Any point in a Cash buffer in Pension Drawdown Account?

Audaxer

Triumph13 wrote: »

For the 4% to fail you generally need both a bad overall return and a bad sequence of returns. I agree that this is may have a higher probability than a random period in the past, but it's still pretty unlikely for a globally balanced portfolio.

In drawdown is it best to use the cash buffer in any loss year or just in a big loss year, for example when over a 10% loss?

Thrugelmir

Triumph13 wrote: »

I agree that this is may have a higher probability than a random period in the past, but it's still pretty unlikely for a globally balanced portfolio.

There's a whole generation investing now that didn't experience the Japanese stock market melt down. A one-off event that has had an impact for decades.

Willsie01

I'm pretty ignorant on income drawdown strategies although that's what I'm aiming to rely on.
I can't understand how holding cash as a buffer can ever lead to reducing the longevity of a retirement fund. How could this be?

Willsie01

Some years ago I was convinced by my current financial adviser to switch my pension pot to the Transact platform based product his company manage. The agreed target for me is that I use my portfolio on an income drawdown basis. I had hoped to be retired by now but as we all know the various vagaries around the globe and here have depressed returns and I'm too nervous to start drawing the planned 4% income in case the portfolio runs out before its 30 year planned duration.
I do have a cash buffer but don't want to start burning through it at the outset.
I know there are links to information about these matters within the forum but can someone point me at a simple primer to introduce me gently to these matters. I've followed a couple of the links but the content was way above my head. I suppose what I need is a "Income Drawdown Strategy for Dummies" type of thing.

MK62

Audaxer wrote: »

In drawdown is it best to use the cash buffer in any loss year or just in a big loss year, for example when over a 10% loss?

There's not really a right of wrong answer to that.......it's going to depend on your view of the world and how big your cash buffer is.......for instance if you have a year of cash and the drop is relatively mi!d, I'd be inclined to save some cash buffer in case the next year is worse.....if you have 3 years and/or the drop is bigger then it may well be different.....I

It could also depend on the previous year.......if that was exceptionally good then a small fallback the following year could be seen as nothing to worry too much about and so you might decide not to use any cash buffer at all......

Audaxer

Willsie01 wrote: »

I can't understand how holding cash as a buffer can ever lead to reducing the longevity of a retirement fund. How could this be?

Some people say it can produce a drag on performance, but I just view it as a defensive asset as well as bonds.

If for example you had near enough 100% equities, that might be okay when accumulating, but if you had that in retirement and wanted to drawdown 4% annually, if there was a bad first decade with little growth, I think there is a good chance you would run out of money.

Triumph13

Thrugelmir wrote: »

There's a whole generation investing now that didn't experience the Japanese stock market melt down. A one-off event that has had an impact for decades.

There's also a whole lot of people citing the Japanese melt down as the kind of thing we should worry about as it could happen any day - without realising that it followed one of history's great asset price bubbles. The Nikkei went up 224% in 4 years. The Yen doubled in value against the dollar. Land prices went so crazy that at one point they were claiming the grounds of the Imperial Palace were worth as much as California. Japan's 'Lost Decade' is the story of an epic hangover after one hell of a party.

Triumph13

Willsie01 wrote: »

I can't understand how holding cash as a buffer can ever lead to reducing the longevity of a retirement fund. How could this be?

Because when you run simulations using historical stock market performance, that's what it shows happening. Cash generally loses value against inflation. Equities generally give a real return. Over a 30 year period that adds up.

Audaxer

Triumph13 wrote: »

Because when you run simulations using historical stock market performance, that's what it shows happening. Cash generally loses value against inflation. Equities generally give a real return. Over a 30 year period that adds up.

I think he means when you are in retirement. If you had 100% equity portfolio in retirement and you had a poor sequence of returns in the first decade of drawdown, that could leave you being worse off than if you had a balanced portfolio, including bonds and a cash buffer.

londoninvestor

Audaxer wrote: »

I think he means when you are in retirement. If you had 100% equity portfolio in retirement and you had a poor sequence of returns in the first decade of drawdown, that could leave you being worse off than if you had a balanced portfolio, including bonds and a cash buffer.

I think you are answering the question "how could a cash buffer increase the longevity of a retirement fund?"

Triumph13 is answering Willsie01's question "how could a cash buffer reduce the longevity of a retirement fund?" - namely, through cash having a lower long-term return than other assets, particularly equities.