Creating sustainable withdrawal strategies in retirement

[Derek Chevalier]

I thought it's worth attempting to put some common questions in one place rather than have them scattered across various threads.

To kick things off.

LeoSayer said:

What kind of plan (other than a lot of contingency) could mitigate sequence of returns risk when equity markets are down 10%+, bond markets are down 10%+ and inflation is up 10%+?

Withdrawal strategies tend to be put under pressure when we have sustained falling markets and high inflation

Taking the 1970s as an example, we had sustained high inflation...

https://www.ons.gov.uk/economy/inflationandpricein...



along with big market falls.

For a sample client taking out an inflation-adjusted 3.5%pa, their portfolio balance would be down ~28% after 2 years if they had retired in 1973.



yet would've been fine over the longer term (30 year retirement)




Contrast that with someone finishing work:

End of 2021: Portfolio fall~10%, withdrawals ~2%. Portfolio balance -12%
1 year ago: Portfolio fall ~6%, withdrawals ~3.5%. Portfolio balance -10%
2 years ago: Portfolio rise 8%, withdrawals ~8%. Portfolio balance ~flat

Hopefully you can see that given that inflation/market falls haven't been around for long enough to have a significant impact on a robust withdrawal strategy, which is designed to cope with far worse.

Of course, you could try and constantly adjust your withdrawal strategy on a weekly/monthly basis in an attempt to protect your retirement pot from what "could" happen, but unless you really think it is "different this time", an annual checkup should be fine.

Note my examples apply to diversified portfolios that have suffered modest falls YTD.

superlightr said:

If someone had put in their life savings say in December for trackers etc or even fed in over the last 12 mths from selling a business then this is a clearly a big sequencing issue/problem is it not?

superlightr said:

It would be if you had put a large sum in though last year.

Hopefully the above answers your question

superlightr said:

Yes we should have x years of cash in case of a poor/bad sequence of returns especially at the start but it not a good situation for sure and one that is hoped does not happen within a short time window of the investment.

I've not seen evidence to suggest replacing equity with cash helps in terms of portfolio sustainability.

"…across all the strategies, replacing equity with cash offers no improvement in the success rate or portfolio longevity! Crucially, the success rate is meaningfully lower for 40-year retirement periods, and it resulted in a significant reduction in the size of the legacy at the end of 30 years in the non-failure scenarios!"

https://www.timelineapp.co/blog/cash-buffers-susta...

[Johnnytheboy]

Juggling with this issue at the moment, so following with interest.

(am on verge of inheriting and deciding if I can afford to retire asap)

[HarryW]

Interesting, my man maths was working on 2 years cash outside of the pension pot. I suppose that could actually be considered as my emergency pot as opposed to a cash buffer within a portfolio though.
Following….

[Jon39]

Increasing income from equities during retirement.

My experience is not of making capital withdrawals, but spending some of the rising dividend income.
Dividends received by ISAs remain untouched, but own name holdings are used as top-ups for bank accounts.
The overall annual rate of dividend increases, far exceed my annual DB pension increases.

Of course there was a 'blip' in 2020 and 2021 (COVID-19), when many companies stopped paying dividends.
It depended on which sectors were held. All hospitality for example, and your dividend income would have gone to zero, but my total fell by 18%, so got away lightly. Some business sectors were unaffected by the pandemic. Almost all big companies have now resumed dividend payments, but my overall annual running total is still stightly below the 2019 peak.

Have not suffered any capital value decline this year. No tech stocks held (except BT, which has been hopeless for years).

Edited by Jon39 on Tuesday 28th June 09:46

[dingg]

Paused my drawdown a few months ago, gut telling me that we're near a bottom now, gas cap pricing possibility on Russian gas should have a negative effect on oil/energy prices, China relaxing travel restrictions on covid signals the start of a general relaxation of the draconian measures they have been using. All points to the bull reawakening, gut tells me I'm going to be drawing down again by December :-)

[Simpo Two]

Jon39 said:

Have not suffered any capital value decline this year.

You should be an investment manager - I would certainly pay you a percent or two to be in that position.

[Jon39]

dingg said:

Paused my drawdown a few months ago, gut telling me that we're near a bottom now, gas cap pricing possibility on Russian gas should have a negative effect on oil/energy prices, China relaxing travel restrictions on covid signals the start of a general relaxation of the draconian measures they have been using. All points to the bull reawakening, gut tells me I'm going to be drawing down again by December :-)

You are very positive and I would like to think you are correct.

I feel more pessimistic unfortunately.

Presumably for many people, their outgoings have (or will over future months) increased considerably. If their incomes/outgoings were tight last year, then trouble looms and the economy slows.

