Retirement portfolio for UK SIPP

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Gemini1962
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Retirement portfolio for UK SIPP

Post by Gemini1962 »

I retired yesterday and need to get my UK SIPP setup ready for the time I begin to drawdown from it (probably in a year or two). I was watching this Morningstar video... https://www.youtube.com/watch?v=vvgOkbcDxbk and I quite liked the idea of their '3 bucket portfolio' for retirees. There never seems to be a lot of information about what to do when you want to start drawing from your pension and the other thing that always catches me out is when these US videos start talking about an all market fund what they actually mean is total US market only. It's a bit like the baseball 'World series' which only has US teams in it :wink:

The idea in the video is that bucket 1 contains cash for 2 years living expenses, bucket 2 holds enough money for 8 years living expenses held in bonds and bucket 3 contains the balance in stocks. The second bucket is there to draw from if bucket one is depleted and the stock market has taken a dive.

I am happy with the stocks that I currently own so don't plan on changing those but I don't really know which bonds to include in the second bucket. My SIPP is held with Fidelity so I am limited to their range of funds although they do offer quite a few Vanguard funds.

Does anybody have any suggestions as to which bond funds would be appropriate in my given circumstances? Thanks.
Valuethinker
Posts: 48954
Joined: Fri May 11, 2007 11:07 am

Re: Retirement portfolio for UK SIPP

Post by Valuethinker »

Gemini1962 wrote: Thu Jul 01, 2021 2:55 pm I retired yesterday and need to get my UK SIPP setup ready for the time I begin to drawdown from it (probably in a year or two). I was watching this Morningstar video... https://www.youtube.com/watch?v=vvgOkbcDxbk and I quite liked the idea of their '3 bucket portfolio' for retirees. There never seems to be a lot of information about what to do when you want to start drawing from your pension and the other thing that always catches me out is when these US videos start talking about an all market fund what they actually mean is total US market only. It's a bit like the baseball 'World series' which only has US teams in it :wink:
Not quite. There are also Canadian team(s).
The idea in the video is that bucket 1 contains cash for 2 years living expenses, bucket 2 holds enough money for 8 years living expenses held in bonds and bucket 3 contains the balance in stocks. The second bucket is there to draw from if bucket one is depleted and the stock market has taken a dive.

I am happy with the stocks that I currently own so don't plan on changing those but I don't really know which bonds to include in the second bucket. My SIPP is held with Fidelity so I am limited to their range of funds although they do offer quite a few Vanguard funds.

Does anybody have any suggestions as to which bond funds would be appropriate in my given circumstances? Thanks.
What you want with a bond fund is stability & diversification.

So one possibility is a UK govt bond ("gilt") index fund. The problem is the duration of the UK gilt index, hence its sensitivity to interest rates, is really long (12-13 years). A unique feature of UK govt bond markets.

So a global govt bond fund, hedged into GBP (most international bond funds are sterling hedged) would work.

Or just a global investment grade bond fund ie that includes corporate bonds. That's riskier, in a period like Mar 2020 it will diverge meaningfully from a straight govt bond fund -- credit risk surfaces at the worst times. But generally it will do the the trick.

The main problem is that you are getting negative yields right now on a lot of safe govt bonds-- the process of hedging back into sterling will reduce your fund returns to something close to the UK gilt index (so say 0.6% right now?). There's not much you can do but "Certificates of Deposit ie CDs in America/ Term Deposits/ UK bank notice accounts**(?) are viable alternatives and have the advantage of not fluctuating in capital value.

** people in the UK don't use them, and I've never figured out what the equivalent is in the UK - an omission on my part.
tubaleiter
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Re: Retirement portfolio for UK SIPP

Post by tubaleiter »

There's not much you can do but "Certificates of Deposit ie CDs in America/ Term Deposits/ UK bank notice accounts**(?) are viable alternatives and have the advantage of not fluctuating in capital value.

** people in the UK don't use them, and I've never figured out what the equivalent is in the UK - an omission on my part.
"Fixed rate" account or "Fixed rate bond" (which is confusing, because it's not "really" a bond). Works the same as a US certificate of deposit, although rates are pretty abysmal there, too - I see 1.06% for 1 year, 1.15% for 2 year, 1.3% for 3 year, 1.6% for 5 year, as compared to 0.5% for "instant access" (normal savings account) or 1% prize rate for Premium Bonds (also not really bonds...)
steveyg50
Posts: 103
Joined: Tue Jul 09, 2019 6:35 pm

Re: Retirement portfolio for UK SIPP

Post by steveyg50 »

I'm not sure the Bucket Approach is what you want really.

There's a fair bit on the wiki about the Bucket idea and fair bit of discussion, for example -

viewtopic.php?t=266896

If you Google -
The Bucket Approach for Retirement: A Suboptimal Behavioral Trick?

You will find a pdf copy of the paper they were discussing.

Seems from initial look though - the main argument against the 'buckets' was that people were not rebalancing from bucket 2 (bonds) into bucket 3 (equity), when the market was down, which surely you could easily be doing.

But if you are rebalancing your buckets then it says the performance of your portfolio is only the same as a static asset allocation, so is no better or no easier to implement.

Worth reading that paper I think but I haven't read it all myself yet to be honest, I haven't figured this out myself yet, only just started thinking about it, maybe the smarter folks can comment hopefully....
Topic Author
Gemini1962
Posts: 173
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Location: UK

Re: Retirement portfolio for UK SIPP

Post by Gemini1962 »

Thanks for the replies, food for thought.

I would be interested to know what other UK investors have done with their SIPP when they retire. The accumulation phase is easy but I find the retirement bit more complicated and harder as I know virtually nothing about bonds.
seajay
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Re: Retirement portfolio for UK SIPP

Post by seajay »

'Bonds' with negative real yields - unattractive. A Permanent Portfolio as a "bond" historically worked well, but given low yields a PP variation to hold IGLS instead of a short and long dated barbell. 25% VUKE, 25% SGLN or PHGP, 50% IGLS

How much bonds, well I track Robert Lichello's AIM against stocks (S&P500) and that recently is suggesting 62% reserves (bonds).

So 38% into CSP1 (US stock/S&P500), 62% into PP as above.

Spend bonds first. I like the SWR approach, 4% of initial portfolio value drawn at the start, then uplift that £ amount by inflation as the amount drawn in subsequent years. Rather than yearly however as I have a ii account with a free monthly trade I draw monthly. Login a few days prior to end of month, sell down whatever asset is most above its target weighting, and T+3 (end of month) login and transfer the funds to my regular spending account. Don't bother with rebalancing, directed withdrawals will in part do that automatically, unless of course you feel it appropriate to rebalance if/when the individual asset weightings had drifted too far for comfort.

Ignore capital valuations, at times they may be down a lot, treat it as a annuity with the intended goal of providing a regular inflation adjusted income and the potential to leave a inheritance for heirs.

More usually if bonds were paying positive real yields a initial 38/62 stock/bond holding that over time, spent the bonds and transitioned to a all-stock holding = 69/31 average constant weighted stock/bond type position/allocation. Near-as 70/30 which is aggressive enough, whilst the structure of starting with just 38% stock reduces early years sequence of returns risk. If you look at the broad reward from such using US data for ease of access and historically it compared to all-stock.

