Annual review should run down cash/bonds and move to 100% Equities?

OldScientist

Pat38493 said:

OldScientist said:

Pat38493 said:

OldScientist said:

Pat38493 said:

phlebas192 said:

I'm an advocate for holding a higher % of equities than most people here seem comfortable with (since I see inflation as the single biggest risk to a comfortable retirement), but 100% with no cash buffer would be "extremely courageous" as Sir Humphrey might say! Backtesting can only tell you what might have happened with the specific assumptions you have chosen to model - and most backtesting I've seen is based on US data which has the huge assumption of "this country benefitted more than any other from the geopolitical upheavals of the 20th century but I'm going to assume that will be replicated in the 21st". Ever wondered how your backtesting would work with Russia, China or Germany as the principle data source to name just the most obvious examples?

For anyone to say more than that you really need to give a lot more information. eg your age, do you have any dependants, what guaranteed income do you have / expect to get (DB pensions, annuities, state pension), how much of your expenditure these cover, rough size of investment pot etc.

I would suggest at the least trying to assign a cash value to whatever other income you might have. eg at the very least you can work out an approximate cash value for your state pension via a tool such as https://comparison.moneyhelper.org.uk/en/tools/annuities. As an example, when my wife joined myself in retirement we were almost 100% in equities if we just looked at investments and saving accounts; but I was already receiving a DB pension and we had the SP to come. Including equivalent cash values for those we were more like 70% equities which is much less risky! 

FWIW, if you have a 60% equities ratio in your investments with a 99% chance of success then you have basically won the game. Why take a massive amount of additional risk for just a small improvement in - possibly spurious - outcomes?

I am in the lucky situation aleady since we have both got DB pension sources and full SP.  I am just about to turn 57 wife 59.  By the time we both reach 67, over 90% of our spending requirements will be covered by those sources and I am pretty sure our situation would still be fairly comfortable even if I ran out of money by then.

Meanwhile, the most important purpose of my DC funds is to make sure we make it till we are both 67, since the drawdowns will be much higher in the next 10 years.  My wife's DB pension is an NHS one that already pays out at full rate.  My DB pension is already in payment but is much smaller.

My spending plan includes some big ticket items and costs that roll off in the first few years, so I am due to spend about 25% of the current nominal value of my assets  fund in the next 3 years - at the moment I have this all in cash, and I am going to draw out of my DC up to the top of the 20% tax threshold with the rest covered by ISA/GIA that come from a house downsize and TFC/PCLS already taken.  Obviously my drawdowns after the first 3 years need to be, and will be, much lower, and after year 10 they will be very small.

On the one hand, if anyone is in a postion to risk 100% equities it's probably me.  On the other hand I was a bit surprised that backtesting is showing I am better off in 100% equities, even though my spend is significantly front loaded to the first 3 years.  I have spent hours studying all the reports and data from these tools and it seems correct to me, obviously within the parameters of the data that it is using.

Also the tool I am using tends to assume regular rebalancing to the mix you have programmed.  It's not very easy with that tool to simulate a glidepath where you basically increase your equity % during the first few years and eventually to 100%.

Common wisdom is that any money you need in the next 10 years should not be in equities, but if I really did that, the backtesting is massively worse.

In the end I guess it comes down to what a couple of replies above already said - how confident am I that I will not sell if there is a huge downturn in year 2, or cut my spending so much that I don't enjoy life as much for a couple of years.  In all prior historical scenarios the portfolio recovered enough for my plan to work after year 3.

Also to an earlier reply - these are not monte carlo simulations these are historical backtests using global financial data including UK, and using UK inflation data.

What duration bonds are you modelling in timeline and voyant? Historically, long duration bonds (both US and UK - not sure off-hand about other countries) have had periods of awful real returns (e.g., from 1940 to 1980) caused by increasing yields and the impact of inflation in the 60s and 70s. So-called 'safe' withdrawal rates can vary considerably (~50 bp depending on the overall asset allocation) with the duration of the fixed income used. Some quick historical modelling (asset returns from macrohistory, equities 50/50 UK/US with fixed income consisting of UK cash) suggests that for a 10 year period, the SWR was 7.0-7.3% between 20-80% equities and 6.5% for 100% equities). Using long bonds instead of cash lowered the SWR by about 40-100 bp (higher reductions with lower equity allocation).

