Does my plan stack up?

[2Old2DieYoung]

Hi.
First post; just found the forum today.

Looking for a bit of guidance please if anyone feels so inclinded.

My wife and I are looking to retire in 2026 at respective ages of 42 and 45 (despite my username, I cannot quite believe I am so close to that age).

Have been expats in Middle East for past 11 years, with a good income that has steadily increased.

We have been very fortunate generally, have travelled extensively and basically aim to become nomadic for the foreseeable future post retirement. A lot of time is expected to be spent in Asia/Eastern Europe/South America etc. Our general lifestyle is low cost easy going, we are not fancy and dont try to keep up with others. Not particularly materialistic, rather simplicity. We just want to enjoy life together.

Our goal is to not have to work but rather live off investment income whether dividend based or by periodically selling equities (this is the crux of my current question which will follow becuase i am a bit lost).

Current status:
UK citizens - no intention of going back to UK
Work in particularly stressful industries with responsible jobs (the main reasons why we've had enough and need out, there is more to life)
No kids - none planned
Mortgaged house which we live in (no other properties and we don't want any) - house will be rented out full time when we travel
No debt (other than mortgage circa £220k)
Currently circa £1.2m cash in fixed deposits at 5.5% P.A. - no other investments
Total savings per month circa £19k
No tax considerations - I am not building any tax payments into our forecast future living expenses for the next few years as we aim to retain our tax free status

Current Plan:
Starting Jan 2024, monthly savings to be allocated 100% to ETF VWRP until Jan 2026 - this should mean circa £450k invested ignoring interim gains or losses
The fixed deposits will mature end 2024, likely this will also end up in VWRP
Estimated total invested £1.8m by Jan 2026, including other small bits we have
All going right, we should also have circa £150k separate cash reserve to cover living expenses in the first 4 years - the aim is to live off this until it runs out to hopefully let the ETF grow further before dipping in to it (estimate expenses of 35k per Yr first 4 years)

In reality, we are budgeting on living expenses of circa £50k per year (adjusted for inflation) after this ignoring tax.

So on paper it seems to work, assuming 7% average ETF growth per year gives way more than we believe we will need in a typical year but is 7% growth averaged year on year a reasonable assumption??

So that being said, this is where I get stuck/scared, call it what you will. In reality, I simply do not know how to best invest the money to maximise our chance of success.

Do we just go all-in on a global ETF like VWRP and ride the waves of the market hoping for growth or do I need a more savy approach?

Should I be looking at a dividend paying ETF rather than a global all share?

Fixed income builds in stability, I understand, but the value of our potential fixed income allocation would not cover our livings costs without severely restricting potential growth due to a much smaller equity allocation.

I understand the basics of investing and the boglehead/ETF long term type approach, I do not want to be trying to pick stocks, and I never believe we are going to be rich, all we want is our time and freedom and to not have to work again unless we choose to.

We could keep working for another 20 years and have £10m in the bank, the earning potential in my field is very significant, but so what, the thought of another 20 years gives me nightmares.

So in essence, in our situation, does the standard global ETF approach / live off the growth by selling stocks periodically stack up? Or what would very good alternatives?

Up to now I have gone through lots of investment theory but not practical experience because I've been scared to make loses. The heartache we go through to earn our income to date instills this fear of making losses in me. I am finacially savy and I know I need to overcome this fear; banking cash feels real even though i know its a typically bad approach.

Once I start there is no turning back and I will quickly overcome this fear. I just need to know I've done everything i can to set out on the correct path initially.

If you made it this far, thank you. Appreciate any feedback.

 

[Exchme]

Not sure what the world markets have done, but the studies done over the last 150 years in the US suggest you could have spent roughly 3.3% of your initial retirement portfolio each year and adjust that for inflation each year and the portfolio held it's value over time.

So a 1.8M pound portfolio could have supported about 60K pound/year (adjusted for inflation). You should have quite a few stocks, say 50-75% as your big enemy over time is inflation and stocks may win against inflation, but bonds don't do well.

