Anyone in high equity allocation whilst retired?

Cobbler_tone

MK62 said:

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?

I’m probably lucky as it will be a 75% DB and 25% DC split but I look at it like this.
Barring a total crash, the net cost to me factoring in employer contributions (on both pensions) and tax benefits is minuscule in relation to my pot. I haven’t worked it out exactly but it is a fraction of the pot, especially mitigating 40%+ tax at source. Once it is in there I don’t factor in getting 10-20-30% growth. The same with company shares, the gain is huge. Admittedly it never sits too well when you see a large amount of money declining. I started my DC in 2021, I’ve flicked around the investments but mainly been in the target date plan. It’s only 7% up and I moved some to a cash plan the day the recent dip started, just to have a ‘play’. I’ve now moved a bit more back and you can see the difference in growth, even on a small amount.
I guess we are all learning (which is a big positive) and could do some things better and protected well in other areas. Avoiding really rash and silly decisions costing tens or hundreds of thousands is a good starting point.
It seems that people are chasing some Holy Grail and THE answer, a lot of which seems to come down to timing and luck.
The answer is 42.

Linton

MK62 said:

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?

I agree that any strategy that uses different sources of income at different times requires market timing which one is very unlikely to get 100% right.  One may either repeatedly swap sources .driven my minor movements in prices or leave things too late after the event has already caused the damage you wanted to avoid.

The strategy I use is that all income from every source goes into the buffer and all expenditure is taken from the buffer.  Thus no timing is required as one is never selling assets to meet immediate expenditure. Over time the buffer increases in size since it would be prudent to ensure that on average income exceeds expenditure.  The buffer can also be used for major one-offs.

At times the buffer may get uncomfortably small or unnecessarily large in which case some strategic rebalancing against the wealth generation portfolios may be required. I have never been troubled by unexpectedly low buffer levels. When overall investments are being re-organised for other reasons one can look at the buffer size at the same time. 

Note that the buffer is not necessarily cash, it can be partially invested.  What is important is that investments can be easily and quickly converted to cash, are well diversified, and subject to only limited volatility.

MK62

Pretty similar here too Linton.......all spending is from the buffer which I can top up whenever a reasonable opportunity arises.......that could be next month, or as much as 3-4 years time. I have the rough equivalent of what my SP will be coming into the buffer from maturing gilts and coupons at various points over the next few years (from a conventional gilt ladder).....I moved from a cash buffer/equity strategy to a cash buffer/gilt ladder/equity strategy after gilt prices fell heavily a few years ago (making gilts a reasonable investment once more).
However, I'm under no illusion that should markets be relatively benign over the next 10-15 years, that this strategy might cost me in terms of lost equity returns I might have had (but don't really need as such) from an equity only portfolio, but I'm not prepared to gamble that markets will be benign over that period......

Triumph13

MK62 said:

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?

The whole idea behind the SWR method is that you sell assets no matter what the market is doing.  And the research says that if you use a cash buffer to draw from instead, when you decide that the market is down, then you tend to do worse.

If you want to up your odds of success / initial withdrawal percentage (two ends of the same seesaw) then accepting some degree of variable income is pretty much the only game in town.  And yes, I'd much rather accept five years of 20% lower income than keep withdrawing at SWR rates through a 5 year 40% drop because that kind of SOR would be a portfolio killer.

MK62

Triumph13 said:

MK62 said:

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?

The whole idea behind the SWR method is that you sell assets no matter what the market is doing. 

....and that seems a rather silly thing to do to me.....

GazzaBloom

Pat38493 said:

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).

In Timeline, if I set the cash amounts to the default zero interest ‘cash’ portfolio option, I still get 100% success in worst, median and best case scenarios. This also correlates with my own spreadsheet cash flow plan and FiCalc, which i also use to ratify my plans. In my spreadsheet plan I set a cash interest rate of 2.5% and an inflation rate the same, annual drawdown amounts are inflated accordingly and that is what the cash amount I hold is based on. It will be there or thereabouts, but can be adjusted as the years roll on, but I don't think we are going back to 0.25% interest rates again anytime soon, if ever again, as we exit the post GFC QE era.

You have to remember that the 8 years cash bucket reduces each year until it's gone, it's not a fixed bucket allocation that gets replenished. Each year the equity percentage increases including any investment growth gains over those first 8 years accumulating untouched by drawdown. This is the benefit of the rising equity glidepath. In the early years of heavier drawdown requirements, our needs are locked in and covered by cash, which won't suffer SORR and by the time I start using the equities, the drawdown amount required is reduced significantly as SPs start paying out.

Timeline creator, Abraham Okusanya, in his 2017 study of cash buffers, actually comments on the rising equity glidepath is his summary, and the data shows it is the most successful strategy of the 11 he tested, whether using bonds or a mix of bonds and cash alongside equities.

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

It's the rebalancing of the starting cash buffer that damages the long term performance when holding cash, but holding cash and depleting it first solves the SORR risk and gives early retirement years peace of mind. By the time I need to start using equities, our drawdown needs are a lot lower so volatility will be less of a concern…well that's the theory…ask me again in year 8!

I am pleased I switched to this strategy in early January this year, I locked in the 8 years of our needs as cash just before the Trump tariff misery rocked the markets. My equities have taken the hit but have 8 years to recover, meanwhile, I get on with early retirement and sleep peacefully, enjoying the weather, rwther than fretting over market performance.

