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

BritishInvestor

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

TBC15 said:

craig1912 said:

NedS said:

craig1912 said:

I’m in drawdown and have been for 18 months. Nothing in cash. I did discuss with my IFA and it remains an option I guess but am comfortable in the long term that it will be the right strategy. It does almost boil down to trying to time the markets and that has never been a great idea

So by selling units/shares to raise the income you need each month (within the confines of the strategies @DairyQueen cites), you are pound cost averaging during decumulation much as you would have done during accumulation.

Both strategies have their downsides - holding large amounts of cash acts as a drag on portfolio performance yielding a guaranteed loss to inflation whereas being 100% invested exposes you to (higher) sequence of return risks that you will need to manage to ensure you do not run out of money.

Yep I get what you are saying other factors come into play, what rate is being drawn down, from what amount, do you want to maintain capital, what other income does one have etc.etc.
My strategy is for the portfolio not to lose money rather gain lots. The fact is even this year i’m only a few percent down and am very confident that I won’t run out of money- my IFA has talked about gifting in a few years to reduce tax liability when I go! 

That’s the beauty of having more than you could possibly need. Getting to that point is what most people strive for. In retirement I still have aspirations to be filthy rich.

Bottom line is that you should only have as much exposure as you can afford to lose. For most people replenishing lost capital is no longer an option in retirement. Very different to while one is still working and can surf the waves. 

Thrugelmir: Not clear what you mean by this. Surely you should only take as much exposure as required (and that you are happy with e.g. historical drawdowns) to ensure that you don't outlive your portfolio? 

Which historical datasets are you basing your thinking on?  

Depends on the asset class(es) - total of around 20 datasets (sometimes more than one dataset used for a given asset class over time) typically going back to 1900.

Thrugelmir

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

TBC15 said:

craig1912 said:

NedS said:

craig1912 said:

I’m in drawdown and have been for 18 months. Nothing in cash. I did discuss with my IFA and it remains an option I guess but am comfortable in the long term that it will be the right strategy. It does almost boil down to trying to time the markets and that has never been a great idea

So by selling units/shares to raise the income you need each month (within the confines of the strategies @DairyQueen cites), you are pound cost averaging during decumulation much as you would have done during accumulation.

Both strategies have their downsides - holding large amounts of cash acts as a drag on portfolio performance yielding a guaranteed loss to inflation whereas being 100% invested exposes you to (higher) sequence of return risks that you will need to manage to ensure you do not run out of money.

Yep I get what you are saying other factors come into play, what rate is being drawn down, from what amount, do you want to maintain capital, what other income does one have etc.etc.
My strategy is for the portfolio not to lose money rather gain lots. The fact is even this year i’m only a few percent down and am very confident that I won’t run out of money- my IFA has talked about gifting in a few years to reduce tax liability when I go! 

That’s the beauty of having more than you could possibly need. Getting to that point is what most people strive for. In retirement I still have aspirations to be filthy rich.

Bottom line is that you should only have as much exposure as you can afford to lose. For most people replenishing lost capital is no longer an option in retirement. Very different to while one is still working and can surf the waves. 

Thrugelmir: Not clear what you mean by this. Surely you should only take as much exposure as required (and that you are happy with e.g. historical drawdowns) to ensure that you don't outlive your portfolio? 

Which historical datasets are you basing your thinking on?  

Depends on the asset class(es) - total of around 20 datasets (sometimes more than one dataset used for a given asset class over time) typically going back to 1900.

Inherent danger is that such data is misread and becomes oversimplified when it is progressively relayed on. 

michaels

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

TBC15 said:

craig1912 said:

NedS said:

craig1912 said:

I’m in drawdown and have been for 18 months. Nothing in cash. I did discuss with my IFA and it remains an option I guess but am comfortable in the long term that it will be the right strategy. It does almost boil down to trying to time the markets and that has never been a great idea

So by selling units/shares to raise the income you need each month (within the confines of the strategies @DairyQueen cites), you are pound cost averaging during decumulation much as you would have done during accumulation.

Both strategies have their downsides - holding large amounts of cash acts as a drag on portfolio performance yielding a guaranteed loss to inflation whereas being 100% invested exposes you to (higher) sequence of return risks that you will need to manage to ensure you do not run out of money.