Try the Firecalc.com simulator to get a feel for the historical US data going back to 1871. That will let you add in other cash flows as well.

 

[OldShooter]

Being forced to sell equities into down markets is the definition of Sequence of Returns Risk (SORR). Many of us maintain conservative fixed income "buckets" that we can draw from when markets do not feel favorable.

Re fear of losses, this is genetically baked into our little mammal selves. I suggest you read a little from the behavioral finance crowd, specifically Thaler and Kahneman. That'a not self-help material so much as know-your-enemy study.

 

[2Old2DieYoung]

Being forced to sell equities into down markets is the definition of Sequence of Returns Risk (SORR). Many of us maintain conservative fixed income "buckets" that we can draw from when markets do not feel favorable.

Re fear of losses, this is genetically baked into our little mammal selves. I suggest you read a little from the behavioral finance crowd, specifically Thaler and Kahneman. That'a not self-help material so much as know-your-enemy study.

Thanks, I'll read up

Say you need 100k to cover expenses in a year of a down market but your fixed income is only providing 20k, and these are your only two income streams, you still have to sell off some equities to cover the gap. Is the idea simply that the Fixed income portion reduces the amount of equity you need to sell that year? Nothing more sophisticated?

So with a reasonable cash buffer to cover the inital X years living costs, this could be used in a similar way - if the market is down, leave the ETF alone and live on the cash buffer but if the ETF is growing use some of it and preserve the buffer in cash?

 

[38Chevy454]

I agree with what Oldshooter is recommending. I would view your money as three different type buckets:
1) Short term 0-2 years - conservative fixed income type investments to cover your needed living expenses. 80-90% fixed income, with a 10-20% of low fee wide diversified equity funds. Having the known stable returns will take the anxiety out of market fluctuations in the current and near future.
2) Mid Term 2-6 years - increasing equities, maybe 50/50 mix of equities and fixed income. Use this bucket to replenish your short term bucket by rebalancing the AA and taking the higher increases in value (whatever is up more: fixed or equities) and moving those increases over to short term bucket. This keeps your short term bucket at a relatively constant and predictable level.
3) Long Term >7 years - mostly equities 80-90% in low fee wide diversified equity funds. This allows for growth that should exceed inflation over the extended period. Use rebalancing to take the profits to replenish the mid term bucket as needed.

I think this is fairly easy to follow, the rebalancing is only 1-2 times per year. Keep the total withdrawal rate at 4% or less and it is pretty assured to have 30 or more years of success. I also emphasize to have wide diversified equity funds. Don't try to chase a hot individual stock. Go with slow and steady. Keep fees low, they have a detrimental effect on your returns.

 

[pb4uski]

I think you will be fine. 50k of inflation-adjusted spending/withdrawals from a 1.8m portfolio is only a 2.8% withdrawal rate and should be very sustainable. You can probably go with a 40% equities/60% fixed income AA and be fine. I don't think there is any need for you to go 100% equities.

In fact, you could probably even go all fixed income. The rate of return that equates to 50k annual withdrawals for 58 years (100-42yo) from a beginning portfolio of 1.8m is 1.78%... if the withdrawals were inflation adjusted then you would have to add inflation to that rate but with 2.5-3.0% inflation that would be 4.28-4.88% which seems plausible.

Is the 150k in addition to the 1.8m so 1.95m in total or part of the 1.8m?

If you were US based you could even do a 20 or 30 year TIPS ladder and then put the rest in equities and annually buy more TIPS to add rungs to the ladder but I'm not sure if similar investment vehicles are available in GBP.

 

[OldShooter]

... Say you need 100k to cover expenses in a year of a down market but your fixed income is only providing 20k, and these are your only two income streams, you still have to sell off some equities to cover the gap. Is the idea simply that the Fixed income portion reduces the amount of equity you need to sell that year? Nothing more sophisticated? ...

