Any point in a Cash buffer in Pension Drawdown Account?

OldMusicGuy

You can't "prove" a cash buffer will be better than not having one. How can you "prove" something that is unknown in the future? You can look at historic data and find out what the chances of failure would be for specific withdrawal rates (use something like cfiresim). That's the best you can get - you have to set a failure rate that you find acceptable.

If you are going to use safe withdrawal rates, you should also research the Guyton Klinger rules (just Google it) to understand how to manage your portfolio and adapt your withdrawal rate based on changing market conditions.

At the end of the day, you have to make a value judgement based on all the above. No-one can "prove" it for you.

barnstar2077

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.

Seems a bit overly harsh. I too would like to see some numbers for this. I think it is quicker to ask smarter people than me if they already have the answer before delving into research and trying to work it out for myself, I am sure the OP just thought the same.

point5clue

There are a couple of interesting articles (though from a US perspective) about 'emergency funds' on ERN https://earlyretirementnow.com/start-here/

Like you he has a low withdrawal rate, so if your risk tolerance could stand it I think he would argue 100pc equity would be best on average.

Personally I'd take a middle path and have some of my funds in a short term gilts funds- if cash is paying no interest all they have to do is beat the charges to be better that cash, and it might even keep pace with inflation once QE is out of the system.

green_man

Ok, so I’ve not run the numbers myself, but I have found the research I was after.
See here: http://investmentmoats.com/financial-independence/why-having-a-cash-buffer-does-not-increase-the-longevity-of-wealth-in-financial-independence/

The conclusion being:

Many financial planners recommend holding cash equal to 2 years’ withdrawals to draw on when your investments are down. The idea is that after a significant down year, you can live off the cash and not touch your investments, to give them some time to recover.

This sounds logical, but was not supported by the 146-year study. For example, assuming 100% in equities and a cash holding, here are the success rates for a 30-year retirement:



In every case, holding cash either had no effect or increased the risk of running out of money. I could not find a single example of a retiring year or withdrawal amount when holding any amount of cash provided a higher success rate than holding no cash.

The study showed that holding cash does not protect you. In fact, it often increases your risk of running out of money.

Audaxer

green_man wrote: »

Ok, so I’ve not run the numbers myself, but I have found the research I was after.
See here: http://investmentmoats.com/financial-independence/why-having-a-cash-buffer-does-not-increase-the-longevity-of-wealth-in-financial-independence/

The conclusion being:

Many financial planners recommend holding cash equal to 2 years’ withdrawals to draw on when your investments are down. The idea is that after a significant down year, you can live off the cash and not touch your investments, to give them some time to recover.

This sounds logical, but was not supported by the 146-year study. For example, assuming 100% in equities and a cash holding, here are the success rates for a 30-year retirement:



In every case, holding cash either had no effect or increased the risk of running out of money. I could not find a single example of a retiring year or withdrawal amount when holding any amount of cash provided a higher success rate than holding no cash.

The study showed that holding cash does not protect you. In fact, it often increases your risk of running out of money.

I have read that the sequence of returns risk is the most important thing, and if you have poor returns in the first decade in a 30 year retirement, then you have a good chance of running out of money. So after a long bull run like we have had, I would definitely want to keep a cash buffer as well as some bond funds. I think 100% equities with no cash buffer would be very risky at this time.

dunstonh, I know you usually run with a cash buffer of 18-24 months. I'd be interested to know whether you would use the cash buffer following a year like the past year when most medium risk portfolios have made a small percentage loss, or would you keep the cash buffer intact to be used in a full blown crash?

OldMusicGuy

green_man wrote: »

The study showed that holding cash does not protect you. In fact, it often increases your risk of running out of money.

Based on past data. If you can guarantee that the future will follow the past, then I buy it. Personally I don't, which is why I hold a lot of cash (more than 2 years worth). Like I said, it's a value judgement based on your own risk profile and financial objectives. If that study gives you the support you need to focus on SWR and allows you to sleep at night, that's great.

kidmugsy

If you want to avoid running out of money Wade Pfau somewhere shows that the best combination is an annuity plus equities.

The advantage of the high equity strategy, based on simulations, seems to be that you'll have a good chance of dying rich. Which is a pretty odd aim: why not aim for having more income before you die?

green_man

OldMusicGuy wrote: »

Based on past data. If you can guarantee that the future will follow the past, then I buy it. Personally I don't, which is why I hold a lot of cash (more than 2 years worth). Like I said, it's a value judgement based on your own risk profile and financial objectives. If that study gives you the support you need to focus on SWR and allows you to sleep at night, that's great.

Well the reasearch is based on 146 years of data with one or two fairly significant events therein;)

green_man

Audaxer wrote: »

I have read that the sequence of returns risk is the most important thing, and if you have poor returns in the first decade in a 30 year retirement, then you have a good chance of running out of money.

And yet holding a cash sum does not reduce this risk it would seem (based on quoted research)

Audaxer

kidmugsy wrote: »

The advantage of the high equity strategy, based on simulations, seems to be that you'll have a good chance of dying rich.

Or you'll have a good chance of running out of money if you have a bad sequence of returns early on, and withdraw higher withdrawal percentages than is safe to do.