Yep I get what you are saying other factors come into play, what rate is being drawn down, from what amount, do you want to maintain capital, what other income does one have etc.etc.
My strategy is for the portfolio not to lose money rather gain lots. The fact is even this year i’m only a few percent down and am very confident that I won’t run out of money- my IFA has talked about gifting in a few years to reduce tax liability when I go! 

That’s the beauty of having more than you could possibly need. Getting to that point is what most people strive for. In retirement I still have aspirations to be filthy rich.

Bottom line is that you should only have as much exposure as you can afford to lose. For most people replenishing lost capital is no longer an option in retirement. Very different to while one is still working and can surf the waves. 

Thrugelmir: Not clear what you mean by this. Surely you should only take as much exposure as required (and that you are happy with e.g. historical drawdowns) to ensure that you don't outlive your portfolio? 

Which historical datasets are you basing your thinking on?  

Depends on the asset class(es) - total of around 20 datasets (sometimes more than one dataset used for a given asset class over time) typically going back to 1900.

Inherent danger is that such data is misread and becomes oversimplified when it is progressively relayed on. 

I worry that basing your approach to sequence of return risk on historic data is you are generally limiting yourself to a hundred odd sample periods whereas with a monte carlo approach you would take the mean and standard deviation in the observed data and run thousands or millions of scenarios and might well find that your 100 observed results all happen to lie within 1 or 2 SDs and thus what on the basis of historic data appears to be a 99% success strategy is actually only an 85% success strategy when compared to all potential scenarios.

BritishInvestor

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

TBC15 said:

craig1912 said:

NedS said:

craig1912 said:

I’m in drawdown and have been for 18 months. Nothing in cash. I did discuss with my IFA and it remains an option I guess but am comfortable in the long term that it will be the right strategy. It does almost boil down to trying to time the markets and that has never been a great idea

So by selling units/shares to raise the income you need each month (within the confines of the strategies @DairyQueen cites), you are pound cost averaging during decumulation much as you would have done during accumulation.

Both strategies have their downsides - holding large amounts of cash acts as a drag on portfolio performance yielding a guaranteed loss to inflation whereas being 100% invested exposes you to (higher) sequence of return risks that you will need to manage to ensure you do not run out of money.

Yep I get what you are saying other factors come into play, what rate is being drawn down, from what amount, do you want to maintain capital, what other income does one have etc.etc.
My strategy is for the portfolio not to lose money rather gain lots. The fact is even this year i’m only a few percent down and am very confident that I won’t run out of money- my IFA has talked about gifting in a few years to reduce tax liability when I go! 

That’s the beauty of having more than you could possibly need. Getting to that point is what most people strive for. In retirement I still have aspirations to be filthy rich.

Bottom line is that you should only have as much exposure as you can afford to lose. For most people replenishing lost capital is no longer an option in retirement. Very different to while one is still working and can surf the waves. 

Thrugelmir: Not clear what you mean by this. Surely you should only take as much exposure as required (and that you are happy with e.g. historical drawdowns) to ensure that you don't outlive your portfolio? 

Which historical datasets are you basing your thinking on?  

Depends on the asset class(es) - total of around 20 datasets (sometimes more than one dataset used for a given asset class over time) typically going back to 1900.

Inherent danger is that such data is misread and becomes oversimplified when it is progressively relayed on. 

Just for clarification I use the tool (Timeline) upon which the data is based so I don't tend to dig around with the raw data

BritishInvestor

michaels said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

BritishInvestor said:

Thrugelmir said:

TBC15 said:

craig1912 said:

NedS said:

craig1912 said:

I’m in drawdown and have been for 18 months. Nothing in cash. I did discuss with my IFA and it remains an option I guess but am comfortable in the long term that it will be the right strategy. It does almost boil down to trying to time the markets and that has never been a great idea

So by selling units/shares to raise the income you need each month (within the confines of the strategies @DairyQueen cites), you are pound cost averaging during decumulation much as you would have done during accumulation.

Both strategies have their downsides - holding large amounts of cash acts as a drag on portfolio performance yielding a guaranteed loss to inflation whereas being 100% invested exposes you to (higher) sequence of return risks that you will need to manage to ensure you do not run out of money.

Yep I get what you are saying other factors come into play, what rate is being drawn down, from what amount, do you want to maintain capital, what other income does one have etc.etc.
My strategy is for the portfolio not to lose money rather gain lots. The fact is even this year i’m only a few percent down and am very confident that I won’t run out of money- my IFA has talked about gifting in a few years to reduce tax liability when I go! 