No, not exactly. No selling equity. Sell enough fixed income assets to meet your cash needs, then plan to replenish/aka rebalance at some time in the future when the market looks better. Many around here keep multiple years of needed cash flow in their fixed income tranche. The range seems to be from about three to maybe ten.

Admittedly this is a mild form of market timing so you cannot expect to get this perfectly right, but probably you can mitigate the SORR at least a bit.

Also, as @38Chevy454 points out, this is also a mild form of a "bucket" strategy. Lots of internet debates about this; again some good reading for you. I am not a fan of a rigid bucket strategy but I do think it is one useful way to view a portfolio.

 

[pb4uski]

The nice thing is that if you have both equities and fixed income and have a down equity market then you have a choice to either take the current year's withdrawal out of fixed income (like OldShooter said, a mild form of market timing) or totally rebalance to target and sell fixed/buy equities while they are on sale.

If you have a prudent plan, either one is probably going to be ok. It is nice to have money and have choices.

 

[TheWizard]

I'm not a bucketeer.
Just choose an AA you're comfortable with in retirement, for example 50/50.

So if your stock allocation is down at present, then sell some of your fixed income allocation for your spending needs to bring your AA back closer to 50/50.
Simple.

No need to play any sleight of hand games with your money...

 

[OldShooter]

... So if your stock allocation is down at present, then sell some of your fixed income allocation for your spending needs to bring your AA back closer to 50/50.
Simple. ...

But what if the amount of money the OP gets from AA rebalancing isn't enough to cover their spending needs? Then, not so simple.

 

[TheWizard]

But what if the amount of money the OP gets from AA rebalancing isn't enough to cover their spending needs? Then, not so simple.

Then just take remaining needed amount pro rata. In the 50/50 example above, that means half from fixed income, half from stock funds.

I also recommend doing essentially equal monthly withdrawals for spending purposes rather than an annual withdrawal (which starts to look like a cash bucket)...

 

[OldShooter]

Then just take remaining needed amount pro rata. In the 50/50 example above, that means half from fixed income, half from stock funds. ...

We'll disagree on that, then. The whole point of this exercise is to avoid selling into a down market. Or at least that's my my objective in managing our portfolio. If AA waves around a little bit, so be it. There are plenty of studies that say highly rigid AA rules are unnecessary as similar AAs produce similar total return.

 

[TheWizard]

We'll disagree on that, then. The whole point of this exercise is to avoid selling into a down market. Or at least that's my my objective in managing our portfolio. If AA waves around a little bit, so be it. There are plenty of studies that say highly rigid AA rules are unnecessary as similar AAs produce similar total return.

Totally correct on AA significance.

But many folks are confused about what constitute a "down market". Just because we're a bit off all-time highs doesn't make it a down market.
No time to explain further...

 

[pb4uski]

But what if the amount of money the OP gets from AA rebalancing isn't enough to cover their spending needs? Then, not so simple.

Nah. It's very simple. I did it for years.

Let's say at the beginning of the year 20x0 you have $1,000,000 (after you have taken your $40,000 withdrawal for the first year) that is right on your 60/40 target... so $600,000 of equities and $400,000 of fixed.

During the year, stocks go down 20% ($600,000 to $480,000) and fixed goes up 5% ($400,000 to $420,000) so before rebalancing and your 20x1 withdrawal you have $900,000.

Inflation is 5% for that year so your withdrawal is $42,000 and you take it from fixed... leaving $858,000 of investments... $480,000 of equities and $378,000 of fixed.

Your new targets for the $858,000 are $514,800 for equities (60% of $858,000) and $343,200 for fixed (40% of $858,000).

Now just sell $34,800 of fixed and buy $34,800 of equities and you have rebalanced to 60/40.

 

[2Old2DieYoung]

I think you will be fine. 50k of inflation-adjusted spending/withdrawals from a 1.8m portfolio is only a 2.8% withdrawal rate and should be very sustainable. You can probably go with a 40% equities/60% fixed income AA and be fine. I don't think there is any need for you to go 100% equities.

