As to the question of when Ben should replenish the cash buffer, it's not that much different to the question of when Bill should sell equities to provide the income withdrawal.....the main difference being that Bill may be forced to sell at a certain time, whereas Ben is not (though he could of course choose the same time as Bill if he wanted). Is this market timing?......perhaps, at least to some degree, but then one way or another both Bill and Ben must choose a time to sell portfolio assets......be that, in Bill's case, he needs money now, or on a fixed date each year, come what may, or throwing a dart at a calendar, or choosing a time yourself - it's unlikely you'll pick the best day of course, only hindsight will tell you that, but then it's equally unlikely that you'll pick the worst either.

As to outcomes, if markets are kind, then there is a good chance that neither Bill nor Ben will suffer plan failure........Bill may end up with a bigger residual pot......but that's the cost of using a cash buffer if it eventually turns out that Ben didn't need to. For myself, this is not a primary concern though.
However if the markets are unkind.......that is a primary concern.

By SWR I am talking about the highest 'no historic failure' real terms constant withdrawal amount expressed as a percentage of the initial pot size.  This definition builds in risk of failure as it is set to zero.

It is obviously easier to model the situation where the portfolio is set to a fixed asset mix proportion and rebalanced regularly and this is what underpins most of the SWR analysis so we can say over the 'worst' possible period what fixed proportions of equities vs bonds vs cash/MM would have given the highest no failure withdrawal rate.

Once you start going to 'replenishable cast pots' then you need to add another set of rules on how those pots are managed.  Rather that each year you rebalance to 70% equities, 25% bonds, 5% cash or whatever, you now need a rule that says 'if equity markets are more than 10% below market high / AP is above 25 or whatever) then rebalance to 80% / 20% / 0% (=markets are down, spend from cash and bonds) otherwise go back to default 70% / 25% / 5%.

Even this simple set of rules makes the modelling of that initial SWR/annual real terms amount much more difficult but in order to justify this or any other set of rules it would seem to make sense to either back test against history or use a montecarlo simulation in order to work out what your SWR/initial safe withdrawal amount is to determine if it is larger than the traditional fixed proportion SWR and indeed simply to know how much you should be contemplating withdrawing.

Are you suggesting that with a cash pot and some sort of dynamic allocation strategy you can withdraw more than the traditional SWR no failure amount from year one in real terms and still have zero failures?

No, that's not what I am suggesting.
If you have a 100% equity portfolio from which you must draw your income, then you are highly exposed to sequence risk, especially in the early phase of retirement (and doubly so, if, like many here, you retired early and are front loading withdrawals prior to state pension.)
Fair enough, a bad sequence may not happen, but if it did you'd have no way to mitigate it's effects other than to reduce withdrawals or accept a higher risk of plan failure. Each has to decide whether these risks are acceptable. If it's not, then you must build into your plan a way to mitigate those effects........one such way is to use a cash buffer. It's not the only way though, and nor is it a magic wand - it will inevitably mean trade offs must be made.

As to backtesting, try it.......but try thinking in terms of plan failure risk rather than final pot size - just because the final pot size is bigger for one portfolio, doesn't necessarily then mean the other resulted in plan failure

Triumph13

 In response to Linton's "I do not understand how Guyton Klinger and similar schemes work in the real world.  Yes you can cut income with say a month's notice.  How do you cut expenditure quickly without severe disruption to your day-to-day life?", the easiest method is just to have some amount of cash savings outside of your drawdown pot, so that you don't have to do anything quickly.

I wouldn't expect any sensible person with a variable income, be they retired, self employed, or whatever, to spend their accounts down to zero before the next paycheck as that would indeed make for severe disruption.  If I have a big expense coming up in a few months, then I would want that in cash now so I would simply draw that portion of income early.

MK62

Triumph13 said:

 In response to Linton's "I do not understand how Guyton Klinger and similar schemes work in the real world.  Yes you can cut income with say a month's notice.  How do you cut expenditure quickly without severe disruption to your day-to-day life?", the easiest method is just to have some amount of cash savings outside of your drawdown pot, so that you don't have to do anything quickly.

That sounds like......a cash buffer!......

Linton

Triumph13 said:

 In response to Linton's "I do not understand how Guyton Klinger and similar schemes work in the real world.  Yes you can cut income with say a month's notice.  How do you cut expenditure quickly without severe disruption to your day-to-day life?", the easiest method is just to have some amount of cash savings outside of your drawdown pot, so that you don't have to do anything quickly.

I wouldn't expect any sensible person with a variable income, be they retired, self employed, or whatever, to spend their accounts down to zero before the next paycheck as that would indeed make for severe disruption.  If I have a big expense coming up in a few months, then I would want that in cash now so I would simply draw that portion of income early.

Yes, which is a buffer and split portfolio strategy. The next questions are “how large is the buffer” and “how does the buffer get replenished?”.

Some people imply that GK is an alternative strategy.

Triumph13

MK62 said:

Triumph13 said:

 In response to Linton's "I do not understand how Guyton Klinger and similar schemes work in the real world.  Yes you can cut income with say a month's notice.  How do you cut expenditure quickly without severe disruption to your day-to-day life?", the easiest method is just to have some amount of cash savings outside of your drawdown pot, so that you don't have to do anything quickly.

That sounds like......a cash buffer!......

It is indeed, and a far more sensible use of one than trying to time the market.  One year of expected drawdown in the buffer lets you weather five years of markets down 40% with only a 20% drop in drawdown income - and a much smaller drop in actual spending if you have any DB / SP / Annuity income.

MK62

Assuming a 20% drop in income for 5 years is acceptable.
As for timing the market, I find it really puzzling that some appear to claim that operating a cash buffer/equity portfolio requires market timing to replenish the buffer....whereas operating a 100% equity portfolio requires no market timing at all......I suppose that's true though if you simply sell assets whenever you need money with no regard to market conditions at all.
If, by market timing you mean attempting to predict the best selling day in the year, then I would agree that it's highly unlikely you'd pull that off by anything other than luck.......but that's quite different to simply deciding not to sell during a significant market downturn....
How do you yourself decide when to sell assets and when to use the buffer?