Retirement strategy, for comments

aroominyork

A thread I started yesterday about messing with my gilts received the appropriate ‘how does it fit with your strategy?’ reply, which promoted me to sketch this retirement plan. I have not used any template, just a blank sheet of paper, so I am happy for the structure as well as the content being critiqued as strongly as necessary. Thanks in advance for reading. 

1             Our situation

 -          Me: Recently retired, may take on some part-time work but not building any income from that into my calcs; State pension due in mid-2028.

-          OH: Retired, State pension (partial, since she moved to the UK from Oz c.20 years ago) and smallish NHS pension, together bringing in 12%-15% of target income.

-          Some side gigs between us bringing in c.10% of target income but they will not last forever so I am not including them in these calcs; they help bridge the gap until my SP kicks in.

-          Owner occupiers, no mortgage. Might downsize but no immediate plans.

 2             Aims

 -          Pass on to our kids our property’s value and c.30% of other assets; 30% seems a target which would also prevent our assets running too low if we refuse to die.

-          Maintain private health insurance which costs about a month’s income due to OH’s (hopefully past) ill health.

-          Maintain comfortable but not extravagant lifestyle; we have done a fair bit of long-haul travel but these days are more interested in UK/Europe.

 3             Assets

 I am giving percentages and not amounts, though the total is between £1m-£2m.

 -          Equities: 41%

-          Corporate bonds (actively managed): 22%

-          Gilt & global aggregate index bond funds: 21%

-          Cash, <2 year fixed term accounts, 2029 ILG: 16%

Equities were close to 60% until late Feb/early March 2025 when OH, who obsessively closely follows US politics, wanted to reduce equity and US exposure. We probably could have compromised around 50% but, not needing to chase growth and being content to share responsibility, I agreed to 40%. The corporate bond funds, which I only own because of confidence in the manager (Man Sterling Corporate Bond and Man Dynamic Income), probably push up the portfolio risk/return to the equivalent of c.50% equities.

The gilt and global aggregate bond funds (split 50/50) are a default position for fixed interest funds not needed in the short term. I am not holding them as dry powder or for income, so it has to be for managing volatility. I am content enough with the yields of the underlying bonds and the protection they should offer if equities tank, but am I holding the right durations (c.7.7 and 6.3 years respectively)?

The cash and <2 year fixed term accounts hold 2-2.5 years’ income needs. The ILG is a first nod to some laddering, also influenced by the current RPI generosity. On another thread I mulled about moving some gilt (and maybe also global aggregate) funds into mid-duration nominal gilts to lock in current yields and also provide more laddering. 

I’ve thought of adding some commodities for diversification but having simplified the portfolio over recent years (by moving from active to overwhelmingly passive equities) I am loathe to mess too much. I understand the benefit of a little gold but would not buy it at current prices. 

We have a fair amount of unwrapped funds so I am trying to minimise tax impact. 

4             Drawdown 

I have estimated long-term inflation adjusted gains for each of the four asset classes (5%, 3%, 1.5%, 1% respectively) and weighted them against our holdings to give a 3.2% withdrawal rate to maintain inflation-adjusted capital. Monevator/The Accumulator has explained why the US’s 4% SWR based on 50% equities/50% Treasuries does not apply to the UK and he might consider 3.2% too high, but it is my starting point. We are not going to play it ultra-safe and OH has no wish to store up funds for a long future life which, given her health issues over recent years, she feels she might not see. 

3.2% plus pensions would be very liveable though would mean holding back on some expenditures; 4% plus pensions is more like our ‘natural’ expenditure level and still leaves c.60% of our capital after 30 years for our kids. But that is on a straight line basis of asset growth and inflation so, in the real world, it is pretty meaningless. 