RPI last 6 months inflation annualised is now over 14%. For those who spend a considerable proportion of their incomes on vehicle fuel and domestic energy (when winter comes), will face a far higher rate of personal inflation.

Let's hope I am wrong about all of this.

[xeny]

dingg said:

Paused my drawdown a few months ago, gut telling me that we're near a bottom now, gas cap pricing possibility on Russian gas should have a negative effect on oil/energy prices, China relaxing travel restrictions on covid signals the start of a general relaxation of the draconian measures they have been using. All points to the bull reawakening, gut tells me I'm going to be drawing down again by December :-)

There's an anticipated 50% rise in the domestic energy cap this autumn and my best assessment is that oil demand is rising with very little spare OPEC capacity indeed. The US isn't going to continue releasing from reserves after the mid terms - no point bribing voters after the vote.

Throw in demand seems to be rotating from goods to services (US durable goods inventories rose in April and May) and the US/UK have tight labour markets so that will induce more stress in as well as reducing the benefits from China reopening, and I don't see the fed relaxing about inflation.

I'm less optimistic than you are.

[Jon39]

Simpo Two said:

Jon39 said:

Have not suffered any capital value decline this year.

You should be an investment manager - I would certainly pay you a percent or two to be in that position.

Well maybe 30 years ago, but I did not know I was any good at it then. In this game, you can only find out afterwards.
As for now, cannot be bothered, but for you John, will tell you the secret.

Top riser for me YTD is BATS.L. (+29.2%). It has been a fantastic performer for decades. Who knows the future.
Otherwise very large cap UK based, internationals with a core of non-cyclicals. Oils come alive at intervals, but generally I avoid cyclical sectors. Select carefully then keep holding.

Some holdings will inevitably be plodders, but just concentrate on the overall portfolio performance, not the individual components.
No need to over complicate. Try to get a feeling about businesses and the managements.

[craig1912]

Been in drawdown for last three and a half years. Current situation makes no difference as I am trusting the plan. Nothing in cash as that is only loosing money at the moment.
Have a look at it with my IFA once a year. Lost around 8-10% this year but will come back over time.

[Derek Chevalier]

Jon39 said:

Increasing income from equities during retirement.

My experience is not of making capital withdrawals, but spending some of the rising dividend income.
Dividends received by ISAs remain untouched, but own name holdings are used as top-ups for bank accounts.
The overall annual rate of dividend increases, far exceed my annual DB pension increases.

Of course there was a 'blip' in 2020 and 2021 (COVID-19), when many companies stopped paying dividends.
It depended on which sectors were held. All hospitality for example, and your dividend income would have gone to zero, but my total fell by 18%, so got away lightly. Some business sectors were unaffected by the pandemic. Almost all big companies have now resumed dividend payments, but my overall annual running total is still stightly below the 2019 peak.

Have not suffered any capital value decline this year. No tech stocks held (except BT, which has been hopeless for years).

Edited by Jon39 on Tuesday 28th June 09:46

It's worth going a bit further back in history to understand how that approach may have fared in more challenging times.

https://finalytiq.co.uk/natural-yield-totally-bonk...

"Proponents of a ‘natural yield’ retirement strategy have offered little empirical evidence to back their theory. They erroneously focus on recent percentage yield of the FTSE 100 or FTSE All Share. Most retirees are more likely to have a portfolio consisting of bonds and shares, at the very least. And it’s crucial that any retirement income strategy works over a very long period and under various market conditions, including the extreme ones!"

"Take for instance, our Class 1900 who started their retirement with a natural income of £4,550. By the second year, their inflation adjusted income fell to £3,897 and by the 5th year it was £3,005. But their troubles were only just beginning; by their 20th year in retirement, their real income yield had fallen to £1,024!"

[TCX]

Derek Chevalier said:

I thought it's worth attempting to put some common questions in one place rather than have them scattered across various threads.

To kick things off.

LeoSayer said:

What kind of plan (other than a lot of contingency) could mitigate sequence of returns risk when equity markets are down 10%+, bond markets are down 10%+ and inflation is up 10%+?

Withdrawal strategies tend to be put under pressure when we have sustained falling markets and high inflation

Taking the 1970s as an example, we had sustained high inflation...

https://www.ons.gov.uk/economy/inflationandpricein...



along with big market falls.

For a sample client taking out an inflation-adjusted 3.5%pa, their portfolio balance would be down ~28% after 2 years if they had retired in 1973.



yet would've been fine over the longer term (30 year retirement)




Contrast that with someone finishing work:

End of 2021: Portfolio fall~10%, withdrawals ~2%. Portfolio balance -12%
1 year ago: Portfolio fall ~6%, withdrawals ~3.5%. Portfolio balance -10%
2 years ago: Portfolio rise 8%, withdrawals ~8%. Portfolio balance ~flat

Hopefully you can see that given that inflation/market falls haven't been around for long enough to have a significant impact on a robust withdrawal strategy, which is designed to cope with far worse.

