Cash Buffer after markets downturn?

atush

I plan to drawdown more aggressively than most in the early years, but will have 3 years in cash to use when markets are down and potentially take nothing. This will be scaled back once state pensions are in payment.

232607

You say you are going to sell them before things get worse but how do you know they will get worse.
Shared are where they are because of the sentiment/outlook that exists at the moment.
If this improves shares will rise, if they deteriorate they will fall. Nobody knows which way they will go.

Thrugelmir

thriftytracey wrote: »

I was going to sell them now before things got worse.

Worse than what? Statistically you will always run the risk of markets falling by 15% in any one year in six. Markets are naturally volatile. Recent fiscal policies has made some investors complacent and over confident in their own investing abilities. Your portfolio needs to be rebalanced to reflect your objectives.

kidmugsy

This bloke's very good.
http://www.theretirementcafe.com

You could learn a lot by working back through his posts. One of his rules for himself in retirement is that he holds 40% of his portfolio in equities - any more would cause him too much anxiety, he reckons.

He's a fan of people building up a base of risk-free retirement income - in the US it's particularly efficient to do that by deferring drawing "social security" until age 70.

It used to be similar here - with the old-style State Pension, deferring drawing it for four or five years paid off very well. It's not remotely as good for the pensioner with the new-style State Pension - but of course it's much better for the taxpayers who no longer have to pay an extravagant reward for deferral.

So, making due allowance for US vs UK, I rate him highly.

bostonerimus

To the OP,
You need to take a hollistic approach to your asset allocation. So start by writing down all your sources of guaranteed retirement income ie state pension, annuities and defined benefit work pensions and the dates they start. Then write down asset allocation of equities, bonds and cash in your DC pensions, ISAs, regular investment accounts and your bank account. You'll also need to know how much you will spend each year. If you can get those numbers together the folks on here can give you an idea of how you are set......but many people doing drawdown like to have at least 1 year's worth of spending in cash so they don't have to sell equities for income in a down market. However, that might be different if you can get a fair portion of your income from dividends or defined benefit pensions.

green_man

bostonerimus wrote: »

To the OP,
.....but many people doing drawdown like to have at least 1 year's worth of spending in cash so they don't have to sell equities for income in a down market.

But this is the crux of the OPs question, when and how do you decide you are in a downturn and when do you use that cash balance and when do you top it up? It’s easy to look back and say How you would have done it in a particular scenario, not so easy when you don’t know if a 30% drop is coming after a 10% drop etc.

Jamesd’s posts do cover some of this in his (excellent though involved) thread posted above but it’s not easy being clear in you mind how you are going to modify your asset allocation depending on what the market has done in the previous 12-24 months.

coastline

green_man wrote: »

But this is the crux of the OPs question, when and how do you decide you are in a downturn and when do you use that cash balance and when do you top it up? It’s easy to look back and say How you would have done it in a particular scenario, not so easy when you don’t know if a 30% drop is coming after a 10% drop etc.

Jamesd’s posts do cover some of this in his (excellent though involved) thread posted above but it’s not easy being clear in you mind how you are going to modify your asset allocation depending on what the market has done in the previous 12-24 months.

I've always had a mix of three , cash in fixed rate bonds, S&S ISA'S and a small DB pension. Yes cash is struggling now to keep up with inflation since the financial crash in 2008 but its what I'm comfortable with.
Regarding the pension pot I'd just take what you need at first and review it yearly. Maybe 4% or even less depends on the size of the pot.?
It appears most savers aren't 100% equity and more 60/40 ish. The links below are a decent read. Other links are show at the end of each summary.

https://www.kitces.com/blog/what-returns-are-safe-withdrawal-rates-really-based-upon/

https://www.kitces.com/blog/understanding-sequence-of-return-risk-safe-withdrawal-rates-bear-market-crashes-and-bad-decades/

https://www.kitces.com/blog/adjusting-safe-withdrawal-rates-to-the-retirees-time-horizon/

DairyQueen

green_man wrote: »

But this is the crux of the OPs question, when and how do you decide you are in a downturn and when do you use that cash balance and when do you top it up? It’s easy to look back and say How you would have done it in a particular scenario, not so easy when you don’t know if a 30% drop is coming after a 10% drop etc.