In fact, you could probably even go all fixed income. The rate of return that equates to 50k annual withdrawals for 58 years (100-42yo) from a beginning portfolio of 1.8m is 1.78%... if the withdrawals were inflation adjusted, then you would have to add inflation to that rate but with 2.5-3.0% inflation that would be 4.28-4.88% which seems plausible.

Is the 150k in addition to the 1.8m so 1.95m in total or part of the 1.8m?

If you were US based you could even do a 20 or 30 year TIPS ladder and then put the rest in equities and annually buy more TIPS to add rungs to the ladder but I'm not sure if similar investment vehicles are available in GBP.

Hi. Thank you.

I don't know about TIPS, I will research.

The 150k is additional to the estimated 1.8m.

My idea was/is to live on the 150k as long as it lasts from when we 'retire' in Jan 26 to allow our invested money to, hopefully, grow.

The 150k would be held in a high interest account and drawn down as needed, not that 4 or 5% of 150k is much, assuming that rate is still achievable, but it would stretch it a couple extra months

Currently everything, circa 1.15m, is in 12 month fixed deposit at 5.46% and becomes available Q3 2024 at which point we expect circa 1.2m

The decision at that point, Oct 24, will be how to allocate the 1.2m.

Split this 50/50 bond ETF/global equity ETF and use the bond income to keep buying more bond ETF or global equity ETF as we don't need the income to live on?

Between now, Nov 23, and Jan 26 we are continuing to accumulate, circa £20k per month, into global equity ETF.

'Retire' Jan 26. Live off the 150k lump as long as it lasts.

Say by 2030 the 150k has run out, we then need circa £1m fixed income at 5% to cover living expenses (ignoring inflation for now to keep it simple).

I suppose the AA of the 1.2m in Oct 24 really depends on the market at that time. I assume that by not building in fixed income at that point, i am increasing potential risk should the markets be down at start of 2030 when our 150k lump runs out and we need to sell off global equity ETF to live/buy bond ETF for living income?

Another long rambling post...


Thanks again

 

[2Old2DieYoung]

No, not exactly. No selling equity. Sell enough fixed income assets to meet your cash needs, then plan to replenish/aka rebalance at some time in the future when the market looks better. Many around here keep multiple years of needed cash flow in their fixed income tranche. The range seems to be from about three to maybe ten.

Admittedly this is a mild form of market timing so you cannot expect to get this perfectly right, but probably you can mitigate the SORR at least a bit.

Also, as @38Chevy454 points out, this is also a mild form of a "bucket" strategy. Lots of internet debates about this; again some good reading for you. I am not a fan of a rigid bucket strategy but I do think it is one useful way to view a portfolio.

Hi. Thanks.

Whem you say 'keep multiple years of cash flow in the fixed income tranche', you are referring to the face value of the fixed income e.g. the bond value if you were to sell it, rather than meaning the actual income derived from that investment?

 

[2Old2DieYoung]

I'm not a bucketeer.
Just choose an AA you're comfortable with in retirement, for example 50/50.

So if your stock allocation is down at present, then sell some of your fixed income allocation for your spending needs to bring your AA back closer to 50/50.
Simple.

No need to play any sleight of hand games with your money...

This is where I am getting slightly confused.

I always thought of fixed income as being exactly that; you have it so you know exactly what you are receiving as income each year, without thinking about the face value of it because you know you will get the same amount back as invested upon maturity

But what I am understanding from your explanation, rightly or wrongly, is that people also consider the face value of the fixed income portion (e.g. the market value of the bond) and may opt to sell it to get that as income rather than selling equity if the market was down

Equity goes down, typically bonds go up

Have I interpreted correctly?

So if I need 50k per year for living expenses, instead of saying I need 1m fixed equity at 5% to achieve this, I should also be considering the face value of the fixed income portion?

