Cash buffer

DT2001

The current pandemic focused my attention on the Cash Buffer. We could retire however OH enjoys her work and our youngest is a few years off Uni/work. We had a year to 18 months buffer(it builds up as make lump sum pension investments close to end of tax year). Lockdown stopped OH’s income overnight so we encashed part of our pots. We have reinvested as new/different work/contracts have been found. We lost some of our paper profits by encashing when we did but  we protected ourselves against a continuing stock market fall and no pick up in income.
Now going forward I want to consider the options more thoroughly.
I read a Wade Pfau podcast recently where he suggested you needed to be more flexible in your expenditure to cope with fluctuations in markets, accept lower withdrawal rates as bond returns were lower, maybe adopt a Bengen approach with a lower and upper limit on withdrawals BUT use buffer assets (cash, whole of life Insurance policies and equity release). He was most averse to using cash as it reduces your invested pot and therefore long term (evened out) gains.
This triggered a memory of a Canadien advisor’s article I read some months ago (when looking at Guyton Klinger etc etc) who I think recommended a low cash reserve as you were depriving yourself of the gains on that money.
I have considered just taking natural income off our portfolio but this obviously gives a lower income.
If retiring early then presumably ones cash reserve will reduce as DB and SP start.

What are others doing and why?

Dox

DT2001 said:

The current pandemic focused my attention on the Cash Buffer. We could retire however OH enjoys her work and our youngest is a few years off Uni/work. We had a year to 18 months buffer(it builds up as make lump sum pension investments close to end of tax year). Lockdown stopped OH’s income overnight so we encashed part of our pots. 

DC pension pots? If so, have you triggered the Money Purchase Annual Allowance limiting yourselves to £4K gross each for any future contributions to DC arrangements?

Linton

There are three reasons I see for holding significant cash during retirement.
1) To avoid being a forced seller at an inappropriate time
2) As part of non-equity section of a balanced portfolio, particularly now that some of us see  that safe bonds can no longer provide long term security.
3( Psychological - this is the important reason for me.  My Growth portfolio would have to be far less adventurous if I did not have the reassurance of a substantial cash holding.

If you have to skimp on your cash reserves because you need the extra return in my view you are simply taking too much risk or perhaps are trying to live out your retirement with insuffient assets.  Either way it's a recipe for sleepless night and perhaps eventual failure of your retirement plan.

Thrugelmir

As has been evidenced in the past 12 months, natural income (equities) is far from guaranteed. Unfortunately Government Bonds no longer provide any fall back. Cash at least smooths volatility. 

DT2001

Dox said:

DT2001 said:

The current pandemic focused my attention on the Cash Buffer. We could retire however OH enjoys her work and our youngest is a few years off Uni/work. We had a year to 18 months buffer(it builds up as make lump sum pension investments close to end of tax year). Lockdown stopped OH’s income overnight so we encashed part of our pots. 

DC pension pots? If so, have you triggered the Money Purchase Annual Allowance limiting yourselves to £4K gross each for any future contributions to DC arrangements?

No, not triggered. Have spent last few years ‘chucking’ money in to ensure funds to utilise personal allowance to the full when OH retires before SPA. Of course guessing when that might happen!

DT2001

Linton said:

There are three reasons I see for holding significant cash during retirement.
1) To avoid being a forced seller at an inappropriate time
2) As part of non-equity section of a balanced portfolio, particularly now that some of us see  that safe bonds can no longer provide long term security.
3( Psychological - this is the important reason for me.  My Growth portfolio would have to be far less adventurous if I did not have the reassurance of a substantial cash holding.

If you have to skimp on your cash reserves because you need the extra return in my view you are simply taking too much risk or perhaps are trying to live out your retirement with insuffient assets.  Either way it's a recipe for sleepless night and perhaps eventual failure of your retirement plan.