At other times the Lichello indicated value was 100% stock such as in early 1980's, at other times it was less than 30% such as in 1999. Recent 38% is indicative of relatively high stock valuations.
Topic Author
Gemini1962
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Location: UK

Re: Retirement portfolio for UK SIPP

Post by Gemini1962 »

There seem to be so many different types of bonds I'm struggling to get my head round it all to be honest. Firstly I don't really get the idea of bonds if I'm honest. From my very limited understanding bonds tend to do the opposite of stocks so if the stock market goes up 75% of the time (on average) then bonds will go down 75% of the time. Why do I want to hold something that's likely to go down in value? Looking back at previous recessions bonds went down just like stocks, just not as much.

I hold my SIPP with Fidelity and tend to go for Vanguard funds when I can but their bond offerings leaves me bemused. They have...
Government bonds
Investment grade bonds
Global bonds
Global corporate bonds
Global credit bonds
Global short term bonds
Global short term corporate bonds
Japanse government bonds
UK government bonds
UK investment grade bonds
UK short term investment grade bonds
US government bonds

How on earth am I meant to decide what I should get out of that lot?
xxd091
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Re: Retirement portfolio for UK SIPP

Post by xxd091 »

Aged 75- retired 18 years
30/65/5 -equities/bonds/cash (5% cash equals 2 years living expenses)
A global equities index tracker and a global bond index tracker hedged to the Pound only
Take 3%+ pa by selling required units from equities or bonds or both maintaining Asset Allocation
Do a withdrawal once a year
Personally I took the 25% tax free cash all at once and lived on it for some years letting SIPP alone to grow
By the time I came to withdraw again the SIPP was at its previous levels!
A simple cheap and easy to understand system
xxd09
Valuethinker
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Re: Retirement portfolio for UK SIPP

Post by Valuethinker »

Gemini1962 wrote: Sat Jul 03, 2021 12:14 pm There seem to be so many different types of bonds I'm struggling to get my head round it all to be honest. Firstly I don't really get the idea of bonds if I'm honest. From my very limited understanding bonds tend to do the opposite of stocks so if the stock market goes up 75% of the time (on average) then bonds will go down 75% of the time
Not at all. Bonds pay low and more stable returns. In the long run, the return of a bond fund is about the average Yield To Maturity of the bonds in the fund.

Unfortunately, due to Central Bank intervention (Quantitative Easing), many government bonds have negative yields.

Since 1981 bond holders have also benefited from a fairly steady fall in interest rates (from over 20% then to almost negative now). A fall in interest rates means an increase in bond prices, due to the future coupons (the fixed payments) being worth more in present value terms. That's been an absolutely wonderful tailwind for bonds, and it's not likely/ possible to re occur from here.

So you find that when interest rates are cut, or economic growth is less than the market expected, bonds tend to do well. On the other hand if inflation is higher than expected then there is an expectation of earlier rises in interest rates set by the central banks, and so bonds do poorly.

They also do relatively well in stock market crashes - government bonds, that is. Corporate bonds follow stocks down in bear markets, but with less intensity.

In terms of a portfolio, bonds offer safety. In bear markets, as stocks go down, there is a rebalancing required into stocks - and bonds have provided the stable near cash equivalents to do so.

The problem right now is some bank accounts and band term deposit products offer better yields than safe govt bonds (gilts).
. Why do I want to hold something that's likely to go down in value? Looking back at previous recessions bonds went down just like stocks, just not as much.
A big exception. Not as much. As a rule of thumb here, and it's only that, it has been suggested that one should always see one's stocks as something that can go down 50% - on a major war, on a financial crisis, on an epidemic, even. And they may take years to regain previous heights.

By contrast, safe govt bond funds might yield a return of -10%.

So in an environment where your stocks are going down -30-50%, bonds only going down by 10% does not look half bad.

And so you will then rebalance into stocks at successively low prices.
I hold my SIPP with Fidelity and tend to go for Vanguard funds when I can but their bond offerings leaves me bemused. They have...
Government bonds
Investment grade bonds
Global bonds
Global corporate bonds
Global credit bonds
Global short term bonds
Global short term corporate bonds
Japanse government bonds
UK government bonds
UK investment grade bonds
UK short term investment grade bonds
US government bonds

How on earth am I meant to decide what I should get out of that lot?
The more corporate bonds a fund has, the more equity risk, the greater correlation with equity markets. You normally want to avoid that - for portfolio diversification reasons.

The global bonds fund, hedged into GBP (most bond funds are currency hedged, most stock funds are not), would do.

Normally I would recommend the UK government bonds fund, but yields are so low that it seems better to diversify.

I also would normally advocate a substantial holding in inflation linked bonds, up to half of your total fixed income (cash, bonds, inflation linked bonds) allocation. However the yields on UK Index Linked Gilts are so appalling right now, that I don't recommend it.
Topic Author
Gemini1962
Posts: 173
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Location: UK

Re: Retirement portfolio for UK SIPP

Post by Gemini1962 »

Valuethinker wrote: Sun Jul 04, 2021 6:30 am Not at all. Bonds pay low and more stable returns. In the long run, the return of a bond fund is about the average Yield To Maturity of the bonds in the fund.
Unfortunately, due to Central Bank intervention (Quantitative Easing), many government bonds have negative yields.
Since 1981 bond holders have also benefited from a fairly steady fall in interest rates (from over 20% then to almost negative now). A fall in interest rates means an increase in bond prices, due to the future coupons (the fixed payments) being worth more in present value terms. That's been an absolutely wonderful tailwind for bonds, and it's not likely/ possible to re occur from here.
So you find that when interest rates are cut, or economic growth is less than the market expected, bonds tend to do well. On the other hand if inflation is higher than expected then there is an expectation of earlier rises in interest rates set by the central banks, and so bonds do poorly.
They also do relatively well in stock market crashes - government bonds, that is. Corporate bonds follow stocks down in bear markets, but with less intensity.
In terms of a portfolio, bonds offer safety. In bear markets, as stocks go down, there is a rebalancing required into stocks - and bonds have provided the stable near cash equivalents to do so.
The problem right now is some bank accounts and band term deposit products offer better yields than safe govt bonds (gilts).
A big exception. Not as much. As a rule of thumb here, and it's only that, it has been suggested that one should always see one's stocks as something that can go down 50% - on a major war, on a financial crisis, on an epidemic, even. And they may take years to regain previous heights.
By contrast, safe govt bond funds might yield a return of -10%.
So in an environment where your stocks are going down -30-50%, bonds only going down by 10% does not look half bad.
And so you will then rebalance into stocks at successively low prices.
The more corporate bonds a fund has, the more equity risk, the greater correlation with equity markets. You normally want to avoid that - for portfolio diversification reasons.
The global bonds fund, hedged into GBP (most bond funds are currency hedged, most stock funds are not), would do.
Normally I would recommend the UK government bonds fund, but yields are so low that it seems better to diversify.
I also would normally advocate a substantial holding in inflation linked bonds, up to half of your total fixed income (cash, bonds, inflation linked bonds) allocation. However the yields on UK Index Linked Gilts are so appalling right now, that I don't recommend it.
Thanks for taking the time to reply. That helps a lot :)
Would you say this fund would fit the bill... https://www.fidelity.co.uk/factsheet-da ... /portfolio
It looks as though it's a global bond fund which is GBP hedged and contains over 14,000 separate bonds. Could that be used as just a single fund to keep it simple?

