Anyone in high equity allocation whilst retired?

OldScientist

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.

The interesting thing about the various rebalancing/'where I am going to take my income from' strategies is that they don't make a lot of difference to the outcomes - see the link @GazzaBloom provided earlier. This is also largely the case for McClung's tests (in the link I provided earlier) except that he found his own Prime and Alternate Prime strategies (which are effectively Bonds First with an algorithm for resupplying bonds from equities) tended to be better across all the markets tested (US, UK, and Japan). While I considered using Prime Harvesting, in the end I used annual rebalancing as it is simpler - essentially take income from whichever parts of the portfolio are below target - this does not require any explicit knowledge of how much I paid for the various parts in the first place.

For historically bad retirements, the retiree ended up, in real terms at least, just spending down the portfolio whether this was by SWR or percentage of portfolio and would have been somewhat grim.

Linton

michaels said:

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.

We hold perhaps £20K in actual cash and much more in PBs.  This is for convenience so we can buy whatever we want at minimal effort without selling equity when prices may be low or planning a long time in advance.  This is more important than a relatively small amount of return from inflation matching.  The much larger holding in a 100% equity growth portfolio is more than enough to provide all the long term inflation matching required and an ongoing income is provided by fixed rate bonds and equity dividends.

I would not use a gilt ladder because of its inflexibility.  Also it only works when interest rates are moderately high.  When rates are lower than market expectations of inflation IL gilts are priced at higher than par. An annuity could provide better long term value because of the sharing of longevity risk.

To summarise : As a basic principle use each asset class for the purposes it is best suited. Equity provides long term above inflation growth, higher yield fixed rate bonds and dividend equity provide a steady income in the medium term and cash enables spending flexibility. 

MK62

OldScientist said:

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.

The interesting thing about the various rebalancing/'where I am going to take my income from' strategies is that they don't make a lot of difference to the outcomes - see the link @GazzaBloom provided earlier. This is also largely the case for McClung's tests (in the link I provided earlier) except that he found his own Prime and Alternate Prime strategies (which are effectively Bonds First with an algorithm for resupplying bonds from equities) tended to be better across all the markets tested (US, UK, and Japan). While I considered using Prime Harvesting, in the end I used annual rebalancing as it is simpler - essentially take income from whichever parts of the portfolio are below target - this does not require any explicit knowledge of how much I paid for the various parts in the first place.

Surely you must have taken that into consideration when setting your targets though......no?

MK62

GazzaBloom said:

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.

Well put....

michaels

GazzaBloom said:

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.

Over the 4 years to March 25 cpi was 24%.  If you had put aside 10 years worth of cash 4 years ago you would now be looking at spending about 9% less in real terms for each of the last 6 years.

GazzaBloom

michaels said:

GazzaBloom said:

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.

Over the 4 years to March 25 cpi was 24%.  If you had put aside 10 years worth of cash 4 years ago you would now be looking at spending about 9% less in real terms for each of the last 6 years.

The 10 years cash put aside would allow for inflated spending, so it would be perhaps 12-13 years of cash in today's money, so I wouldn't be spending any less, I would have to have saved more.

When the cash runs dry the equities take over and in the meantime have done some heavy lifting.

I get your point about cash but you need to stop banging on about it. You go your way I will continue on my own very happy path.

OldScientist

MK62 said:

OldScientist said:

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.

The interesting thing about the various rebalancing/'where I am going to take my income from' strategies is that they don't make a lot of difference to the outcomes - see the link @GazzaBloom provided earlier. This is also largely the case for McClung's tests (in the link I provided earlier) except that he found his own Prime and Alternate Prime strategies (which are effectively Bonds First with an algorithm for resupplying bonds from equities) tended to be better across all the markets tested (US, UK, and Japan). While I considered using Prime Harvesting, in the end I used annual rebalancing as it is simpler - essentially take income from whichever parts of the portfolio are below target - this does not require any explicit knowledge of how much I paid for the various parts in the first place.

Surely you must have taken that into consideration when setting your targets though......no?

The targets allocations were largely set according to how much we need to rely on the portfolio for income. From the start of retirement a significant portion of our income was provided by a DB pension while the portfolio supplied discretionary expenditure. In order to slightly damp down fluctuations in the amounts withdrawn we started at an equity allocation of a shade under 60%. By the time our SP are in payment, we will barely need the portfolio at all and our asset allocation will move to being higher in equities (80%). Of course, various other scenarios have been considered (early deaths, DB pension into PPF, etc.) and each has a knock on effect on the asset allocation.

Pat38493

michaels said:

GazzaBloom said:

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.

Over the 4 years to March 25 cpi was 24%.  If you had put aside 10 years worth of cash 4 years ago you would now be looking at spending about 9% less in real terms for each of the last 6 years.

I suspect that if your plan has 100% back testing success with having an 8 year cash buffer plus inflation allowance over 8 years, you plan will have 100% success no matter what mix you use, so therefore if you have the money why take the risk of investing it in equities if it helps you to sleep better at night with it in cash?

Also - if the bulk of the drawdown amount in real terms is happening in the first decade, this makes the difference much smaller than if you are trying to make the money last 30 or 40 years.   In my plan there is some similar effects - I have a year of two of cash as an opening balance - after that I can choose almost any mix of bonds and equities and the success % hardly changes (although of course the end of life balance changes quite a bit).

GazzaBloom

Pat38493 said:

michaels said:

GazzaBloom said:

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.

Over the 4 years to March 25 cpi was 24%.  If you had put aside 10 years worth of cash 4 years ago you would now be looking at spending about 9% less in real terms for each of the last 6 years.

I suspect that if your plan has 100% back testing success with having an 8 year cash buffer plus inflation allowance over 8 years, you plan will have 100% success no matter what mix you use, so therefore if you have the money why take the risk of investing it in equities if it helps you to sleep better at night with it in cash?

Also - if the bulk of the drawdown amount in real terms is happening in the first decade, this makes the difference much smaller than if you are trying to make the money last 30 or 40 years.   In my plan there is some similar effects - I have a year of two of cash as an opening balance - after that I can choose almost any mix of bonds and equities and the success % hardly changes (although of course the end of life balance changes quite a bit).

Plus the cash I have set aside is a mix of salary sacrificed, very tax efficient, pension contributions and realised equity gains i sold down at all time market highs in early January this year.