Best method for validating strategy?

magd36

QrizB said:

magd36 said:

Before I comment, can I ask how you split the original quote and answer in sections? 

Quote the same post several times, editing the quoted text and inserting your responses into the flow.

magd36 said:

This would be really helpful. I can use the quote feature but lose the format if I answer between sections.

It takes a little bit of work and can be tricky on a phone but is easier on laptop/desktop.

Thanks. Very helpful.

magd36

Bostonerimus1 said:

So how much income do you need to generate and for how long from what size pension pot?

Well that depends how and when I want to use cash versus using the taxable part of my DC pension. It also varies over the years depending on when my wife's and my state and DB pensions kick in.

Roughly I have an income gap of 30k from year 1-7, 19k from year 8-10, 7k from year 11-16 and then no gap.

My DC is roughly 220k+ and cash ISA's 250k+. I therefore don't feel I have any need to take unnecessary risk but passing onto my dependents would be a bonus.

Bostonerimus1

30k is 6.4% of your pension pot and you have to account for inflation. That's a large percentage to be withdrawing at the beginning of retirement, but you have 250k in cash so while you are giving up some growth you can avoid some sequence of return risk. But you will be spending down your pot quite aggressively. 

Presumably the 11 year gap to when you have no income gap is to do with either DB or SP pensions starting?

magd36

dunstonh said:

The diminant figure is actually 0.5%.    Its smaller values where 0.75%-1.00% is used.   

Agree, but to get the 0.5% ongoing you need to transfer whole pensions at a fee of 2-3%. Furthermore, 0.5% of a bigger pot results in bigger absolute costs. My point is it all eats away at precious pension/investment income. I really believe IFA's should charge a larger percentage but only on gains made as opposed to the total funds even when it falls.

dunstonh said:

Nov 2021 to October 2023 effectively unwound the bubble that had built up post credit crunch due to quantitative easing.  They are now back in the ballpark of their long-term average.

I believe the effect on bonds was caused by a sudden increase in the rate of interest over a short period (presumable as a result of the aforementioned quantitative easing). Most pension funds hadn't predicted this and if you were close to retirement and had a significant bond weighting for "security" you were badly affected.

With volatility, this could happen again and therefore short term bonds and money market funds seem to be the latest solution.

It's interesting that virtually no expert predicted this (or certainly no main stream pension fund was immune).

I'm not criticising anyone, just pointing out that even when paying for advice it's not always correct.

dunstonh said:

This is why platforms are starting to introduce fixed-term annuities "on platform" as these can be used to provide some of the defensive assets coverage.  It's early days on the intermediary side and will probably be non-existent on the DIY side but it may suit some people.    On the DIY side, some are buying direct defensive assets, i.e. gilts rather than gilt funds.

I worry for future generations. With the state pension barely covering living costs and almost no DB pensions anymore, the average person needs to become far more knowledgeable about pensions and investments for post 60+ life. Not only that, they'll likely need to pay someone from the exact money they need for retirement to get some help and advice. Hopefully pension dashboards are the start of a solution to this.

magd36

Bostonerimus1 said:

30k is 6.4% of your pension pot and you have to account of inflation. That's a large percentage to be withdrawing at the beginning of retirement, but you have 250k in cash so while you are giving up some growth you can avoid some sequence of return risk. But you will be spending down your pot quite aggressively. 

Presumably the 11 year gap to when you have no income gap is to do with either DB or SP pensions starting?

Correct, DB and SP pensions (as well as age!!!) should result in no income gap.

Your point about spending down aggressively is exactly my concern and why I want to try and use cash to avoid sequence of return risk as well as using low risk funds. I also need to balance inflation risk.

This gets to the heart of my post. I have a plan, which includes fund allocation, withdrawal order rule, rebalancing etc. I need someone with experience to validate it and see what the risk of retiring at 60 really is. I just don't want to also lock in 2-3k per year fees as well as potentials one of costs of transfers or investment set-ups.

dunstonh

Agree, but to get the 0.5% ongoing you need to transfer whole pensions at a fee of 2-3%. Furthermore, 0.5% of a bigger pot results in bigger absolute costs. My point is it all eats away at precious pension/investment income. I really believe IFA's should charge a larger percentage but only on gains made as opposed to the total funds even when it falls.

