Retirement plan geared to sequence of return risk, what to do when portfolio is rising

Hoenir

QrizB said:

Hoenir said:

DT2001 said:

Hoenir said:

Why expose all your portfolio to 40% falls and high levels of volatility. Stock markets are for the long term , 10 years plus. Surely better to take a risk adjusted approach.  Losing less capital value in a downturn is a far more effective way of investing. Then focusing entirely on the potential upside gains. 

If markets fall by 40% our overall income (using the rainy day fund) would be down 10/12% so I don’t see it as too volatile.

I can only assume your personal view is based on experience purely on the recent bull market.

You might've missed that OP will, by 2032, have £38k of combined DB and SP and an essential annual spend of £18k.

Their £1M of equities could go to zero and stay there, and they'd still have an income similar to the average working-age household.

I suspect they're in the same boat as certain other regulars and realise they could've retired years ago!

Never been a shortage of people who believe they've discovered the Holy Grail of Investing. Only to later discover that they haven't.  Not my money so doesn't concern me if people prefer to speculate. If anything provides more opportunties for those more diligent. Trading after all takes two parties. It's not a one sided game. No longer surprised when the room can be full of rhino's and investors prefer to remain oblivous to them. The four most expensive words in the English languge are called so for good reason. 

PropertyGuru_Wannabe

QrizB said:

Hoenir said:

DT2001 said:

Hoenir said:

Why expose all your portfolio to 40% falls and high levels of volatility. Stock markets are for the long term , 10 years plus. Surely better to take a risk adjusted approach.  Losing less capital value in a downturn is a far more effective way of investing. Then focusing entirely on the potential upside gains. 

If markets fall by 40% our overall income (using the rainy day fund) would be down 10/12% so I don’t see it as too volatile.

I can only assume your personal view is based on experience purely on the recent bull market.

You might've missed that OP will, by 2032, have £38k of combined DB and SP and an essential annual spend of £18k.

Their £1M of equities could go to zero and stay there, and they'd still have an income similar to the average working-age household.

I suspect they're in the same boat as certain other regulars and realise they could've retired years ago!

Absolutely!  The OP has absolutely zero chance of running out of money for retirement life.  I think most people fear not having enough and which is why they spend hundreds of thousands on annuities despite the investment potential and opportunity costs.  Each to their own.

OP, I think what you should do is withdraw from the pension pot up to the max basic tax threshold with your partner.  That way, you can get your funds out of the pot tax efficiently, and you can consider putting unused funds into an S&S ISA.  The sequence of returns risk doesn't really apply to you as your expenditure is so low.  If markets drop, you sit tight.  If markets rise, then you may consider withdrawing more to spend for a quality life.  Once we hit 65 upwards, our health may start to deteriorate and you need to think about enjoying life more before your mind says yes but your body says no.  You have way more than enough.

DT2001

QrizB said:

Hoenir said:

DT2001 said:

Hoenir said:

Why expose all your portfolio to 40% falls and high levels of volatility. Stock markets are for the long term , 10 years plus. Surely better to take a risk adjusted approach.  Losing less capital value in a downturn is a far more effective way of investing. Then focusing entirely on the potential upside gains. 

If markets fall by 40% our overall income (using the rainy day fund) would be down 10/12% so I don’t see it as too volatile.

I can only assume your personal view is based on experience purely on the recent bull market.

You might've missed that OP will, by 2032, have £38k of combined DB and SP and an essential annual spend of £18k.

Their £1M of equities could go to zero and stay there, and they'd still have an income similar to the average working-age household.

I suspect they're in the same boat as certain other regulars and realise they could've retired years ago!

I am at stay at home father. I told OH she could retire 5 years ago however she enjoys her work so continues. We travel regularly so I think have a good work life balance.

DT2001

Hoenir said:

QrizB said:

Hoenir said:

DT2001 said:

Hoenir said:

Why expose all your portfolio to 40% falls and high levels of volatility. Stock markets are for the long term , 10 years plus. Surely better to take a risk adjusted approach.  Losing less capital value in a downturn is a far more effective way of investing. Then focusing entirely on the potential upside gains. 

