How much to keep in rainy day savings during retirement?

blueandgreenpoppy

...And to add to my previous post, how much that leaves us for the purchase of a new house.

kuratowski

Notwithstanding that you already have a budget that covers home maintenance and car replacement and all the rest, I would say the amount to keep in your rainy day contingency fund is the amount that allows you to sleep comfortably at night, however much that is!

jamesd

Because your pension income is mainly guaranteed your core long term cash need is three to twelve months for unanticipated spending.

Since you're in your last year of work close to top financial priority for both of you is to make pension contributions equal to your whole gross (after any salary sacrifice) pay. Also within the 40k annual allowance and carry-forward of unused allowance from the previous three years.

You do this because:

1. 25% of the gross can be withdrawn from a personal pension as a tax free lump sum, effectively saving you income tax on a quarter of your pay.

2. You can withdraw as much as you like from a personal pension whenever you like provided you're 55 or older and I assume that you both are or soon will be. You can even take the tax free lump sum from a pot while still working and place the 75% into a flexi-access drawdown account for taxable withdrawing when you finish work. Tax planning then determines how much of the taxable bit you take out each year, or you can just leave it or take it out and reinvest in an ISA.

Because investments typically grow faster than mortgage interest rates it tends to be a better move to take a mortgage and keep investments than use all cash by selling investments and using no mortgage. So how much is left for your purchase is whatever combination of mortgage and cash you want to use. Even without the state pensions you say you have excess income, so a mortgage can be a good use of it.

Mortgage to age 85 and older are readily available and include the newish option of the retirement interest only mortgage. This is almost ideal for your situation because you can make interest only payments until your state pensions start then use them to do any capital repaying that you want.


In addition to emergency cash, you're planning a major purchase soon and you should move all of the investment money that you intend to use for that purchase out of investments and into cash. This is so last minute market movements don't scupper your plans. Personal pensions normally provide a cash facility or if not a money market fund is the standard safe substitute.

MEM62

I have a DC pension so will be keeping circa 12-months living expenses in a slush fund.  This is primarily to prevent us drawing money down during a market slump.  

blueandgreenpoppy

jamesd said:

Because your pension income is mainly guaranteed your core long term cash need is three to twelve months for unanticipated spending.

Since you're in your last year of work close to top financial priority for both of you is to make pension contributions equal to your whole gross (after any salary sacrifice) pay. Also within the 40k annual allowance and carry-forward of unused allowance from the previous three years.

You do this because:

1. 25% of the gross can be withdrawn from a personal pension as a tax free lump sum, effectively saving you income tax on a quarter of your pay.

2. You can withdraw as much as you like from a personal pension whenever you like provided you're 55 or older and I assume that you both are or soon will be. You can even take the tax free lump sum from a pot while still working and place the 75% into a flexi-access drawdown account for taxable withdrawing when you finish work. Tax planning then determines how much of the taxable bit you take out each year, or you can just leave it or take it out and reinvest in an ISA.

Because investments typically grow faster than mortgage interest rates it tends to be a better move to take a mortgage and keep investments than use all cash by selling investments and using no mortgage. So how much is left for your purchase is whatever combination of mortgage and cash you want to use. Even without the state pensions you say you have excess income, so a mortgage can be a good use of it.

Mortgage to age 85 and older are readily available and include the newish option of the retirement interest only mortgage. This is almost ideal for your situation because you can make interest only payments until your state pensions start then use them to do any capital repaying that you want.


In addition to emergency cash, you're planning a major purchase soon and you should move all of the investment money that you intend to use for that purchase out of investments and into cash. This is so last minute market movements don't scupper your plans. Personal pensions normally provide a cash facility or if not a money market fund is the standard safe substitute.

Thanks, that's very useful. We are both over 55 and now self employed. I hadn't thought about making more pension contributions, but that makes sense.
We have kept the new house money in cash reserves and need to move soon so there's not too much in cash for a longer period.

blueandgreenpoppy

MEM62 said:

I have a DC pension so will be keeping circa 12-months living expenses in a slush fund.  This is primarily to prevent us drawing money down during a market slump.  

The pandemic really brought home to me how important that is if you rely on stock market investment for pensions.

We are so lucky to have DB schemes.

gm0

A number of responders like me are DC drawdown and have to worry about sequence risk and choose to carry substantial extra cash (and/or non-equities and less volatile assets) as buffer to support (variable) income and potentially avoid ill timed sales in the worst of market volatility and initial recovery. 