I haven't got a very large pot in comparison to some of the posts I see here because when I was younger you had no choice but to buy an annuity and I didn't like the idea of giving an insurance company all my savings to then die the year after (as happened to my father-in-law). So I plowed all my money into my house with the view to downsizing when I retired but now I've got there my wife doesn't want to move hahaha So I am going to be dependent on what I've got in my SIPP and can't afford to lose it but I found the accumulation phase much easier to understand than the de-accumulation phase.
xxd091 wrote: Sat Jul 03, 2021 5:46 pm Aged 75- retired 18 years
30/65/5 -equities/bonds/cash (5% cash equals 2 years living expenses)
A global equities index tracker and a global bond index tracker hedged to the Pound only
Take 3%+ pa by selling required units from equities or bonds or both maintaining Asset Allocation
Do a withdrawal once a year
Personally I took the 25% tax free cash all at once and lived on it for some years letting SIPP alone to grow
By the time I came to withdraw again the SIPP was at its previous levels!
A simple cheap and easy to understand system
xxd09
I had thought about taking the 25% tax free and living off it but the other side is that if I just take 25% tax free as I go along then over the next 30 years (fingers crossed I live that long) I will do better because the portfolio will hopefully grow. So in effect I'll be taking 25% of a bigger number if you see what I mean?
xxd091
Posts: 492
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Location: UK

Re: Retirement portfolio for UK SIPP

Post by xxd091 »

I think you could be right doing the tax free withdrawals in a partial manner
It is more complicated to manage
Relies on HMRC refunding you timeously on your R55 forms for overpayment of tax
You might have paid more tax at the end of the exercise
Living off the tax free sum means paying no tax for years -tax being a major cost
Personal choice
xxd09
steveyg50
Posts: 103
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Re: Retirement portfolio for UK SIPP

Post by steveyg50 »

https://occaminvesting.co.uk/the-best-v ... investors/

This article may be right up your street, it explains bond funds in an easily digestable way for non experts like me and you.

This Occam guy is effectively a boglehead and I don't believe there's anything much in this article which would be disputed by many.

He is saying government Bond funds have better crash protection than corporate but slightly lower returns. He thinks instead of having just UK government bonds (gilts) have a global government bond fund instead for more diversity (ishares have one, Vanguard don't). I believe this is essentially the Boglehead philosophy.

He prefers the ishares global government bond fund but thinks the Vanguard global Aggregate bond fund you listed or the ishares equivalent (which are approx 60% government and 40% corporate) are decent substitutes, probably little different in performance.

So yes, best of my knowledge the vanguard bond fund you listed is viable option for your only bond fund. Its what I'm using in Vanguard account. Since you aren't using Vanguard you could consider the ishares global government Bond fund instead? Probably then add index linked gilt as you get older. Some people may think you should have some gilts as well as a global bond fund, and some people seem to prefer just gilt rather than global government bonds. Some people want some corporate bonds, some think that's a bad idea. But I don't think you will go far wrong with the Vanguard global bond fund personally.

https://www.vanguardinvestor.co.uk/arti ... ement-fund

If you look towards bottom of this link you will see a 'glide path' diagram showing mix of bond funds used in Vanguard target retirement fund. They do have a fair amount of gilt (switching to fairly large amount of index linked gilt as getting older) but for simplicity I think we are OK for now with just the global Aggregate bond fund, and probably later as aging add some index linked gilt.

Another question... Your SIPP is Fidelity? I think the fee is 0.35% (not sure if it is capped?).
Vanguard platform is 0.15%.

Is it worth transferring over your SIPP to Vanguard?
Topic Author
Gemini1962
Posts: 173
Joined: Sun Jan 26, 2020 4:22 am
Location: UK

Re: Retirement portfolio for UK SIPP

Post by Gemini1962 »

steveyg50 wrote: Mon Jul 05, 2021 3:50 pm https://occaminvesting.co.uk/the-best-v ... investors/

This article may be right up your street, it explains bond funds in an easily digestable way for non experts like me and you.

This Occam guy is effectively a boglehead and I don't believe there's anything much in this article which would be disputed by many.

He is saying government Bond funds have better crash protection than corporate but slightly lower returns. He thinks instead of having just UK government bonds (gilts) have a global government bond fund instead for more diversity (ishares have one, Vanguard don't). I believe this is essentially the Boglehead philosophy.

He prefers the ishares global government bond fund but thinks the Vanguard global Aggregate bond fund you listed or the ishares equivalent (which are approx 60% government and 40% corporate) are decent substitutes, probably little different in performance.

So yes, best of my knowledge the vanguard bond fund you listed is viable option for your only bond fund. Its what I'm using in Vanguard account. Since you aren't using Vanguard you could consider the ishares global government Bond fund instead? Probably then add index linked gilt as you get older. Some people may think you should have some gilts as well as a global bond fund, and some people seem to prefer just gilt rather than global government bonds. Some people want some corporate bonds, some think that's a bad idea. But I don't think you will go far wrong with the Vanguard global bond fund personally.

https://www.vanguardinvestor.co.uk/arti ... ement-fund

If you look towards bottom of this link you will see a 'glide path' diagram showing mix of bond funds used in Vanguard target retirement fund. They do have a fair amount of gilt (switching to fairly large amount of index linked gilt as getting older) but for simplicity I think we are OK for now with just the global Aggregate bond fund, and probably later as aging add some index linked gilt.

Another question... Your SIPP is Fidelity? I think the fee is 0.35% (not sure if it is capped?).
Vanguard platform is 0.15%.

Is it worth transferring over your SIPP to Vanguard?
Thanks for the reply/info. I need to spend the time and read those articles, so a bit of homework!
In answer to why I don't go with Vanguard - I do have one non-Vanguard fund (Tech fund) which I would like to keep and I pay 0.2% fees as I get reduced fees and so do my kids as well, which helps them a bit.
If I could kick the single non-Vanguard fund then I would switch to Vanguard and move my kids as well but until such time I will stick with Fidelity.
steveyg50
Posts: 103
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Re: Retirement portfolio for UK SIPP

Post by steveyg50 »

Ah, for some reason I thought your Fidelity SIPP was smaller than it is.

I still have about 20% of my equity in active funds and they are with Fidelity at the higher fee.
Topic Author
Gemini1962
Posts: 173
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Location: UK

Re: Retirement portfolio for UK SIPP

Post by Gemini1962 »

steveyg50 wrote: Tue Jul 06, 2021 7:08 pm Ah, for some reason I thought your Fidelity SIPP was smaller than it is.

I still have about 20% of my equity in active funds and they are with Fidelity at the higher fee.
If you hold ETFs with Fidelity they cap the charges for those at £45/year so I have two of those both of which are Vanguard ones (VUSA & VEVE). Then I have a tech index fund which is run by L&G... https://www.fidelity.co.uk/factsheet-da ... statistics and I really like this fund so I can't give it up and become a true believer although I only have about 15% in this fund. I also have 1/3 in VUSA which is an S&P500 index tracker which again is not the path of a true Boglehead but until the global index funds start to beat it I am sticking with it. So far this year VUSA is up 15.64% and VEVE is up 12.08%.

