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Genius! And while not the point, funny too! Thank you @TA.
Thanks for the update @TA.
In terms of factors, for NCF, you’ve ditched multifactor for SCV and Momentum, with just the one pair of factors for a rebalancing bonus, rather than several (i.e. between quality/ momentum/ size/ liquidity/ value/ low volatility).
Momentum and Value are strongly negatively correlated. Did you feel that, given that, and given also that SCV shows stronger performance than Size or Value alone, that those points made the case for having no multifactor?
On commodities, are you still preferring broad single ETF exposure (UC15) rather than decomposing into say agricultural (e.g. CF Industries Holdings, Nutrien Ltd etc), petrochemicals and energy (e.g. GXLE, the SPDR S&P U.S. Energy Select Sector UCITS ETF including midstream, refiners, oil services and E&P) and ‘industrial metals’ ETFs (which cover copper, uranium, silver, rare earths, lithium, and energy transition metals more generally)? If so, then could you possibly elaborate why? Obviously I get the simplicity point. But you could add yield with PBR.A or EC, or even CVX, XOM or BP.
It’s great stuff @TA and your work is much appreciated.
I’m in 3rd year of drawdown myself now and I’m certainly finding it more complicated than accumulation ! Our portfolio structure is simpler than NCF but it’s spread over 2 workplace pensions (split into crystallised/uncrystallised pots) , multiple fixed term cash ISA’s (nominal bond proxies), S&S ISA’s, SIPP’s not to mention 2 future DB pensions and state pensions to factor in.
I’m sure I’m not alone in this multiple pot scenario which makes asset allocation, withdrawals & tax efficiency somewhat tricky and not helped by the restricted fund options in workplace pensions. Overall , I accept it’s probably a good problem to have but still..
BTW, I still cant get my head around gold & commodities as defensive assets. Tim Hale in Smarter investing uses the word picture of whisky and water to describe growth and defensive assets and blending them both to get a balanced portfolio. I’m pretty sure gold and commodities are much more whisky than water, at least for me.
Hello,
Can you please explain how the ‘tax free ISA space’ works?
> Our sim retirees will face this decision next year. But for now they’ve got £94,515 tax-free space in the ISAs, or about 25% of the portfolio’s total value post-withdrawal.
When you say ‘tax free space’ it reads like there is a limit to their withdrawals, but maybe you mean that they have about £95k left in the ISA that they can withdraw from?
Sorry, maybe I just misread this?
Thanks for the great article which comes at a good time for me as I start to think about my retirement which may start in the next decade… (I’m 50)
@TA,
Thanks for another excellent read – both the process and the writing style! =o)
I think it’s really valuable to have this kind of worked example of how to do a good job of a fairly common situation.
Whilst I’m still a little way from retirement, I think this kind of article is helping me cement the right kind of thinking, ready for when I need it – nice one.
Regarding withdrawals from. SIPP or ISA we led to believe that in 2027+ the SIPP will face tax on death.
In our position where other income uses up the personal tax allowance, you’re going to take the tax hit on the SIPP sooner or later. I’ve taken the view that might as well take the hit now , we know the tax rates and the trend seems up rather than down ….
Great article, I wonder how the factor returns will pan out over many years ? They have not been encouraging for a very long time.
Thank you, this article is incredibly helpful. I have just retired and found this website. I am embarking on de accumulation and the points in the article and comments are great.
In this portfolio, it has happened naturally due to platform limitations, but would it be advantagous to bias safer assets to the SIPP and growth assets to the ISA, assuming they will be treated much the same for extraction in drawdown, and somehow calculating that during accumulation (lol)? Over the long term, the growth rate of the ISA will be more and so it’s more tax saved. Assuming you live to spend it, of course. I can’t imagine anyone gets all this perfectly optimum, after the fact. There are far too many animals with wagging tails (e.g. chancellors) wandering between the spinning plates. Thanks for the great continuing article!