If markets fall by 40% our overall income (using the rainy day fund) would be down 10/12% so I don’t see it as too volatile.

I can only assume your personal view is based on experience purely on the recent bull market.

You might've missed that OP will, by 2032, have £38k of combined DB and SP and an essential annual spend of £18k.

Their £1M of equities could go to zero and stay there, and they'd still have an income similar to the average working-age household.

I suspect they're in the same boat as certain other regulars and realise they could've retired years ago!

Never been a shortage of people who believe they've discovered the Holy Grail of Investing. Only to later discover that they haven't.  Not my money so doesn't concern me if people prefer to speculate. If anything provides more opportunties for those more diligent. Trading after all takes two parties. It's not a one sided game. No longer surprised when the room can be full of rhino's and investors prefer to remain oblivous to them. The four most expensive words in the English languge are called so for good reason. 

I am following a simple adjusted Warren Buffet plan - global passive ETF rather than S&P 500 and ultra short bonds. I am not trading regularly or chasing returns. I’m aiming to get a steady (in terms of average %) return over 30 years. 

AlanP_2

I'm not sure I understand your question then tbh.

You have a plan for SWR, but not one for pot value increasing but then go on to state:

Now I am wondering if I bank say £20k so come what may with the market we have the maximum income (on my original figures) in year 1 of whenever full retirement occurs.

To me I read that as a strategy to deal with SWR not one to deal with a higher pot value. 

DT2001

AlanP_2 said:

I'm not sure I understand your question then tbh.

You have a plan for SWR, but not one for pot value increasing but then go on to state:

Now I am wondering if I bank say £20k so come what may with the market we have the maximum income (on my original figures) in year 1 of whenever full retirement occurs.

To me I read that as a strategy to deal with SWR not one to deal with a higher pot value. 

Exactly, I am questioning how or if I should adjust my plan if/when the pot size increases BEFORE starting drawdown.
The value has increased so do I just let it roll until retirement or ‘lock’ in some of the increase by adding to my rainy day pot.

OldScientist

DT2001 said:

We are possibly 2 years off retirement (when I say we I mean OH) however OH may continue beyond that in semi retirement depending on work offered (self employed with 5/6 sources which are unrelated to each other).

I will have SP in 1 year. We have 3 small DBs in payment £14.5k. There is a cash/nr cash fund to cover OH’s SP equivalent until SPA in 7 years. Necessary spend £18k

We have a written down plan to take 1% per quarter of total equity investments. This could lead to highly variable income depending on the sequence of events. The variability is not a psychological problem as we have been self employed for 30+ years and this income will be used for travel and any excess gifted. I have a rainy day fund which I thought to use if the market tanked to supplement the lower drawdown. Example pot £1.1m at start - income £44k p.a. - crash, £600k pot income £24k + £10k from rainy day fund . Rainy day fund would last 10 years without any recovery from investment pot. If crash occurs I expect travel opportunities would be restricted as well. 

Anyway I am happy with the plan to cope with downturns. Having just moved platforms (to reduce costs) I am more aware of the recent increase in the portfolio as the baseline has been reset. There is nothing in my plan to utilise the increase other than taking the 1% per quarter on the higher figure. Now I am wondering if I bank say £20k so come what may with the market we have the maximum income (on my original figures) in year 1 of whenever full retirement occurs.

Any thoughts as we all tend to concentrate, inevitably, on ensuring our investments will last.