Fidelity don't charge to hold cash in your account either and with 2 ETFs at £45/year each my charges are actually less than Vanguard.

I have moved some more of my equities into cash this morning so I have enough in cash for 7 years of living expenses which will be enough to get me to the point where I receive my state pension. I realise the cash won't keep up with inflation but it also won't go down either.

I will continue to research bonds but I actually think I prefer holding cash. I watched this last night which was interesting... https://www.youtube.com/watch?v=c13O6Amn1lQ and his advice was to hold 30% in cash. I'm at about 25% at the moment.
Valuethinker
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Re: Retirement portfolio for UK SIPP

Post by Valuethinker »

Gemini1962 wrote: Wed Jul 07, 2021 5:01 am
steveyg50 wrote: Tue Jul 06, 2021 7:08 pm Ah, for some reason I thought your Fidelity SIPP was smaller than it is.

I still have about 20% of my equity in active funds and they are with Fidelity at the higher fee.
If you hold ETFs with Fidelity they cap the charges for those at £45/year so I have two of those both of which are Vanguard ones (VUSA & VEVE). Then I have a tech index fund which is run by L&G... https://www.fidelity.co.uk/factsheet-da ... statistics and I really like this fund so I can't give it up and become a true believer although I only have about 15% in this fund. I also have 1/3 in VUSA which is an S&P500 index tracker which again is not the path of a true Boglehead but until the global index funds start to beat it I am sticking with it. So far this year VUSA is up 15.64% and VEVE is up 12.08%.

Fidelity don't charge to hold cash in your account either and with 2 ETFs at £45/year each my charges are actually less than Vanguard.

I have moved some more of my equities into cash this morning so I have enough in cash for 7 years of living expenses which will be enough to get me to the point where I receive my state pension. I realise the cash won't keep up with inflation but it also won't go down either.

I will continue to research bonds but I actually think I prefer holding cash. I watched this last night which was interesting... https://www.youtube.com/watch?v=c13O6Amn1lQ and his advice was to hold 30% in cash. I'm at about 25% at the moment.
The Yield Curve plots the years to maturity (x axis) v the yield (Y axis) of bonds of different maturities.

What you observe from the yield curve in *normal* circumstances is that if you are in cash (less than 1 year to maturity) you are typically giving up 1-2% pa of returns each year vs holding say the index average (7 years, say; for UK gilts though it is more like 13 years - thus UK gilt funds are much more sensitive to interest rate changes as measured by "modified duration" or "duration" on a bond fund).

Compound that over 10 or 20 or 30 years and it's a big chunk of change.

That's why we way here that one should generally keep cash *above emergency expenses of anywhere from 6 months to 3 years, depending on personal circumstances and other sources of income* to a bare minimum.

However these are not normal times. UK cash, with duration 0 years, earns 0-1% pa, say. UK govt bonds with years to maturity of 10 years (and duration of 7-8 say) yield 0.6% last I looked.

So at the moment the yield curve is not really "normal upward sloping" (at least for retail investors). You only really lose out if interest rates fall even further (which has always seemed very hard to imagine for the last 10 years, and then they have proceeded to fall further).

In the long run, we'd all like to hold lots of inflation linked gilts (TIPS to Americans). But right now the UK versions of that pay -2.5% yield - a guaranteed loss of 2.5% of purchasing power every year to maturity (if inflation is as the market expects). That seems really poor value.
steveyg50
Posts: 103
Joined: Tue Jul 09, 2019 6:35 pm

Re: Retirement portfolio for UK SIPP

Post by steveyg50 »

I have the L&g tech index fund too, and I have been very happy with it!

I only have a relatively small amount though and (although an index) it's in the part of my portfolio I class as 'active'. You seem to have rather a lot. 'only 15%' seems a lot to me.

Since the US index is heavily dependant on tech, have you a bit of a double-whammy here?

I don't think all that many will criticise having cash instead of bonds in the current climate, I am also, but things will change and then I will be buying vanguard global bond index again (or ishares global government or both).
Topic Author
Gemini1962
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Location: UK

Re: Retirement portfolio for UK SIPP

Post by Gemini1962 »

Valuethinker wrote: Wed Jul 07, 2021 8:11 am The Yield Curve plots the years to maturity (x axis) v the yield (Y axis) of bonds of different maturities.

What you observe from the yield curve in *normal* circumstances is that if you are in cash (less than 1 year to maturity) you are typically giving up 1-2% pa of returns each year vs holding say the index average (7 years, say; for UK gilts though it is more like 13 years - thus UK gilt funds are much more sensitive to interest rate changes as measured by "modified duration" or "duration" on a bond fund).

Compound that over 10 or 20 or 30 years and it's a big chunk of change.

That's why we way here that one should generally keep cash *above emergency expenses of anywhere from 6 months to 3 years, depending on personal circumstances and other sources of income* to a bare minimum.

However these are not normal times. UK cash, with duration 0 years, earns 0-1% pa, say. UK govt bonds with years to maturity of 10 years (and duration of 7-8 say) yield 0.6% last I looked.

So at the moment the yield curve is not really "normal upward sloping" (at least for retail investors). You only really lose out if interest rates fall even further (which has always seemed very hard to imagine for the last 10 years, and then they have proceeded to fall further).

In the long run, we'd all like to hold lots of inflation linked gilts (TIPS to Americans). But right now the UK versions of that pay -2.5% yield - a guaranteed loss of 2.5% of purchasing power every year to maturity (if inflation is as the market expects). That seems really poor value.
Thanks for the reply. I do find the whole bond thing very confusing and because I don't fully understand it I'm going to stay in cash as I don't feel comfortable investing in something I know I don't really understand. I will try to learn more about them though.
steveyg50 wrote: Wed Jul 07, 2021 12:43 pm I have the L&g tech index fund too, and I have been very happy with it!

I only have a relatively small amount though and (although an index) it's in the part of my portfolio I class as 'active'. You seem to have rather a lot. 'only 15%' seems a lot to me.

Since the US index is heavily dependant on tech, have you a bit of a double-whammy here?

I don't think all that many will criticise having cash instead of bonds in the current climate, I am also, but things will change and then I will be buying vanguard global bond index again (or ishares global government or both).
I did have 20% in the tech fund until recently when I decided to scale it back a bit. In 2019 that fund returned 39% and then in 2020 it returned 38%. Year to date it's up 17% so I find it very difficult to give it up, which is why I don't class myself as a true Boglehead, but I'm trying :? As a true Boglehead I would transfer everything into a single global index fund but until one of them beats the S&P500 I'm staying with my main allocation to the S&P500. At present I'm...
35% Vanguard S&P500 index fund
25% Vanguard global index fund (developed only no emerging markets)
15% L&G Tech fund (sort of an index fund but actively managed)
25% cash

I'm personally not a fan of emerging markets as they seem very volatile. The two Vanguard global funds, one with emerging markets (VWRL) and one without (VEVE), show that the one without EM has done better to date. When that changes I might start to look at EM but until then I'd rather leave them alone.
Valuethinker
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Re: Retirement portfolio for UK SIPP

Post by Valuethinker »

Gemini1962 wrote: Thu Jul 08, 2021 4:33 am
Valuethinker wrote: Wed Jul 07, 2021 8:11 am The Yield Curve plots the years to maturity (x axis) v the yield (Y axis) of bonds of different maturities.