@Hariseldon – Remember the couple are childless with no relatives other than each other. There is, effectively, no tax on death because they don’t care what happens to the money after death (other than transferring all to surviving spouse after first passes – how do ISA and SIPP transfer, from a tax perspective?). It’s the most unrealistic assumption about this scenario in my book but I guess true for some. Personally, I think we should treat IHT as a tax on those left behind (the living), which it is effectively, rather than a tax on death. Only those who want high IHT call it a tax on death.
So sad it wasn’t quite at the harvest level, would have loved to have seen a harvest scenario walkthrough. I guess I’ll have to wait another year (at least).
@Brooksy – I think you make a really great point about Hale’s whisky and water metaphor which made a deep impression on me when I read his book.
Essentially I think there are two schools of diversification that DIY investors borrow from.
The 60/40 school says equities and government bonds are enough. Equities for growth, bonds for slumps and a source of dry powder. Wait long enough and both assets will beat inflation.
The All-Weather school says that’s not enough. Look at the 1970s: both assets took a simultaneous pasting. Same post-WW1 in the UK. To deal with that, you need assets that behave very differently from each other. Enter more complicated asset allocations blending equities, long duration bonds, gold, commodities, cash.
The problem with the All-Weather school is that all those assets – bar cash – are highly volatile / marmite-y. At any one time, two or three of them could be amazing while the fourth is 50% down. So it’s hard to handle and easy to just end up chasing performance.
I think the 60/40 became the default because of its simplicity, because it was easier to explain (equities powerful but tricksy, bonds safe and boring), and also because inflation wasn’t a problem when retail / DIY investing came of age. Essentially the lid is kept on inflation from the 1980s through to 2021. Meanwhile gold and commodities both suffered bear markets lasting longer than a decade so try explaining that.
What people glossed over was that longer duration bonds could be terrible too and that the default UK government bond fund was chock full of them. Then 2022.
Anyway, I’m going on too long. I think you’re right to point out that gold and commodities can be truly awful and that’s a good reason to decide not to own them.
@ Simon B – Sorry, by “£94,515 tax-free space in the ISAs” I was just referring to the current value of the ISAs.
In terms of tax planning, I like to think of it as unrestricted tax-free space. As in, you could take it all out tomorrow and not receive a letter from HMRC. Whereas the SIPP grows tax-free but income is taxed on withdrawal above the personal allowance.
@Always Late – Yes, in theory, you could up the equity allocation in the ISA, especially if you decided you weren’t going to touch it for a quite a while. Obvs you’re banking on good times ahead and if you get it right the completely tax-free investment vehicle grows fastest. This seems sound to me given we’re all investing on the assumption our portfolios will rise over time.
But when I looked at the NCF scenario I decided against really leaning into this. Essentially because it seemed to me the couple would be calling on their ISAs within a few years and I couldn’t know there wouldn’t be a 10-year bear market in full swing by then.
The experience of my parents (and in-laws) has informed much of my thinking here. I think retirement is front-loaded. The first 10 to 15 years are vital. A potentially wonderful time of life. After that, health concerns come to dominate, horizons narrow, opportunities pass.
So I didn’t want to make too many bets on things going well, or on turning out OK over the long term.
@Always Late and Hariseldon – My reading of the changes to pension IHT rules was that the loophole on pensions as intergenerational tax-free gift is being closed? In the past, some people seemed to favour running down their ISAs to preserve SIPPs which could then be passed on if they died early or didn’t need the money.
It seems to me that logic still holds because ISAs are less flexible from an IHT perspective and are a liability if you hope to get social care support in the future.
Does that sound about right or am I missing something? That’s just my basic skim read at the moment. I need to look into this in more detail, so would be good to hear from anyone with more experience.
@Hariseldon – Your tax read makes complete sense to me. For example, if the NCF couple were ten years older and drawing a full State Pension each then that would basically use up the Personal Allowance. In that scenario, I think it would be a good idea to withdraw most or all of their income from the SIPP for a while now the tax-free cash has run out.
Let the ISAs run for a bit and see where they are in a few years.
@TA (article): “I still can’t quite believe how much micro-management is involved.”
