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

[Deleted User]

Mentioned before my drawdown strategy, may not be right, but makes me sleep well
Based on number of years spending
2 years cash
Years 3-5 MyMap 3 as core and three wealth preservation ITs/funds (so roughly a 20/80 split) as satellites 
Years 6-9 60/40 split between Vanguard and HSBC Global Strategy Balanced (I don't like more than a 100k in each fund, even though these are huge companies)
Years 10+ LGGG/L&G International Index/Fidelity Index  as core and a number of equity ITs and funds (Smithson, Fundsmith, BG Discovery, Bankers,  BG Managed) as satellites 

Chickereeeee

green_man said:

Obviously in hindsight it’s easy to come up with the best strategy to cope effectively with that scenario.

What the study does is take 146 years of history and runs different cash/equities mixes through 10 different types of drawdown strategy to see how often one mix and strategy beats another.   There were zero cases where the higher cash percentage gave an advantage.

in your case of this year you may gain this year but you will have lost in the previous 10 years by having 10/15% In cash rather than equities.

Given the generally held view is that cash should be held I found this an interesting counterpoint.

The comparison table has 10% cash, which reduces the equity, rather than the bond, allocation, which is clearly nonsense. The cash allocation should be taken from the bond allocation (ie the 'reduce volatility' holding rather than the 'growth engine' holding) giving a 50/40/10 % equity/bond/cash portfolio. This is mentioned in his report, and he says the result is similar  to the equity/bond only scenario, but without details.
So, it looks like you can have the growth/long term security, with cash holding short term comfort, after all.

DairyQueen

michaels said:

I think it may depend on your drawdown profile.  I used the SWR toolbox spreadsheet which has however many years of data and found that the highest SWR with a portfolio of cash and equities came at about 80% equities, 20% cash, this wasn't with any mucking about drawing cash when equities were in some way deemed low.  However half my planned retirement income comes from 2 state pensions payable in approx. 15 years so the drawdown is front loaded.  Without that the proportion of equities would probably be higher.

If it made sense to draw from cash rather than equities when markets were 'low' earlier this year did it not also make sense to rebalance from cash to equities at the same point, and equally when markets are 'high' doesn't it make sense to reduce equities and increase cash rather than just fiddling about at the edges via withdrawal strategy?

I agree that it depends on your drawdown profile. We are also front loading (first 5 years) and due to begin this year. 

Over a 3 month period prior to Jan this year, and fearful of an adverse sequence of returns (black swan anyone?), I rebalanced our portfolio so there was sufficient pension-wrapped cash to provide those five years of income. Suffice to say that I was very pleased that I did so. I slept very soundly when the markets crashed. I converted bonds to cash when I rebalanced and our current allocation is 75/8/17.

In 5+ years we will have sufficient guaranteed income to cover all expenses so are able to suspend drawdown indefinitely from that point forward. However, the (small) bond allocation is available to provide a few more years of optional drawdown at a (current) withdrawal rate of below 2% should equity markets turn south for a prolonged period.

No intention of reducing equities below 75% as that allocation is a 10+ year investment. I will likely allow the equity %age to increase toward 80% as the cash is withdrawn and will take a view on whether to hold more bonds when I review the allocation each year. I am averse to gilts whilst the QE taps are on full blast and the pandemic has added an extra layer of risk to corporate bonds. I prefer to take the inflation hit and let cash reduce volatility.

If we were reliant on drawdown for essential income throughout retirement I would adopt a more structured drawdown strategy. We have a first world problem as tax rather than SWR is the biggest issue for Mr DQ.

We are also holding a wodge of unwrapped cash in order to finance a property purchase. With the worst ever timing, we need to sell two properties and buy one this year, and the wodge is insurance against us not finding a buyer for one of them. If we can't sell either then our retirement plans are screwed as we will be trapped in either a tiny cottage or a city flat with barely room to swing the cat.

If we sell both homes then the wodge will be available to invest or spend and we will need to revisit our drawdown strategy and asset allocation.

michaels

Chickereeeee said:

green_man said:

Obviously in hindsight it’s easy to come up with the best strategy to cope effectively with that scenario.

What the study does is take 146 years of history and runs different cash/equities mixes through 10 different types of drawdown strategy to see how often one mix and strategy beats another.   There were zero cases where the higher cash percentage gave an advantage.

in your case of this year you may gain this year but you will have lost in the previous 10 years by having 10/15% In cash rather than equities.

Given the generally held view is that cash should be held I found this an interesting counterpoint.

The comparison table has 10% cash, which reduces the equity, rather than the bond, allocation, which is clearly nonsense. The cash allocation should be taken from the bond allocation (ie the 'reduce volatility' holding rather than the 'growth engine' holding) giving a 50/40/10 % equity/bond/cash portfolio. This is mentioned in his report, and he says the result is similar  to the equity/bond only scenario, but without details.
So, it looks like you can have the growth/long term security, with cash holding short term comfort, after all.

Also I didn't see a drawdown strategy where the cash is drawn when equity values are low (presumably low is defined by a fall in cape or something) so again pretty meaningless when the whole reason for the cash holding is to avoid drawing equities when they are low.  
There are actually some much better analyses that do show that actually markets can be low for multiple years, much longer than any cash buffer could support but equally if you just look at SWRs using cfiresim or SWR toolbox spreadsheet you find that holding a proportion of bonds or even cash does increase the 'no failure' SWR.