I am stuck with the notion of capital preservation so in effect trying to live off the fixed income rather than selling any investments; perhaps the wrong way to be thinking

 

[OldShooter]

Hi. Thanks.

Whem you say 'keep multiple years of cash flow in the fixed income tranche', you are referring to the face value of the fixed income e.g. the bond value if you were to sell it, rather than meaning the actual income derived from that investment?

Yes, market value (not face) of the fixed income assets.

If you do some reading on "bucket investment strategy" you will get a sense of looking at your assets from a bucket viewpoint. I am not recommending taking a mechanistically rigid bucked approach but I think it is one useful way to look at a portfolio.

 

[2Old2DieYoung]

Yes, market value (not face) of the fixed income assets.

If you do some reading on "bucket investment strategy" you will get a sense of looking at your assets from a bucket viewpoint. I am not recommending taking a mechanistically rigid bucked approach but I think it is one useful way to look at a portfolio.

Thanks, I'll do that.

Can I also please ask. If I am being advised by an independent FA (they don't get paid based on what I choose to invest in, they just provide advice for a low flat yearly fee), to buy a Bond ETF such as that in the screen shot below, why on earth would I chose this bond ETF when it appears to perform really badly? -11.54% over 3 years doesn't seem to make sense to me on face of it and the annual return is around 2.09%.

Is choosing a higher yielding bond etf or perhaps a mix of three bond etfs a better strategy to increase rate of return?

 

[pb4uski]

The problem with bond ETFs aka bond funds is that you cede control to the manager. If you need a slug money in 3-6 months your only way is to get it is to sell a certain number of shares of the bond ETF.

With a portfolio of individual bonds you can just set aside the proceeds of a maturing bond rather than reinvest the proceeds or sell a bond that is near to maturity which would have a lower loss than the portfolio average.

So many of us here prefer individual bonds over bond ETFs because we like more control. The disadvantage is that managing an individual bond portfolio is a bit of work but the big brokerage houses have bond desks to help you with that.

Another alternative, in between bond ETFs and individual bonds are target maturity bond ETFs offered by BlackRock and iShares. These are similar to bond funds except all the bonds in the fund mature in a given year and when you get to that year maturity proceeds are accumulated during the year and a terminal distribution of the fund's assets is made in December. It is easier to manage than individual bonds and provides diversification since each fund holds hundreds of bonds.

 

[2Old2DieYoung]

The problem with bond ETFs aka bond funds is that you cede control to the manager. If you need a slug money in 3-6 months your only way is to get it is to sell a certain number of shares of the bond ETF.

With a portfolio of individual bonds you can just set aside the proceeds of a maturing bond rather than reinvest the proceeds or sell a bond that is near to maturity which would have a lower loss than the portfolio average.

So many of us here prefer individual bonds over bond ETFs because we like more control. The disadvantage is that managing an individual bond portfolio is a bit of work but the big brokerage houses have bond desks to help you with that.

Another alternative, in between bond ETFs and individual bonds are target maturity bond ETFs offered by BlackRock and iShares. These are similar to bond funds except all the bonds in the fund mature in a given year and when you get to that year maturity proceeds are accumulated during the year and a terminal distribution of the fund's assets is made in December. It is easier to manage than individual bonds and provides diversification since each fund holds hundreds of bonds.

Great, thank you for the pointers and info, really helpful.

 

[Exchme]

This is where I am getting slightly confused.

I always thought of fixed income as being exactly that; you have it so you know exactly what you are receiving as income each year, without thinking about the face value of it because you know you will get the same amount back as invested upon maturity

But what I am understanding from your explanation, rightly or wrongly, is that people also consider the face value of the fixed income portion (e.g. the market value of the bond) and may opt to sell it to get that as income rather than selling equity if the market was down

Equity goes down, typically bonds go up

Have I interpreted correctly?

So if I need 50k per year for living expenses, instead of saying I need 1m fixed equity at 5% to achieve this, I should also be considering the face value of the fixed income portion?