Coincidentally, I am in the middle of one of the two portfolio withdrawals we do each year. Including ‘cash’, we have 6 individual funds (two equities, 3 fixed income, and gold) – with the aid of a spreadsheet it has taken me about an hour and a half (including submitting three sell orders) – so to a large extent I agree. While I am gradually decreasing the complexity of the portfolio (two funds were removed in the last year), with a target of two funds (possibly just one – a multi-asset fund) plus cash, there is still the worry that with cognitive decline the process will become too difficult (although the plan is that in most years portfolio withdrawals won’t be needed once our SP are in payment).
It might be interesting to compare how well alternatives would have done:
1) Natural yield (e.g., using income investment trusts). I’ve done some very preliminary backtesting (only one IT so far) and this approach does surprisingly well compared to a total return with variable withdrawal strategy.
2) Annuitisation. Back in 2024, a joint 100% beneficiary RPI annuity at 65yo could have been be bought with a 3.7% payout rate (4.1% for 50% beneficiary, 4.5% single life). So, using 40% of the portfolio (i.e. £200k) would have provided £7400 in the first year, £7770 in the second and £7811 in the third (using the Jan 2026 value of RPI). How much income would have then been obtained from the portfolio would have depended on the asset allocation – given the additional flooring, something approaching 100% equities might have been justifiable and would have potentially simplified the portfolio (and the withdrawal process).
With regards to ‘prime harvesting’ are you treating equities as a group in terms of whether the ‘sell to bonds’ threshold has been met or each individual fund? I think a case can be made either way.
@DH (#2). Being a pedant, can I suggest changing “Momentum and Value are strongly negatively correlated” to “Momentum and Value were strongly negatively correlated” since future correlations are unknown (I note that correlation between major assets has varied with time).
Interesting article -lots of detail-I really enjoy reading about these to me reasonably complicated portfolios and how to use them in retirement
However I aimed to constantly streamline my portfolio as I got older(now 80) and have just a few parameters now to juggle -suits me personally and probably my age
3 global index funds only for bonds and equities
Half our retirement income coming from portfolio -the other half is a Teacher’s pension plus 2 State Pensions
Portfolio was split in half between ISAs and SIPPS
Was drawing from ISAs mainly -so been living tax free off portfolio for many years
Changed IHT rules mean that SIPPs are now being used (have 3 kids who don’t need the money but I grudge giving anything to this predatory government)
I stock to a 3+% withdrawal rate-one or two withdrawals from portfolio each year-simple ( a little Asset Allocation programme inside Quicken2004 shows me what assets to sell and at the same time maintain the chosen asset allocation)-stay within the 20% tax rate
Asset Allocation currently is 36.56/57.39/6.05 -equities/bonds/cash-cash =2 years living expenses -conservative
It’s all very personal on how much saved ,income required etc etc
Seemed to have for me worked so far!
xxd09
@Alan S – Your point about cognitive decline is well made. Right now, for me, it’s an interesting challenge. For future me, perhaps not. My own strange hobbies aside, I’ve watched loved ones navigate these challenges who don’t have the slightest interest in or temperament for managing a volatile portfolio. Yet another has recently been diagnosed with dementia while otherwise having plenty of miles left on the clock.
An inflation-linked annuity is a really good option as far as I’m concerned. I very much hope these products are never pulled from the market as happened in the US.
It would be interesting to benchmark the NCF against annuitisation. I’ll try to make time to do that.
Re: Prime Harvesting – I’m treating the equities as one block but I think you’re right there’s a good case to be made for harvesting them separately. Especially when you can access risk factors with relatively low correlations to each other. Would also mean I can stop making Louise sad 🙂 I’ll have a think on that.
@Louise – To keep you going in the meantime: https://earlyretirementnow.com/2017/04/19/the-ultimate-guide-to-safe-withdrawal-rates-part-13-dynamic-stock-bond-allocation-through-prime-harvesting/
@Hariseldon – I forgot to say, it looks to me like the factors still work. Small-value has trailed the market in the US but looks good in the rest of the world. Essentially Big Tech smashed everyone over the last 10 years or so.
World momentum beat World equities even over the last 10-years because it was full of Big Tech.