Luckily you don't have that to worry about with more than essential income covered by inflation indexed DB.

Beyond the usual admonition to have 6-12 in "emergency" - for the usual suspects -  replace the boiler, written off car needs replacing above insured value etc. one offs. 

Property issues would be the next one from my perspective.  If you are moving and buying something there is clearly a whole range of cashflow demanding issues that can come up with a property either because you bought something which has projects to do (in the price hopefully but you still need to pay the builder/trades) or just surprise maintenance events.  Or it's a flat and they are the stage where the leaseholders are buying the freehold out and whack up the service charge to pay this off.  That sort of thing.  Or you unfortunately bought a flat with a poorly provisioned sinking fund and then a big bill - lifts or something like that comes due and drops on the current tenants.  Something to think about anyway.

Albermarle

blueandgreenpoppy said:

MEM62 said:

I have a DC pension so will be keeping circa 12-months living expenses in a slush fund.  This is primarily to prevent us drawing money down during a market slump.  

The pandemic really brought home to me how important that is if you rely on stock market investment for pensions.

We are so lucky to have DB schemes.

Yes many would agree with you , although we get a lot of posters on this forum desperate to transfer out of DB schemes and take the money.

In fact probably the main advantage of DB schemes , is actually the large amount of money put into them by the employer . If an employer would put the same high % contributions into a DC scheme , then you would probably be in an even better situation . Partly because anything left in a DC scheme can be passed onto your beneficiaries when you die .

Things like the Pandemic are actually not that relevant as in fact markets are now above where they were before the pandemic. In the last ten years people with DC pots have seen some big rises in value .

Probably having a DB and a DC pension is a kind of sweet spot .

MEM62

blueandgreenpoppy said:

MEM62 said:

I have a DC pension so will be keeping circa 12-months living expenses in a slush fund.  This is primarily to prevent us drawing money down during a market slump.  

The pandemic really brought home to me how important that is if you rely on stock market investment for pensions.

We are so lucky to have DB schemes.

The value of a DB scheme cannot be over-estimated.  I have a small one from a company for whom I worked for four years back in the 80's.  I did add some AVC's but nevertheless, when I reach 60 it will pay me £5k a year.  I wish the rest of my working life had similar returns.   

DairyQueen

We are not in a dissimilar position to you OP.

I struggled to calculate a budget for our retirement move, how the move would impact our expenses in retirement, and how much unwrapped cash we should hold. It's a bit of a 'how long is a piece of string' exercise and personal to the individual. Research and review frequently and eventually the wood appears through the trees.

The expenses calculation is still a work in progress as we are not yet properly moved-in, but I have a much better idea since we completed our purchase. We have always erred on the side of caution in our calculations as we would rather have too much cash losing value to inflation than rely on a timely conversion of illiquid assets.

FWIW and as an example....

Our (preplanned into retirement) house move was impacted by the pandemic but we got there eventually. We owned two modest homes and sold one to finance upsizing before purchasing. We calculated our max house budget as:

(Net sale proceeds + Total unwrapped cash) - (Unwrapped cash allocated for next 5 years + Emergency Cash + Cash Buffer).

Actual figures:

(317k + £446k) - (28k+25k+55k) = 655k

The 'allocated cash' includes known major spends (excluding housing). For us, this includes a major holiday, pandemic permitting.

'Emergency cash' covers unexpected, major costs such as replacing vehicles sooner than anticipated, gifting to kids if the eldest stepd decides to marry, or if either need a cash subsidy.

The 'cash buffer' is a combination of 'sleep well' and 'suspend drawdown for up to 5 years in a crash'. We are over cautious despite having sufficient guaranteed income to cover expenses from 2025 onward. We are front-loading drawdown from 2022 to bridge the gap.

We sought a home in move-in condition but that didn't go to plan. Our new home is in the perfect location and has an-almost perfect layout, but has been neglected for the best part of a decade. Everything requires replacement, plus a small extension. We purchased at £475k so have a refurb budget of £175k. As inflation and building costs will now be higher than anticipated we are watching scope and costs carefully. 

From 2025 we expect (today's values):

Income (gross):
DB Pension: 30k
2 x SP = £18.6k
SIPP drawdown (up to tax allowances - BRT for OH and zero for me): £10.3k.

Expenses (net): 37-40k plus travel.

Unwrapped cash - 78k (replenished from drawdown as required).

Other assets:
120k in retained profits from our ltd company
2nd property 220k.

We have excluded 'other assets' from the calculation as they are illiquid and we are considering gifting the 2nd property.