Jamesd’s posts do cover some of this in his (excellent though involved) thread posted above but it’s not easy being clear in you mind how you are going to modify your asset allocation depending on what the market has done in the previous 12-24 months.

But the whole point of using a drawdown strategy is to avoid that kind of guesswork. Strategies use algorithms that do this donkey work for you. The key thing is to choose a strategy with flexible drawdown rates. These typically accommodate recent market movements and alert you to when/if/how much you should switch between different asset classes.

The important thing is to adopt a strategy and stick to it. The evidence shows that these strategies work much better than trying to time markets, or by using a straight-line rate (i.e. the US 4% or the UK 3% rule).

Selling equities in response to a recent market dip is usually the worst thing you could possibly do, regardless of whether you are still accumulating or are in the decumulation phase.

Having said that, OP shouldn't be holding any money in equities that is needed within 5 years. This is the first rule of investing in equities.

Linton has already mentioned that OP shouldn't differentiate between assets held within and outside a pension wrapper. Once age 55+ pension assets are accessible and the wrapper is only relevant for tax planning.

If OP will have no/little other taxable income next tax year then the sensible thing is to enter drawdown on retirement to max out withdrawals from the pension up to the available personal allowance. Use it or lose it.

OP signals that his unwrapped assets (equities and cash) are 'modest'. This is a relative term but if the cash is OP's emergency fund then it should be retained as such.

OP: in your situation I would seek to organise my portfolio ready for drawdown. I wouldn't defer drawdown as you have a golden opportunity to extract tax-free income from the pension wrapper which will close when you receive SP.

If your income requirements exceed the approx, £16k p.a. you will be able to drawdown tax free using UFPLS then top-up from unwrapped assets. An alternative would be to take the whole 25% commencement cash lump sum, and take a lower annual amount (12k next tax year) or some-and-some.

Prior to entering drawdown, your assets should be split between the thee main asset classes (bonds/cash/equities) by reference to a drawdown strategy. Your emergency cash (i.e. the cash you need to fund unexpected. large bills) should be excluded. The cash that you need as part of your income should be included in the total drawdown portfolio, whether held inside or outside the pension wrapper.

It is best to begin positioning your portfolio for drawdown a few years before retirement. You may miss out a little on growth if equities rise in the interim. Typically drawdown strategies reduce exposure to equities (the %age varies with attitude to risk and chosen strategy). However, you will also limit the downside of market volatility.

The important thing is not the overall value of the portfolio on any given day but its ability to sustain the income you require throughout your life.

I understand your current quandary but, having left planning so late, I'm afraid you may have to bite the bullet and hit the sell button on some of your equities at a non-optimum time. Not necessarily to fund income but simply to position your portfolio ready for drawdown.

I would delay rebalancing (use some of your cash for income if necessary) until I had chosen a strategy. I would then rebalance using market dips/rises over a period of, say, a year, or until equities begin an upward trend if you can afford to hold-out.

If you don't want the hassle of managing drawdown, or are at a loss to know how to set-up it up for drawdown, then you need an IFA.

thriftytracey

DairyQueen wrote: »

James's thread on safe withdrawal rates/strategies:
https://forums.moneysavingexpert.com/discussion/5466114/drawdown-safe-withdrawal-rates&highlight=drawdown+jamesd

Thank you - and for the reassurance.

kidmugsy

From The Retirement Cafe: 'Lastly, let’s talk about “optimal asset allocation.” Gordon Irlam published a study in which he noted that, while it would be tremendously helpful to know the optimal allocation, his estimate of the 95th percentile confidence interval for equity allocation was roughly between 10% and 80%. Based on that analysis, I can’t know with any certainty at all whether rebalancing would move me closer or farther from optimal. Tweaking an asset allocation within 5% tolerance is, I believe, an example of the massive overconfidence prevalent in many areas of retirement planning. We feel certain about things that aren’t certain, at all.'

Let me repeat: 'the massive overconfidence prevalent in many areas of retirement planning'.

One lesson that has been true historically, and which may remain true in future, is that the returns on equities tend to be higher when the equities are bought (or held) when valuations are low, and tend to be lower when the equities are bought (or held) when valuations are high.

Are equity valuations high or low at the moment? In the US, at least, they are high.