What you observe from the yield curve in *normal* circumstances is that if you are in cash (less than 1 year to maturity) you are typically giving up 1-2% pa of returns each year vs holding say the index average (7 years, say; for UK gilts though it is more like 13 years - thus UK gilt funds are much more sensitive to interest rate changes as measured by "modified duration" or "duration" on a bond fund).

Compound that over 10 or 20 or 30 years and it's a big chunk of change.

That's why we way here that one should generally keep cash *above emergency expenses of anywhere from 6 months to 3 years, depending on personal circumstances and other sources of income* to a bare minimum.

However these are not normal times. UK cash, with duration 0 years, earns 0-1% pa, say. UK govt bonds with years to maturity of 10 years (and duration of 7-8 say) yield 0.6% last I looked.

So at the moment the yield curve is not really "normal upward sloping" (at least for retail investors). You only really lose out if interest rates fall even further (which has always seemed very hard to imagine for the last 10 years, and then they have proceeded to fall further).

In the long run, we'd all like to hold lots of inflation linked gilts (TIPS to Americans). But right now the UK versions of that pay -2.5% yield - a guaranteed loss of 2.5% of purchasing power every year to maturity (if inflation is as the market expects). That seems really poor value.
Thanks for the reply. I do find the whole bond thing very confusing and because I don't fully understand it I'm going to stay in cash as I don't feel comfortable investing in something I know I don't really understand. I will try to learn more about them though.
steveyg50 wrote: Wed Jul 07, 2021 12:43 pm I have the L&g tech index fund too, and I have been very happy with it!

I only have a relatively small amount though and (although an index) it's in the part of my portfolio I class as 'active'. You seem to have rather a lot. 'only 15%' seems a lot to me.

Since the US index is heavily dependant on tech, have you a bit of a double-whammy here?

I don't think all that many will criticise having cash instead of bonds in the current climate, I am also, but things will change and then I will be buying vanguard global bond index again (or ishares global government or both).
I did have 20% in the tech fund until recently when I decided to scale it back a bit. In 2019 that fund returned 39% and then in 2020 it returned 38%. Year to date it's up 17% so I find it very difficult to give it up, which is why I don't class myself as a true Boglehead, but I'm trying :? As a true Boglehead I would transfer everything into a single global index fund but until one of them beats the S&P500 I'm staying with my main allocation to the S&P500.
That's a red flag to a Boglehead, because it implies performance chasing. You are saying you will buy after the index has outperformed?
At present I'm...
35% Vanguard S&P500 index fund
25% Vanguard global index fund (developed only no emerging markets)
15% L&G Tech fund (sort of an index fund but actively managed)
25% cash
Make sure you know what is in the tech fund so you are not surprised when it underperforms. A few big stocks (Apple) will have a very significant impact on performance. Given the S&P500 is also heavily weighted towards the big 5 tech companies, you are doubling up your bets.
I'm personally not a fan of emerging markets as they seem very volatile. The two Vanguard global funds, one with emerging markets (VWRL) and one without (VEVE), show that the one without EM has done better to date. When that changes I might start to look at EM but until then I'd rather leave them alone.
Yes re volatility.

Is it greater than for tech stocks? Tech stocks have been volatile *upwards* so of course we all forget they are volatile when it's going our way.

Those of us who lived through 2000-03 tech crash discovered that tech is volatile downwards as well. Lots of good reasons to argue we are not at that point in the cycle, but I have lived through (at least 3) tech bear markets in my investment lifetime. DEC, Compaq, IBM etc...

EM *are* volatile. And the index is heavily weighted towards China - and some Chinese tech stocks in particular (Alibaba, Tencent). [EDIT - rather one should consider whether one wants to own this exposure to the world economy. It is probably not essential but it is an omission large enough to think about]
Last edited by Valuethinker on Thu Jul 08, 2021 8:19 am, edited 1 time in total.
minimalistmarc
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Re: Retirement portfolio for UK SIPP

Post by minimalistmarc »

Gemini1962 wrote: Fri Jul 02, 2021 4:26 pm Thanks for the replies, food for thought.

I would be interested to know what other UK investors have done with their SIPP when they retire. The accumulation phase is easy but I find the retirement bit more complicated and harder as I know virtually nothing about bonds.
How much is in your SIPP and how much annual income do you want to draw down from it? How old are you? Other assets?

What other do with their SIPP is of no relevance to you. For example, some will use their SIPP exclusively for estate planning/IHT avoidance.
minimalistmarc
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Re: Retirement portfolio for UK SIPP

Post by minimalistmarc »

Gemini1962 wrote: Sat Jul 03, 2021 12:14 pm There seem to be so many different types of bonds I'm struggling to get my head round it all to be honest. Firstly I don't really get the idea of bonds if I'm honest. From my very limited understanding bonds tend to do the opposite of stocks so if the stock market goes up 75% of the time (on average) then bonds will go down 75% of the time. Why do I want to hold something that's likely to go down in value? Looking back at previous recessions bonds went down just like stocks, just not as much.

I hold my SIPP with Fidelity and tend to go for Vanguard funds when I can but their bond offerings leaves me bemused. They have...
Government bonds
Investment grade bonds
Global bonds
Global corporate bonds
Global credit bonds
Global short term bonds
Global short term corporate bonds
Japanse government bonds
UK government bonds
UK investment grade bonds
UK short term investment grade bonds
US government bonds

How on earth am I meant to decide what I should get out of that lot?
Global bonds is the one I would go for
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Re: Retirement portfolio for UK SIPP

Post by seajay »

Gemini1962 wrote: Sat Jul 03, 2021 12:14 pm There seem to be so many different types of bonds I'm struggling to get my head round it all to be honest.
Many firms/stocks issue Corporate bonds - borrow. If you want to hold bonds you could buy into those issues (lend). Doesn't take much consideration however to deduce that is wasteful use of capital (borrowing/lending to oneself ties up capital for 0% nominal (worse in real terms) outcome).

Bonds broadly have 0% reward expectancy in real terms, worse after taxation. In the UK they don't even bother taxing the capital gains from bond price changes as it would be just a waste of effort/time.

Buffett shifts bond risk over to the stock side, 90/10 stock/T-Bills for instance instead of 80/20 stock/bond. Or 80/20 stock/T-Bills instead of 60/40 stock/bonds ... according to how much reserves you consider to be appropriate for you and the amount that represents as a percentage of your total investment capital. You don't really want to be selling stock shares at a time when share prices had dropped a lot in order to pay for a replacement damaged roof/whatever.
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Gemini1962
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Re: Retirement portfolio for UK SIPP

Post by Gemini1962 »

Valuethinker wrote: Thu Jul 08, 2021 4:41 am That's a red flag to a Boglehead, because it implies performance chasing. You are saying you will buy after the index has outperformed?
Yes I guess I'm saying that when the US ceases to be the dominant power then it will be time to change my investment strategy. Can I ask which funds you invest in just out of interest? As I said I'm not a certified Boglehead yet but I've come a long way since joining this forum as I have managed to kick a lot of the active funds I had! If you think I'm bad now you should have seen me before :shock:
minimalistmarc wrote: Thu Jul 08, 2021 4:47 am How much is in your SIPP and how much annual income do you want to draw down from it? How old are you? Other assets?
What other do with their SIPP is of no relevance to you. For example, some will use their SIPP exclusively for estate planning/IHT avoidance.
In my original question I was trying to get at how those who do draw down from their SIPP manage it in terms of what they are invested in in retirement and how they then pull money from it.

