I just checked this too. With respect, the fact that Dod's not heard of sequence risk until now isn't surprisingTheRIT wrote:Looking back the end of 1994 was a very good time to retire.
![Very Happy :D](./images/smilies/icon_e_biggrin.gif)
I just checked this too. With respect, the fact that Dod's not heard of sequence risk until now isn't surprisingTheRIT wrote:Looking back the end of 1994 was a very good time to retire.
Would you mind explaining how you determine "overweight" in that case? How many assets are you dealing with?tikunetih wrote: Every so often I top-up the cash from asset sales, selling down overweight positions to return them to target allocations.
IMHO this is THE big problem with a self-funded I'm on my own retirement vs say a 'pooled group fund' designed to support multi-aged people for perpetuity with new contributors, FIRE entrants through to "those who no longer need the money". The day you retire decides your fate - you now have YOUR sequence of returns baked in. Let's use history, the US proxy again, my 2% example from above and let's say I have 40 years of retirement ahead of me. Get a favourable sequence and my wealth increases by x40, get an unfavourable sequence and it's less than x2. That is a ridiculously large divide.Gilgongo wrote:I just checked this too. With respect, the fact that Dod's not heard of sequence risk until now isn't surprisingI also see that that by some estimates, it's not much of a problem beyond about the first 10-15 years of a 30-40 year retirement, and of course with a sufficiently large portfolio it'll take some pretty terrible management to run into much serious trouble anyway (just ask Donald Trump!).
Well that is easy today. It is something over 5% currently which slightly surprises me but then there are some high income and very low growth shares around in the UK at the moment. I also hold four bond funds but they are in total a very small proportion of my total assets.TheRIT wrote:This is a critical point and as somebody who has had plenty of years in living a self funded retirement your experience (both psychological and mechanical) is invaluable to us "newbies". Would you be prepared to share in % terms what annual income to assets ratio you started with at the end of 1994 and what that % looks like today?Dod101 wrote:...or try to live beyond their financial ability. ...
Thanks for sharing. Your post reminds me of the saying "life is what happens when you're busy making plans". It's important to plan but not over plan because "stuff" happens.Dod101 wrote:Well that is easy today. It is something over 5% currently which slightly surprises me but then there are some high income and very low growth shares around in the UK at the moment. I also hold four bond funds but they are in total a very small proportion of my total assets.
I really do not know what the percentage would have been at the end of 1994 because, like many who suddenly had a largish lump sum, I really did not know much about what I was going to do with it except that I knew I was not going to buy an annuity. I spent quite a bit of capital on upgrades to housing and so on and frankly probably lived on some of the capital for a while. After what I can only describe as a bit of trial and error (probably more of the latter) I realised that if I concentrated on shares that paid a half decent dividend at least the dividends would be fairly secure and so my version of a HYP was born.
Over that length of time, I have given away a significant amount, mostly to my children to help with house purchase, but certainly I now have much more capital than I had on 1 January 1995. I was never afraid of money but was always fairly cautious with it. I know some of my colleagues and friends retiring on much the same terms were, and some made the most awful mess of it. I think knowing your self and your capabilities is essential because some who got in a mess should never have had that sort of money in their hands in the first place.
As for being a good time to retire, compared to retiring on 31 December 2019, yes I would agree. The Covid crisis would certainly be a shock to any system, but do not forget that we had the tech bubble in 2000 which made and lost many fortunes, and then the 2008/9 crisis and now this. These are facts of life which occur every so often and we need to be prepared for them.
Dod
Do you have a source for that?TheRIT wrote: Using your 5% as a proxy starting drawdown plus my previous example of historic returns shows that while you have more capital than you started because of a favourable sequence in 16% of cases a 5% starting withdrawal only increasing with inflation would now have £0. A big difference...
Not doing anything clever and it's not over simplified. I'm just using previous historic sequence of returns. As I've mentioned I've used US data as a proxy. This one will give you the story https://calculator.ficalc.app/ The only changes I made are set the Length of Retirement to 25 years (Dod's length of retirement so far) and the Constant Dollar Retirement Strategy to $50,000 (ie a starting drawdown of 5% increasing with inflation). 20 of the past 125 years (16%) would have failed.dealtn wrote:Do you have a source for that?
