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Decumulation: No Cat Food retirement portfolio update 2024 [Members]
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Bit puzzled about the mechanics of drawdown and the IL gilt holding. Perhaps I missed it but if you need to release cash what do you sell ? If you are holding IL to maturity do you exclude selling any of them ?
The 60/40 portfolio growth at this relatively early stage is a little worrying
My feeling -what do I know!-is that this simple ,cheap,easy to follow and understand portfolio ( ie 60/40) will continue to outperform in spite of the many interesting assets in the designer investment plan
Plain vanilla index funds held forever with no tinkering are an almost unbeatable boring format
xxd09
@ Paul_a38 – There’s no 2025 linker, so the first will mature in 2026, the next in 2027 and so on. When they mature, the cash is released into the spending pot. If cash is needed in the meantime, you can sell any part of the portfolio including the linkers. You don’t have to hold the linkers to maturity. You can sell them anytime.
@ xxdo9 – the 60/40 might continue to build on its lead. One reason you might expect this ex-ante is because over the long term you’d expect medium bonds to outperform short bonds, short linkers and gold.
But the 60/40 portfolio is weak in inflationary scenarios, so if we experience higher inflation in the years to come then I’d expect an all-weather portfolio to win.
I think there’s an issue here with viewing portfolio performance solely in terms of growth when risk is an issue too. As a retiree, I can’t just not sell when the markets are down as an accumulator can. I need to pay the bills, so I’d like the option to sell gold or commodities or linkers – which may well be doing well – when equities and conventional bonds are tanking.
Re: The comparison with 60/40 portfolio, it’s a fair enough comment in that I think there’s a decent chance the simple two-fund portfolio could outperform the No Cat Food over the next 20 years.
That doesn’t mean I think it *will* but I can’t see a great deal of reason for more confidence than a coin flip either way.
However the crucial point was just made by @TA:
This is not an accumulation portfolio — even more so where you’re adding new money.
Here volatility matters, particularly downside volatility coinciding with withdrawals — aka sequence of returns risk!
Anyway, whichever way it goes I expect some people to over-index (ba dum tish!) on the outcome.
If the 60/40 outperforms (especially if it also delivers similar volatility, perhaps because commodities flounder say) then it’ll seem like that was the best option all along.
Similarly if No Cat Food outperforms, we may get readers who are still *accumulating* wondering if they should switch from a LifeStrategy 60 or 80 into a No Cat Food clone.
But no, the idea is to build a portfolio as best you can for *your future needs*.
For example, if you have £5m and you need £50K to live on then maybe that’s 90% in VWRL and 10% in long gilts.
On the other hand, if you are 80, totally risk-averse, and have £50K to your name to supplement your state pension, there’s an extremely good argument for keeping it all in cash.
I’m putting down this comment as a marker that I fully expect to link to in the years to come! 😉
Beware hindsight bias.
We invest looking forward through a hazy windscreen, not through the rear-view mirror.
At Tescos a 400g can of Whiskas costs £1.69 whereas a Tescos own brand 400g can of Scots Broth costs £0.62. This might be important information for you in case your NCF portfolio plummets.
A couple of points as a 21 years retired investor with a 30/70 (now 35/59/6 ) where 6= living expenses cash) portfolio which has done the buisness-so far!-I have always maintained 2+ years living expenses in cash which has taken me through many severe downturns without having to sell assets (stocks and bonds) when they have hopefully temporarily collapsed!
(I use 3 index funds only-2x equity and 1 x bond)
Re the price of Scotch Broth and Whiskas-as a daily walker in many places it is a noticeable trend that young couples of “breeding “ age now are childless but always have a dog-a sign of different priorities in the current times
PS as a former abattoir veterinarian it might interest people to know that all the offal that well off /not knowing British won’t eat -kidneys livers etc go to make up cat food ( cats are obligate carnivores)and dog food -so it is in fact quite a superior product-food wise
xxd09
Excellent piece. Thank you @TA.
Sorry for an inane question here @TA, but I’ve not previously (directly) held a fixed term debt security like an index linked bond (as opposed to an ETF or an OEIC holding linkers) through to maturity.
If I were to hold such in a version of an NCF decumulation portfolio until the bonds matured would I then have to actually do anything at, just before, or just after maturity?
Or, put another way, at maturity does the par redemption value just appear in the SIPP account as cash without any action on my part?
Vaguely relatedly, it would be super useful to have a piece on the nut and bolts step by step mechanics of extracting both the 25% tax free lump sum and the 75% taxable income for each year with the minimal incidence of tax – i.e. taking steps to stop the issue some pensioners have faced with emergency tax rate coding or going into ART due to taking the taxable sum in one go and then the Revenue automatically assuming, quite wrongly, that instead of it being a once a year payment that it will be a monthly one.