Can I ask, how many years of non guaranteed income do you have?
When we withdrew funds earlier this year we had 3 to 4 (spending quite a bit lower at the moment as we used to travel often - enjoying today and saving).
Especially agrée with Point 3 for my OH

SouthCoastBoy

Currently I have around 40% in cash with the vast majority being outside the pension. I am close to retirement (1 to 2 years) but am around 11 years from State Pension Age and have no DB pension therefore need to ensure I have cash available if needed without unnecessarily going into invested pension and with brexit and covid going on who knows what is going to happen to the markets.
 As we are currently in a low inflation environment I am not too concerned about this, however if inflation rose and interest rates didn't I would most probably look at investing some of this in index linked bonds or equities/funds, however it would depend on my circumstances at the time and what I am comfortable with.

Linton

Sorry for the extra post, but its an opportunity to make another possibly tendentious point.

I ignore Wade Pfau, Guyton & Klinger and all the rest.  I suspect that none of them have actual experience of managng money in retirement, or perhaps they do now but they did not when coming up with their ideas.

The policy I adopt is to spend what I like when I like from cash reserves, rebalancing once a year or so.  "What I like" is tempered by a spreadsheet financial plan covering the rest of my days.  If the plan shows more than enough money is available we can take extra holidays, carry out major house improvements etc.  If not, such things can be delayed  and planned expenditure for the rest of our lives slightly reduced.  "Slightly reduced"  because the effects are spread over a long time period. 

[Deleted User]

When you say “cash” do you mean:
1. “High” interest cash holdings or money market funds or
2. Actual non-interest bearing cash sitting in a pension or some other account or under the pillow?

The latter makes no sense to me. I do hold some of the former but only in tax disadvantaged/regular accounts.  Its probably 3 years’ worth of expenses which largely keeps pace with inflation. 

As you I increased my FI allocation this year - in January as I am considering leaving employment in the not too distant future - to 30 percent. Most of it is in the government or high quality bonds, some inflation protected. Trying to keep the average duration short. Also use preferred shares which I classify as 50% FI and 50% equity. I bought them in March and they returned more than the equity from that point.  

Linton

Deleted_User said:

When you say “cash” do you mean:
1. “High” interest cash holdings or money market funds or
2. Actual non-interest bearing cash sitting in a pension or some other account or under the pillow?

The latter makes no sense to me. I do hold some of the former but only in tax disadvantaged/regular accounts.  Its probably 3 years’ worth of expenses which largely keeps pace with inflation. 

As you I increased my FI allocation this year - in January as I am considering leaving employment in the not too distant future - to 30 percent. Most of it is in the government or high quality bonds, some inflation protected. Trying to keep the average duration short. Also use preferred shares which I classify as 50% FI and 50% equity. I bought them in March and they returned more than the equity from that point.  

If the question was for me - the cash, mainly in Premium Bonds is currently about 4-5 years worth of what we need to cover normal spending, in addition to the guaranteed income, .  More than this is held in Wealth Preservation funds.

As our wealth increases thanks to the prudently pessimistic assumptions made when we retired I will be increassing both the WP funds and the cash, the latter being used to max out the premium bonds.

DT2001

Linton said:

Sorry for the extra post, but its an opportunity to make another possibly tendentious point.

I ignore Wade Pfau, Guyton & Klinger and all the rest.  I suspect that none of them have actual experience of managng money in retirement, or perhaps they do now but they did not when coming up with their ideas.

The policy I adopt is to spend what I like when I like from cash reserves, rebalancing once a year or so.  "What I like" is tempered by a spreadsheet financial plan covering the rest of my days.  If the plan shows more than enough money is available we can take extra holidays, carry out major house improvements etc.  If not, such things can be delayed  and planned expenditure for the rest of our lives slightly reduced.  "Slightly reduced"  because the effects are spread over a long time period. 

I like that approach and as we have both been self employed for 30+ years are quite happy to adopt a flexible approach. SWR in all its formats gives a rough guide as to size of pot you need.
Thank you