Couple of points, 1) if you have a balanced portfolio part should be in cash, cash does not crash, so make sure you have 3 to 5 years cash, if the market rises top up your cash, if it falls don't top up your cash, or put another way only drawdown from stocks when they are high and leave them to recover when they are low. Point 2) I don't want to have loads of money when I'm 85 in a home dribbling in the corner trying to remember my own name. I want to spend highly (holidays etc) when I'm younger and can actually travel, so I'd burn down quicker at the front end and then go subsistence when my spending needs reduce anyway. Just a couple of thoughts for you. Just my view anyway. Thanks.
Hi Andrew, thanks for watching and taking the time to comment. A few initial thoughts. 1) I agree, however many have multi-asset funds which have cash-like holdings but you can't segment them. So it's about portfolio construction here. As you highlight, might not be necessary but does depend on how you hold your assets. 2) Couldn't agree more, that is part of good planning. Who wants more money at 90!?
Thanks! This is some great information. This should really be covered by pension company presentations when we sign up for a pension. Then it's more likely that people would understand what they should be contributing for a certain level of probable income come retirement day. Or at least, better understand the compromises being made at the time.
This was so valuable to me in my retirement. Many many thanks 👍 I am really looking forward to hearing more bout this... off to check your later Vlogs - Ta.
Thanks for the video. Have you come across the book "It's all about the income" by Michael Lynch. He basically advocates a "two bucket strategy". Bucket 1 the first few years expected expenditure held in cash (how many years varies from retiree to retiree - but not intended to be many years). Bucket 2 The growth portfolio (eg &0% shares and 30% bonds). He says if bucket 2 has gone up in the previous year und your next year out of bucket 2; but if Bucket 2 has gone down, then fund your next year out of bucket 1. As far as I can remember if bucket 1 runs out, it doesn't get topped up from bucket 1. He acknowledges that he extra cash will cause a drag on the overall portfolio. What do you think of this approach? (in broad terms)
...but there is no cash buffer in the modelling. Do you have any videos, or is there any cash flow modelling tool that actually implements an optimum 3 bucket strategy for example whereby the crashes are ridden out by spending down cash and then the long term stocks bucket is used optimally to top up the cash bucket (and maybe the medium term bucket if you are using the 3 bucket strategy?)
Of course this adaptive strategy is only viable if you have enough discretionary spending in your retirement budget to be able to make potentially significant cuts. I like it, though, and I think its a far more realistic model. A major problem is that more often that not experience financial shocks when we can least afford them rather than when we can most afford them.
Yes, absolutely. I feel it works in combination with a safety-first approach where a base line is secured. Next week's video is on this! Thanks for watching 👍
Many thanks for that explanation. Whilst the numbers stack up, they don't take inflation into account. With this, I'm thinking that the lower withdrawals mean that the money doesn't run out, but they cover expenses with a higher cost of living? If you consider you need £40k to live with, will £25k a few years later allow you a decent living? I suppose part of the answer is how much of the initial £40k was necessary and how much was discretionary...
It kinda of makes sense. A question for you. Could you do a video on income in a bit more detail, meaning add the OAP pension and spending habits when you get older, say 75, as we all know people spend less when they get older, I've worked my retirement on a 2.4% return with 25% taken out and looks good at this point earning interest with it on savings and helping retirement. Also add some savings options and returns to the income as that will also have an impact on the outcome of yearly earnings. Hope this is not too much to ask for. Understand it's a bit of a guessing game - so many calculators out there that confuses the best of us - own excel sheet helps me, great video and thanks, Nick
Hi Nick, thanks for watching and leaving a comment. Yes, I'll have a look at coming back to this in a bit more depth in a future video with things that most people will want to consider like State Pensions and potentially spending more in the earlier years of retirement.