If you constructed a 10 year inflation linked gilt ladder (e.g., see https://lategenxer.streamlit.app/Gilt_Ladder which suggests a current payout rate of about 10.5%) to provide the required floor of inflation linked income in the run up to the state pension, would that leave you some surplus for a risk portfolio (with 100% equities if required)?

Just to clarify my understanding here, when you say the payout is 10.5%, you do not mean that I will get a 10.5% return on my investment?  Looking at the tool, it seems to mean that over 10 years, I could take out 10.5% of my investment per year, but at the end I have nothing, so it's not a 10.5% return - the return rate compared to equities is more like 3.7% if I am reading the tool correctly?

The difference is that this return is (almost) guaranteed?

However how would you actually implement this in real life?  If I implemented this inside my SIPP wrapper, by for example purchasing bonds like T27A in my interactive investor account, I still have to pay 20% marginal tax on withdrawal, which does not seem to be taken into account in the results of this tool (although that's the same regardless how I invest the money in the SIPP)?

Back of a napkin - it looks like doing this would leave me with excess £147K to invest in equities until age 67 in my SIPP.  Looking at the Timeline balances chart, this is below the 10th percentile of historical outcomes at age 67, but above the worst case.  

By doing this I can probably lock in my retirement plan and get rid of inlation risk for a significant part of it, but I will be throwing away a high chance of much better outcomes, and also some of my flexibility.

I could also try to implement this outside of my tax wrappers - I'd have to think that through a bit more but it would be for a lower amount as most of my portfolio is currently in pensions.

What I called the payout rate is same as the withdrawal rate and not the return. The real return is around 0.8% with a nominal return of 3.8% if inflation is 3% over the next 10 years. Of course, the real return of equities, bonds, and cash is unknown over the next 10 years.

In the absence of a UK debt default, this income is guaranteed. You're entirely right in that it covers the downside and provides certainty at the expense of reduced upside. Unfortunately, that is one of those decisions where there isn't a magic formula since it at least depends on the ability to adapt to downside equity risk and legacy requirements as well as any innate aversion to risk.

I agree that the big tax advantage of gilt ladders (i.e., no capital gains) is lost within a pension. Our own (relatively short ladder) is in an ISA but that was because we could construct it from already existing funds rather than a result of planning!

What do you mean by using already existing funds?  I was taking a look at this yesterday and with my current SIPP provider, Interactive Investor, you cannot buy individual index linked gilts online - it says that you have to call them to do it (which presumably means much higher transaction charges).  It looks like you can purchase non index linked gilts online though.

I am wondering if a non index linked gilt ladder might work well in a SIPP if you are planning to withdraw up to a particular frozen tax band every year.

Meantime is anyone aware of providers where you can buy index linked gilts like the ones mentioned in the tool quoted above online without doing phone transactions and higher charges?

A bit ironic to be researching this when my original post was about going to 100% equities I know, but I’m also curious about all approaches.

Sorry, me being sloppy with language. By existing funds I meant money that I'd already got not particular etfs.

When I set up the ILG ladder (iweb, now Scottish widows) I had to phone them, but the transaction cost was the same as that for online (£5). My understanding is that ILGs can now also be bought online (nominal gilts certainly can be), but you don't know the price in advance (the purchase is quick enough to not be a problem unless the bond markets are very volatile - there was a thread here recently, that I cannot now find).

Yes, a nominal gilt ladder will provide a known amount of income (coupons and maturing bonds) each year. I note that the coupons and maturing bonds from the ladder don't provide a constant flow of income (see the cashflow tab of the tool), so some will have to be held as cash (MMF?) while awaiting withdrawal.

tigerspill

OldScientist said:

Pat38493 said:

OldScientist said:

Pat38493 said:

OldScientist said:

Pat38493 said:

phlebas192 said:

I'm an advocate for holding a higher % of equities than most people here seem comfortable with (since I see inflation as the single biggest risk to a comfortable retirement), but 100% with no cash buffer would be "extremely courageous" as Sir Humphrey might say! Backtesting can only tell you what might have happened with the specific assumptions you have chosen to model - and most backtesting I've seen is based on US data which has the huge assumption of "this country benefitted more than any other from the geopolitical upheavals of the 20th century but I'm going to assume that will be replicated in the 21st". Ever wondered how your backtesting would work with Russia, China or Germany as the principle data source to name just the most obvious examples?

