How Much Cash Should I Keep in My Portfolio in drawdown ?

thickasabrick

With early flexi-retirement beckoning when I hit the magic 55 years later this year I've started the process of consolidating my portfolio into my SIPP which is held with Fidelity.

I had planned to keep two to three years worth of expenses in cash but came across an article linked from Monevator's Weekend reading which has got me re-considering.

The Poor Swiss : How often should you withdraw money from your portfolio?

I'm hoping to at least make it to the median expected lifespan 86 so looking specifically at the 30 year timespan.

Read the article a day after I'd liquidated half my workplace pension which was 100% in the "Scottish Equitable Overseas Equity Tracker Pension Fund" GB00B046S109 which has performed beyond my wildest expectations over the last year and half since I switched into it. 

Felt a bit odd selling something that is performing so well but Fidelity don't list it so thought I would split the transfer into two tranches and use the first tranche as the cash portion.
So with the portion I'd already kept in my SIPP I've ended up with 16.25 % in cash which is now starting to look a bit too cautious.

TVAS

Firstly I worked for Fidelity and I saw huge growth.

They are brilliant at fund selection so I am struggling to believe there is not an Overseas Worldwide equity fund.

You 16.25% is too cautious but you have failed to mention what the 83.75% is invested in.

2 - 3 years worth of expensive is a long time to be out of the market. 

You have also failed so say how much tax free cash you intend to take.

If you need to take a specific sum and cannot afford to take anything less, stick that amount in cash, if it does not really matter how much cash you take later this year invest the whole amount.

It depends on if you want to take 25% later this year, or in slices part cash part income. Reading between the lines it sounds like you are still working so any pension income will be added to earned income which might push you into another tax band. 

I say always try to take income on Month 12 March. 

This means you will get 12/12ths of your personal allowance so the payment will be paid gross. If you only take £12,570 no further tax to pay. If you take more, your tax code will be adjusted in the next tax year.

So if you took max TFC this year, your first payment would be tax year ending 2023 assuming you have earned income in this tax year ending 2022. 

As soon as you take income the total annual contribution to a pension plan reduces to 4k p.a. I know you want to retire at 55 however bear this mind because you might be offered short term contract with pension contributions. Just bear this in mind.

AlanP_2

As much as is needed to let you sleep well at night.


It also depends on what other cash / assets you have outside pension. If you had 2-8 years worth of planned spend in cash / PBs outside pension then you would probably be 100% invested inside pension.

Albermarle

If not done already , you should read about 'sequence of returns risk '
Basically once the drawdown starts , you should have enough cash to cover two or five years income, so you do not have to withdraw from the drawdown pot during a bad market downturn .

thickasabrick

TVAS said:

Firstly I worked for Fidelity and I saw huge growth.

They are brilliant at fund selection so I am struggling to believe there is not an Overseas Worldwide equity fund.

You 16.25% is too cautious but you have failed to mention what the 83.75% is invested in.

2 - 3 years worth of expensive is a long time to be out of the market. 

You have also failed so say how much tax free cash you intend to take.

If you need to take a specific sum and cannot afford to take anything less, stick that amount in cash, if it does not really matter how much cash you take later this year invest the whole amount.

It depends on if you want to take 25% later this year, or in slices part cash part income. Reading between the lines it sounds like you are still working so any pension income will be added to earned income which might push you into another tax band. 

I say always try to take income on Month 12 March. 

This means you will get 12/12ths of your personal allowance so the payment will be paid gross. If you only take £12,570 no further tax to pay. If you take more, your tax code will be adjusted in the next tax year.

So if you took max TFC this year, your first payment would be tax year ending 2023 assuming you have earned income in this tax year ending 2022. 

As soon as you take income the total annual contribution to a pension plan reduces to 4k p.a. I know you want to retire at 55 however bear this mind because you might be offered short term contract with pension contributions. Just bear this in mind.

My SIPP is 100% Vanguard LifeStrategy 60 , plan is to switch to an ETF to take advantage of Fidelity's fee structure on drawdown. Which one still to be decided, top contenders are HSBC or Vanguard All world. 

Still working this tax year so it'll be TFLS to get us through to the start of next tax year when my SO will also pick up a TFLS and defined benefit pension.

Following tax year will also be TFLS for me, simply to defer the MPAA limits for as long as possible for the reason you mentioned, might want to pick up the occasional short term contract.

The 'sequence of returns risk' is why I bit the bullet on cashing in half my workplace pension. The fantastic gains we've had over the last year and bit due to QE inflating assets has been something else and I was starting to feel that QE was heading towards the consumption side now that lockdown restrictions are being lifted.

I'd been putting off commiting due to the uncertainties with the lockdown restrictions but as I only had a small amount of cash decided to use the transfer from my workplace pension to my SIPP to spur me into action.

If Europe has COVID-19 under control and travel restrictions have been lifted then aiming for an October exit otherwise will wait until after Christmas and review the situation in January 2022.

Prism

Albermarle said:

If not done already , you should read about 'sequence of returns risk '
Basically once the drawdown starts , you should have enough cash to cover two or five years income, so you do not have to withdraw from the drawdown pot during a bad market downturn .

That is one way to approach it but generally the historical models and examples like the Trinity Study don't assume you hold any cash at all except for that years spends. They do typically assume that someone would hold some level of bonds along side equities which would usually mean that the effects of a market downturn would be lessened. 

I think the holding cash example has become more popular in the last few years with concerns about bond valuations but I wouldn't say it is required.

bostonerimus

Cash, and things close to cash like very short duration bonds, are spent when the markets are down and it would be bad to have to sell. They act as a buffer and emergency fund for bad times. I've heard of allocations ranging from one to five years of spending, three years is pretty safe, but it would not have been enough in Japan back in the 1990s.

So do a budget and come up with the amount of cash you need. If you have an annuity, DB pension, state pension or something like rental income you might need to keep less cash on hand.

This is where multi-asset funds are not ideal in drawdown. They do rebalance, but you cannot decide to sell bonds over equities. So you might have something like VLS80 and add a short term bond fund and cash to come up with your final allocation.

Albermarle

My SIPP is 100% Vanguard LifeStrategy 60 , plan is to switch to an ETF to take advantage of Fidelity's fee structure on drawdown. Which one still to be decided, top contenders are HSBC or Vanguard All world. 

So the cash can have two functions - as you are moving to a more volatile/risky investment , the cash can be a  bond substitute to dilute the 100% equities global tracker . Plus can be used to counter sequence of returns risk if necessary.

Of course you have to also take account of cash and investments outside the pension as well.

tacpot12

I think two years of living expenses is about the optimum to keep in cash.  Even in the worst crash, markets seem to recover within a couple of years.

The Poor Swiss study was interesting, but the result was to be expected as studies have shows that frequent investing of smaller sums produces a better return than occasional, larger investments and trying to time the market, and the study was looking at the reverse of this.

However in retirement, when you drawing down on your pension, it seems easier to spot when NOT to sell, rather than trying to spot when to buy during your accumulation phase. This might be confirmation bias on my part, but I'm happy with my decision to keep two years worth of living expenses out of the market in case of market problems. I think it is also worth having six months cash somewhere other than your pension provider in case they have any IT trouble and you can make any withdrawals. 

bostonerimus

If you are doing something close to the 4% annual withdrawal rate, then 2 years of spending would be about 8% of your portfolio. Of course the 4% rule did not include a cash allocation when it was derived.

michaels

Keeping cash when inflation is at 1% or less isn't too expensive.  Perhaps the calculus changes if inflation goes to 5% + ?