If my understanding is correct you have

SP of 12k, DB pensions of 14.5k (are these fully inflation protected or capped), and enough cash to cover a second SP of £12k for 7 years (this may be reduced by inflation) for a total of £38.5k (and the same after the second SP is in payment)

4% of your portfolio of £1.1m would provide £44k in the first instance for a total of £82.5k

Although you say are happy with the variability, the fact that you are looking to mitigate the effects of a potential crash between now and retirement suggests that that may not entirely be the case. There are several ways of reducing the volatility of portfolio income (i.e., the effects of a crash) when using a percentage of portfolio approach,
1) Use a small cash buffer (see a very long thread at https://www.bogleheads.org/forum/viewtopic.php?t=284519 for details)
2) Reduce the equity component of the portfolio (although this may, in the long term, increase inflation risk)
3) Smooth the withdrawals (e.g., take the average of the portfolio size over the last N years - although this introduces the possibility of the portfolio becoming exhausted)
4) Increase the level of the income floor from the current amount of just under 50% (i.e., 38.5/82.5k) of total income through annuities or an inflation linked gilt ladder.

DT2001

OldScientist said:

DT2001 said:

We are possibly 2 years off retirement (when I say we I mean OH) however OH may continue beyond that in semi retirement depending on work offered (self employed with 5/6 sources which are unrelated to each other).

I will have SP in 1 year. We have 3 small DBs in payment £14.5k. There is a cash/nr cash fund to cover OH’s SP equivalent until SPA in 7 years. Necessary spend £18k

We have a written down plan to take 1% per quarter of total equity investments. This could lead to highly variable income depending on the sequence of events. The variability is not a psychological problem as we have been self employed for 30+ years and this income will be used for travel and any excess gifted. I have a rainy day fund which I thought to use if the market tanked to supplement the lower drawdown. Example pot £1.1m at start - income £44k p.a. - crash, £600k pot income £24k + £10k from rainy day fund . Rainy day fund would last 10 years without any recovery from investment pot. If crash occurs I expect travel opportunities would be restricted as well. 

Anyway I am happy with the plan to cope with downturns. Having just moved platforms (to reduce costs) I am more aware of the recent increase in the portfolio as the baseline has been reset. There is nothing in my plan to utilise the increase other than taking the 1% per quarter on the higher figure. Now I am wondering if I bank say £20k so come what may with the market we have the maximum income (on my original figures) in year 1 of whenever full retirement occurs.

Any thoughts as we all tend to concentrate, inevitably, on ensuring our investments will last.

If my understanding is correct you have

SP of 12k, DB pensions of 14.5k (are these fully inflation protected or capped), and enough cash to cover a second SP of £12k for 7 years (this may be reduced by inflation) for a total of £38.5k (and the same after the second SP is in payment)

4% of your portfolio of £1.1m would provide £44k in the first instance for a total of £82.5k

Although you say are happy with the variability, the fact that you are looking to mitigate the effects of a potential crash between now and retirement suggests that that may not entirely be the case. There are several ways of reducing the volatility of portfolio income (i.e., the effects of a crash) when using a percentage of portfolio approach,
1) Use a small cash buffer (see a very long thread at https://www.bogleheads.org/forum/viewtopic.php?t=284519 for details)
2) Reduce the equity component of the portfolio (although this may, in the long term, increase inflation risk)
3) Smooth the withdrawals (e.g., take the average of the portfolio size over the last N years - although this introduces the possibility of the portfolio becoming exhausted)
4) Increase the level of the income floor from the current amount of just under 50% (i.e., 38.5/82.5k) of total income through annuities or an inflation linked gilt ladder.

Thanks for the link. I have started the thread and will slowly work through it. It has already raised a few interesting views so I am sure I will enjoy it. Is there a VPW table for the U.K. or a globally diversified fund?

 I cannot see us spending the income I am suggesting it might be possible to draw however it would be my intention to pass surplus income onto the next generation. It would be good to be able to pass on a relatively steady amount so smoothing income or adjusting monthly/quarterly amounts along the lines of VPW could be a possibility.

OldScientist

DT2001 said:

OldScientist said:

DT2001 said:

We are possibly 2 years off retirement (when I say we I mean OH) however OH may continue beyond that in semi retirement depending on work offered (self employed with 5/6 sources which are unrelated to each other).

