How much of my portfolio should be in cash during retirement?

Notepad_Phil

_pete_ said:

My SIPP is invested in Vanguard LS60 and the HSBC equivalent (can't remember the exact name at the moment).  I understand that there is such thing as 'sequence of returns risk' and that I should try to mitigate this by having several years worth of living expenses held in cash (including the current year's requirements).
I am effectively retired, and no longer making contributions to my SIPP.
I would appreciate the views of contributors to this forum on how many years worth of income I should have in cash, given the make-up of my SIPP.
I appreciate there is no definitive answer, but I'd like to get a sense of the range.

I've probably got greater than the average in cash (multiple years) , but it's held outside of the investment portfolio platforms in various bank/building society accounts and has been beating CPI over the last 3 years since early-retiring in my mid fifties.

However my investments are 100% equities (no bonds at all) and my cash allows me to sleep easily at night - I realise that I'm lucky and have got to a position where I can have significant amounts held in investments, enough to pay for my early-retirement by taking the natural yield from it, and also have the luxury of high amounts in cash in case the stock market falls off a cliff and stays in the doldrums until state pension kicks in.

I guess the question of how much cash to hold depends to a great deal on how much you can afford to have. If you need to have most of your money tied up in investments (equity, bond and others) to generate the income you need to live off, then you may need to live with only a year of income held in cash. Hopefully you can afford to hold more, but the amount really does depend on you and your attitude to risk.

[Deleted User]

coastline said:

The current yield on the SP500 is just under 2%. A world tracker is similar.
https://www.multpl.com/s-p-500-dividend-yield
https://www.hl.co.uk/shares/shares-search-results/v/vanguard-funds-ftse-all-world-etf-usdgbp
I'm not saying this is the answer but an option. 5 years before retirement you could start holding the dividend payments as cash in your pot. That should give a base for an initial 3% withdrawal rate and see how it goes. If you have other savings in a bank account then even better.
There's always questions about inflation and dividends. Research shows it's not all that bad.
https://seekingalpha.com/article/439171-has-dividend-growth-kept-up-with-inflation
This is a decent website for past events.
https://www.yardeni.com/pub/buybackdiv.pdf

Inflation isn’t that bad for stocks. What really hurts them is deflation. Thats when cash is king

DairyQueen

This is one of those 'how long is a piece of string' questions as it depends on so many factors.

1) How reliant are you on the income from drawdown? i.e. are there any other sources of guaranteed income? If so, will these income sources cover all your non-discretionary expenses if you need to suspend drawdown?

2) Do you have a separate emergency cash fund to cover unexpected, large expenses (our extension required a £3,000 roof repair this year). We hold our emergency cash discrete from drawdown funds.

3) Attitude to risk. Some people sleep well at night holding 6 months drawdown income in cash. Others (like me) need 3-5 years. 

4) Do you intend to suspend drawdown completely if SoR goes against you? 

5) Will you be taking yield from investments, or will you drawdown using a strategy of rebalancing a mix of equities/bonds/cash (i.e. per your current allocation)? Do you anticipate higher income requirements at different phases of retirement (e.g. to fund travel in the early years)?

6) Do you wish to ringfence any capital (for, say, inheritance)? Or is the whole pot available for drawdown during your lifetime?

These kinds of questions will determine how the portfolio is structured and the withdrawal rate you anticipate at different phases of retirement. This feeds into a forecast of cash requirements and allows you to estimate how much you hold in cash to protect against SoR risk and also to deliver your projected WR (withdrawal rate). 

We are front loading drawdown over the next 5 years and currently hold sufficient cash to meet our spending plans throughout this period as we would rather take an inflation hit than compromise the early years of retirement. Our WR will be high in the early years and then reduce to between 0 and 2%.

From year 5 onward we will hold cash sufficient to cover 2/3 years drawdown but we are fortunate to be able to suspend drawdown indefinitely if markets are very bearish.

tigerspill

I hold 7 years in cash.  This includes a few years where I will need to support the full year from cash, and then some where I need to top up my and my wife's DB pensions.
I am comfortable with this and understand the inflation risks of this, but am risk averse in terms of investments.  So I guess I am at one end of the scale on this.

