Cash Buffer in case of poor sequence of returns

DT2001

tigerspill said:

My plan is to always try and have 5 years in cash.  Each year I calculate Money Needed less Income from DB/SP pensions.  Sum for 5 years and hold in Premium Bonds and other accounts.
My plan is the to sell investments each year to replenish cash.  My basic trigger for withdrawing investments is that they have covered inflation.  If they don't cover inflation, then I won't withdraw until they increase again above inflation.

Can I ask, is 5 years of cash 20% of your pot (working on SWR of 4%)?
Do you invest a higher %, than might normally be considered ideal (60/40), in equities as you hold cash to cover 5 years outside?
Did you look at an income geared portfolio so you could drip feed into your cash pot whilst generally ignoring capital variations?  My MIL had an income portfolio set up a few years ago to utilise IHT excess income relief as she wanted to retain control of the capital for care fees. It has produced steady returns and the capital does seem despite some volatility to be holding its own

tigerspill

DT2001 said:

tigerspill said:

My plan is to always try and have 5 years in cash.  Each year I calculate Money Needed less Income from DB/SP pensions.  Sum for 5 years and hold in Premium Bonds and other accounts.
My plan is the to sell investments each year to replenish cash.  My basic trigger for withdrawing investments is that they have covered inflation.  If they don't cover inflation, then I won't withdraw until they increase again above inflation.

Can I ask, is 5 years of cash 20% of your pot (working on SWR of 4%)?
Do you invest a higher %, than might normally be considered ideal (60/40), in equities as you hold cash to cover 5 years outside?
Did you look at an income geared portfolio so you could drip feed into your cash pot whilst generally ignoring capital variations?  My MIL had an income portfolio set up a few years ago to utilise IHT excess income relief as she wanted to retain control of the capital for care fees. It has produced steady returns and the capital does seem despite some volatility to be holding its own

It probably is around 20%.
However, as time goes on, "5 years worth of cash" will reduce significantly.
Currently and for the next 5 years, this cash will top up my DB pension income.  In 4/5 years, my wife will start to take her DB pension, do the next 7 years will "cost" much less in terms of needing top up money.  After that SP kicks in for both of us so at that stage the income will be sufficient without top up cash.
So we plan to start spending more and see how it goes.  Well once we are allowed to travel.
My plan for investments is to have some lower risk - VLS40 and some higher risk - VLS 80.  Each year I will withdraw from the VLS 80 as long as it has done "well" and VLS 40 when equities haven't done "well" and I need cash.
Still sorting the details, but this is broadly my thinking.
I am starting to consolidate my portfolio as it is currently a mess (I started a thread on this a few weeks ago).  So pretty much a green field.  Moving slowly as I learn more.

Thrugelmir

tigerspill said:

DT2001 said:

tigerspill said:

My plan is to always try and have 5 years in cash.  Each year I calculate Money Needed less Income from DB/SP pensions.  Sum for 5 years and hold in Premium Bonds and other accounts.
My plan is the to sell investments each year to replenish cash.  My basic trigger for withdrawing investments is that they have covered inflation.  If they don't cover inflation, then I won't withdraw until they increase again above inflation.

Can I ask, is 5 years of cash 20% of your pot (working on SWR of 4%)?
Do you invest a higher %, than might normally be considered ideal (60/40), in equities as you hold cash to cover 5 years outside?
Did you look at an income geared portfolio so you could drip feed into your cash pot whilst generally ignoring capital variations?  My MIL had an income portfolio set up a few years ago to utilise IHT excess income relief as she wanted to retain control of the capital for care fees. It has produced steady returns and the capital does seem despite some volatility to be holding its own

My plan for investments is to have some lower risk - VLS40 and some higher risk - VLS 80.  Each year I will withdraw from the VLS 80 as long as it has done "well" and VLS 40 when equities haven't done "well" and I need cash.

Why not hold VLS60? 

tigerspill

Thrugelmir said:

tigerspill said:

DT2001 said:

tigerspill said:

My plan is to always try and have 5 years in cash.  Each year I calculate Money Needed less Income from DB/SP pensions.  Sum for 5 years and hold in Premium Bonds and other accounts.
My plan is the to sell investments each year to replenish cash.  My basic trigger for withdrawing investments is that they have covered inflation.  If they don't cover inflation, then I won't withdraw until they increase again above inflation.

Can I ask, is 5 years of cash 20% of your pot (working on SWR of 4%)?
Do you invest a higher %, than might normally be considered ideal (60/40), in equities as you hold cash to cover 5 years outside?
Did you look at an income geared portfolio so you could drip feed into your cash pot whilst generally ignoring capital variations?  My MIL had an income portfolio set up a few years ago to utilise IHT excess income relief as she wanted to retain control of the capital for care fees. It has produced steady returns and the capital does seem despite some volatility to be holding its own

My plan for investments is to have some lower risk - VLS40 and some higher risk - VLS 80.  Each year I will withdraw from the VLS 80 as long as it has done "well" and VLS 40 when equities haven't done "well" and I need cash.

