Any point in a Cash buffer in Pension Drawdown Account?

Fermion wrote: »

I keep a small cash buffer of about 6 months of monthly income drawdown payments, but the key thing about my portfolio is that all of my funds are held in Income units which I find is easier to track the ongoing income/Dividend Yield and so far has avoided me having to sell any funds, particularly when the market is depressed as it is currently

The ongoing cash income statements that I get from HL makes it very easy to check if my pension withdrawals are on track. (For info I'm only trying to take the natural yield and keep my income drawdown pot generally intact)

The 'problem' with that approach is that the natural income from a balance equity portfolio is fairly low: about 1.8% from memory, which is lower than the safe withdrawal rate. If the fund focuses on high income equities, you can get up to about 3.5%, BUT the total return of the fund tends to be much lower.

You may be OK with this, but it is an issue for me.

TL;DR: you are giving up higher returns for the sake of easier administration.

kidmugsy wrote: »

Right then, young man, another one for your reading list: be sure to be suspicious of strategies that rely on so-called safe withdrawal rates from equity portfolios. They are probably a rather extravagant way to fund a retirement. To see why, google "The 4% Rule—At What Price?"
by Jason S. Scott , William F. Sharpe , and John G. Watson

Having read that paper I am a little unclear as to exactly what their proposed alternative is. Perhaps you could explain.


However two aspects did concern me. In their calculations they made the assumption that one could get safe bonds with a real return of 2%. At the moment that is impossible, at least in the UK. Secondly, they appear to advocate the use of call options to reduce risk. Whether these are readily available in the US I dont know. However as an experienced but amateur UK investor I would not know how to do this. It would be far beyond the capabilities of most retirees. And then it raises questions like are they eligible for SIPPs and ISAs?


I would agree with them that blind and rigid use of something like a 4% rule based on a relatively high % equity portfolio is less than optimal. However at the moment I do not see any alternative simple strategy that can be used at least as a starting point for managing ones finances in retirement.

Linton wrote: »

However two aspects did concern me. In their calculations they made the assumption that one could get safe bonds with a real return of 2%. At the moment that is impossible, at least in the UK.

Exactly - index linked gilts have yields of -1.5% or worse, not surprising when inflation is higher than interest rates. At that yield the guaranteed option would only get you 2.6% rather than the 4.46% they use in their example.

Linton wrote: »

In their calculations they made the assumption that one could get safe bonds with a real return of 2%..

Yes, back then they probably could have got 2% on TIPS. But then, back then, 4% might have been a "safe withdrawal rate". Nowadays an American might easily be persuaded to subtract 1% from each number. I dare say a Briton should subtract even more.

But that's detail - the point is that there were (and doubtless still are) reasonable assumptions that lead to the conclusion that drawing a fixed income from a highly erratic portfolio is asking for trouble, and that the trouble shows up as the whole enterprise being needlessly expensive. If I remember rightly, they also point out that another trouble would be that the profits are likely to turn up at the wrong age - late in retirement rather than early in retirement.

Robert_McGeddon wrote: »

There is still a risk on the revenue side of things of course

Do you know a good source for a graph showing the history of dividends? I don't think I've ever seen one. Yet it must exist because I've seen many dozens of people assuring me that dividends are pretty stable.

Robert_McGeddon wrote: »

but that's true of all investment types.

No it isn't: that's why the writers compare equities with Treasuries or Gilts, on which they assume that both revenue risk and principal risk are negligible. (On Gilts, history bears them out. So far.)