Early-retirement wannabe

Terron

OldMusicGuy wrote: »

There are some that are lower risk for sure. My core holding is one of the lower risk Vanguard funds, as I am trying to protect against downside risk in the long term. That dropped by nearly 3% during the recent correction (compared to its December 2017 level). My highest risk fund dropped by nearly 5%. So it's relatively lower risk, but if there was a major downturn I would still be facing a significant loss. Which is why I have at least 5 years of cash in a combination of my SIPP, various cash accounts, ISAs and fixed interest bonds.

But I have just retired and have no source of income apart from my DC pot and savings, so that suits me. Probably not appropriate if (like many people on here) you have some form of guaranteed income floor like a DB pension.

Is that cash making more than inflation, or have you replaced the chance of a major drop with the near certainty of a small drop each year.
Bonds, of course are not cash and are used in funds to lower risk (hopefully).

I have a couple of DB pensions but they are not guaranteed to keep paying the same value. Mostly they are linked to inflation up to a maximum of 5%. If inflation goes higher they will decline in value, Part (the GMP) is only linked up to 3%, Still I am looking forward to taking them next year.


Y don't think there is anything that is zero risk.

Anonymous101

runninglea wrote: »

off topic slightly but everyone goes on about their 'number'. Where is link to work this out or thread please

https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

OldMusicGuy

Terron wrote: »

Is that cash making more than inflation, or have you replaced the chance of a major drop with the near certainty of a small drop each year.
Bonds, of course are not cash and are used in funds to lower risk (hopefully).

Overall, at the moment I am making about 1.8% on all my cash and bonds that are held outside my SIPP, I have a chunk of my SIPP sat in cash making nothing (well .1% or whatever it is HL give me, but it costs me nothing). Inflation is a meaningless measure for me at the moment. My personal inflation rate will probably be about -10 to -20% over the next 2 to 3 years as we downsize. In the long term (ie 30 to 40 years) I am modelling 3% inflation and even with my cash at 1.8% (so not allowing for hoped for increases in interest rates), I am fine because my investments should deliver above average inflation growth.

I regard the bonds in my bond ladder as part of my cash and near cash that has zero risk. It is to provide income over the next 5 to 10 years at minimal risk. I don't need to worry about inflation unless it gets to silly levels (eg above 5% consistently).

MK62

Y don't think there is anything that is zero risk.

There arguably isn't, but cash is about as close as it gets.

At the moment, it may be taking a slight real-terms loss (if you use the headline rate of inflation as the measure), but that loss is fairly predictable (relatively speaking) in the shorter term and you can plan for it - the only alternative is to take more risk in the hope of better returns, but doing that misses the point of keeping cash in the first place - downside protection.

It's a personal decision as to how much you decide to keep as cash for this - for OldMusicGuy that's 5yrs, I'm probably around half that.....some keep very little, and that's their choice - the downside we are protecting against might never come - or it might come next week. I suppose in some ways it's a bit like insurance.....

Personally I like the feeling that no matter what the markets do, there's no immediate need to panic.....well, not for a few years anyway .....and in the event of a crash, I won't, in the short term, need to sell any assets at rock bottom prices in order to live on as usual. I accept there's a potential cost (missing out on potential higher gains on that money) from following this approach, but it's one I'm happy with - I accept of course though that it might not be for everyone.

Remember though, that like your house, your investments haven't really made or lost anything until you come to sell them......until then it's all "on-paper"......the important bit is when you actually do sell, and I prefer that to be my choice, as far as possible, rather than being forced into it at a bad time.

kidmugsy

I wonder how many old people are fairly cool to equities on the grounds that taking a risk to make a gain isn't terribly attractive if IHT were to take 40% of the gain. Or maybe they pile into AIM shares?

Taxes change incentives. Incentives cause action.

MK62

I wonder how many old people

Obviously not aimed at me then.......:)

OldMusicGuy

kidmugsy wrote: »

I wonder how many old people are fairly cool to equities on the grounds that taking a risk to make a gain isn't terribly attractive if IHT were to take 40% of the gain. Or maybe they pile into AIM shares?

Nothing to do with IHT for me. We don't plan to leave anything for our son (but we will be giving him a chunk of the equity we realize from downsizing, so we are gifting him his inheritance upfront). If we both die earlier than expected and leave more than the IHT threshold, then he can pay the tax because anyone getting £325K out of the blue can afford to pay tax on anything above that!

We have accumulated enough to see us through our retirement, we don't need more. My strategy is to protect what we have against downside. If my invested funds grow at or slightly above inflation over the next 30 years we will be fine. If inflation gets to silly levels I will have to rethink, but at the moment that does not look likely.

k6chris

Anonymous101 wrote: »

https://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/

It's a brilliant post and explains the 'secret' of FI - namely live of less and save the extra you have, which will go further as you are living off less. Simples!

Terron

OldMusicGuy wrote: »

Overall, at the moment I am making about 1.8% on all my cash and bonds that are held outside my SIPP, I have a chunk of my SIPP sat in cash making nothing (well .1% or whatever it is HL give me, but it costs me nothing). Inflation is a meaningless measure for me at the moment. My personal inflation rate will probably be about -10 to -20% over the next 2 to 3 years as we downsize. In the long term (ie 30 to 40 years) I am modelling 3% inflation and even with my cash at 1.8% (so not allowing for hoped for increases in interest rates), I am fine because my investments should deliver above average inflation growth.

I regard the bonds in my bond ladder as part of my cash and near cash that has zero risk. It is to provide income over the next 5 to 10 years at minimal risk. I don't need to worry about inflation unless it gets to silly levels (eg above 5% consistently).

I keep 2-3 months as cash normally. I used to keep more when interest rates were higher. If I need more quickly I could use my credit card, which I pay off every month. My next reserve is a fund with a high proportion of bonds that I pay into regularly, I can get moeny out in a few days if needed. Typically it will have 6-9 months of income in it.

Vurrently almost all my income comes from rents which aren't as volatile as the markets. Next year two DB pensions and a GAR annuity will add close to 19k to that. Probably these other income streams are why I don't feel the need to keep as much cash.

I do have more cash than normal at the moment as I am assembling the deposit for another property.so far by sellinf my highest risk and lowest performing assets.

OldMusicGuy

Terron wrote: »

Vurrently almost all my income comes from rents which aren't as volatile as the markets. Next year two DB pensions and a GAR annuity will add close to 19k to that. Probably these other income streams are why I don't feel the need to keep as much cash.

Indeed, I feel I am in a minority on here as most people seem to have DB pensions and other sources like rent for a guaranteed income floor. In many ways I feel I am more like my son's generation, most of whom will never have the chance of any form of DB pension. Obviously I will get an income floor from my SP (in 5.5 years time).

I did toy with moving some of my cash into a rental property but decided that would be too much like hard work and stress in retirement, and the tax regime doesn't encourage that now.