I am stuck with the notion of capital preservation so in effect trying to live off the fixed income rather than selling any investments; perhaps the wrong way to be thinking

Bonds sometimes move opposite stocks and sometimes move with them. There is very little long term correlation and what there is slightly positive (meaning they move together slightly more often than they move differently).

The key thing to remember is that since stocks have much more variability than bonds, your asset allocation sets your risk and likely return. Varying that allocation with buckets is market timing, trying to take more risk when markets are down and less when markets are up.

I started my journey thinking buckets were great and tried to prove it to myself using historical data. One difficulty I had was there are so many free parameters in the bucket universe - how much cash, how quickly do you draw it down, when do you start to replenish, do you replenish and if so, how fast? I couldn't find a strategy that worked better than a fixed allocation and eventually gave up. Even if I had found something, it would most likely have been random chance (when many combinations of guesses are tested against the data, the odds of "seeing" a pattern that is actually just random chance goes way up, many academic papers eventually turn out to be garbage because they ignored this).

After my failed attempt, I read forums like this and Bogleheads.org and haven't seen anyone point to a study that settled the question. Markets just have too much random chance, a strategy that worked great in one historical sequence might have been awful in another.

To sum up, there is no way to know in advance what strategy is going to be best. I like the fixed asset allocation (or an age related glide path) as it is a simple way to control risk. Others may feel better with buckets, but odds are that there is no free lunch.

 

[TheWizard]

No free lunch, correct.
And there's also no way to make a too small accumulation behave like a much larger accumulation.

I hold no bond funds, only TIAA Traditional and a MM fund. Both of these fixed income investments reinvest earnings, so "capital preservation" is a moot point. I sell what's needed for RMDs and Roth conversions...

 

[target2019]

Thanks, I'll do that.

Can I also please ask. If I am being advised by an independent FA (they don't get paid based on what I choose to invest in, they just provide advice for a low flat yearly fee), to buy a Bond ETF such as that in the screen shot below, why on earth would I chose this bond ETF when it appears to perform really badly? -11.54% over 3 years doesn't seem to make sense to me on face of it and the annual return is around 2.09%.

Is choosing a higher yielding bond etf or perhaps a mix of three bond etfs a better strategy to increase rate of return?

When you isolate a particular ETF or Mutual Fund, it is difficult to understand why people use a particular investment. You were expecting a nice return on those years, but what you're seeing is the effect of a large move in response to interest rate changes.

People use an ETF/MF to satisfy some portion of their asset allocation. When you're accumulating in younger years, this is a simple way to carry out a plan. There are other ways, too.

When you get to the precipice of retirement, you're decumulating. Now, the ETF that made sense before may not be appropriate.

If you're paying an FA for advice, it makes sense to discuss FA recommendations here. But you will hear many opinions, making decisions more difficult.

Have you read an investment planning book? I think that can be a path to building an approach you can live with for a very long retirement.

You might want to ask the FA about his guiding principles too.

 

[Out-to-Lunch]

I started my journey thinking buckets were great and tried to prove it to myself using historical data. One difficulty I had was there are so many free parameters in the bucket universe - how much cash, how quickly do you draw it down, when do you start to replenish, do you replenish and if so, how fast? I couldn't find a strategy that worked better than a fixed allocation and eventually gave up. Even if I had found something, it would most likely have been random chance (when many combinations of guesses are tested against the data, the odds of "seeing" a pattern that is actually just random chance goes way up, many academic papers eventually turn out to be garbage because they ignored this).

After my failed attempt, I read forums like this and Bogleheads.org and haven't seen anyone point to a study that settled the question. Markets just have too much random chance, a strategy that worked great in one historical sequence might have been awful in another.

To sum up, there is no way to know in advance what strategy is going to be best. I like the fixed asset allocation (or an age related glide path) as it is a simple way to control risk. Others may feel better with buckets, but odds are that there is no free lunch.

I think this is an excellent summary.