That’s the beauty of having more than you could possibly need. Getting to that point is what most people strive for. In retirement I still have aspirations to be filthy rich.

Bottom line is that you should only have as much exposure as you can afford to lose. For most people replenishing lost capital is no longer an option in retirement. Very different to while one is still working and can surf the waves. 

Thrugelmir: Not clear what you mean by this. Surely you should only take as much exposure as required (and that you are happy with e.g. historical drawdowns) to ensure that you don't outlive your portfolio? 

Which historical datasets are you basing your thinking on?  

Depends on the asset class(es) - total of around 20 datasets (sometimes more than one dataset used for a given asset class over time) typically going back to 1900.

Inherent danger is that such data is misread and becomes oversimplified when it is progressively relayed on. 

I worry that basing your approach to sequence of return risk on historic data is you are generally limiting yourself to a hundred odd sample periods whereas with a monte carlo approach you would take the mean and standard deviation in the observed data and run thousands or millions of scenarios and might well find that your 100 observed results all happen to lie within 1 or 2 SDs and thus what on the basis of historic data appears to be a 99% success strategy is actually only an 85% success strategy when compared to all potential scenarios.

It's monthly sampling, not annual. 
IMO Monte Carlo has its place (and I've used it intensively in a previous life) but if sufficient real data is available I would rather use that (with the caveat that the future could well be worse than the worst outcome in the last ~120 years)
https://www.kitces.com/blog/monte-carlo-analysis-risk-fat-tails-vs-safe-withdrawal-rates-rolling-historical-returns/

Audaxer

green_man said:

Audaxer said:

michaels said:

NedS said:

michaels said:

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.

Sequence of return risk means your safe withdrawal rate based on historic market performance is higher with 20% cash 80% equities than it is with 100% cash.

My point is that a strategy to withdraw from cash rather than equities when markets are by some definition 'low' is effectively a dynamic rebalancing strategy that should recognised for what it is and formalised.  If at some market level it makes sense to hold less cash and more equities (and vice versa) then why not rebalance the whole portfolio correspondingly rather than tinkering at the edges via the drawdown?

Playing devil's advocate here, and I could have quoted many posts...

Surely in it's simplest form this is attempting to time the market? You are making a judgement call whether you think equities will rise or fall from a given point, and based on that you are making a decision whether to withdraw from cash if you think markets will rise or equities if you think markets will fall. And all the time (maybe the next 30-40 years) you have the drag of 20% of your portfolio sat in cash making a loss, being eroded by inflation. You have a 50:50 chance of being right. As we know equities rise 2/3rd's of the time, on that basis one should stay fully invested and be right 2/3rd's of the time.

So it's a fools game to try to time the market in accumulation but we are saying it's OK once we retire in decumulation?

Maybe 20% is simply far too high? If you are looking at a diversified global equity portfolio and using typical 3-4% withdrawal rates, 20% cash may be 4-5 years worth of cash, and then we have the natural yield of our portfolio which may be 2% (or higher if our portfolio is targeting income) which pushes out our cash position to 8-10 years.

With 100% equity, if one is able to limit spending to 3% withdrawal during bad years, then with a natural yield of 2%, you would only be drawing down 1% equities compared to the drag that sitting on 20% cash would cause.

I think we are agreeing - holding cash for drawing down when markets are 'low' is effectively timing the market.  

If you are holding cash that you are going to drawdown for income when markets are low, I don't see how that can be classed as timing the market. You would only be trying to time the market if you planned to reinvest that cash when the markets were low.

I can’t see how you wouldn’t consider this ‘timing the market’?  When is the ‘market low’? Is it low now?. You are basically making a decision of liquidating assets or waiting. Just the same as putting money in, buy now or wait until cheaper. You are saying wait until prices are better until you liquidate. I’m not saying it’s wrong but it’s certainly a form of ‘timing the market’.

If you have a portfolio of investments which have just had a big fall in value, and you also have a large cash holding, it would seem to me the most sensible thing to do is to take cash for income rather than selling investments for income. As your cash holding will be a higher percentage of your overall pot than previously, taking cash as income also helps to rebalance.

DairyQueen

Audaxer said:

green_man said:

Audaxer said:

michaels said:

NedS said:

michaels said:

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.

Sequence of return risk means your safe withdrawal rate based on historic market performance is higher with 20% cash 80% equities than it is with 100% cash.