IFAs are not responsible for investment returns.   So, establishing remuneration as an investment performance fee would be inappropriate.  

How would it work?  For example, if you invested on 1st January 2000, then your fund value on any equities content would be lower on 1st January 2010 as the markets fell over that 10 year period.   

I doubt any firm could continue with 10 years of zero income.  And again, what influence did an IFA have on global equities in that period? - None.

I believe the effect on bonds was caused by a sudden increase in the rate of interest over a short period (presumable as a result of the aforementioned quantitative easing). Most pension funds hadn't predicted this and if you were close to retirement and had a significant bond weighting for "security" you were badly affected.

The expectation of markets and governments was that the unwinding would be much slower.     The invasion of Ukraine resulted in energy challenges that spiked prices, driving inflation upwards, creating a perfect storm.  It was the worst period in over 100 years (pretty much since reliable records became available).

With volatility, this could happen again and therefore short term bonds and money market funds seem to be the latest solution.

They are for short term but even with the 2021-2023 falls,  the medium term and long term gilts/bonds outperformed cash and short term gilts/bonds if you had bought them before 2011.

It just reminded everyone of the importance of bucketing your planning when drawing money out.

Bostonerimus1

magd36 said:

Bostonerimus1 said:

30k is 6.4% of your pension pot and you have to account of inflation. That's a large percentage to be withdrawing at the beginning of retirement, but you have 250k in cash so while you are giving up some growth you can avoid some sequence of return risk. But you will be spending down your pot quite aggressively. 

Presumably the 11 year gap to when you have no income gap is to do with either DB or SP pensions starting?

Correct, DB and SP pensions (as well as age!!!) should result in no income gap.

Your point about spending down aggressively is exactly my concern and why I want to try and use cash to avoid sequence of return risk as well as using low risk funds. I also need to balance inflation risk.

This gets to the heart of my post. I have a plan, which includes fund allocation, withdrawal order rule, rebalancing etc. I need someone with experience to validate it and see what the risk of retiring at 60 really is. I just don't want to also lock in 2-3k per year fees as well as potentials one of costs of transfers or investment set-ups.

The gap between your retirement and DB and SP seems to be your big issue, so why are you retiring that early and have you thought about some part time work?

People are naturally apprehensive when they look at drawdown and it can seem very daunting. But if you keep things simple I think many people can do it without an IFA. The most obvious way to generate retirement income is an annuity, but you give up your capital, next would be a gilt ladder and here's and example for a 500k portfolio that comes close to your 30k income requirement.

https://www.ii.co.uk/analysis-commentary/building-gilt-ladder-everything-you-need-know-ii534096

After that there are income focused investment trusts, dividend focused portfolios and total return approach from a more growth oriented portfolio.

magd36

dunstonh said:

IFAs are not responsible for investment returns. So, establishing remuneration as an investment performance fee would be inappropriate.

How would it work?  For example, if you invested on 1st January 2000, then your fund value on any equities content would be lower on 1st January 2010 as the markets fell over that 10 year period.   

I doubt any firm could continue with 10 years of zero income.  And again, what influence did an IFA have on global equities in that period? - None.

I think we'll have to disagree on that.

In terms of pensions, I think an IFA has a responsibility to grow or at least protect your money. If they aren't adding any value because they're advised method of making money is failing isn't the clients fault. What is the justification for receiving money for advice that didn't benefit the client? Even cash grew above zero percent from 2000 to 2010.

I don't think we'll see eye to eye on that which is ok. I understand your point but seems wrong to make money from giving advice that didn't benefit the client.

dunstonh said:

The expectation of markets and governments was that the unwinding would be much slower. The invasion of Ukraine resulted in energy challenges that spiked prices, driving inflation upwards, creating a perfect storm.  It was the worst period in over 100 years (pretty much since reliable records became available).

Some say plan your investment for the worst case scenario as compounding will take care of the rest.

dunstonh said:

It just reminded everyone of the importance of bucketing your planning when drawing money out.

100%

magd36

Bostonerimus1 said:

The gap between your retirement and DB and SP seems to be your big issue, so why are you retiring that early and have you thought about some part time work?

