Any point in a Cash buffer in Pension Drawdown Account?

Paul_Herring

cash held within a SIPP is pooled with all other cash held by that provider so you get a %age of one lot of 85k FSCS compensation.

I'm fairly certain that the £85K limit doesn't apply to anything held in a SIPP, be it in cash or not.

green_man

Id just like to reiterate that this is a genuine query, I have no ulterior motive here. I currently have £50k cash and £600k mixed asset fund (70% equities) in my pension pot. I want to start drawdown of this in two years time and I'm just trying to figure out if maintaining such a Cash Buffer is advantageous or not.

I find the responses to the link I posted earlier interesting, much to the point that no one has actually come back and said they are reconsidering their level of cash buffer. So what am I missing? The analysis seems pretty sound and conclusive to me. Many on here have much more financial understanding than me so either:

I'm missing something - i.e other research contradicts this, yet no one has posted anything that actually disagrees.

People are just too set in their ways - Its an a idea that seems to have been accepted wisdom for so long that its just too ingrained in?

So to summarise some of the response/rational above:

OldMusicGuy - accepts the analysis but believes it does not cover all possible scenarios (of course no analysis can). He believes a cash buffer de-risks his retirement by allowing for scenarios that have never occurred before. Its an interesting stance I'm just struggling to think what scenarios it actually helps in.

Bostonerimus - points out that a cash sum to allow for emergencies is a factor, certainly in his case of BTL upkeep etc this seems sensible, my particular thoughts though are on using it just to de risk pension income return which is a slightly different topic.

tacpot12 - Seems at least to have taken on board the analysis but is justifying the buffer in a similar way to OldMusicGuy,

Most of the rest of the responders whilst not dismissing the analysis as such seem to be putting forward ideas that too me have been debunked in the article.



So for those running a buffer how and when is it used? What level of drop from a peak means you will take income from Cash? Of course this is going to introduce a whole level of complexity to your portfolio that wouldn't be there otherwise, when draw cash?, when topup cash? Clearly a level of "calling the market" is required here. For the novice investor two oft quoted rules seem to be: Don't try to guess the market; Maximise time in the market. Running a cash buffer pretty much runs against these doesn't it? Is a cash buffer for advanced investors only?

green_man

dunstonh wrote: »

Expanding on what you are saying, that is nothing unique to current situation. The early millennium was a drawn-out affair which saw the FTSE fall 6.5% in 2000, -14.7% in 2001 and -23.4% in 2002.

Not all "crashes" are within a week or two. Sometimes you get the drawn out decline.

And as green-man is investing much higher than the typical retired individual, rather than -5% three years in a row, those figures could well be -6.5%, -14.7%, -23.4%.



This is where your capacity for loss comes in and the method you are using. If you have a cash buffer both within the pension and externally, you can reduce the sale of equities to little or nothing.

Reviews should be yearly. You should play scenarios out and think how they would impact on your standard of living.

So a few months ago when the market was near to top my yearly withdrawal level would be 2.2%. Currently it stands at 2.4%. If markets were to drop another 30% (for a total of 40%, similar to the 2000-2002 period) my income would need to be 3.5% a year (at the worse point) so it might average 3% over 3-4 years, so I might draw 12% of pot over 4 years rather than a typical 8.5%. Of course to offset that extra draw I have had an extra 10% invested for approx 10 years ( assuming cash buffer accessed once a decade). So does the cash buffer result in a better outcome ? Im not convinced it does but im happy to be corrected:)

Spreadsheetman

My cash buffer is outside my investments and is my emergency money. It doesn't factor into my withdrawal rate calculations at all.

In the first few years of retirement (soon) I want to be able to cashflow various property transactions without having to borrow anything (because no job = no loans) or pay any tax on the money.

If it turns out that investments do well and grow a lot over the next few years then when I don't need to be as cash-rich I will reduce it down by moving gradually into ISAs.

The other thing that is keeping me holding more cash is that all withdrawal rate calculations are based on historic data and/or statistical simulations. I don't want to be the 1 failure in 100 retirements as I don't get to try again in this life.

Linton

green_man wrote: »

........
So for those running a buffer how and when is it used? What level of drop from a peak means you will take income from Cash? Of course this is going to introduce a whole level of complexity to your portfolio that wouldn't be there otherwise, when draw cash?, when topup cash? Clearly a level of "calling the market" is required here. For the novice investor two oft quoted rules seem to be: Don't try to guess the market; Maximise time in the market. Running a cash buffer pretty much runs against these doesn't it? Is a cash buffer for advanced investors only?