I suspect it is over-simplified, so would like to be proved wrong.
For instance does that 5% withdrawal rate apply to all time periods, or is it statistically adjusted for market movements. That is to say does it treat 5% withdrawal the same for all market condition start points, or does it adjust for recent market change?
Imagine a 4% withdrawal rate starting "last year", and also a 5% withdrawal rate on the same basis. Now a year later a different retiree with a 5% withdrawal rate, but the market has fallen 20%. Which of the 2 previous scenarios does it match up with?
You need a pretty complex Monte-Carlo type analysis I would suggest to reach a conclusion of 16% so I am intrigued as to the study. It will be worthy of reading.
Ah!TheRIT wrote:Not doing anything clever and it's not over simplified. I'm just using previous historic sequence of returns.dealtn wrote:Do you have a source for that?
I suspect it is over-simplified, so would like to be proved wrong.
For instance does that 5% withdrawal rate apply to all time periods, or is it statistically adjusted for market movements. That is to say does it treat 5% withdrawal the same for all market condition start points, or does it adjust for recent market change?
Imagine a 4% withdrawal rate starting "last year", and also a 5% withdrawal rate on the same basis. Now a year later a different retiree with a 5% withdrawal rate, but the market has fallen 20%. Which of the 2 previous scenarios does it match up with?
You need a pretty complex Monte-Carlo type analysis I would suggest to reach a conclusion of 16% so I am intrigued as to the study. It will be worthy of reading.
Yes, and this is also why I would suggest that anyone on these boards saying "Just draw down on the dividends" or anything to do with natural yield in order to live in retirement is revealing they don't actually have skin in the game. With a pot big enough to do that (basically a million quid), you can give any advice you want. Unless of course it's not that big, in which case you'll start playing the same game as the rest of us:TheRIT wrote:That is the problem. To cover all historic eventualities as a proxy for what might happen in the future you need so much wealth that in the majority of cases you leave a 'metric truckload' on the table when you no longer have a need for it. Unless of course one wants to play the 'do you feel lucky punk' game...
Full disclosure: As I mentioned above I'm trying to do just that. 3 years of cash + enough investments to spend "only" 85% of the dividends and to make matters worse 5% of my portfolio is gold which doesn't pay much of a dividend.Gilgongo wrote:Yes, and this is also why I would suggest that anyone on these boards saying "Just draw down on the dividends" or anything to do with natural yield in order to live in retirement is revealing they don't actually have skin in the game. With a pot big enough to do that (basically a million quid), you can give any advice you want. Unless of course it's not that big, in which case you'll start playing the same game as the rest of us:
https://finalytiq.co.uk/natural-yield-t ... -strategy/
Not to press the point, but on what basis would you therefore disagree with the article I link to when it says, "... a natural yield approach is a bonkers retirement income strategy for virtually all but very wealthy retirees, who mostly rely on other sources of steady income." Is it that your 85% rule means you'll need to operate a parallel strategy to mitigate the fluctuations?TheRIT wrote:As I mentioned above I'm trying to do just that
I think the first point is that drawdown is both a psychological thing as well as a mechanical thing. All these articles that keep getting regurgitated in various forms only ever address the second. I'm yet to meet one of these authors (and that includes all the famous FIRE bloggers) who's actually living what they write about when it comes to 4% rules, SORR etc. When setting my initial strategy I addressed each in turn:Gilgongo wrote:Not to press the point, but on what basis would you therefore disagree with the article I link to when it says, "... a natural yield approach is a bonkers retirement income strategy for virtually all but very wealthy retirees, who mostly rely on other sources of steady income." Is it that your 85% rule means you'll need to operate a parallel strategy to mitigate the fluctuations?