Cheers mate! Thanks for watching, I need to catch up on your videos. You've been smashing the content for months now. Respect how prolific you are with it. I know that level of consistency is not easy and great to see your getting the traction you deserve! 🙌🙌
Excellent video. One observation.. if you plan to use a guard rail strategy for withdrawals, you need to plan to over save to allow lower withdrawals at certain times. However this somehow defeats the point of needing a guard rail ☹️
That’s a really interesting point (took me a while going back and forth thinking about it!) How I would reframe it is, there are a few levers that can be pulled for making sure anyone doesn’t run out of money. Anything around the 4% rule is based around a ‘capital target’ if you are intending to use an investment-based strategy in retirement. A sort of rule of thumb for how much you should have saved. Guardrails reframe this as a way to pull one of the levers if things don’t go well. So we’re pulling on of the others levers which is expenditure and adapting that in line with the markets. For most, they have a minimum amount which they can cut back to, then their average ‘would like to spend’ amount, then a ‘ideally I’d spend.’ So, I would look it as - if we’re depending on the markets, we have reasonable assumptions but we don’t truly know what the market will give us. Guardrails allow us to put a structure in place so you won’t run out of money and however good or bad, we know what we can likely spend. The challenge with focusing purely on a capital target Is the answer to - ‘how much is enough’ could always potentially be more or, it depends. So it’s very tricky to know when to take the leap to retire. This allows us to be a structure in real time. Thanks very much for watching and leaving such an insightful comment. It’s an excellent one! 🙌
Hi, thanks for watching. For the purposes of this video. It is a high-level illustration of the concept of how adaptive spending works. It's not intended to give a full overview of personal taxation in retirement. There was no need to make the video extremely difficult to follow by adding that layer of complexity on the assumptions to explain the context. As far as when advising clients ALL clients are ALWAYS advised on their net position, with taxation calculations done specifically so they know where they stand. All good advice will always be done illustrating the net position. Frankly, that's one of the big ways we as advisers show our value when comparing strategies.
I think it’s overly complex and in this scenario clearly doesn’t match typical retirement spending needs, which are generally front-loaded. I have a better suggestion, try to spend only what you need to live life well but not lavishly. (Unless you know you can afford to, and that’s your thing, in which case you probably don’t need a spending strategy.) Try to match your means and the lifestyle it took you to save what you have saved for your retirement. The principal is that it is not possible to spend less than you need - start there and adjust up.
Hmm... I think I'll respectfully disagree with that one Justin. Mainly just as while I acknowledge there's more to a proposed spending structure such as this. It's often required to get away from vagaries as saying - spend what you need, but not too lavish. Which means very different things to different people. Appreciate you watching and adding to the discourse. 👍
@@PrinciplesPersonalFinance As I say, you cannot spend less than you need. You have to make a determination as to how much you need in any spending scheme. It's not really vague, it's just a little long winded - but the gist is, if I can calculate how large a pension I need now, then I can also continue to do that throughout my retirement. If I cannot then the whole thing is hopeless including any of the myriad of spending schemes that are extolled over UA-cam.
😂 Fair enough! It is - while most people see retirement income planning as this flat 'we spend £35k for the rest of our life and that's what it is; there is another level which can be very useful to manage the sustainability of income, which is adaptive spending!
Now I feel mean about my comment! 😂 I set myself a level at which I cream off any tax free entitlement I have left. I.e. I still have around £140k tax free cash and when the portfolio hits £950k, I take out around £30k and crystallise the rest in a growth drawdown portfolio. I also take out £1000 per month from the drawdown wrapper, to take advantage of my personal tax allowance. I am also lucky to have a few years cash available for my monthly income. Yes inflation will erode some of my savings/income but I guess it’s what you spend it on as to the extent it hits your cash.
Amazing - I’m 34 and this is super helpful !
Couple of points, 1) if you have a balanced portfolio part should be in cash, cash does not crash, so make sure you have 3 to 5 years cash, if the market rises top up your cash, if it falls don't top up your cash, or put another way only drawdown from stocks when they are high and leave them to recover when they are low. Point 2) I don't want to have loads of money when I'm 85 in a home dribbling in the corner trying to remember my own name. I want to spend highly (holidays etc) when I'm younger and can actually travel, so I'd burn down quicker at the front end and then go subsistence when my spending needs reduce anyway. Just a couple of thoughts for you. Just my view anyway. Thanks.
Hi Andrew, thanks for watching and taking the time to comment.
A few initial thoughts.