People are naturally apprehensive when they look at drawdown and it can seem very daunting. But if you keep things simple I think many people can do it without an IFA. The most obvious way to generate retirement income is an annuity, but you give up your capital, next would be a gilt ladder and here's and example for a 500k portfolio that comes close to your 30k income requirement.

https://www.ii.co.uk/analysis-commentary/building-gilt-ladder-everything-you-need-know-ii534096

After that there are income focused investment trusts, dividend focused portfolios and total return approach from a more growth oriented portfolio.

Unfortunately it's a health issue that leads me to retirement.

I feel with cash and my DC pension my needs should be met if I take a low risk option. I just need someone to validate my plan seems reasonable.

The gilt ladder is interesting and possibly a 7 year annuity for my wife and I, but I'm hoping to find an advisor to validate the plan rather than make income from the capital and possible growth. My own experience with IFA's has not really had any benefit with on going charges negating the benefits.

gm0

>The validation I’m looking for is how/when I should withdraw from cash, investments and pensions as well as the >funds and allocation of money within those funds based on my withdrawal plan and low risk attitude (with >marginally higher risk for investments I’m unlikely to need within the next 8 years). 

Some things to ponder.

An IHT management strategy for drawdown in retirement widely adopted prior to the 2027 IHT changes was "spend pension last" (S&S ISA etc) before pension or SIPP.  Now. Not so much. As DC pensions have lost their peculiar exemption.  In future who knows. What else will change.  

Non-pension money already extracted as TFLS or via excess of spending but taxed income is more accessible for capital needs.   

More fiddling with one or both tax wrappers (Pension and ISA) can be expected.   Political discussion not encouraged.  But the history shows what treasury wonks typically come up with.  The current minister has a well documented history and trail of ideas from time at think tanks.

There will be annual speculation about the targeting of DB and DC pensions in particular.  And this will (as before) slowly ratchet. In some manner.  It will not often get more generous. Only less.  After speculative risk on growth assets.  This (regulatory) is the biggest risk to a succesful deaccumulation plan - one which is IHT aware and "to the rules".  For those with DC pensions and say - a mortgage paid house alongside.

Sequence of return comes in third place after those two.  Other than "spreading things out" (not all in one basket) there is little short of emigration becoming non-UK domiciled and transfer to a valid overseas setting that can be done about the malovelence of future UK governments as they thrash around impotently.

Drawdown access methods is a fertile field of reserach and internet myth.  Both the magnitude of "differences" across methods and some testing thereof can be found both here, at ERN website. And in Mclung Living off your money.  Which provides a healthy survey and test of what makes any difference and the (small) magnitude of it.  Most drawdown methods can be made to look "good" by their sponsor/boosters - with careful selection of assumptions.   The future will do whatever it does.  I have been more interested in avoiding unwanted additional problems - than squeezing an extra 0.3% WR.   

Setting income can be a function of "sustainable income".  Or it can be a function of income tax, IHT and gifting planning. 

Nobody can really say what a valid strategy is - it depends on your choices, the risks you run.  The taxes you pay and when.  So goal dependent.


For drawdown

The strategy for buffering equities with other things and how income is generated. Is also not universal.  Some people like to keep asset allocation constant. Sell small amounts for income at point of need - automatically.  And their portfolio, and income approach is implemented like that.

Others like to take income from cash and/or specific asset classes and specific funds and then refill the pot with inc units.  By growth asset sales at, and only at, rebalancing. Manually.  This immunises against auto selling in flash crashes.  But lower risk asset classes - are - lower risk - and lower potential return.  You cover your sequence risk needs by choosing an approach across all your assets and tax wrappers.  So that income can be sustained in a major correction. Then holding assets on a DIY platform that supports that approach efficiently.  Trade costs.  ETF/Fund holding costs.

The blend of S&S ISA depletion and pension income can be adjusted to suit your year to year income tax planning and use of allowances

It is a widely held opinion that monthly UFPLS is efficient for drawing income.  And this is true for a wide range of people. It is doable DIY.  But for various market historic and FCA regulatory reasons less well supported on DIY platforms than advised.