So how to create a more sophisticated model? Monevator likes McClung’s dynamic withdrawal rate but it is clearly complex and i) I would have to run it in the background without OH’s involvement (or her knowledge), because she would have no interest in me explaining why we have to trim this or that corner when we still have money which is not going to run out any day soon, and ii) models like that seem more tailored to people with fewer assets who need a strict process to give them confidence they will not run out of money. 

5             Withdrawal strategy 

I used to think we would go for three (or maybe four) buckets and rebalance annually, but I am also drawn to Monevator’s dynamic asset allocation which says you sell bonds annually, sell equities into bonds after a run-up in equity values, and rebalance as usual within asset classes. But he warns that a “dynamic asset allocation could leave you 100% in equities during a multi-year bear market in your seventies”, which doesn’t appeal. 

I think I’m in the position – which I guess is common to people entering drawdown – of not properly planning future withdrawals because I’m used to accumulating and not withdrawing. If our cash takes us through to early 2028 and (ignoring the year in between for the moment) the ILG maturing in 2029 holds another two years’ expenditure, do I really need to think about what funds I will tap in 2031? 

So that is as far as I have got. Critique, comments, suggestions would be very welcome.

QrizB

Might be a better fit on the Pensions forum, although I think most of the regulars visit here too.

https://forums.moneysavingexpert.com/categories/pensions-annuities-retirement-planning

aroominyork

QrizB said:

Might be a better fit on the Pensions forum, although I think most of the regulars visit here too.

https://forums.moneysavingexpert.com/categories/pensions-annuities-retirement-planning

Yup, happy for it to move/be moved. (How does that happen...?)

Barralad77

“ So that is as far as I have got. Critique, comments, suggestions would be very welcome.”

My suggestion is to break this down into much smaller questions. You’ve arguably laid out the rest of your life/lives and asked people to make sense of it all. You will probably have more success if you ask specific questions. Of course, others may have a different take on it.

masonic

Corporate bonds overall make up quite a large slice of the portfolio, but if this is a response to equities having been cut so low then I suppose I see what you are doing there. I'd agree that broadly this is likely to behave most like a 50:50 portfolio.

As such a withdrawal rate around the 3% mark doesn't look unreasonable and would probably lead to a fairly low risk of failure. Have you done any modelling? Backtesting and/or Monte Carlo simulations? With the additional constraint of leaving enough for kids it may be more challenging, but if that is to be viewed as a buffer for the extreme, less so.

You've mentioned the potential for downsizing and alluded to some capacity to reduce spending (albeit you aren't starting from a position of full comfort).

For withdrawals, what I'd favour would be some simple decision rules, for example taking from equities unless they've drawn down beyond a threshold, treating the defensives as dry powder for hard times. But this part can be experimented with and will have a much lower impact than what you are invested in.

Any plan will need to be adapted over the years, so a shorter term plan that is detailed and seeks to achieve a portfolio level that gives you flexibility for the longer term is a way to break the challenge into something that feels more familiar.

aroominyork

Thanks, masonic.

I've never done a Monte Carlo. Would you recommend this version https://www.portfoliovisualizer.com/monte-carlo-simulation? A UK version would work better.

Your withdrawals suggestion is very different from either taking from bonds, or annual rebalancing. Do you know any reading matter (not too long...) which discusses the main options - pros/cons etc.?

Linton

Have you checked the tax posittion - are you in danger of being a higher rate tax payer particularly after SP age?. Or perhaps being in a position where the amount tied up in pensions can never be seriously reduced without paying higher rate tax.

I dont like bonds which just sit there in a corner not being equity and waiting for something to happen.  Is there something more useful you can do with them?  For example if they were held as diversified corporate bonds in an ISA they could generate a very useful amount of fairly stable tax free income. This would also reduce the need to continually sell equities.

masonic

aroominyork said:

I've never done a Monte Carlo. Would you recommend this version https://www.portfoliovisualizer.com/monte-carlo-simulation? A UK version would work better.

