Is this draw down method sane?

[DavidD5er]

Hi, I've recently been looking in detail about how I might go about living off my portfolio, but am getting a bit overwhelmed by the many different withdrawal methods I've seen described.

(BTW I'm in the UK so some of the tax and social security stuff will be different but I don't think this unduly affects my question.)

I understand the primary issue to guard against is sequence risk if I get a bear market or two in the first 10-15 years.

On retirement, I'm likely to have a pretty mixed set of holdings, which currently looks a bit like this:

• A bunch of high-yield shares and IT producing approx. 30% of my target income in dividends. The capital makes up about 40% of the portfolio.
  
• Some passive stock ETFs/trackers making up another 20%
  
• Some bonds and gilts ETFs/trackers making up about 10%
  
• A gold ETF making up about 10%
  
• Cash savings making up about 20%

I'll aim to take 3.5% at the start (which equals my target yearly income amount), and then take that income amount every year, bumping it up by inflation perhaps.

The way I was thinking of doing this is to take an income every six months by using the natural yield from the socks and ITs first (so not touching the capital there), then draw down on my other holdings according to how they've performed over the past 6 months. So I'd compare their value six months ago to today and make up the remaining income from each in order of performance ranking while trying to preserve the overall 60/20/20 asset allocation (so I don't eat up all my bonds too quickly, for example.

That way, I think I'll be able to mitigate sequence risk by running down stocks in the bull markets and bonds/gold/cash in the bears.

But then I read about "equity glidepaths" "Guyton guardrails" and loads of other strategies and my head explodes

But does this "supplemented natural yield" method also make sense in my case? I've also read about the dangers of relying on natural yield in bear markets too...

BTW I'm hoping to get the UK state pension at age 67 which is about 10 years into my retirement. This should hopefully shore up some effect of a bear market on my portfolio before then.

Any suggestions appreciated!

 

[38Chevy454]

It seems your basic question is just one of rebalancing to maintain your desired allocation, while taking the needed income out. As many have said, moeny is fungible and whether you take it from dividends, or from increased price appreciation, the net result is really the same.
Since you don't have pension income for 10 years, the fear of the sequence of returns risk is a bit more concern. But as you stated, selling the assets that are up (or at least down less), you would maintain the allocation. It seems you have quite a bit in cash, you may want to just use some of that first and not worry about selling anything for a while.

 

[audreyh1]

I take all distributions in cash - this is interest, dividends and cap gains distributions - let it accumulate during the year (most is paid in Dec). I withdraw our annual income at the beginning of January and immediately rebalance the portfolio back to the target AA. This naturally means more is taken from the past year’s winners, and less from the losers.

I don’t worry about principal or yield. I just use total return.

Guyton and other fancier schemes are for managing income during periods of market stress.

I use a simple % of remaining portfolio method rather than the traditional % of initial portfolio, thereafter adjusting for inflation each year. I take a fixed % of the portfolio value at the end of each year and don’t adjust for inflation. So my income goes up and down depending on portfolio performance. I’m OK with varying income.

 

[DavidD5er]

Thanks for this - I guess as long as I draw down on winners more than losers, then I should be OK.

One thing that did occur to me is that the way market sentiment seems to work is that bonds/gilts and gold go up in anticipation of stocks falling. So is it best to default to drawing down on stocks if they are they going up, and ignore non-stock performance even if they out-perform stocks, until markets go negative?

Good point about the cash too BTW.

 

[grayv]

That way, I think I'll be able to mitigate sequence risk by running down stocks in the bull markets and bonds/gold/cash in the bears.

Will the portfolio be ok if interest rates jump?

 

[Dtail]

You state you would run down stocks in a bull market, but wouldn't the stocks naturally run itself down somewhat in a bear market?

 

[DavidD5er]

Will the portfolio be ok if interest rates jump?

This, I don't know. I suppose the bonds will go down when that happens, but I'm less sure about the behaviour of the stocks. This seems like a separate question though.

 

[DavidD5er]

You state you would run down stocks in a bull market, but wouldn't the stocks naturally run itself down somewhat in a bear market?

I suppose so, but the withdrawal "formula" (if I can call it that) would simply rank the least poorly performing assets to draw down on first. I don't think I can completely guard against sequence risk, just reduce it.