1) I agree, however many have multi-asset funds which have cash-like holdings but you can't segment them. So it's about portfolio construction here. As you highlight, might not be necessary but does depend on how you hold your assets.
2) Couldn't agree more, that is part of good planning. Who wants more money at 90!?
Yep. I like that. I’m 54 this summer and will be starting drawdown in a little over a year. This really helps
Great stuff, thanks for watching!
Enjoying the content! Cheers!
Thanks Stan, appreciate you watching. Cheers for taking the time to comment! 👍
Thanks! This is some great information. This should really be covered by pension company presentations when we sign up for a pension. Then it's more likely that people would understand what they should be contributing for a certain level of probable income come retirement day. Or at least, better understand the compromises being made at the time.
Thanks for watching and the support! 🙌
Yes, I agree, more should be done to help inform people on this.
Food for thought! Great video…
Thank you! Cheers for watching and the support. Much appreciated 🙏
Good video. Thank you.
Thanks Carl, appreciate you watching and taking the time to comment. 🙏
You should have mentioned Michael Kitces who speaks of the bowling alley bumper rail like spending strategy
Yes, his work has been a big influence!
This was so valuable to me in my retirement. Many many thanks 👍
I am really looking forward to hearing more bout this... off to check your later Vlogs - Ta.
Great stuff! Thank you for watching and your support! 🙌
I'll just assume I'll never be able to retire! That way I'm not disappointed!
😂that is one strategy for sure!!! Thanks for watching 🙌
Thanks for the video.
Have you come across the book "It's all about the income" by Michael Lynch. He basically advocates a "two bucket strategy".
Bucket 1 the first few years expected expenditure held in cash (how many years varies from retiree to retiree - but not intended to be many years).
Bucket 2 The growth portfolio (eg &0% shares and 30% bonds).
He says if bucket 2 has gone up in the previous year und your next year out of bucket 2; but if Bucket 2 has gone down, then fund your next year out of bucket 1.
As far as I can remember if bucket 1 runs out, it doesn't get topped up from bucket 1.
He acknowledges that he extra cash will cause a drag on the overall portfolio.
What do you think of this approach? (in broad terms)
Great video mate!
Thanks Dean, appreciate you watching!
...but there is no cash buffer in the modelling. Do you have any videos, or is there any cash flow modelling tool that actually implements an optimum 3 bucket strategy for example whereby the crashes are ridden out by spending down cash and then the long term stocks bucket is used optimally to top up the cash bucket (and maybe the medium term bucket if you are using the 3 bucket strategy?)
Of course this adaptive strategy is only viable if you have enough discretionary spending in your retirement budget to be able to make potentially significant cuts. I like it, though, and I think its a far more realistic model. A major problem is that more often that not experience financial shocks when we can least afford them rather than when we can most afford them.
Yes, absolutely. I feel it works in combination with a safety-first approach where a base line is secured.
Next week's video is on this!
Thanks for watching 👍
Great simulation
Thank you! Appreciate you watching 🙌
Another great video.
Thanks very much James, appreciate you watching and taking the time to comment! 🙌
Many thanks for that explanation. Whilst the numbers stack up, they don't take inflation into account. With this, I'm thinking that the lower withdrawals mean that the money doesn't run out, but they cover expenses with a higher cost of living? If you consider you need £40k to live with, will £25k a few years later allow you a decent living? I suppose part of the answer is how much of the initial £40k was necessary and how much was discretionary...
It kinda of
makes sense. A question for you. Could you do a video on income in a bit more detail, meaning add the OAP pension and spending habits when you get older, say 75, as we all know people spend less when they get older, I've worked my retirement on a 2.4% return with 25% taken out and looks good at this point earning interest with it on savings and helping retirement. Also add some savings options and returns to the income as that will also have an impact on the outcome of yearly earnings. Hope this is not too much to ask for. Understand it's a bit of a guessing game - so many calculators out there that confuses the best of us - own excel sheet helps me, great video and thanks, Nick
Hi Nick, thanks for watching and leaving a comment. Yes, I'll have a look at coming back to this in a bit more depth in a future video with things that most people will want to consider like State Pensions and potentially spending more in the earlier years of retirement.