In this regard too, IIRC, you were going to try and utilise the £5,000 p a. allowance for income up to £17,570 p.a. which is neither pension income nor earnt income.
With the existing BR PSA of £1,000 p.a. and dividend allowance of £500 p.a. that currently gives £18,770 p.a. which in theory could be received with incurring IT.
Would you be able to go into more detail of how you would go about that, and how it fits within the withdrawal strategy from the NCF portfolio?
Many thanks indeed 🙂
Just spotted that should be £19,070 p.a.not £18,770 p.a. Apologies.
Last comment I promise – just to clarify by ‘nuts and bolts, step by step’, I meant literally what form(s) etc do I need to send the SIPP provider and the Revenue so it doesn’t go awry (or to stop it going “a bit Pete Tong” as they used to say in my misspent early 1990s youth)?
I’ve got the overall idea of using the PA limit of £12,570 p.a. from the ‘Pension drawdown mechanics and tax efficiency’ sub section of the April Part 1 for the NCF portfolio drawdown portfolio piece.
It’s the micro minutiae and practical mechanics that I’m not so sure of now.
Sorry for (yet) another clarificatory post and much obliged for your help/thoughts.
@Delta Hedge — Since neither myself nor @TA (as I understand it) are yet in drawdown we’re not best-placed to give you watertight info of that sort, even if it was in our remit.
(I’m not sure that it is. I can see it’d be useful but it’s going to be a can of worms given people different personal tax situations, sources of income, various employers and DC and DB pension combos, etc).
That’s my first thought but maybe @TA sees it differently.
If any old hands in drawdown would like to chime in with details, please do 🙂
Thanks for the kind words on the piece!
Many thanks for a brilliant set of articles. So helpful for those of us just starting decumulation.
I’d be grateful for any thoughts on three points:
1) From previous reviews, you’re plainly enthusiastic about Michael McClung’s Living Off Your Money – which I found interesting, but dense. He has specific portfolio models, which have apparently been robustly tested, and which seem very different from the No Cat Food Portfolio. You’re of course aiming for simplicity, and he may be too US-centric, but it would be helpful to have your thoughts on (a) why No Cat Food differs from the McClung models; (b) whether one should be thinking about the McClung portfolios instead, and (c) to what extent solid evidence favours either No Cat Food or McClung.
2) I sort of understand, at a high level, what McClung says about harvesting, and what you’ve written about it in the earlier piece about withdrawal from No Cat Food. But the specifics are tricky, and not always obvious. How one approaches harvesting, and the details of the calculations, are crucial to decumulation, and just as important as portfolio construction.
Could you consider either doing a separate piece about this, setting out precise harvesting steps/calculations/ explanations in your usual, brilliantly, clear style, or deal with it in more detail in the next report (next March?) on No Cat Food? Preferably the former. This could be extremely helpful to those of us looking for relatively straightforward, and prudent, ways of calculating how much to withdraw each year.
3) The multi-factor fund in No Cat Food usefully illustrates one way to diversify, and you explained its rationale in the post on setting up the portfolio. However, looking at it again now, in the light of market / general developments, and in light of comments on this site, would you still be inclined to go for the multi-factor fund for equity diversification, or would you be thinking about other approaches? Although the time period is limited, is the multi-factor fund doing what you intended, in terms of significantly diversifying from a small number of dominant US stocks?
Apologies for a lengthy comment, but any thoughts from you – or others on the site – would be much appreciated.
Keep up the wonderful work!
@deltahedge
The mechanics of drawdown are platform dependent. I have used ii and HL it’s not a major problem but just follow the ( numerous) steps required. Drawdown is through the platform, no contact with HMRC.
Re the tax treatment just do what you need to do, if they take too much tax on one payment you can claim it back or it will correct over future drawdown payments, with the annual tax return as a last point of correction if all else fails.
I have tried taking one smaller payment first then a larger payment, hoping to avoid excessive taxation initially, with mixed results… best not to over think it ! Some admin will be required.
Re the portfolio mix, I am not too sure about the commodities and multi factor additions which McClung advocates, I suspect that each time period is different, markets adapt with knowledge of what happened before and data mining is a real danger.
For example I saw the inflation issues of 2022 coming but my efforts to get ahead of the crowd was not very successful, each time is a little different and the unexpected happens.
It will be very interesting to see how this plays out but the regular equity/bond mix has much to commend it.
Personally I am much more inclined to tinker with the bond holdings than the equity holdings presently.
@DH(7)
There was extensive discussion on how to minimise excess deduction of tax on SIPP withdrawals in the comments on this Monevator article earlier this year
https://monevator.com/pension-drawdown-rules/
For my own part I revised my own conclusions considerably during the course of the discussion.