Why not hold VLS60? 

That is a very good question - and one I am wrestling with.
I cant get my head around whether holding VLS60 - and have to sell this as and when needed; and having VLS 40/80 and being able to chose which to sell.  Do I end up with the same? 
My thinking is that holding two allows me to chose which to sell depending on how equities have done at that point.  But I cant work out if having VLS60 does this anyway and Vanguard manage the balancing in this context.
I would be very grateful for any insight on this.

Secret2ndAccount

The return from VLS60 would be the same as from equal investments in VLS40 and VLS80. However, the ability to choose to sell either the equities or the bonds requires holding the two separate parts. Maybe a better question would be why not VLS20 and VLS100

JohnWinder

I think you're exactly right in your reasoning to hold a mix of VLS40 and VLS80, or 20 and 80, or bonds only and stocks only (in the right proportions). But it's only a matter of degree compared with the simple (read 'good') choice of VLS60.

Think about it: if you hold a stocks only fund for 60% or your money, and a bonds only fund for 40%, you get full control of how much equities to cash in when you need cash - you'll choose none if equities have fallen. If you hold VLS80 and VLS 20 instead, you now are obliged to sell a little bit of your equities; and if you hold VLS60 and VLS40, by selling VLS40 you are obliged to sell even more of your equities. And with VLS60 you have no discretion.

But put some numbers (how much you'll be withdrawing, and how much equities might have fallen) into a couple of examples and you might find it's not worth worrying about. And the less you plan or are obliged to withdraw each time, the less you will be impacted by 'selling equities when they're down'. When I put a 50% crash in equity values (bonds' value unchanged), and then decide to withdraw 10% of my total, I find I'm selling equities to the value of 3% of my wealth with VLS60, and equities to the value of 2% of my wealth with VLS40. Doesn't seem a big difference. Those calculations might be wrong, so do your own.

As to Vanguard balancing VLS60, I can't imagine they only sell your bonds when you withdraw 10% during an equity crash. If you withdraw 10% of VLS60, you'd be selling 10% or your equities and 10% of your bonds, surely.

Thrugelmir

tigerspill said:

Thrugelmir said:

tigerspill said:

DT2001 said:

tigerspill said:

My plan is to always try and have 5 years in cash.  Each year I calculate Money Needed less Income from DB/SP pensions.  Sum for 5 years and hold in Premium Bonds and other accounts.
My plan is the to sell investments each year to replenish cash.  My basic trigger for withdrawing investments is that they have covered inflation.  If they don't cover inflation, then I won't withdraw until they increase again above inflation.

Can I ask, is 5 years of cash 20% of your pot (working on SWR of 4%)?
Do you invest a higher %, than might normally be considered ideal (60/40), in equities as you hold cash to cover 5 years outside?
Did you look at an income geared portfolio so you could drip feed into your cash pot whilst generally ignoring capital variations?  My MIL had an income portfolio set up a few years ago to utilise IHT excess income relief as she wanted to retain control of the capital for care fees. It has produced steady returns and the capital does seem despite some volatility to be holding its own

My plan for investments is to have some lower risk - VLS40 and some higher risk - VLS 80.  Each year I will withdraw from the VLS 80 as long as it has done "well" and VLS 40 when equities haven't done "well" and I need cash.

Why not hold VLS60? 

That is a very good question - and one I am wrestling with.
I cant get my head around whether holding VLS60 - and have to sell this as and when needed; and having VLS 40/80 and being able to chose which to sell.  Do I end up with the same? 
My thinking is that holding two allows me to chose which to sell depending on how equities have done at that point.  But I cant work out if having VLS60 does this anyway and Vanguard manage the balancing in this context.
I would be very grateful for any insight on this.

Vanguard will be rebalancing the funds constantly with the broader monetary flows in and out of each VLS wrapper.

Which equities are you referring too. Global markets may not remain in tandem indefinitely.  The recovery of individual markets/economies from Covid is not going to be uniform. 

michaels

Here is some maths/research for those who still think a cash buffer makes sense:

https://earlyretirementnow.com/2017/03/29/the-ultimate-guide-to-safe-withdrawal-rates-part-12-cash-cushion/

You have to think about how long a correction might last in real rather than nominal terms and then also factor in rebuilding the cash buffer for the next correction.

JohnWinder

This dude has done all that thinking for you....https://earlyretirementnow.com/2019/10/30/who-is-afraid-of-a-bear-market

[Deleted User]

Good stuff. 

The answer to all that scary stuff is in one word: diversification.
For example his story a out 2000 bear wouldn’t have looked anywhere near that bad if he had international stocks as well as US.  And bonds.