My point is that a strategy to withdraw from cash rather than equities when markets are by some definition 'low' is effectively a dynamic rebalancing strategy that should recognised for what it is and formalised.  If at some market level it makes sense to hold less cash and more equities (and vice versa) then why not rebalance the whole portfolio correspondingly rather than tinkering at the edges via the drawdown?

Playing devil's advocate here, and I could have quoted many posts...

Surely in it's simplest form this is attempting to time the market? You are making a judgement call whether you think equities will rise or fall from a given point, and based on that you are making a decision whether to withdraw from cash if you think markets will rise or equities if you think markets will fall. And all the time (maybe the next 30-40 years) you have the drag of 20% of your portfolio sat in cash making a loss, being eroded by inflation. You have a 50:50 chance of being right. As we know equities rise 2/3rd's of the time, on that basis one should stay fully invested and be right 2/3rd's of the time.

So it's a fools game to try to time the market in accumulation but we are saying it's OK once we retire in decumulation?

Maybe 20% is simply far too high? If you are looking at a diversified global equity portfolio and using typical 3-4% withdrawal rates, 20% cash may be 4-5 years worth of cash, and then we have the natural yield of our portfolio which may be 2% (or higher if our portfolio is targeting income) which pushes out our cash position to 8-10 years.

With 100% equity, if one is able to limit spending to 3% withdrawal during bad years, then with a natural yield of 2%, you would only be drawing down 1% equities compared to the drag that sitting on 20% cash would cause.

I think we are agreeing - holding cash for drawing down when markets are 'low' is effectively timing the market.  

If you are holding cash that you are going to drawdown for income when markets are low, I don't see how that can be classed as timing the market. You would only be trying to time the market if you planned to reinvest that cash when the markets were low.

I can’t see how you wouldn’t consider this ‘timing the market’?  When is the ‘market low’? Is it low now?. You are basically making a decision of liquidating assets or waiting. Just the same as putting money in, buy now or wait until cheaper. You are saying wait until prices are better until you liquidate. I’m not saying it’s wrong but it’s certainly a form of ‘timing the market’.

If you have a portfolio of investments which have just had a big fall in value, and you also have a large cash holding, it would seem to me the most sensible thing to do is to take cash for income rather than selling investments for income. As your cash holding will be a higher percentage of your overall pot than previously, taking cash as income also helps to rebalance.

Audaxer is differentiating between the past and the future.

There is a difference between trying to time the market (anticipating future market returns) and responding to recent market performance. Drawdown strategies use the latter; speculative investing uses the former.

craig1912

BritishInvestor said:

Thrugelmir said:

TBC15 said:

craig1912 said:

NedS said:

craig1912 said:

I’m in drawdown and have been for 18 months. Nothing in cash. I did discuss with my IFA and it remains an option I guess but am comfortable in the long term that it will be the right strategy. It does almost boil down to trying to time the markets and that has never been a great idea

So by selling units/shares to raise the income you need each month (within the confines of the strategies @DairyQueen cites), you are pound cost averaging during decumulation much as you would have done during accumulation.

Both strategies have their downsides - holding large amounts of cash acts as a drag on portfolio performance yielding a guaranteed loss to inflation whereas being 100% invested exposes you to (higher) sequence of return risks that you will need to manage to ensure you do not run out of money.

Yep I get what you are saying other factors come into play, what rate is being drawn down, from what amount, do you want to maintain capital, what other income does one have etc.etc.
My strategy is for the portfolio not to lose money rather gain lots. The fact is even this year i’m only a few percent down and am very confident that I won’t run out of money- my IFA has talked about gifting in a few years to reduce tax liability when I go! 

That’s the beauty of having more than you could possibly need. Getting to that point is what most people strive for. In retirement I still have aspirations to be filthy rich.

Bottom line is that you should only have as much exposure as you can afford to lose. For most people replenishing lost capital is no longer an option in retirement. Very different to while one is still working and can surf the waves. 

Thrugelmir: Not clear what you mean by this. Surely you should only take as much exposure as required (and that you are happy with e.g. historical drawdowns) to ensure that you don't outlive your portfolio? 
craig1912: Interested in the strategy not to lose money - isn't the purpose of the retirement pot to spend it?

Yep- which is what I’m doing, probably phrased that wrong but not really needing much growth so portfolio is low volatity.

coastline

Link from the 21st July.
https://monevator.com/cash-versus-bonds/
Feb 2020
https://monevator.com/how-to-choose-an-swr-for-your-isa-and-your-pension-to-hit-financial-independence-fast/