For my own personal circumstances I will need to pull 4%/year from the starting number to top-up my final salary schemes which kick in next summer when I'm 60.
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Re: Retirement portfolio for UK SIPP

Post by Valuethinker »

Gemini1962 wrote: Thu Jul 08, 2021 5:24 am
Valuethinker wrote: Thu Jul 08, 2021 4:41 am That's a red flag to a Boglehead, because it implies performance chasing. You are saying you will buy after the index has outperformed?
Yes I guess I'm saying that when the US ceases to be the dominant power then it will be time to change my investment strategy. Can I ask which funds you invest in just out of interest? As I said I'm not a certified Boglehead yet but I've come a long way since joining this forum as I have managed to kick a lot of the active funds I had! If you think I'm bad now you should have seen me before :shock:
There's not usually a bell ringing that tells us "when Great Britain ceases to rule the waves". People worried about the decline of Britain as an industrial nation, and as an Imperial one, for a long time before it actually happened. We can now say that August 4, 1914 was the end of Britain's dominant rule over the world, but it remained the largest world empire until the Fall of Singapore in February 1941 (signalling the loss of Malaya & then Burma). The Royal Navy was arguably the world's dominant one (although smaller than the US Navy) so its eclipse was really only evident in December 1941 (the sinking of the battleship HMS Prince of Wales, and the battlecruiser, HMS Repulse, off Malaya by Japanese torpedo bombers). And the financial decline was probably not conclusive until Britain went off the Gold Standard in 1931.

These things are only obvious in hindsight. There were no newspaper headlines announcing the end of the British Empire when Singapore surrendered, but a young high schooler named Harry Yew (later Lee Kwan Yew) suddenly realised that the British would not be forever, and began to plot the course that would make him father of his nation, now one of the richest in the world). The moment of the end of American ascendancy may not have come, or it might have been the Fall of Saigon in 1975, or another date.

(I would add no historian agrees when the Fall of Rome was).

My fund? It's not the lowest cost solution, but Vanguard has a FTSE All-World fund. That stops me trying to weight between EM & Developed Markets - it includes essentially 100% of both.

The fewer investment decisions I make or actions I take *after* setting my initial bond/ equity split, the better I do. Have realised this after 30+ years of investing -- enlightenment came slowly.

My bonds are actually held in pensions (due to the Life Time Annual Allowance limitation ie £1.07m which in equities, I could conceivably breach at some point in the future) and I use global bond funds hedged to GBP (whatever the particular insurance companies offer).
minimalistmarc wrote: Thu Jul 08, 2021 4:47 am How much is in your SIPP and how much annual income do you want to draw down from it? How old are you? Other assets?
What other do with their SIPP is of no relevance to you. For example, some will use their SIPP exclusively for estate planning/IHT avoidance.
In my original question I was trying to get at how those who do draw down from their SIPP manage it in terms of what they are invested in in retirement and how they then pull money from it.

For my own personal circumstances I will need to pull 4%/year from the starting number to top-up my final salary schemes which kick in next summer when I'm 60.
4%, indexed to inflation, is a tricky number. Given current interest rates there's no way of getting 4% pa (real) returns without taking considerable risk. You wind up digging into capital and then the same amount of money becomes a larger and larger percentage of what is left (compound interest, but in reverse).

A rule of thumb would be that you can afford to "spend" 1/35th of your capital (at retirement) each year in retirement. However there is a non zero chance of you living to be over 95 (unless you have certain medical conditions) and if you have a female spouse, that's a quite real risk for her.

There are better ways of figuring this out but the best measure of what you can afford to spend is always what annuity you can buy with the premium (lump sum) you have, at that age (usually with a 50% spousal benefit). There's a choice between a flat annuity (ie falling in value with inflation each year) and one which is indexed to inflation. At inflation of 2.5% pa, the crossover point (where the latter catches up to the former) is about 18 years, I think. If inflation is higher than expected, it happens sooner.

The good news is that if you are able to flex the amount you withdraw with market conditions, you can "bank" good years of investment performance, and cut your draw in bad years. So "sequence of return risk" ie of a series of bad years of investment performance when you retire, is thus minimized.

The other bit of good news is that your FS schemes are inflation indexed, and that will provide some of the long term inflation protection a retiree needs (it's the equivalent of buying inflation indexed annuities but at a "better" rate because of risk pooling by the pension fund*).

When you get into your 70s, it is worth considering buying annuities with some of the money. Depending on your desire to leave an estate.

* when an insurance company sells you an annuity, there is "adverse selection" - annuitants live *longer* than the average lifespan. That's bad news in terms of the cost of providing an income to end of life. In a pension fund, this is much less of an issue because there's no discretion on the part of the members about buying the pension - the short lived subsidise the long lived (as they do with any pension or insurance product -- or if you think about it, lucky car drivers subsidise unlucky ones, lucky householders subsidise unlucky ones etc)).

Another "good" piece of news is that average life expectancy probably hasn't risen in the last 18 months, due to Covid-19. I don't imagine the actuaries have any view, as yet, whether this leads to a permanent adjustment (higher annuity rates).
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Re: Retirement portfolio for UK SIPP

Post by seajay »

Gemini1962 wrote: Thu Jul 08, 2021 5:24 amFor my own personal circumstances I will need to pull 4%/year from the starting number to top-up my final salary schemes which kick in next summer when I'm 60.
Maybe you might be worrying too much, fear of transition into retirement is natural/common. A year ahead or so of you (on a pension being paid basis, I actually 'retired' nearly two decades ago). For me, a now/recent being received £13K/year type occupational index linked pension at 60 that will be supplemented with a further £9K/year state pension at age 67, so I opted to bridge the £9K/year state pension (7 years x 9K = £65K set aside (actually opted to expand that in reflection of present day negative real yields)) so £22K/year income, supplemented with any investment income/SWR. Compared to actual spending that requires relatively little/low SWR (blue collar family type background, a relatively frugal basic living lifestyle where push-come-to-shove occupational and state pensions alone could be enough to cover basics, i.e. around $30K/year in US$ terms). Own home, so no rent to be found/paid which I guess could be considered as being worth another £12K/year benefit. Investment capital (a pretty decent amount in our case) is in effect for the fun activities side. What with occupational and state pension combined with imputed rent benefit being relatively tax efficient and tallying to around £34K/year another individual to compare might have to be on a £50K/year gross salary that's reduced to £34K after taxes and further reduced to to £22K/year after paying £12K/year rent. As you have a final salary pension and a SIPP and you own your own home I suspect you're also in line for a state pension in later years and perhaps much better placed than you think.
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Re: Retirement portfolio for UK SIPP

Post by Gemini1962 »

Valuethinker wrote: Thu Jul 08, 2021 8:28 am My fund? It's not the lowest cost solution, but Vanguard has a FTSE All-World fund. That stops me trying to weight between EM & Developed Markets - it includes essentially 100% of both.

