Capital-preservation strategy for 5 year income drawdown
Discussion
TLDR: I’m looking for a capital-preservation investment strategy for mine and Mrs Oxgreen’s ISAs over the next five years. How would 20/60/20% equities/bonds/cash fare?
Mrs Oxgreen and I are 52 and 53 respectively. She is an ex-teacher, now self-employed doing online tutoring. She limits her workload to keep her income below the higher-rate tax threshold, and says she enjoys it and would keep doing it even if we won the lottery. I have been retired for just over a year and would only return to work if I had to.
For many years I’ve managed our investments, focused on growth, and almost 100% global equities. Now that we’re semi-retired I have tilted somewhat towards bonds, and I have been drawing down a modest top-up income from the ISAs.
But now, we are planning to upgrade to a bigger and nicer house. This will consume a large chunk of our ISAs, and we need to ensure that the remainder can continue to provide the necessary top-up income until I hit 58 and my DC pensions become available. Later on we’ll also have Mrs Oxgreen’s teaching pension (from 60) and I also have a couple of deferred DB pensions (from 65).
So our ISAs need to provide some “bridge” income for about the next five years without running out. We want to keep pace with inflation, minimise crash losses, and don’t care too much about growth. This will require a very different strategy from what I’ve been doing for many years!
Conscious that sequence-of-return risk is a potential issue, I was idly talking to ChatGPT and asking it about the effect of a 2008-style downturn on various portfolio mixtures. I am currently considering the following:
20% global equity index
60% short-term bond index
20% cash
From 58 I could rebalance the remaining funds back to a slightly more growth-based setup, perhaps 60/40 equities/bonds. My DC pensions would remain at 60/40 for the time being.
What do you think of that 20/60/20? Too cautious? Not cautious enough? Will it keep pace with inflation? How badly would it have suffered in 2008? Am I insane?
Grateful for your thoughts…
Mrs Oxgreen and I are 52 and 53 respectively. She is an ex-teacher, now self-employed doing online tutoring. She limits her workload to keep her income below the higher-rate tax threshold, and says she enjoys it and would keep doing it even if we won the lottery. I have been retired for just over a year and would only return to work if I had to.
For many years I’ve managed our investments, focused on growth, and almost 100% global equities. Now that we’re semi-retired I have tilted somewhat towards bonds, and I have been drawing down a modest top-up income from the ISAs.
But now, we are planning to upgrade to a bigger and nicer house. This will consume a large chunk of our ISAs, and we need to ensure that the remainder can continue to provide the necessary top-up income until I hit 58 and my DC pensions become available. Later on we’ll also have Mrs Oxgreen’s teaching pension (from 60) and I also have a couple of deferred DB pensions (from 65).
So our ISAs need to provide some “bridge” income for about the next five years without running out. We want to keep pace with inflation, minimise crash losses, and don’t care too much about growth. This will require a very different strategy from what I’ve been doing for many years!
Conscious that sequence-of-return risk is a potential issue, I was idly talking to ChatGPT and asking it about the effect of a 2008-style downturn on various portfolio mixtures. I am currently considering the following:
20% global equity index
60% short-term bond index
20% cash
From 58 I could rebalance the remaining funds back to a slightly more growth-based setup, perhaps 60/40 equities/bonds. My DC pensions would remain at 60/40 for the time being.
What do you think of that 20/60/20? Too cautious? Not cautious enough? Will it keep pace with inflation? How badly would it have suffered in 2008? Am I insane?
Grateful for your thoughts…
Dr Mike Oxgreen said:
TLDR: I m looking for a capital-preservation investment strategy for mine and Mrs Oxgreen s ISAs over the next five years. How would 20/60/20% equities/bonds/cash fare?
Mrs Oxgreen and I are 52 and 53 respectively.
I think that strategy would see you barely ahead of inflation, albeit likely to preserve your "capital". And that's assuming the investments are all in a tax wrapper of one sort or another ISA/SIPP. If you're paying tax on it or drawing any income from it I think you'd be going backwards.Mrs Oxgreen and I are 52 and 53 respectively.
My personal opinion (and many may disagree) is that anything under 60% equities at your age is "high risk" in the context of average life expectancy another 35 years.
From a Pension dd perspective I am 64 my wife 61 and my main pot is 76% Equities / 24% Bonds - both in various funds.
It is this pot that will fund our annual costs for the rest of both of our lives.
We have other pots of UT’s , IIB ‘s and ISA’s ( again all funds ) which I can’t see being used other than for additional house purchase funds ( if applicable ) plus major spends like car changes etc.
We also have various cash savings and VCT / EIS investments.
Overall probably something like 70% Equities / 20% “ Cash “ and 10% Bonds.
This suits us both but may not be “ technically “ the right answer for others and that’s the main point.
Whatever you come up with has to make you both comfortable.
However as such with that caveated your EQ percentage seems quite low.
It is this pot that will fund our annual costs for the rest of both of our lives.
We have other pots of UT’s , IIB ‘s and ISA’s ( again all funds ) which I can’t see being used other than for additional house purchase funds ( if applicable ) plus major spends like car changes etc.
We also have various cash savings and VCT / EIS investments.
Overall probably something like 70% Equities / 20% “ Cash “ and 10% Bonds.
This suits us both but may not be “ technically “ the right answer for others and that’s the main point.
Whatever you come up with has to make you both comfortable.
However as such with that caveated your EQ percentage seems quite low.
Me 65 ,wife 66
I retired at 57 wife stopped working after birth of first child at 27.
Quick calculation shows currently equities at about 70% short term mmf 20% cash 10%
We've been through the difficult years between retiring and now both almost at state pension age.
