Bucketing strategy/ Risk ladder

Pat38493

Bostonerimus1 said:

I'm not a fan of chronological risk buckets. I think they add a layer of unnecessary complexity. Why not just keep one or two years money in cash and then just do variable Guyton Klinger type withdrawals from your stock and bond portfolio taking interest and dividends first.

It is recommended and used by some, including some IFAs, partly because they think it helps their clients sleep at night.

However on a theoretical level, you are right - you might as well just pick a % allocation and rebalance and you will get roughly the same result.

The other issue with cash flow ladders is that if your withdawals are quite heavily front loaded and you get a financial crash, it forces you to reduce your overall risk by selling most of the equities in your longest term bucket and limit the chances of ever recovering.

Bostonerimus1

Pat38493 said:

Bostonerimus1 said:

I'm not a fan of chronological risk buckets. I think they add a layer of unnecessary complexity. Why not just keep one or two years money in cash and then just do variable Guyton Klinger type withdrawals from your stock and bond portfolio taking interest and dividends first.

It is recommended and used by some, including some IFAs, partly because they think it helps their clients sleep at night.

However on a theoretical level, you are right - you might as well just pick a % allocation and rebalance and you will get roughly the same result.

The other issue with cash flow ladders is that if your withdawals are quite heavily front loaded and you get a financial crash, it forces you to reduce your overall risk by selling most of the equities in your longest term bucket and limit the chances of ever recovering.

People love to complicate things. Lucia et al have made lots of money complicating Evansky's original cash plus investments idea, which my Mum and Dad were doing in 1949 and they weren't the first. Financial advisors and authors love to repackage common sense and sell it to people looking for a solution. I do a Evansky two bucket strategy, because its just plain cash flow common sense, ie. I need money to pay bills and buy beer so I keep that in my bank account. I invest money that I don't need to spend and can take interest and dividends to top up cash when necessary. As most people will be invested for 20 or 30 years in retirement I don't see much need to radically change asset allocation when going into retirement as SP gives a foundation. I suppose the risk averse might want to be a bit more bond heavy or even buy an annuity, but drawdown doesn't need a radical change in strategy IMO, just a change of perspective.

redpete

I'm in the early years of retirement and hold approx 50% in geographically diverse equity trackers, approx 5 yrs worth of anticipated income in a gilt ladder and the balance in bond and money mkt funds. 

As and when the equities grow beyond 20% I sell off 20% and move into bonds / MMs. The income yield from gilts and bond/MM funds helps to build the gilt ladder which I otherwise fund from selling off bonds/MM.

This works whilst I have the interest and capability to manage it. If I lose interest or mental capacity I will have to change it to something simpler.

Bostonerimus1

redpete said:

I'm in the early years of retirement and hold approx 50% in geographically diverse equity trackers, approx 5 yrs worth of anticipated income in a gilt ladder and the balance in bond and money mkt funds. 

As and when the equities grow beyond 20% I sell off 20% and move into bonds / MMs. The income yield from gilts and bond/MM funds helps to build the gilt ladder which I otherwise fund from selling off bonds/MM.

This works whilst I have the interest and capability to manage it. If I lose interest or mental capacity I will have to change it to something simpler.

This seems perfectly sensible to me. You can think of such an arrangement in terms of asset classes and their relative risks and returns just as you would in the accumulation phase. The only difference from the accumulation phase is probably the gilt ladder and obviously money being taken out rather than deposited. If the time buckets concept helps someone, then fine, it's just that I see it as an unnecessary complication rather than being helpful in drawdown planning.

MetaPhysical

redpete said:

I'm in the early years of retirement and hold approx 50% in geographically diverse equity trackers, approx 5 yrs worth of anticipated income in a gilt ladder and the balance in bond and money mkt funds. 

As and when the equities grow beyond 20% I sell off 20% and move into bonds / MMs. The income yield from gilts and bond/MM funds helps to build the gilt ladder which I otherwise fund from selling off bonds/MM.

This works whilst I have the interest and capability to manage it. If I lose interest or mental capacity I will have to change it to something simpler.

Precisely my plan redpete, I am about to retire.  Do you hold your gilts in index linked gilts or just ordinary ones?

redpete

MetaPhysical said:

redpete said:

I'm in the early years of retirement and hold approx 50% in geographically diverse equity trackers, approx 5 yrs worth of anticipated income in a gilt ladder and the balance in bond and money mkt funds. 

As and when the equities grow beyond 20% I sell off 20% and move into bonds / MMs. The income yield from gilts and bond/MM funds helps to build the gilt ladder which I otherwise fund from selling off bonds/MM.

This works whilst I have the interest and capability to manage it. If I lose interest or mental capacity I will have to change it to something simpler.

Precisely my plan redpete, I am about to retire.  Do you hold your gilts in index linked gilts or just ordinary ones?

Mainly ordinary gilts because I was still trying to work out how ILG pricing and yields worked. I'm about to fill a couple of gaps with ILGs.  My justification was also that standard bond yields are priced in with the market's expectation for inflation, and in the short term this is a small enough risk for me.

I think I've gone over the top with the ladder - too many issues held and hence 4-5 UFPLS withdrawals a year when I think 2-3 a year would be fine.

MetaPhysical

redpete said:

MetaPhysical said:

redpete said:

I'm in the early years of retirement and hold approx 50% in geographically diverse equity trackers, approx 5 yrs worth of anticipated income in a gilt ladder and the balance in bond and money mkt funds. 