The fewer investment decisions I make or actions I take *after* setting my initial bond/ equity split, the better I do. Have realised this after 30+ years of investing -- enlightenment came slowly.

My bonds are actually held in pensions (due to the Life Time Annual Allowance limitation ie £1.07m which in equities, I could conceivably breach at some point in the future) and I use global bond funds hedged to GBP (whatever the particular insurance companies offer).

4%, indexed to inflation, is a tricky number. Given current interest rates there's no way of getting 4% pa (real) returns without taking considerable risk. You wind up digging into capital and then the same amount of money becomes a larger and larger percentage of what is left (compound interest, but in reverse).

A rule of thumb would be that you can afford to "spend" 1/35th of your capital (at retirement) each year in retirement. However there is a non zero chance of you living to be over 95 (unless you have certain medical conditions) and if you have a female spouse, that's a quite real risk for her.

There are better ways of figuring this out but the best measure of what you can afford to spend is always what annuity you can buy with the premium (lump sum) you have, at that age (usually with a 50% spousal benefit). There's a choice between a flat annuity (ie falling in value with inflation each year) and one which is indexed to inflation. At inflation of 2.5% pa, the crossover point (where the latter catches up to the former) is about 18 years, I think. If inflation is higher than expected, it happens sooner.

The good news is that if you are able to flex the amount you withdraw with market conditions, you can "bank" good years of investment performance, and cut your draw in bad years. So "sequence of return risk" ie of a series of bad years of investment performance when you retire, is thus minimized.

The other bit of good news is that your FS schemes are inflation indexed, and that will provide some of the long term inflation protection a retiree needs (it's the equivalent of buying inflation indexed annuities but at a "better" rate because of risk pooling by the pension fund*).

When you get into your 70s, it is worth considering buying annuities with some of the money. Depending on your desire to leave an estate.
I can see the sense in having just one fund as it takes away the constant desire to tinker with things but the global funds available to me via Fidelity are highly correlated to the S&P500 and over the last 5 years they have under performed against the S&P. I have hedged my bets a bit as I hold 35% S&P and 25% global (excluding emerging markets) but I find it difficult to go to 100% global. I'm an aspiring Boglehead but not there yet :wink:

I could give my pension pot to an insurance company now and they would give me the yearly income I'm looking for (assuming I don't take the 25% tax free amount and I take a sole pension which isn't index linked). But I don't want to follow my father-in-law who lasted a year after retiring before dropping down dead which was wonderful for the insurance company.

I'm happy to have nothing left at the end of my time so selling the equities as I go is not a concern. I have had a good run up over the last few years so I have just converted 7 years worth of living expenses into cash and that will get me to the point of my state pension kicking in, so at least I shouldn't starve no matter what. I want to achieve £12k/year out of my SIPP which currently has £300k in it.
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Re: Retirement portfolio for UK SIPP

Post by Gemini1962 »

seajay wrote: Thu Jul 08, 2021 11:16 am Maybe you might be worrying too much, fear of transition into retirement is natural/common. A year ahead or so of you (on a pension being paid basis, I actually 'retired' nearly two decades ago). For me, a now/recent being received £13K/year type occupational index linked pension at 60 that will be supplemented with a further £9K/year state pension at age 67, so I opted to bridge the £9K/year state pension (7 years x 9K = £65K set aside (actually opted to expand that in reflection of present day negative real yields)) so £22K/year income, supplemented with any investment income/SWR. Compared to actual spending that requires relatively little/low SWR (blue collar family type background, a relatively frugal basic living lifestyle where push-come-to-shove occupational and state pensions alone could be enough to cover basics, i.e. around $30K/year in US$ terms). Own home, so no rent to be found/paid which I guess could be considered as being worth another £12K/year benefit. Investment capital (a pretty decent amount in our case) is in effect for the fun activities side. What with occupational and state pension combined with imputed rent benefit being relatively tax efficient and tallying to around £34K/year another individual to compare might have to be on a £50K/year gross salary that's reduced to £34K after taxes and further reduced to to £22K/year after paying £12K/year rent. As you have a final salary pension and a SIPP and you own your own home I suspect you're also in line for a state pension in later years and perhaps much better placed than you think.
You retired at 40? Wow, good effort :D
Yes I will qualify for the full state pension and so will my wife. My wife has 2 final salary pensions from BT and as a Headteacher so we won't starve.
We own the house we live in which is valued at £950k so we could downsize if we needed to and I would rather reduce my standard of living than continue to work! My wife doesn't want to retire just yet so I'm not going to touch my SIPP until next summer when I turn 60 and my final salary ones kick in.
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Re: Retirement portfolio for UK SIPP

Post by seajay »

Gemini1962 wrote: Fri Jul 09, 2021 5:16 amI want to achieve £12k/year out of my SIPP which currently has £300k in it.
Buffett style 90/10 US S&P500 (CSP1 maybe in mind of Buffett's "don't bet against America" preference) and Cash (IGLS perhaps).

4% SWR, 4% of the initial portfolio value drawn/spent in the first year (or monthly proportioned), uplifted by inflation as the amount drawn/spent in subsequent years. Historically the worst case 30 years ended with nothing remaining, but on average you ended with far more than the inflation adjusted start data amount. There's a greater risk of not actually getting to see another 30 years. Must be counted as being like a annuity however, as though it had all been spent (but where you retain access to the capital), the capital value in inflation adjusted terms can drop a lot, but even from such lows the primary objective of income production historically was still met. Use a asymmetric type of rebalancing, spend down cash in bad years, don't use the cash to top up on more shares, replenish/maintain cash to/at 10% during better times.

Personally I prefer 50/50 US/gold, but I only require less than 3% SWR. A 50/50 of the two (90/10 and 50/50) also worked well, if not better at uplifting the historic worst case SWR.

Yet others are content with 50/50 stock/bonds, or 67/33 or even 75/25

Image

At a slightly lower 3.75% SWR between 50/50 and 75/25 stock/bond looked to be safer than all-stock. In those cases something like a Vanguard LifeStrategy might be easiest but I don't know about the in's/out's of a LS within SIPP.
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Re: Retirement portfolio for UK SIPP

Post by LHRAdam »

Just been posting on a really interesting thread on Gen-X investors and studied this thread with interest.

I’m planning to retire in just over 4 years at 54. Obviously I cannot access SIPP until later but one BH philosophy which has helped me is to consider all investments added together as one big “pot”, essentially for the purposes of asset allocation and tax as well as simplicity. My investing has got more conservative since finding BH but by following the principles I’m happy and have learned such a lot.

Bonds - yeah. 🤔

Just to add my 10c.