Audaxer

tigerspill said:

I hold 7 years in cash.  This includes a few years where I will need to support the full year from cash, and then some where I need to top up my and my wife's DB pensions.
I am comfortable with this and understand the inflation risks of this, but am risk averse in terms of investments.  So I guess I am at one end of the scale on this.

I agree. If you have enough cash to cover the 7 years, and enough invested to cover future top-ups to your DB pensions, I don't think you need to worry about the inflation risk. 

atush

_pete_ said:

My SIPP is invested in Vanguard LS60 and the HSBC equivalent (can't remember the exact name at the moment).  I understand that there is such thing as 'sequence of returns risk' and that I should try to mitigate this by having several years worth of living expenses held in cash (including the current year's requirements).
I am effectively retired, and no longer making contributions to my SIPP.
I would appreciate the views of contributors to this forum on how many years worth of income I should have in cash, given the make-up of my SIPP.
I appreciate there is no definitive answer, but I'd like to get a sense of the range.

Personally, i am  a fan of keeping my emergency cash in case of bad markets out of my pension- ie thru savings.  Then any cash in my pension could be a smaller fund used to DD in good times and reinvest during bad.
PS we intend to have 2 to 3 yrs in cash as we intend to remain invested

Robert_McGeddon

I empathise with DairyQueen's post.

 

If my only source of income was via SIPP and/or own pension I would be concerned about sequence of returns risk, rebalancing etc. But, like many others, I will get a full state pension in due course. I am also fortunate to have a small legacy DB pension. My DC pension is there to top up my income to the minimum I need to live on plus discretionary (i.e. fun & luxury) spending.  In a serious financial climate I could batten down the hatches and just about live off the income already guaranteed. I could defer replacing the car for a couple of years or suspend payments into the SIPP or perhaps eat a lot more pasta if absolutely necessary!  I have no need for anything other than a token cash buffer.

 

But I do keep cash (or near cash) for emergencies such as major house repairs, supporting my kids at short notice or addressing needs of elderly parents. Not a lot - but enough to make me feel comfortable.

 

I found BritishInvestor’s link to Abraham Okusanya’s article on cash buffers helpful – as is Abraham’s book “Beyond the 4% rule,” given its UK perspective. I expect to hold a little more in equities than Abraham’s examples as I think equities are a better long term proposition – but of course everyone has different circumstances and different perspectives.

michaels

The more I think about it the more I think that holding cash to use for specific near term drawdowns is an imaginary construct.

The only reason to hold cash rather than equities is to reduce volatility (ie less downside risk at the expense of less upside opportunity).

Any use of drawing from cash when markets are low is about rebalancing at the edges in response to market conditions whereas in fact rebalancing in response to market conditions may be an appropriate strategy but that strategy should be pursued explicitly rather than implicitly through drawdown adjustment.

michaels

I went to cfiresim and tried various different proportions of cash in a cash/equity portfolio with a front loaded drawings profile (to represent a 10 year period from drawdown start to state pension entitlement) and the lower the cash proportion I went with (right down to 0%) the higher the safe withdrawal rate.

One drawback of cfiresim is that you can only set a single rate of return for cash (I set 1%) so it is probably too impacted by inflation, I would rather have been able to set a zero real return on cash which might result in holding cash having some value as a buffer against sequence or return risks.  Anyone know of any analysis on this or a tool I could use to model this better?

_pete_

michaels said:

The more I think about it the more I think that holding cash to use for specific near term drawdowns is an imaginary construct.

The only reason to hold cash rather than equities is to reduce volatility (ie less downside risk at the expense of less upside opportunity).

Any use of drawing from cash when markets are low is about rebalancing at the edges in response to market conditions whereas in fact rebalancing in response to market conditions may be an appropriate strategy but that strategy should be pursued explicitly rather than implicitly through drawdown adjustment.

michaels said:

I went to cfiresim and tried various different proportions of cash in a cash/equity portfolio with a front loaded drawings profile (to represent a 10 year period from drawdown start to state pension entitlement) and the lower the cash proportion I went with (right down to 0%) the higher the safe withdrawal rate.

This is really interesting.  I appreciate that the extend of one's cash holding depends at least in part on personal factors such as how safe we need to feel (and my initial post was to get a feel for 'real world' practice), but I had assumed that there would be a definitive 'correct' answer to  the following question:
'Which sequence of returns risk mitigation strategy gives the best results over the course of retirement'?
Is there an uncontroversial 'right' answer to this?