Any point in a Cash buffer in Pension Drawdown Account?

green_man

So the old school wisdom seems to be that it’s sensible to carry a cash sum within your investments so that in the event of a crash you can draw on this sum and allow for the market to recover before you sell anymore investments. Seems sensible but these sums seem to be specified as 2-3 years of typical drawdown withdrawal, so you have this portion of your pot permanently out of the market. Does this stand up to financial scrutiny?

I’ve got to say I currently do follow the this and although I’m not in drawdown yet I will be in two years. But would you just not be better off in the long run by running 100% equities and just selling what you need each month. I’m talking about selling 0.2% of equities a month here to fulfill living expenses, so even in a crash this will only go up to 0.3-0.4% per month. Doesn’t the benefit of extra investment in the market outweigh the savings made in event of crash?

dunstonh

Seems sensible but these sums seem to be specified as 2-3 years of typical drawdown withdrawal, so you have this portion of your pot permanently out of the market. Does this stand up to financial scrutiny?

Its a matter of choice. I usually run with around 18-24 months.

But would you just not be better off in the long run by running 100% equities and just selling what you need each month.

Most investors in retirement wouldnt have 100% invested in equities. So, if you have a very high risk profile and capacity for loss are not an issue for you then the cash float is not needed.

green_man

dunstonh wrote: »

Its a matter of choice. I usually run with around 18-24 months.



Most investors in retirement wouldnt have 100% invested in equities. So, if you have a very high risk profile and capacity for loss are not an issue for you then the cash float is not needed.

So as a professional investor/advisor you must surmise that the cash buffer does indeed offer an advantage? Does analysis actually show this to be true? In my case I don’t have a capacity for loss in that I need to maintain my withdrawal rate. But does the buffer actually protect that in the long term? (I genuinely don’t know)

OldMusicGuy

Do you want to sleep at night or not? I suggest you read about sequence of returns risk. A fairly high level article can be found here: https://www.thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672

Largely it depends on your own perspective, appetite for risk and also your financial objectives. If you believe strongly that the markets will always in the long term, and over the length of your retirement, return x%, then maybe you don't need a cash buffer.

If however you believe we are in rather uncharted territory and that the norms of the past might not apply so readily in the future, you may be more comfortable holding a reasonable or even significant cash buffer.

It also depends how much you have in your DC pot to meet your long term financial needs. If you have enough, might it be better to be more defensive, especially in early years of retirement? However, if you still need growth then you will have to embrace more risk.

Albermarle

Cash in a DC pot normally does not earn any interest. Holding cash outside a pension wrapper means at least you will get 1.5/2.25%. Of course it will not have benefitted from tax relief going into the pension but then again when/if you take the cash it is non taxable.

green_man

OldMusicGuy wrote: »

Do you want to sleep at night or not? I suggest you read about sequence of returns risk. A fairly high level article can be found here: https://www.thebalance.com/how-sequence-risk-affects-your-retirement-money-2388672
.

Yeh that site makes some good points on this subject, it would have been great if it had followed through with what the actual result of taking out cash to provide yearly bond income in the first few years (or using a cash sum as a buffer). I understand the whole “can you sleep at night” point but I’d like to see figures to support the fact that it does in fact reduce the risk as opposed to 100% equities with a 0.2% monthly withdrawal rate.

green_man

Albermarle wrote: »

Cash in a DC pot normally does not earn any interest. Holding cash outside a pension wrapper means at least you will get 1.5/2.25%. Of course it will not have benefitted from tax relief going into the pension but then again when/if you take the cash it is non taxable.

Indeed, I am talking about holding cash within your SIPP (likely on near 0% return) rather than investing in equities, rather than holding some additional outside SIPP. I’m not sure if this later strategy makes a material difference or not.

westv

I'd rather have a cash buffer than restrict myseĺf to 0.20% withdrawal rate!

green_man

westv wrote: »

I'd rather have a cash buffer than restrict myseĺf to 0.20% withdrawal rate!

Can you show that having a cash buffer means you can withdraw at a higher rate than otherwise?

(I’m not restricting myself to that it’s just that’s what I need to support my income needs, and that is monthly by the way, so 2.5% a year approx)

drumtochty

You appear to want someone else to do the numbers and present it to you. You appear to ask te same question again no matter the answer you get as no one gives you the model you believe exists somewhere.



You appear to have a reasonable grasp of what your aims are and how to get there.


Why do you not do your research and build a model and publish your data with your researched assumptions and figures here.


Then the posters here can advise on the resonableness of your assumptions and if you post your model on a sharing site others can interogate it and again comment on its reasonableness.


Most of the posters here build our own simple models not complicated models to work out if our ideas are reasonable.


You will get a better response that way.

green_man

drumtochty wrote: »

You appear to want someone else to do the numbers and present it to you. You appear to ask te same question again no matter the answer you get as no one gives you the model you believe exists somewhere.



You appear to have a reasonable grasp of what your aims are and how to get there.


Why do you not do your research and build a model and publish your data with your researched assumptions and figures here.


Then the posters here can advise on the resonableness of your assumptions and if you post your model on a sharing site others can interogate it and again comment on its reasonableness.


Most of the posters here build our own simple models not complicated models to work out if our ideas are reasonable.


You will get a better response that way.

It’s a fair point, but had I gone down that road and the first response was, look at this it proves that a cash buffer reduces risk then I would have wasted my time. Given it seems to be a widely used strategy I assumed there might be concrete supporting evidence of its benefit, it seems not so I guess I may go down this route.

I’ll post back on my findings.