Took the suggestion onboard last year about the significant interest rate risk associated with UK gilts (as compared with, say, US Treasuries) and rebalanced twice into a completely new short gilt fund (IGLS) to shorten average duration. UK gilts have done badly this year so far, as have long US Treasuries and I learned so much by studying carefully several threads on the reasons for the latter on the main/US page. I’ll continue to build my IGLS position when rebalancing opportunities arise, up to about 50/50 long/short gilts.
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Re: Retirement portfolio for UK SIPP

Post by Valuethinker »

LHRAdam wrote: Fri Jul 09, 2021 3:14 pm Just been posting on a really interesting thread on Gen-X investors and studied this thread with interest.

I’m planning to retire in just over 4 years at 54. Obviously I cannot access SIPP until later but one BH philosophy which has helped me is to consider all investments added together as one big “pot”, essentially for the purposes of asset allocation and tax as well as simplicity. My investing has got more conservative since finding BH but by following the principles I’m happy and have learned such a lot.

Bonds - yeah. 🤔

Just to add my 10c.

Took the suggestion onboard last year about the significant interest rate risk associated with UK gilts (as compared with, say, US Treasuries) and rebalanced twice into a completely new short gilt fund (IGLS) to shorten average duration. UK gilts have done badly this year so far, as have long US Treasuries and I learned so much by studying carefully several threads on the reasons for the latter on the main/US page. I’ll continue to build my IGLS position when rebalancing opportunities arise, up to about 50/50 long/short gilts.
A global, investment grade, government bond fund, hedged into sterling, will have c 7-8 years duration. More of your return (and potential negative returns, at times) will come through gains/ losses on foreign exchange hedges, rather than interest and capital appreciation of the underlying bonds. But that shouldn't matter (although it will make the return harder to understand or predict).

Long US Treasury bond index will have a longer duration than the US Treasury bond index. The latter 7-8 years. The former? If it is composed of longer than 10 years to maturity bonds, perhaps duration of 14-15 years?

The main problem may be Lifetime Annual Allowance, and therefore your fixed income weighting should be in the pension(s). *But* that depends on how you are going to finance the period from age 54. I think there is a good case for ST bonds, held in ISAs or taxable (if not enough room in ISA) for those 3 years of expenses, say, before you tap into your SIPP.

It's unfortunately quite easy to wind up paying too much tax (relative to the optimal solution) in this world.
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Re: Retirement portfolio for UK SIPP

Post by LHRAdam »

Thanks for the reply!

Yeah - I think I’ve got it. Switching the self-made UK gilt “blend” that I currently have for a global government bond index hedged to GBP would reduce average duration and might push up return a bit but at the cost of less transparency on how the return/loss is generated.

54-55 - cash which is currently in a fixed rate 5-y “bond” at a building society, and from cash I’m saving monthly now for this purpose - thus post-tax

55+ from SIPP.

I currently have about 30x expenses but it’s in mostly in pensions. I also have some debt which ideally is paid off before stopping working. However the debt is included in the (current) 30x number.

The reasons for adding short gilt was to reduce the average duration of my bond position, but as you say this would also fund the first few years when sold.
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Re: Retirement portfolio for UK SIPP

Post by Valuethinker »

LHRAdam wrote: Tue Jul 13, 2021 2:35 pm Thanks for the reply!

Yeah - I think I’ve got it. Switching the self-made UK gilt “blend” that I currently have for a global government bond index hedged to GBP would reduce average duration and might push up return a bit but at the cost of less transparency on how the return/loss is generated.
That's right. The Foreign Exchange hedging mechanism *roughly* adjusts the returns to the UK govt level -- with some differences because the UK gilt index has the longest duration of any govt bond index (around 13 years, last time I checked - US/ Germany are more like 7-8 years last time I looked -- if you look at the duration of any bond fund or ETF which tracks those index it will give you a feel for it.
54-55 - cash which is currently in a fixed rate 5-y “bond” at a building society, and from cash I’m saving monthly now for this purpose - thus post-tax

55+ from SIPP.

I currently have about 30x expenses but it’s in mostly in pensions. I also have some debt which ideally is paid off before stopping working. However the debt is included in the (current) 30x number.

The reasons for adding short gilt was to reduce the average duration of my bond position, but as you say this would also fund the first few years when sold.
You are not wrong in doing that (adjusting duration by blending 2 bond funds). Your bank account has a duration of 0 in that calculation, and your fixed rate bond has a duration of something like 3.5 years (but shrinking each year - whereas a bond fund keeps reinvesting in longer term bonds to roughly hold the same (modified) duration as the underlying index).

When you say 30x expenses that's your whole portfolio?

I think in "buckets". Want to have at least 5 years of retirement expenses (net of any DB pension benefits accrued) in instruments of certain return
like bonds or bank accounts. The important point is to get to state pension age safely, but also have the opportunity to have fun in the early years of retirement when health is better.

After that bucket, the rest can be more risk balanced ie with a significant weighting in equities.
LHRAdam
Posts: 41
Joined: Thu Jul 26, 2018 7:58 pm

Re: Retirement portfolio for UK SIPP

Post by LHRAdam »

Thanks again for the reply.

I was playing around a bit this morning for curiosity alone.

IGLH (global government bonds hedged to GBP ETF) vs what I have now VGOV (UK Gilts ETF)

The difference in weighted average maturity is striking:
IGLH 10.2
VGOV 17.2

Average yield to maturity is a little longer for VGOV:
IGLH 0.54
VGOV 0.85

Volatility is also higher with VGOV especially during 2021 (due to interest rate risk?):
IGLH 3.89% last 12 months
VGOV 8.28% last 12 months

But IGLH comes at a TER cost (presumably for the hedge?):
IGLH 0.25%
VGOV 0.07%

My personal situation:
30x expenses is total portfolio yes.
I already have more than 5 years in total “blended” bonds. The big change I have made over the last 12 months is to rebalance into short bond (IGLS) for the reasons above. Previous to this I just bought VGOV. Together with what I have in cash, this is 4 years expenses.
Valuethinker
Posts: 48954
Joined: Fri May 11, 2007 11:07 am

Re: Retirement portfolio for UK SIPP

Post by Valuethinker »

LHRAdam wrote: Wed Jul 14, 2021 7:33 am Thanks again for the reply.

I was playing around a bit this morning for curiosity alone.

IGLH (global government bonds hedged to GBP ETF) vs what I have now VGOV (UK Gilts ETF)

The difference in weighted average maturity is striking:
IGLH 10.2
VGOV 17.2

Average yield to maturity is a little longer for VGOV:
IGLH 0.54
VGOV 0.85

Volatility is also higher with VGOV especially during 2021 (due to interest rate risk?):
IGLH 3.89% last 12 months
VGOV 8.28% last 12 months

But IGLH comes at a TER cost (presumably for the hedge?):
IGLH 0.25%
VGOV 0.07%

My personal situation:
30x expenses is total portfolio yes.
I already have more than 5 years in total “blended” bonds. The big change I have made over the last 12 months is to rebalance into short bond (IGLS) for the reasons above. Previous to this I just bought VGOV. Together with what I have in cash, this is 4 years expenses.
Modified Duration is a better measure (takes into account the present value of the coupons, as well as the actual return of Principal of the bond at maturity).

Agree the TER is not a good thing, particularly given very low government bond yields right now.

There's nothing in the Yield To Maturity difference - they are just about the same for all practical purposes. Note how little additional yield you get for reaching another 5 years duration, say.
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