For anyone to say more than that you really need to give a lot more information. eg your age, do you have any dependants, what guaranteed income do you have / expect to get (DB pensions, annuities, state pension), how much of your expenditure these cover, rough size of investment pot etc.

I would suggest at the least trying to assign a cash value to whatever other income you might have. eg at the very least you can work out an approximate cash value for your state pension via a tool such as https://comparison.moneyhelper.org.uk/en/tools/annuities. As an example, when my wife joined myself in retirement we were almost 100% in equities if we just looked at investments and saving accounts; but I was already receiving a DB pension and we had the SP to come. Including equivalent cash values for those we were more like 70% equities which is much less risky! 

FWIW, if you have a 60% equities ratio in your investments with a 99% chance of success then you have basically won the game. Why take a massive amount of additional risk for just a small improvement in - possibly spurious - outcomes?

I am in the lucky situation aleady since we have both got DB pension sources and full SP.  I am just about to turn 57 wife 59.  By the time we both reach 67, over 90% of our spending requirements will be covered by those sources and I am pretty sure our situation would still be fairly comfortable even if I ran out of money by then.

Meanwhile, the most important purpose of my DC funds is to make sure we make it till we are both 67, since the drawdowns will be much higher in the next 10 years.  My wife's DB pension is an NHS one that already pays out at full rate.  My DB pension is already in payment but is much smaller.

My spending plan includes some big ticket items and costs that roll off in the first few years, so I am due to spend about 25% of the current nominal value of my assets  fund in the next 3 years - at the moment I have this all in cash, and I am going to draw out of my DC up to the top of the 20% tax threshold with the rest covered by ISA/GIA that come from a house downsize and TFC/PCLS already taken.  Obviously my drawdowns after the first 3 years need to be, and will be, much lower, and after year 10 they will be very small.

On the one hand, if anyone is in a postion to risk 100% equities it's probably me.  On the other hand I was a bit surprised that backtesting is showing I am better off in 100% equities, even though my spend is significantly front loaded to the first 3 years.  I have spent hours studying all the reports and data from these tools and it seems correct to me, obviously within the parameters of the data that it is using.

Also the tool I am using tends to assume regular rebalancing to the mix you have programmed.  It's not very easy with that tool to simulate a glidepath where you basically increase your equity % during the first few years and eventually to 100%.

Common wisdom is that any money you need in the next 10 years should not be in equities, but if I really did that, the backtesting is massively worse.

In the end I guess it comes down to what a couple of replies above already said - how confident am I that I will not sell if there is a huge downturn in year 2, or cut my spending so much that I don't enjoy life as much for a couple of years.  In all prior historical scenarios the portfolio recovered enough for my plan to work after year 3.

Also to an earlier reply - these are not monte carlo simulations these are historical backtests using global financial data including UK, and using UK inflation data.

What duration bonds are you modelling in timeline and voyant? Historically, long duration bonds (both US and UK - not sure off-hand about other countries) have had periods of awful real returns (e.g., from 1940 to 1980) caused by increasing yields and the impact of inflation in the 60s and 70s. So-called 'safe' withdrawal rates can vary considerably (~50 bp depending on the overall asset allocation) with the duration of the fixed income used. Some quick historical modelling (asset returns from macrohistory, equities 50/50 UK/US with fixed income consisting of UK cash) suggests that for a 10 year period, the SWR was 7.0-7.3% between 20-80% equities and 6.5% for 100% equities). Using long bonds instead of cash lowered the SWR by about 40-100 bp (higher reductions with lower equity allocation).

If you constructed a 10 year inflation linked gilt ladder (e.g., see https://lategenxer.streamlit.app/Gilt_Ladder which suggests a current payout rate of about 10.5%) to provide the required floor of inflation linked income in the run up to the state pension, would that leave you some surplus for a risk portfolio (with 100% equities if required)?