@ Lilbucket – Noted! Also that genuinely made me LOL.
@ Delta Hedge – AFAIK, the cash on a redeemed bond should just appear in your brokerage account with out any further ado. I’m only just getting to grips with this side of things myself but I’ll note that brokers like AJ Bell, HL, and Freetrade (for Treasury bills) are working to make the plumbing as seamless as possible for individual gilts. As it is, if interest payments just turn up in your account, I don’t see why redemption payments wouldn’t either. It’s your money.
My thanks to DavidV for pointing you towards the drawdown article which ignited a superb discussion in the comments. I’d say the thread is well worth your time and you’ll find some useful links in the piece and the comments too.
Re: Starting Rate For Savings: It’s not going to be an issue as it’s only needed to cover interest payments held outside of ISA or SIPP. Right now that’s just the emergency fund which isn’t going to rake in more than the £1K personal savings allowance. Originally, the Starting Rate was also going to cover bonds held in a GIA (due to taking all tax-free cash at once) but I scrapped that plan after discovering phased drawdown – thanks to a Monevator reader, can’t remember who.
For tax purposes, you can account for the Starting Rate by filling in a self-assessment form or otherwise contacting HMRC.
@ david1203825 – I’m very glad you’re finding it useful. Writing these pieces and hearing back from Monevator readers is clarifying a lot of issues for me too.
Re: your questions:
1) IIRC McClung tested against various iterations of an equity:bond portfolio. Behind the scenes, he also tested against gold but found little evidence for or against. Gold really is the joker in the pack so would be the first asset class I’d jettison when simplifying the portfolio.
AFAIK, McClung didn’t test against commodities but I think I’m correct in saying that the best ground-breaking research covering long-term commodity returns only emerged after his book was published.
Similarly, linkers were only made available in the US in the 1990s, and in the UK from 1981, so are typically excluded from SWR studies – including McClung’s.
An equities:bond portfolio is fine in my view, especially for simplicity’s sake, but it has a clear weakness: high and unexpected inflation.
Meanwhile, there is good evidence that individual linkers and commodities are the best defence in this scenario, which is why I include them.
You could reasonably argue that McClung’s work is based on SWRs that survived inflationary episodes in the past e.g. post-WW2 and the 1970s.
But should retirees fear inflation? Yes. Therefore I’d rather hold a chunk in asset classes that can deal with a prolonged inflationary spiral – especially as equities and conventional gov bonds do not.
I’d say it’s the limitations of SWR research to date that has excluded these asset classes, rather than any sound case for excluding them.
Gold is much more of a toss up, I think. Early Retirement Now has written a post on whether gold helps a US based retirement. My memory is he was ambivalent about it but his post showed some evidence in favour of a chunky gold allocation.
2) You make a very good point about Prime Harvesting. I’ve had to rewrite McClung’s rules in my own words to make sure they’re clear in my head, so I can do something along those lines.
3) I still think that – of all the ways one could sub-divide equities – factor investing is the best evidenced. But the world has been dominated by a handful of US tech firms since factor investing ETFs came on-stream not ten years ago.
The historical record shows that any asset class can have a sub-par decade (and the rest). But equally nobody can guarantee that factor investing will continue to perform well in the future.
Ultimately, I don’t see good evidence it’s the wrong thing to do, plenty of ex-ante evidence it’s the right thing, but it’s still a risk.
@DH & TA
Yes, there’s nothing you need to do when an individual gilt matures. You’ll just get the final coupon payment and the capital appearing in your account, for you to then move or invest as you please.
I say that based on my experience with a nominal gilt. As strange as linkers are, I don’t think they differ in this respect.
@TA @DH
>My thanks to DavidV for pointing you towards the drawdown article …
I ought to give credit to Al Cam, who only today, in a separate debate we are having over on ermine’s blog, reminded me of those comments and the superb Quilter paper that was referenced among them.
Characteristically thoughtful, useful, comments in response to my queries. Many thanks – much appreciated.
@Delta Hedge. When the gilt matures the cash appears in your account. No need to do anything.
Re drawdown tax. I tried to be clever and took first payment in March thinking that would stop the month 1 business. Didn’t work, no idea why not but reclaiming was easy, just an online form.
HL and II, which I deal with, have very good online help re all things sipp.
A SIPP withdrawal this financial year which generated a tax repayment via an online P55 sent in on June 11th was finally paid into my bank account on 12th September
A letter sent August was replied to in Sept as the repayment was processed
All my paperwork was in order
Busy times at HMRC-in the good old days a month was the normal repayment period
xxd09
Just to confirm what others have said relating to direct gilt holdings:
I have had one just mature with HL and the redemption money automatically appeared in my account with no action on my part.