As and when the equities grow beyond 20% I sell off 20% and move into bonds / MMs. The income yield from gilts and bond/MM funds helps to build the gilt ladder which I otherwise fund from selling off bonds/MM.

This works whilst I have the interest and capability to manage it. If I lose interest or mental capacity I will have to change it to something simpler.

Precisely my plan redpete, I am about to retire.  Do you hold your gilts in index linked gilts or just ordinary ones?

Mainly ordinary gilts because I was still trying to work out how ILG pricing and yields worked. I'm about to fill a couple of gaps with ILGs.  My justification was also that standard bond yields are priced in with the market's expectation for inflation, and in the short term this is a small enough risk for me.

I think I've gone over the top with the ladder - too many issues held and hence 4-5 UFPLS withdrawals a year when I think 2-3 a year would be fine.

Me and you must have been joined at birth.  Exactly my thinking too.

Cobbler_tone

Bostonerimus1 said:

Pat38493 said:

Bostonerimus1 said:

I'm not a fan of chronological risk buckets. I think they add a layer of unnecessary complexity. Why not just keep one or two years money in cash and then just do variable Guyton Klinger type withdrawals from your stock and bond portfolio taking interest and dividends first.

It is recommended and used by some, including some IFAs, partly because they think it helps their clients sleep at night.

However on a theoretical level, you are right - you might as well just pick a % allocation and rebalance and you will get roughly the same result.

The other issue with cash flow ladders is that if your withdawals are quite heavily front loaded and you get a financial crash, it forces you to reduce your overall risk by selling most of the equities in your longest term bucket and limit the chances of ever recovering.

People love to complicate things. 

The truest point I've read on this thread.
Build a decent pension and have cash in ISA's/the bank. I swear some people fancy themselves as the Wolf of Wall street and the majority of people seem to navigate through life just fine without spending rafts of time with complicated financial planning, although appreciate some may enjoy it as a pastime, or chasing every potential £.
At the same time some people make some really daft decisions.

Linton

Cobbler_tone said:

Bostonerimus1 said:

Pat38493 said:

Bostonerimus1 said:

I'm not a fan of chronological risk buckets. I think they add a layer of unnecessary complexity. Why not just keep one or two years money in cash and then just do variable Guyton Klinger type withdrawals from your stock and bond portfolio taking interest and dividends first.

It is recommended and used by some, including some IFAs, partly because they think it helps their clients sleep at night.

However on a theoretical level, you are right - you might as well just pick a % allocation and rebalance and you will get roughly the same result.

The other issue with cash flow ladders is that if your withdawals are quite heavily front loaded and you get a financial crash, it forces you to reduce your overall risk by selling most of the equities in your longest term bucket and limit the chances of ever recovering.

People love to complicate things. 

The truest point I've read on this thread.
Build a decent pension and have cash in ISA's/the bank. I swear some people fancy themselves as the Wolf of Wall street and the majority of people seem to navigate through life just fine without spending rafts of time with complicated financial planning, although appreciate some may enjoy it as a pastime, or chasing every potential £.
At the same time some people make some really daft decisions.

Pension drawdown has only been a viable option for most people for the past 10 years during when conditions have been benign. There is no experience of how the various strategies and those that use them will manage when we have a serious crash. It is far too early to say that people will navigate fine without proper financial planning.

Bostonerimus1

Linton said:

Cobbler_tone said:

Bostonerimus1 said:

Pat38493 said:

Bostonerimus1 said:

I'm not a fan of chronological risk buckets. I think they add a layer of unnecessary complexity. Why not just keep one or two years money in cash and then just do variable Guyton Klinger type withdrawals from your stock and bond portfolio taking interest and dividends first.

It is recommended and used by some, including some IFAs, partly because they think it helps their clients sleep at night.

However on a theoretical level, you are right - you might as well just pick a % allocation and rebalance and you will get roughly the same result.

The other issue with cash flow ladders is that if your withdawals are quite heavily front loaded and you get a financial crash, it forces you to reduce your overall risk by selling most of the equities in your longest term bucket and limit the chances of ever recovering.

People love to complicate things. 

The truest point I've read on this thread.
Build a decent pension and have cash in ISA's/the bank. I swear some people fancy themselves as the Wolf of Wall street and the majority of people seem to navigate through life just fine without spending rafts of time with complicated financial planning, although appreciate some may enjoy it as a pastime, or chasing every potential £.
At the same time some people make some really daft decisions.

Pension drawdown has only been a viable option for most people for the past 10 years during when conditions have been benign. There is no experience of how the various strategies and those that use them will manage when we have a serious crash. It is far too early to say that people will navigate fine without proper financial planning.

My point is that "proper financial planning" doesn't need to be complicated, or perhaps I should say overly complicated. The US has a longer experience of DC pensions and drawdown than the UK and its very much a mixed picture. The switch from DB to DC transferred costs and risk from the employer to the employee and was a big money maker for the fund management companies like Vanguard, Fidelity etc.; no wonder they lobbied for it so hard. People who use the DC system early and often can build up significant wealth and then simple drawdown strategies provide income and have generally left money for children to inherit. But DC has been a disaster for many who managed their money poorly and/or got sucked into funds with excessive fees. For them the US equivalent of an IFA would have been useful, but that comes with added costs too.

The trade off is that DB pensions work for everyone and with DC pensions there are some who do very well and others who fail. It's not surprising that the idea arose in a country that usually values the individual over a collective benefit.