I am leaning towards an equities and cash portfolio with cash varying between 20% and 30% correlated with the CAPE (higher CAPE = more cash) but with formal rebalancing rather than just rebalancing via withdrawal pot choice.  This is for a portfolio with front weighted withdrawals, mostly for years 3-15, I suspect if the withdrawals were spread equally then the cash proportion would be a bit lower.

stephenadarglas

neilnockie said:

0% should be in cash.
Saving is losing with inflation.
Invest in funds targeting a 15-20% return & you'll way outperform cash.

It's not neilnockie's turn to have the brain today I'm afraid

83705628

michaels said:

Chickereeeee said:

green_man said:

Obviously in hindsight it’s easy to come up with the best strategy to cope effectively with that scenario.

What the study does is take 146 years of history and runs different cash/equities mixes through 10 different types of drawdown strategy to see how often one mix and strategy beats another.   There were zero cases where the higher cash percentage gave an advantage.

in your case of this year you may gain this year but you will have lost in the previous 10 years by having 10/15% In cash rather than equities.

Given the generally held view is that cash should be held I found this an interesting counterpoint.

The comparison table has 10% cash, which reduces the equity, rather than the bond, allocation, which is clearly nonsense. The cash allocation should be taken from the bond allocation (ie the 'reduce volatility' holding rather than the 'growth engine' holding) giving a 50/40/10 % equity/bond/cash portfolio. This is mentioned in his report, and he says the result is similar  to the equity/bond only scenario, but without details.
So, it looks like you can have the growth/long term security, with cash holding short term comfort, after all.

Also I didn't see a drawdown strategy where the cash is drawn when equity values are low (presumably low is defined by a fall in cape or something) so again pretty meaningless when the whole reason for the cash holding is to avoid drawing equities when they are low.  
There are actually some much better analyses that do show that actually markets can be low for multiple years, much longer than any cash buffer could support but equally if you just look at SWRs using cfiresim or SWR toolbox spreadsheet you find that holding a proportion of bonds or even cash does increase the 'no failure' SWR.

I am leaning towards an equities and cash portfolio with cash varying between 20% and 30% correlated with the CAPE (higher CAPE = more cash) but with formal rebalancing rather than just rebalancing via withdrawal pot choice.  This is for a portfolio with front weighted withdrawals, mostly for years 3-15, I suspect if the withdrawals were spread equally then the cash proportion would be a bit lower.

/
Mind if I ask where you get your CAPE data, are you talking about global/UK/US markets, and what range of Cape values inform what range of cash allocations?

LHW99

in your case of this year you may gain this year but you will have lost in the previous 10 years by having 10/15% In cash rather than equities.

True if the cash remained at that 10%-15% of the portfolio, because if you started with £100K and ended with £200k, you cash portion would have increased proportionally.

However, in real life have "2 years income in cash" (say) may, or may not increase proportionally. For example, we have very low inflation currently, but an SP that has been increased according to the triple lock. It means that if 2 years income 10 years ago was £10k, the requirement now could only be £17k (or of course it could be £30k!).

My point being, that careful studies are good and helpful, but may not necessarily reflect real life scenarios.

BritishInvestor

LHW99 said:

in your case of this year you may gain this year but you will have lost in the previous 10 years by having 10/15% In cash rather than equities.

True if the cash remained at that 10%-15% of the portfolio, because if you started with £100K and ended with £200k, you cash portion would have increased proportionally.

However, in real life have "2 years income in cash" (say) may, or may not increase proportionally. For example, we have very low inflation currently, but an SP that has been increased according to the triple lock. It means that if 2 years income 10 years ago was £10k, the requirement now could only be £17k (or of course it could be £30k!).

My point being, that careful studies are good and helpful, but may not necessarily reflect real life scenarios.

I think the studies, and the tools based upon them are more than able to deal with most real life scenarios.

Audaxer

Deleted_User said:

Mentioned before my drawdown strategy, may not be right, but makes me sleep well
Based on number of years spending
2 years cash
Years 3-5 MyMap 3 as core and three wealth preservation ITs/funds (so roughly a 20/80 split) as satellites 
Years 6-9 60/40 split between Vanguard and HSBC Global Strategy Balanced (I don't like more than a 100k in each fund, even though these are huge companies)
Years 10+ LGGG/L&G International Index/Fidelity Index  as core and a number of equity ITs and funds (Smithson, Fundsmith, BG Discovery, Bankers,  BG Managed) as satellites 

Deleted_User, I'm interested to know if you would use your cash for spending in the first two years irrespective of what happens in the markets during these two years? If my investments performed well in these first two years, I would tend to drawdown from my investments and keep the two year cash buffer to draw on in times of poor market returns. 

cfw1994

green_man said:

Obviously in hindsight it’s easy to come up with the best strategy to cope effectively with that scenario.

What the study does is take 146 years of history and runs different cash/equities mixes through 10 different types of drawdown strategy to see how often one mix and strategy beats another.   There were zero cases where the higher cash percentage gave an advantage.

in your case of this year you may gain this year but you will have lost in the previous 10 years by having 10/15% In cash rather than equities.

Given the generally held view is that cash should be held I found this an interesting counterpoint.

I don't disagree - as I said "Clearly that study tells me I am entirely wrong - I haven't read the detail of it - but I suspect I would feel a whole lot better about life, & that's the real aim, eh ".

Part of financial life is the mental side.   For me, having a chunk in premium bonds, which we probably agree are generally rubbish 'investments', but that give a teeny tiny possibility of a hint above inflation.....as a small part of an overall investment plan.....feels good. 
None of us know the best place for investments...but we all want to feel good about what we're doing, eh