MK62

I have no more idea what the market is going to do than anyone else........that's the point. 
However, if you invest in the stock market and are sufficiently diversified, then there is an expectation that while the value of that investment will fluctuate up and down, the general trend will be upwards. If you do not expect this, then I'm not sure why you'd invest in the first place. Those fluctuations will, to a large degree, determine your overall return on investment.

At the base level though, you do not need to be an investment genius to work out if the current value of your investment is worth more or less than you paid for it (after adjusting for inflation)......nor do you need to be a genius to figure out that selling at a loss is generally not a good idea if you can avoid doing so.....but then if you simply sell no matter what, you probably wouldn't know.

michaels

GazzaBloom said:

Pat38493 said:

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).

In Timeline, if I set the cash amounts to the default zero interest ‘cash’ portfolio option, I still get 100% success in worst, median and best case scenarios. This also correlates with my own spreadsheet cash flow plan and FiCalc, which i also use to ratify my plans. In my spreadsheet plan I set a cash interest rate of 2.5% and an inflation rate the same, annual drawdown amounts are inflated accordingly and that is what the cash amount I hold is based on. It will be there or thereabouts, but can be adjusted as the years roll on, but I don't think we are going back to 0.25% interest rates again anytime soon, if ever again, as we exit the post GFC QE era.

You have to remember that the 8 years cash bucket reduces each year until it's gone, it's not a fixed bucket allocation that gets replenished. Each year the equity percentage increases including any investment growth gains over those first 8 years accumulating untouched by drawdown. This is the benefit of the rising equity glidepath. In the early years of heavier drawdown requirements, our needs are locked in and covered by cash, which won't suffer SORR and by the time I start using the equities, the drawdown amount required is reduced significantly as SPs start paying out.

Timeline creator, Abraham Okusanya, in his 2017 study of cash buffers, actually comments on the rising equity glidepath is his summary, and the data shows it is the most successful strategy of the 11 he tested, whether using bonds or a mix of bonds and cash alongside equities.

https://finalytiq.co.uk/cash-reserve-buffers-withdrawal-rates-old-wives-fables-retirement-portfolio/

It's the rebalancing of the starting cash buffer that damages the long term performance when holding cash, but holding cash and depleting it first solves the SORR risk and gives early retirement years peace of mind. By the time I need to start using equities, our drawdown needs are a lot lower so volatility will be less of a concern…well that's the theory…ask me again in year 8!

I am pleased I switched to this strategy in early January this year, I locked in the 8 years of our needs as cash just before the Trump tariff misery rocked the markets. My equities have taken the hit but have 8 years to recover, meanwhile, I get on with early retirement and sleep peacefully, enjoying the weather, rwther than fretting over market performance.

Cash suffers from sequence of inflation risk. Cash held over the last 3 years has seen a 10% plus real terms loss.  If I were going to bridge a gap to an index linked cash flow I would use an index linked gilts ladder (which indeed is what I will do).  I can't understand why one would run inflation risk in order to avoid equity volatility risk. They are both risks just because they have different names.

michaels

MK62 said:

I have no more idea what the market is going to do than anyone else........that's the point. 
However, if you invest in the stock market and are sufficiently diversified, then there is an expectation that while the value of that investment will fluctuate up and down, the general trend will be upwards. If you do not expect this, then I'm not sure why you'd invest in the first place. Those fluctuations will, to a large degree, determine your overall return on investment.

At the base level though, you do not need to be an investment genius to work out if the current value of your investment is worth more or less than you paid for it (after adjusting for inflation)......nor do you need to be a genius to figure out that selling at a loss is generally not a good idea if you can avoid doing so.....but then if you simply sell no matter what, you probably wouldn't know.

I think anyone who thinks in terms of selling at a loss is falling into the trap of thinking that previous equity valuations are a driver of future valuations.  If it were possible to predict the future path of equities based on the past then machine learning algorithms would be using it to print money, or more precisely this information would already be priced in and the opportunity to do so would no longer exist.

GazzaBloom

michaels said:

Cash suffers from sequence of inflation risk. Cash held over the last 3 years has seen a 10% plus real terms loss.  If I were going to bridge a gap to an index linked cash flow I would use an index linked gilts ladder (which indeed is what I will do).  I can't understand why one would run inflation risk in order to avoid equity volatility risk. They are both risks just because they have different names.

It's not possible to buy individual gilts or set up an index linked gilts ladder inside my workplace pension, where the bulk of our money is saved.

With regards inflation over the last 3 years, a short term money market fund has risen nearly 14% cumulatively over the last 3 years.

I have mitigated the impact of future inflation, or an estimate of it, by inflating my expected drawdown each year. Yes it's costing me as the cash may not earn inflation beating interest for much longer but I have factored than into my planning.

Also, personal inflation is different for everyone and rarely matches the headline figure, we all spend differently. For example fuel inflation has minimal impact on me as we do less miles per year in retirement by a significant magnitude now we are not commuting, where it hits a working family a lot harder.

There are many paths we can all take to reach the grave without running out of money, no single method works for everyone. I invest in equities for the long term inflation beating growth, cash is part of a short term risk-off allocation, risk-off in terms of it won't be volatile and I can plan around it's stability for short term needs and is instantly available.