Bucketing strategy/ Risk ladder

Bostonerimus1

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.

Pat38493

Linton said:

RecliningInPeace said:

I'm very close to retirement and am adopting a bucketing strategy, or risk ladder as I prefer to call it. I have two years' net income in cash, one year's in an ETF with mostly bonds, one year's in an ETF with some bonds and the rest in 100 equity (MSCI World tracker). It is this alll equity pot that I will draw income from, primarily.

I'm sure there will be different opinions on how many years' cash to hold, how risky the other allocations are, etc., but my question is around when and how to dip into the cash holding.

Generically the advice is to use cash when equity is down, so that you don't have to sell distressed equity, but how do people approach this is in practice? For example, say my all equity pot is £x when I retire. Do I draw on cash when it drops a certain percentage? Or to a certain value?

Let's say I land on a rule to draw from the cash pot when equity has fallen 15%. What if by the first time there is a 15% drop in equity, the pot has grown to £1.3x? Do I then tolerate a drop back to £x, or stick to my rule of 15%? Do I have different plans for a 15% drop over two months versus a slower drop?

Maybe I am overthinking this, but would be glad to hear your views.

I believe any strategy that relies on switching income streams will be difficult and potentially  counterproductive  to implement consistently. The danger is that your timing will be less than optimal only switching from investments to savings and back again too late as you need to be convinced circumstances have really changed. 

The strategy I have used for the past 20 years is
1) Maintain separate 100% equity growth, 50% equity/50% fixed interest income, and near to cash portfolios. Overall my investment allocation is about 60% equity/40% FI+cash.
2)  put all income from whatever source into the near to cash portfolio 
3) take all expenditure from the near to cash portfolio
4) Avoid selling investments for cash.  Apart from very rare rebalancing, the only times I sell investments from the growth portfolio is to increase the size of the income portfolio. So a crash should not be a problem since the cost of the investments being purchased will also have fallen. Investment income is far more stable than nvestment prices.

This strategy has been operated continuously without any need to make major short term  investment decisions such as switching income streams.

What rate of dividend / income return are you making on your fixed income portion, and did it hold up when there was a downturn in equities e.g. 2008?

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.