These posts have the run down:
https://monevator.com/small-value/
https://monevator.com/do-the-risk-factors-beat-the-market/
Incidentally, low vol also looks good it’s just not for me. The case for small and value (as opposed to small-value) looks relatively weak.
@TA – Thanks again for this series, and I sort of use McClung on my withdrawal strategy so I get the prime harvesting stuff, one thing didn’t calculate for me, perhaps it is the grammar the context or the way it is written – or I’m just being a bit obtuse (it happens)…
“That £20,813 is the withdrawal amount per person to fund their retirement income for the next year. It amounts to a generous 5.2% withdrawal rate from a portfolio worth £399,517.”
… Is that 5.2% per person (Couple implied earlier on) – £41,626 -10.4%???
This, is in the words of the song, “twisting my melon man”
JimJim
@DH – The multi-factor ETF was always a muddy compromise.
I wanted a product that enabled me to invest across factors with low correlations to each other. I also wanted to play in the small-value space as opposed to the small cap and large-value alternatives.
That product didn’t exist. It still doesn’t but the arrival of AVSG (small-value ETF) was a game-changer for me.
I think AVSG would always have prompted me to sell FSWD (multi-factor ETF). Because FSWD’s value is large and its small not that small.
But FSWD also changed its index last year to incorporate low vol. I’ve got nothing against low vol per se. It’s just I’ve got five other asset classes taking care of business on the vol front.
So FSWD is out, AVSG is in, and the remaining question was how many ETFs do I need to adequately diversify across risk factors. To fully replace FSWD I should own a World momentum and World quality ETF. But it seemed that I could get the bulk of what I wanted from momentum alone. And simplicity has a quality all of its own.
Re: commodities. AIUI, there’s a strong rebalancing bonus to be earned from diversifying across different commodity contracts.
I’ve got no reason to think I can outperform a broad commodities ETF on that score.
Maybe I could work hard enough to acquire the knowledge. I’ve done this on the risk factor side. I know why FSWD isn’t quite the product I’m looking for.
I’ve made some progress on the commodities side. Perhaps enough to distinguish between different broad commodity ETFs. But not enough to think I could do better by selecting a hand of separates.
By better here, I don’t really mean outperform. I mean ex ante adopt a position that seems better suited to my circumstances than the most convenient alternative. Actual performance is in the lap of the gods.
Does it seem worth it to me to put energy into beating a broad commodity ETF? No. I need to draw the line somewhere and get on with the rest of my life. Commodities are only 10% of the portfolio. I want them to act as a strategic diversifier which they do. I don’t care about squeezing out every last drop of performance. I might very well shoot myself in the foot during the attempt. And it’s sunny outside.
Does that make sense? I’m interested in why you are prepared to dive so much deeper. I guess you enjoy it? I’m not sure I’m right about this but I don’t think you work in finance? So your investment knowledge is an opportunity cost to some extent?
Re: small-value. The Dimensional Global Targeted Value ETF (DPGT) is now available as an alternative to AVSG. AVSG was a bit more small-valuey than DPGT’s parent fund last time I checked. That was before the actual launch of DPGT though.
Out of interest, do you know of a liquidity risk-factor product? Vanguard closed their ETF some years ago. 60 seconds Googling hasn’t solved it for me 🙂
@JimJim – Hi! The figures are quoted per person so you gotta double everything for the pair. (I expect Brucie had a catchphrase for that).
Joint portfolio: £799,034
Joint income: £41,826 (or £41,681 once every last stray £ was accounted for)
Withdrawal rate: 5.2%
Intriguingly, they’re now approaching PCLS “comfortable retirement” territory. Last year they would have been more in the “moderate” ball park, and closer to “minimum” at the outset.
https://www.retirementlivingstandards.org.uk/
As I’m thinking this through, it’s helping me process why using a dynamic withdrawal rate is worth it. Essentially, the last-gen in my life either aren’t, or don’t look like they will, get anywhere near age 95.
SWR-based retirement rules are pessimistic. Especially because they don’t take into account spending patterns that typically decline with age.