Great vid mate. I'm never going to retire, fixed it :P
Cheers mate! Thanks for watching, I need to catch up on your videos. You've been smashing the content for months now. Respect how prolific you are with it. I know that level of consistency is not easy and great to see your getting the traction you deserve! 🙌🙌
Excellent video. One observation.. if you plan to use a guard rail strategy for withdrawals, you need to plan to over save to allow lower withdrawals at certain times. However this somehow defeats the point of needing a guard rail ☹️
That’s a really interesting point (took me a while going back and forth thinking about it!)
How I would reframe it is, there are a few levers that can be pulled for making sure anyone doesn’t run out of money. Anything around the 4% rule is based around a ‘capital target’ if you are intending to use an investment-based strategy in retirement. A sort of rule of thumb for how much you should have saved.
Guardrails reframe this as a way to pull one of the levers if things don’t go well. So we’re pulling on of the others levers which is expenditure and adapting that in line with the markets. For most, they have a minimum amount which they can cut back to, then their average ‘would like to spend’ amount, then a ‘ideally I’d spend.’
So, I would look it as - if we’re depending on the markets, we have reasonable assumptions but we don’t truly know what the market will give us. Guardrails allow us to put a structure in place so you won’t run out of money and however good or bad, we know what we can likely spend.
The challenge with focusing purely on a capital target Is the answer to - ‘how much is enough’ could always potentially be more or, it depends. So it’s very tricky to know when to take the leap to retire. This allows us to be a structure in real time.
Thanks very much for watching and leaving such an insightful comment. It’s an excellent one! 🙌
The problem I have with financial advisors the figures they use, is this gross or net because we should know tax has to be payed.
Hi, thanks for watching. For the purposes of this video. It is a high-level illustration of the concept of how adaptive spending works. It's not intended to give a full overview of personal taxation in retirement. There was no need to make the video extremely difficult to follow by adding that layer of complexity on the assumptions to explain the context.
As far as when advising clients ALL clients are ALWAYS advised on their net position, with taxation calculations done specifically so they know where they stand. All good advice will always be done illustrating the net position. Frankly, that's one of the big ways we as advisers show our value when comparing strategies.
I liked this video
Thanks Oliver, appreciate you watching 👍
I think it’s overly complex and in this scenario clearly doesn’t match typical retirement spending needs, which are generally front-loaded. I have a better suggestion, try to spend only what you need to live life well but not lavishly. (Unless you know you can afford to, and that’s your thing, in which case you probably don’t need a spending strategy.) Try to match your means and the lifestyle it took you to save what you have saved for your retirement. The principal is that it is not possible to spend less than you need - start there and adjust up.
Hmm... I think I'll respectfully disagree with that one Justin. Mainly just as while I acknowledge there's more to a proposed spending structure such as this. It's often required to get away from vagaries as saying - spend what you need, but not too lavish. Which means very different things to different people.
Appreciate you watching and adding to the discourse. 👍
@@PrinciplesPersonalFinance As I say, you cannot spend less than you need. You have to make a determination as to how much you need in any spending scheme. It's not really vague, it's just a little long winded - but the gist is, if I can calculate how large a pension I need now, then I can also continue to do that throughout my retirement. If I cannot then the whole thing is hopeless including any of the myriad of spending schemes that are extolled over UA-cam.
Made me think I would never do that or be bothered to do that correctly myself. Was that the point? 😉 reasonable argument if so.
😂😂 not intentionally but can't complain at the end result!!
So in summary……I have no idea what your point is! 😂
😂 Fair enough! It is - while most people see retirement income planning as this flat 'we spend £35k for the rest of our life and that's what it is; there is another level which can be very useful to manage the sustainability of income, which is adaptive spending!
Now I feel mean about my comment! 😂 I set myself a level at which I cream off any tax free entitlement I have left. I.e. I still have around £140k tax free cash and when the portfolio hits £950k, I take out around £30k and crystallise the rest in a growth drawdown portfolio. I also take out £1000 per month from the drawdown wrapper, to take advantage of my personal tax allowance. I am also lucky to have a few years cash available for my monthly income. Yes inflation will erode some of my savings/income but I guess it’s what you spend it on as to the extent it hits your cash.