Just to clarify my understanding here, when you say the payout is 10.5%, you do not mean that I will get a 10.5% return on my investment?  Looking at the tool, it seems to mean that over 10 years, I could take out 10.5% of my investment per year, but at the end I have nothing, so it's not a 10.5% return - the return rate compared to equities is more like 3.7% if I am reading the tool correctly?

The difference is that this return is (almost) guaranteed?

However how would you actually implement this in real life?  If I implemented this inside my SIPP wrapper, by for example purchasing bonds like T27A in my interactive investor account, I still have to pay 20% marginal tax on withdrawal, which does not seem to be taken into account in the results of this tool (although that's the same regardless how I invest the money in the SIPP)?

Back of a napkin - it looks like doing this would leave me with excess £147K to invest in equities until age 67 in my SIPP.  Looking at the Timeline balances chart, this is below the 10th percentile of historical outcomes at age 67, but above the worst case.  

By doing this I can probably lock in my retirement plan and get rid of inlation risk for a significant part of it, but I will be throwing away a high chance of much better outcomes, and also some of my flexibility.

I could also try to implement this outside of my tax wrappers - I'd have to think that through a bit more but it would be for a lower amount as most of my portfolio is currently in pensions.

What I called the payout rate is same as the withdrawal rate and not the return. The real return is around 0.8% with a nominal return of 3.8% if inflation is 3% over the next 10 years. Of course, the real return of equities, bonds, and cash is unknown over the next 10 years.

In the absence of a UK debt default, this income is guaranteed. You're entirely right in that it covers the downside and provides certainty at the expense of reduced upside. Unfortunately, that is one of those decisions where there isn't a magic formula since it at least depends on the ability to adapt to downside equity risk and legacy requirements as well as any innate aversion to risk.

I agree that the big tax advantage of gilt ladders (i.e., no capital gains) is lost within a pension. Our own (relatively short ladder) is in an ISA but that was because we could construct it from already existing funds rather than a result of planning!

What do you mean by using already existing funds?  I was taking a look at this yesterday and with my current SIPP provider, Interactive Investor, you cannot buy individual index linked gilts online - it says that you have to call them to do it (which presumably means much higher transaction charges).  It looks like you can purchase non index linked gilts online though.

I am wondering if a non index linked gilt ladder might work well in a SIPP if you are planning to withdraw up to a particular frozen tax band every year.

Meantime is anyone aware of providers where you can buy index linked gilts like the ones mentioned in the tool quoted above online without doing phone transactions and higher charges?

A bit ironic to be researching this when my original post was about going to 100% equities I know, but I’m also curious about all approaches.

Sorry, me being sloppy with language. By existing funds I meant money that I'd already got not particular etfs.

When I set up the ILG ladder (iweb, now Scottish widows) I had to phone them, but the transaction cost was the same as that for online (£5). My understanding is that ILGs can now also be bought online (nominal gilts certainly can be), but you don't know the price in advance (the purchase is quick enough to not be a problem unless the bond markets are very volatile - there was a thread here recently, that I cannot now find).

Yes, a nominal gilt ladder will provide a known amount of income (coupons and maturing bonds) each year. I note that the coupons and maturing bonds from the ladder don't provide a constant flow of income (see the cashflow tab of the tool), so some will have to be held as cash (MMF?) while awaiting withdrawal.

Yes, you can purchase ILGs online with iWeb/SW and I have done this in the past couple of weeks.  You don't know exactly the cost but you can get a very close idea.  My trades took around 10 minutes from hitting the purchase confirmation to receiving the completion email and them being visible on my account.  The only issue is they show the clean price so looks like a big loss.  I wrote to them about this and their response was that in getting the prices, they only get the clean prices and are looking at an option to enhance this to include the dirty price - though no commitment to do this or timescales.

Storcko14

MallyGirl said:

II users have reported that you only get charged the online trading fee despite having to do it by phone.

That's correct.  Worth noting that the process for my 7 recent purchases took an hour.  Step 1 - you speak to the Back Office and tell them what you want. Step 2 - you're on hold while the BO speaks to a dealer.  Step 3 - the BO gives you the dealer's quotes (clean price bid/offer, accrued interest, dirty price, consideration, commission & total cost per trade) and you confirm acceptance.  Step 4 - you're back on hold while they trade.  Step 5 - the deals are confirmed back to you and are available online a few minutes later.