If you are seeing a cash buffer purely in the context of a mechanistic process whereby sometimes assets are sold to raise annual expenditure and other times saved cash is used I would agree with you that it is difficult to see both how it would work in practice and what the benefits would really be. Similar results can be achieved with much less thought and arbitrary decision making by rebalancing assets on an annual basis.



However if you are questioning the use of a significant amount of cash within a diversified retirement portfolio then I would disagree strongly. Cash is simply another asset alongside equity, bonds, property, and many other things. It has advantages and disadvantages. At the moment it is a viable proxy for minimum risk bonds. It also provides psychological support when equity falls rapidly as you know you wont go short, at least for a few years.



In your particular situation where your drawdown level is rather low perhaps sustainability in good times and bad is not so much of an issue. Other people who are normally drawing 3.5% or more could risk depleting their core investment holdings that are needed to ensure future income.



You talk about "a better outcome". How do you define this? As a retiree I am not looking for maximum return, but rather sufficient return to meet my objectives, return that is as certain as it can be. Getting a good night's sleep is more important than leaving behind an extra £100K when I die.

bearshare

green_man wrote: »

So for those running a buffer how and when is it used? What level of drop from a peak means you will take income from Cash? Of course this is going to introduce a whole level of complexity to your portfolio that wouldn't be there otherwise, when draw cash?, when topup cash? Clearly a level of "calling the market" is required here. For the novice investor two oft quoted rules seem to be: Don't try to guess the market; Maximise time in the market. Running a cash buffer pretty much runs against these doesn't it? Is a cash buffer for advanced investors only?

I have long wondered the same thing:: when do you use the cash buffer? If you are living off natural income, then obviously just top up any shortfall. But if you normally sell investments, it is not obvious at all. If the market drops 20% the comes back 10%, do you use cash buffer after the fall, but stop after the rise? Even though it is still down? (Use whatever % in the example you want). Is the market down now, or up?

I have significant cash buffer, which I have held for many years. This has certainly significantly reduced my overall returns, so i would have been better off having no cash pile and just selling as normal in a down market.

Isn't anything else just trying to predictt the market?

bearshare

Linton wrote: »

However if you are questioning the use of a significant amount of cash within a diversified retirement portfolio then I would disagree strongly. Cash is simply another asset alongside equity, bonds, property, and many other things. It has advantages and disadvantages. At the moment it is a viable proxy for minimum risk bonds. It also provides psychological support when equity falls rapidly as you know you wont go short, at least for a few years.

I prefer ALL my assets to produce some sort of real return. Even gold can go up in price when markets go down. Cash seldom produces much of a return, and has negative return now.

The psychological/emotional aspect is the only reason that makes sense to me, but such reasons seldom lead to the beat returns.

kidmugsy

bostonerimus wrote: »

SWR is often set up with a 95% success probability over 30 years. The vast majority of model runs produce large portfolio values at death if the SWR is maintained. So you don't have to be lucky to end up rich, you have to be unlucky not to.

If I may say so that's just an insane statement. Nobody knows what the future will bring. There is no 95% probability - nobody can know whether the future will mimic the past, especially since it's often restricted to an American past starting less than a century ago in 1926. Nobody can know whether 30 years is a relevant period. Nobody can know whether Gaussian curves are the most intelligent way to represent risk in the models. And, nobody can know whether the investor will hold his nerve or whether he'll capitulate in a market trough.

But if you do insist on that approach to your decision, you are still faced with the fact that, based on those assumptions, it seems that the SWR approach is an expensive way to fund your retirement, and that much of its pay-off - should that happen - is likely to arrive so late in life that it's not much use to you anyway.

Linton

bearshare wrote: »

I prefer ALL my assets to produce some sort of real return. Even gold can go up in price when markets go down. Cash seldom produces much of a return, and has negative return now.

The psychological/emotional aspect is the only reason that makes sense to me, but such reasons seldom lead to the beat returns.

There are no assets at the moment that will safely produce a positive real return, something that will only make a limited real loss is the best you can do. Whilst you are building up a pension pot you have the fairly high security of a steady income and so can recover from major falls. This enables you to focus on the long term. Finances in retirement are very different, the short term is important if you want to enjoy the standard of living to which you have become accustomed. A loss cannot be recovered from new money and could impact your income for the rest of your life. Conversely maximising long term gain is of relatively low importance.


Using uncorrelated higher risk investments is fine, but being uncorrelated there is nothing to prevent them falling at the same time.

Spreadsheetman

Linton wrote: »

....
You talk about "a better outcome". How do you define this? As a retiree I am not looking for maximum return, but rather sufficient return to meet my objectives, return that is as certain as it can be. Getting a good night's sleep is more important than leaving behind an extra £100K when I die.

Exactly. Better does not necessarily mean "more".