Of course, you could try and constantly adjust your withdrawal strategy on a weekly/monthly basis in an attempt to protect your retirement pot from what "could" happen, but unless you really think it is "different this time", an annual checkup should be fine.

Note my examples apply to diversified portfolios that have suffered modest falls YTD.

superlightr said:

If someone had put in their life savings say in December for trackers etc or even fed in over the last 12 mths from selling a business then this is a clearly a big sequencing issue/problem is it not?

superlightr said:

It would be if you had put a large sum in though last year.

Hopefully the above answers your question

superlightr said:

Yes we should have x years of cash in case of a poor/bad sequence of returns especially at the start but it not a good situation for sure and one that is hoped does not happen within a short time window of the investment.

I've not seen evidence to suggest replacing equity with cash helps in terms of portfolio sustainability.

"…across all the strategies, replacing equity with cash offers no improvement in the success rate or portfolio longevity! Crucially, the success rate is meaningfully lower for 40-year retirement periods, and it resulted in a significant reduction in the size of the legacy at the end of 30 years in the non-failure scenarios!"

https://www.timelineapp.co/blog/cash-buffers-susta...

Even by PH land standards....who was retiring with £700+k retirement pot in '73?????

[FrankieBee]

Jon39 said:

Have not suffered any capital value decline this year. No tech stocks held (except BT, which has been hopeless for years).

I call complete BS. Recognised by the fact no one has replied to your nonsensical claim. But if you are that good can you replace my discretionary fund manger? Ta

[Burwood]

FrankieBee said:

Jon39 said:

Have not suffered any capital value decline this year. No tech stocks held (except BT, which has been hopeless for years).

I call complete BS. Recognised by the fact no one has replied to your nonsensical claim. But if you are that good can you replace my discretionary fund manger? Ta

It’s not BS just disingenuous. Energy like shell have gained but have been terrible investments over 20 years. Not sure why BAT is a poster child, terrible investment too. Then there are the ethics.

[NRS]

Burwood said:

FrankieBee said:

Jon39 said:

Have not suffered any capital value decline this year. No tech stocks held (except BT, which has been hopeless for years).

I call complete BS. Recognised by the fact no one has replied to your nonsensical claim. But if you are that good can you replace my discretionary fund manger? Ta

It’s not BS just disingenuous. Energy like shell have gained but have been terrible investments over 20 years. Not sure why BAT is a poster child, terrible investment too. Then there are the ethics.

Yeah, this has been the puzzling thing about his posts. He mentions he has done well over decades with a buy and hold strategy in a few select companies over decades. But he's done very well this year due to having several cyclical companies. But these don't tend to do much over the long term, so it's hard to see how both can be true at the same time.

[keith333]

NRS said:

Burwood said:

FrankieBee said:

Jon39 said:

Have not suffered any capital value decline this year. No tech stocks held (except BT, which has been hopeless for years).

I call complete BS. Recognised by the fact no one has replied to your nonsensical claim. But if you are that good can you replace my discretionary fund manger? Ta

It’s not BS just disingenuous. Energy like shell have gained but have been terrible investments over 20 years. Not sure why BAT is a poster child, terrible investment too. Then there are the ethics.

Yeah, this has been the puzzling thing about his posts. He mentions he has done well over decades with a buy and hold strategy in a few select companies over decades. But he's done very well this year due to having several cyclical companies. But these don't tend to do much over the long term, so it's hard to see how both can be true at the same time.

On 28th May he claimed to be up 21.2% YTD. In a year when both bonds and equities are down considerably, I have to question his honesty. Sorry.

[NRS]

keith333 said:

On 28th May he claimed to be up 21.2% YTD. In a year when both bonds and equities are down considerably, I have to question his honesty. Sorry.

If you were heavily in O&G it would could make sense, but then that would not match the long term strategy outlined. If you have enough weighing on O&G now to see those gains then around 2014 he should have heavily underperformed for example, given a buy and hold strategy (which is what has been stated before).

[Derek Chevalier]

FrankieBee said:

But if you are that good can you replace my discretionary fund manger? Ta

To be fair, it's not a particularly challenging hurdle to overcome. DFMs incur an additional layer of costs which, given the efficiency of the markets, can be tricky for them to overcome.
If your DFM is on ARC/FE, you should be able to compare their performance vs a low-cost, globally diversified portfolio.

https://www.assetrisk.com/research/performance-ind...