Gilgongo sounds a little bitter almost. If he has insufficient funds to see a decent retirement on the income his capital will produce maybe he needs to rethink the whole proposition of retiring early (which it sounds as if is what he wants) Anyone trying to live off the natural yield I can assure you has 'skin in the game', and I think it would be unwise for anyone to try to live off capital in any other way. I have never played any game with my investment funds and of course what is being ignored here are the investment returns. Living within your income is the only sensible mantra in retirement as at any other time and cutting your cloth to suit that is the only way it will work.Gilgongo wrote:Yes, and this is also why I would suggest that anyone on these boards saying "Just draw down on the dividends" or anything to do with natural yield in order to live in retirement is revealing they don't actually have skin in the game. With a pot big enough to do that (basically a million quid), you can give any advice you want. Unless of course it's not that big, in which case you'll start playing the same game as the rest of us:TheRIT wrote:That is the problem. To cover all historic eventualities as a proxy for what might happen in the future you need so much wealth that in the majority of cases you leave a 'metric truckload' on the table when you no longer have a need for it. Unless of course one wants to play the 'do you feel lucky punk' game...
https://finalytiq.co.uk/natural-yield-t ... -strategy/
I think we need to agree that this is an extreme positionDod101 wrote:I think it would be unwise for anyone to try to live off capital in any other way
Thanks for detailing this. The psychological aspect is certainly significant, and a hybrid of natural yield with some capital erosion (and presumably keeping an even asset allocation along the way to mitigate sequence risk to an extent) is interesting.TheRIT wrote: I think the first point is that drawdown is both a psychological thing as well as a mechanical thing.
Since we're way off topic anyway... I'd been assuming that the growing pressure on the UK govt to stop using RPI means that anyone relying on index-linked gilts will need to prepare for up to a 30% drop in the future. I think there's been a stay of execution, but I'm not sure I have your confidence in Linkers being much of an answer in the long term.1nvest wrote:With Linkers providing a DIY annuity sorted,
My strategy has me dividing my wealth into more than just stocks and bonds. Currently it calls for 15% UK Equity (my home country), 15% Asia Equity (my likely soon to be home - thank you FI again), 5% EM Equity, 25% International Equity (40% US, 40% Europe, 20% Japan), 5% Gold, 10% REIT's, 19% Bonds (Linkers and Corporate) and 6% cash (my 3 years of cash). Other than a HYP which I'm slowly exiting this is achieved with tracker funds/ETF's. So my rebalancing within each asset class is taken care of by the fund itself. QED.Gilgongo wrote:Thanks for detailing this. The psychological aspect is certainly significant, and a hybrid of natural yield with some capital erosion (and presumably keeping an even asset allocation along the way to mitigate sequence risk to an extent) is interesting.
So to return to the topic, because practice of maintaining asset allocation feels to be the same thing as what I was proposing.
Let's say we want to maintain the 50:50 stocks/bonds ratio you mention. How exactly would you choose to rebalance if not by looking at each asset (bond fund/ETF, HYP stock, whatever) historic price and dividend movements? Would that not imply a ranking operation and then selling the winners to bolster the losers? And by "losers" does that mean "divi cutters"?
This the detail I'd like to get into rather than generalising on broad strategy.
With a liability matched ladder the idea is that you have a bond that matures each year to the inflation adjusted value of your anticipated spending in that year, so there's no rebalancing, you just load the ladder from the offset, buying one that matures in a year that matches that years spending, another that matures in two years time that matches that years spending ...etc. The difficult part other than having the funds to load that, is predicting what your spending needs will be in future years. And yes there is a risk that the state can renege by such tactics as revising the rules (taxation, actual inflation rate ...etc.). The claims are often that the state doesn't default on its obligations, however they have done so numerous times in the past, not full defaults, but partial defaults in disguise. Henry VIII for instance was known as copper-nose-'enry because silver coins that represented the silver value of the coin were minted with copper interiors during his realm, and when the silver plating wore down on his image over time, the copper beneath would show through.Gilgongo wrote:... but I'm not sure I have your confidence in Linkers being much of an answer in the long term.1nvest wrote:With Linkers providing a DIY annuity sorted,
Be that as it may, the same overall question applies to you too I think (although I'm not sure I understood a lot of what you were saying): how exactly would you go about re-balancing?