So I’d rather front-load now and let an annuity take care of our eighties and beyond.
“twisting my melon man”
This phrase always makes me laugh. I regularly quote it to Mrs TA to this very day. She loves that 🙂
I always thought it was some cool piece of Manc slang but I’ve just looked it up. Apparently Shaun Ryder nicked it from a Steve McQueen documentary?
It was a very good read(the whole series). I’m around 8 years away from the 55 retirement goal and it is good to see a proper strategy to work on it.
Thank you for the post.
@TA #16: you’re right of course.
(At least in the aggregate) it’s not worth the effort to try and add to the performance of a broad asset class tracker. I wasn’t much interested in investing, finance or economics until 2007, when I resolved to learn something. In recent years (more in the last 5 than in the last 10) I’ve come to enjoy finding some individual names for a complimentary, active selection side sleeve to go along with the passive asset class trackers. So, that might be some individual miners and/ or O&G E&Ps for (respectively) precious metals/ commodo and commodo.
The problem for individual names is it that all has to align perfectly. The macro, the flows, the fundamentals, the market mispricing (has to be a bona fide collective misunderstanding), the ramp (not worth doing for a 10% pop), the margin of safety (do look down) and some fat divis (so you get paid to wait: i.e., logically a cash divi in a SIPP/ISA is the same economically as a buy back or a capital gain; but, by heck, psychologically it helps so much to hold a named stock pick if you actually see that you’re getting paid to turn up and wait).
The chance of all of those things lining up at once is negligible, so you always end up compromising on something. That’s nerve wracking in itself.
And then there’s the individual idiosyncratic volatility of single stocks.
Even if you win (eventually and overall), then you pay for it mentally in some measure. They live rent free in your mind.
So, I agree it’s a fools errand to try; but I’m a fool here and it is an errand 😉
Very interesting to see your thinking on FSWD and AVSG. I tend to agree.
@TA great post not sure I understood all of it though! I’m still, after 2 years of drawdown 100% invested in equities. I’m 56 and still think there’s time to accumulate and weather the roller coaster of global markets. Am I being foolish…
@TA (#14)
AFAIK, inflation linked annuities in the US had a relatively short existence – they didn’t appear to exist in 1999 (e.g., see text at bottom of page 4 in “The History of annuities in the United States”, Poterba, NBER WP6001) while in 2018 only 0.2% of quotes were for cpi adjusted annuities (page 108 of Safety First Retirement Planning, Pfau) and they were phased out shortly afterwards. With low (negative real) interest rates, the initial payment was significantly below that for a nominal annuities and (in 2018) inflation was generally under control.
In the UK, it is interesting to note that the fraction of annuities with an escalation (the data are not broken down into type of escalation – rpi or fixed percentage) has risen from 14% in 2021 to 20% in 2025. It would appear that a bout of inflation has concentrated thoughts on protecting annuity income, so hopefully the rpi/cpi version will survive (although a reduction in the issue of long maturity ILG might be a problem). Mind you the fraction of pensions pots used to purchase an annuity is still only around 9% (see Tables 1 and 14 in FCA retirement income market data, 2024/25).
@Jayne – I guess there are a few different angles here that could help you.
One is how would you feel if the market fell 50% over the next 2 years and didn’t recover for a decade?
It’s been a while since we’ve gone through a slump like that but there have been some beasts. World equities fell 51% during the Dotcom Bust and was under water for over 13 years in real terms. See: https://monevator.com/bear-market-recovery/
Instead of thinking about it in percentages, visualise the problem in pounds. Maybe try writing down the current value of your investments. Now halve it. How does the new number make you feel? Can you imagine how you would feel if it does happen? One day it will. That’s nailed on, we just don’t know when.
Another question is are you relying on those investments to live on? Or are they a “nice to have”, while your essentials are actually covered by other sources of income.
If you can live quite happily no matter what happens to the equities then you can afford to take more risk. This is my mum’s position. Her expenses are covered by pension and annuity. So she’s 100% in equities. The danger lies in her becoming too used to equities going gangbusters and the psychological boost that comes with it.