Yes, the portfoliovisualizer tool is a good one. It allows you to do some stress testing and is reasonably flexible. I'm not aware of any freely available ones with a UK focus. I think Pensioncraft may have one available to their members, but I don't know anything about it. All modelling is flawed and should be taken with a pinch of salt, so I don't tend to worry too much about currency effects reducing precision.

aroominyork said:

Your withdrawals suggestion is very different from either taking from bonds, or annual rebalancing. Do you know any reading matter (not too long...) which discusses the main options - pros/cons etc.?

It's really just turning around similar principles as those you would use in accumulation, i.e. passive and threshold rebalancing. When decumulating, I'd put the priority first on natural yield (dividends and interest withdrawn rather than reinvested), then on investments that are overweight vs your target allocation (which will tend to be equities). When everything is more or less in balance, the argument to take from equities is a greater probability of them growing back over the next period. You also have some active corporate bond funds to throw into this mix.

Such an approach would reduce the need for rebalancing, just as in accumulation, adding new money to the investments that are most underweight or, failing that, lowest growth, would achieve the same ends. It's more of a focus when you have a portfolio held on a flat fee platform with dealing charges. But if you are on the more cautious side, it would probably make sense to have tighter control of equities growing above target than falling below target.

I've seen more discussion of the mechanics of things here than I have in external articles or books. Monevator had did a series on decumulation a long time ago. Obviously this is not a consideration for those who hold a multi-asset fund (or annuitise), and I think the bucket approach, despite having its merits, is not a popular choice.

Bostonerimus1

There are plenty of algorithms for retirement drawdown that try to produce stable income from inherently unstable investment markets. Why not consider the old fashioned approach of SP, annuity and natural yield ie dividends and interest. That makes things simple.

aroominyork

Linton said:

Have you checked the tax posittion - are you in danger of being a higher rate tax payer particularly after SP age?. Or perhaps being in a position where the amount tied up in pensions can never be seriously reduced without paying higher rate tax.

Tax will not be an issue. After I start drawing SP, and modelling straight line withdrawals across all assets, tax would be 8.8% of gross withdrawals/income. I have no DB pension so I can delay touching SIPP and have the full £1000+£5000 starter savings rate (plus/minus the difference between SP and personal allowance). At the moment my only income is a few £k from a side gig so, since I have plenty of 0% taxable savings bandwidth, we have moved most cash into Chase at 4.75% easy access (over FSCS limit but too good to miss), including from our cash ISAs (they are flexible so we can move it back overnight on 5 April).

Linton said:

I dont like bonds which just sit there in a corner not being equity and waiting for something to happen.  Is there something more useful you can do with them?  For example if they were held as diversified corporate bonds in an ISA they could generate a very useful amount of fairly stable tax free income. This would also reduce the need to continually sell equities.

Bonds are the area where I feel least comfortable that I know what I am doing. I am happy with the two Man corporate funds and would not add further diversified bonds, beyond those in the global aggregate fund. Point noted about using them for income, thanks.

But govt/aggregate bonds is the where I am most uncertain. My thinking is that the gilt/aggregate index funds give me a little more duration for money not needed in the next c.5 years, which should increase yield a little and give more scope for price appreciation if I sell them because equities have tanked when I am planning a withdrawal. I held some short dated nominal gilts which matured a few months ago; that money is now in the Chase account. At the moment I plan to wait until the Chase boosted rate ends next summer and then make a call on where to keep cash to cover the next few years, taking advantage of the 0% bandwidth mentioned above. Does that seem sensible? (I expect you'll say that's not how you like your bonds!)

aroominyork

Bostonerimus1 said:

There are plenty of algorithms for retirement drawdown that try to produce stable income from inherently unstable investment markets. Why not consider the old fashioned approach of SP, annuity and natural yield ie dividends and interest. That makes things simple.

I could suggest annuity to OH but at the same time I'd have to ask if you have a spare sofa. When she arrived here from Australia, pre-Osborne reforms, she could not understand or accept the govt mandating that your money dies with you.