I will have SP in 1 year. We have 3 small DBs in payment £14.5k. There is a cash/nr cash fund to cover OH’s SP equivalent until SPA in 7 years. Necessary spend £18k

We have a written down plan to take 1% per quarter of total equity investments. This could lead to highly variable income depending on the sequence of events. The variability is not a psychological problem as we have been self employed for 30+ years and this income will be used for travel and any excess gifted. I have a rainy day fund which I thought to use if the market tanked to supplement the lower drawdown. Example pot £1.1m at start - income £44k p.a. - crash, £600k pot income £24k + £10k from rainy day fund . Rainy day fund would last 10 years without any recovery from investment pot. If crash occurs I expect travel opportunities would be restricted as well. 

Anyway I am happy with the plan to cope with downturns. Having just moved platforms (to reduce costs) I am more aware of the recent increase in the portfolio as the baseline has been reset. There is nothing in my plan to utilise the increase other than taking the 1% per quarter on the higher figure. Now I am wondering if I bank say £20k so come what may with the market we have the maximum income (on my original figures) in year 1 of whenever full retirement occurs.

Any thoughts as we all tend to concentrate, inevitably, on ensuring our investments will last.

If my understanding is correct you have

SP of 12k, DB pensions of 14.5k (are these fully inflation protected or capped), and enough cash to cover a second SP of £12k for 7 years (this may be reduced by inflation) for a total of £38.5k (and the same after the second SP is in payment)

4% of your portfolio of £1.1m would provide £44k in the first instance for a total of £82.5k

Although you say are happy with the variability, the fact that you are looking to mitigate the effects of a potential crash between now and retirement suggests that that may not entirely be the case. There are several ways of reducing the volatility of portfolio income (i.e., the effects of a crash) when using a percentage of portfolio approach,
1) Use a small cash buffer (see a very long thread at https://www.bogleheads.org/forum/viewtopic.php?t=284519 for details)
2) Reduce the equity component of the portfolio (although this may, in the long term, increase inflation risk)
3) Smooth the withdrawals (e.g., take the average of the portfolio size over the last N years - although this introduces the possibility of the portfolio becoming exhausted)
4) Increase the level of the income floor from the current amount of just under 50% (i.e., 38.5/82.5k) of total income through annuities or an inflation linked gilt ladder.

Thanks for the link. I have started the thread and will slowly work through it. It has already raised a few interesting views so I am sure I will enjoy it. Is there a VPW table for the U.K. or a globally diversified fund?

 I cannot see us spending the income I am suggesting it might be possible to draw however it would be my intention to pass surplus income onto the next generation. It would be good to be able to pass on a relatively steady amount so smoothing income or adjusting monthly/quarterly amounts along the lines of VPW could be a possibility.

There isn't an existing table, but one can be constructed in a spreadsheet (see below). The nice thing about percentage of portfolio methods is that, unlike SWR, the exact values are, in the long run, not that critical

Given an 'expected' real return of r and years remaining in the planning period y, then the percentage to withdraw can be found using

pmt(r%,y,-100,0,1)

As a special case, setting r=0 gives a 1/y withdrawal.

For example, assume real returns for UK equities of 5% and for UK gilts of 1.3%, then for a 60/40 portfolio r would be about 3.5% then the first few values of a 40 year planning period (suitable for a couple around 60yo with current longevity predictions). I've also included values for r=2.5% and 4.5%.

Years to go r=3.5% r=2.5% r=4.5%

40             4.52       3.89       5.20

39             4.58       3.94       5.25

38             4.64       4.01       5.30

37             4.70       4.07       5.36

36             4.76       4.14       5.42

If the realised returns exceed the value of r, the real withdrawal will go up, while if the real returns are below r, then the real withdrawal will go down. In other words, choosing a higher r will tend to front load real withdrawals, while choosing a lower r will tend to backload withdrawals.

While I am using ABW (search for that one on bogleheads, I note that VPW is just a special case of ABW) with no cash buffer, since our income floor is about 80% of our spend so portfolio variability is not really an issue, if I was doing this again, I would probably have just used a simple linear increase in the percentage to withdraw (my initial planning period was about 45 years), e.g., 3.6%, 3.8%, 4.0%, 4.2%, etc.