I guess my final question is, if you do need the money, then where do you draw the line? When do you know you have enough? To paraphrase William Bernstein: stop playing when you’ve won the game.
I’ve tried to grapple with the problem of derisking here:
https://monevator.com/when-to-derisk-before-retirement/
Good luck with it. The last two years have been great but…
@DH – Heh, we both had our Damascene moment around the same time. Just in time for the GFC! It sounds like an adrenaline sport for the mind for you and I’m all in favour of that 🙂
@Alan S – Cheers! That’s very reassuring.
@TA: maybe worth my mentioning that one area of portfolio construction which I anticipate both the passive and the active sides of the debate can get onboard with is where there’s no pure passive play on a desired strand to the portfolio.
So, for DM SCV, there’s AVSG (which I’ve been misremembering as AVSC, apologies for that, and I hold it too!) and DPGT.
But that leaves EM SCV.
If one wanted whole of world (DM and EM) SCV exposure then for the EM side of that there’s a EM low volatility high dividend ETF and an EM small capitalisation high dividend ETF, but no EM SCV ETF, as such.
That means having to look at country or region specific ITs with an EM small value explicit mandate or such a tilt in practice.
There’s a few of those, albeit that they’re more officially either small or value than small and value; but in practice a couple do actually do both.
There’s an argument that high dividend and / or low volatility screens for quality in EM equities and that high dividend also gives you the value tilt. High quality was arguably more important in the past in previously less regulated and more macro risk prone EM but, given the worsening state of the major DMs these days (fiscal dominance and debt, state capture/ standards of governance erosion, war as policy, populism, bad demographics), I’m no longer convinced EM is actually more risky than DM. Frankly, I’d rather now have a nearly 14% annual yield on Brazilian 10 year bonds than just over 4% in same duration US Treasuries. It’s not the old days anymore with the DM v EM risk profiles.
Thanks again @TA as I’ve said before this is such a useful series. And def don’t apologise for the detail – that’s the huge value in this – being able to see the mechanics work. Plus as others have said it’s a funny engaging read.
Anyway. I’ve set my own portfolio up now with a simple spreadsheet tracker and statement of rules. I’m with you about it being a helpful thing to intellectually engage with for now but also plan to simplify as it progresses so others can operate it should that be needed!
Thanks Andy J and to everyone who’s taken the time to encourage me to carry on in the same vein. You asked for it! 🙂
@DH – I’ll take the opposite side of your EM vs DM comment just for a laugh.
Democratic states go through regular crises. You’d struggle to name a decade when people didn’t think the country was going to the dogs. The advantage of democracies is that they are more responsive. More able to take corrective action to solve their problems.
The symptoms you identify as evidence of malaise (fiscal dominance and debt, state capture/ standards of governance erosion, war as policy, populism, bad demographics) are not new excepting bad demographics. And that’s a universal problem except in Africa.
As an investor, I think it’s more likely that I’ll earn a return in countries where the rule of law and freedom of speech have strong roots versus countries where they are easily subverted.
14% is a tempting yield but it tells you everything you need to know about the nature of the risk. I know you’re comfortable with that so I hope it works out.
To me the wild card in all of this, is whether we can get our act together to face down Russia. And I suppose the way the wind blows in the next couple of elections: US mid-terms, US presidential 2028. I don’t necessarily fear the election of the far right in UK, France and Germany – excepting the implications for Ukraine. Don’t get me wrong. I think electing right-wing populists is a terrible idea. But at least you get the chance to chuck them out again when they prove to be screw-ups. At least the first time around. It’s best not to give them a chance to get their feet under the table though.
All true in general, but I’m not sure that Brazil specifically has worse rule of law issues than the US at this point in time. It does have a lower public sector debt (76% to 92% of GDP, depending upon how it’s measured, versus 124% of GDP in the US, if I remember it right), no structural deficit, less bad underlying demographics and, like the US, has plenty of natural resources. And given the nearly 10% yield gap (at 10 year duration) over the US, you get a large margin of safety with inflation at 3.8% v 2.4% in the US.