Mrs d gets her uk pension in a few months mine in 2028.
Even if we took a 40% hit it wouldn't make too much of a difference tbh . Although it would irritate
I retired at 57 wife stopped working after birth of first child at 27.
Quick calculation shows currently equities at about 70% short term mmf 20% cash 10%
We've been through the difficult years between retiring and now both almost at state pension age.
Mrs d gets her uk pension in a few months mine in 2028.
Even if we took a 40% hit it wouldn't make too much of a difference tbh . Although it would irritate
Panamax said:
My personal opinion (and many may disagree) is that anything under 60% equities at your age is "high risk" in the context of average life expectancy another 35 years.
Where did you get 35 years from? I’ve made it very clear I’m talking about an income bridge for five years.alscar said:
From a Pension dd perspective I am 64 my wife 61 and my main pot is 76% Equities / 24% Bonds - both in various funds.
It is this pot that will fund our annual costs for the rest of both of our lives.
We are not talking about “the rest of our lives”. I am talking about an income bridge for five years.It is this pot that will fund our annual costs for the rest of both of our lives.
Hmmm… I’m disappointed that no-one seems to have read and understood the brief.
We are not talking about a pot that has to sustain us for the rest of our lives. That is a very different investment proposition. We have other pots and income streams that will sustain us from 58 until we die.
This particular pot only has to provide us with reliable income for the next five years, without running out.
Somebody queried whether the investment is subject to tax. I’ve re-read my post, and I’m pretty sure I mentioned several times that I’m talking about investments within an ISA.
I need an income bridge for five years. I’m not talking about a 40 year retirement pot.
eyebeebe said:
Struggling to undertstand what your aim is here. Do you want to preserve all the capitals at it s current value and live off the income/gains, do you want the value to remain the same adjusted for inflation, do you just not want to run out or something else?
I want to draw a modest income without running out. That’s what I meant when I said “our ISAs need to provide some ‘bridge’ income for about the next five years without running out”. I didn’t say I wanted the balance to remain constant.The balance is going to reduce because I’ll (probably) be drawing down faster than the returns, but I ideally don’t want the returns to be less than inflation, nor do I want it to lose hugely due to a 2008-style downturn. I don’t really care what the remaining balance is after five years, provided I don’t hit zero before five years. Anything left over is a bonus.
Dr Mike Oxgreen said:
We are not talking about the rest of our lives. I am talking about an income bridge for five years.
That was not clear from your original post. Most readers will have taken you to mean living through the next five years and then onwards. If you've got a humungous DB pension kicking in it would have been a good idea to mention it, because it changes the picture dramatically.On a "spend it all in 5 years" time horizon the answer looks simple - just stick it all on deposit.
30% cash - numeours bank offerings
60% short term bond etf or mmf - avoids interest rate pain
10% gold etf - inflation/recession hedge
You could get ai to generate a gilt ladder for you but meh, I personally couldn’t be arsed - hence would prefer an etf. If you think there’s chance for a large chunk of interest rate chopping in your 5yr timeline then you might give more credence to building a ladder.
Panamax said:
Dr Mike Oxgreen said:
We are not talking about the rest of our lives. I am talking about an income bridge for five years.
That was not clear from your original post.Perhaps it would help if I put some numbers on it to illustrate what I mean.
Imagine you have a pot of £100,000, and you want to draw down £10,000 per year for five years.
In the absence of inflation, and if we imagine zero returns and zero losses, your £100,000 would comfortably give £10,000 per year and you’d have £50,000 left.
But throwing in inflation means I actually want to draw down a bit more each year. Therefore the returns on my pot need to give me at least inflation in order to end up with a similar amount.
Now throw in a big crash in year one. If the pot is invested entirely in equities, that could reduce its value by 40-50% and the remaining 4 years of drawdown at £10,000 per year (plus inflation) results in the pot coming way too close to running out.
So I want an investment mix that ideally gives returns of inflation or a little better, and reduces the crash loss to a level that still allows the pot to continue to provide £10,000 per year (plus inflation) without coming close to running out.
Imagine you have a pot of £100,000, and you want to draw down £10,000 per year for five years.
In the absence of inflation, and if we imagine zero returns and zero losses, your £100,000 would comfortably give £10,000 per year and you’d have £50,000 left.
But throwing in inflation means I actually want to draw down a bit more each year. Therefore the returns on my pot need to give me at least inflation in order to end up with a similar amount.
Now throw in a big crash in year one. If the pot is invested entirely in equities, that could reduce its value by 40-50% and the remaining 4 years of drawdown at £10,000 per year (plus inflation) results in the pot coming way too close to running out.
So I want an investment mix that ideally gives returns of inflation or a little better, and reduces the crash loss to a level that still allows the pot to continue to provide £10,000 per year (plus inflation) without coming close to running out.
lizardbrain said:
Average real return of cash over past 25 years has been about 0.3%
So if keeping up with inflation is your key goal, then cash will do
But there have been periods within recent years when cash has returned way below inflation. If that happens during the next five years then cash won’t do.So if keeping up with inflation is your key goal, then cash will do
borcy said:
Whats the worst outcome, falling behind inflation or losing some of it in a market crash?
I would prefer not to fall behind inflation if possible, and therefore 100% cash doesn’t feel right because cash has done precisely that at times during recent years. That said, I guess there’s nothing more crash-proof than cash (except in 2008 when banks were collapsing).Losing some value in a market crash might be inevitable, depending on what I’m invested in, and I can accept that. But losing a lot, especially if it then means I won’t have enough to provide the drawdown without getting uncomfortably low, would not be acceptable. So a high percentage of equities is probably not suitable over this timeframe.
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