Retirement Investing - Less Risky Bets

Thrugelmir

NedS said:

Thrugelmir said:

NannaH said:

If (when) interest rates rise, will Sipp providers start paying interest on cash held?

Never have done historically. That's how platforms generate income. At best they put clients cash balance on overnight deposit. Not rates which are comparable with those for retail deposits. 

Hargreaves Lansdown used to pay me interest on money held as cash in my SIPP, and have stated they intend to do so again once interest rates have risen sufficiently. My recently opened Fidelity SIPP also states they intend to resume interest payments on cash once interest rates permit. They clearly have a percentage in mind they want to top slice and then anything above that are happy to pass onto customers.

Platforms have been under investigation in this regard by the FCA. Though with BOE base below 1% since 2009. Be a while yet one suspects. What's really required is a proper deposit option for larger sums that investors wish to park for a period of time.  

Audaxer

DT2001 said:

Audaxer said:

Linton 

A cash buffer is also useful for emergencies and major one-off expenditure.  It means one can take a relatively expensive holiday or buy a new car without having to worry about rebalancing and whether it would jeopardise the retirement plan.   So adding that to the buffer of 4-5 years cover for crashes could give a total of 5-10 years expenditure.

I'd certainly agree with having 5 to 10 years worth of cash for emergencies and major one-off expenditure for those that can afford it. For example, for those retirees that have other sources of income such as DB and State pensions that covers most of their expenditure, and they just need to withdraw relatively small percentages from their investments as a top-up. In these circumstances, their investment pot is probably going to continue to grow significantly over the long term anyway, so they don't need to plough more cash into their investments unless they want to increase their pot for inheritance.  

How do you work out the amount if they are one off/emergencies?

If, as in your example, people have most of their expenditure covered by DB and/or SP and are only normally withdrawing a small % of their pot is there not a case for keeping less in cash?

They do not need to keep more in cash, but I'm suggesting in that example they may want to keep more in cash rather than risk more in investments than they need to, as they are already more than covered for their regular income needs by their DB pension, SP and investments. In that example, as they are only needing to draw a little from their investments, their pot will most likely increase over time anyway. As they have managed to accumulate such a big pot, I'm suggesting they may want to get round to spending some of their hard earned cash rather than just investing more and never actually spending it.  

Linton

DT2001 said:

Audaxer said:

Linton 

A cash buffer is also useful for emergencies and major one-off expenditure.  It means one can take a relatively expensive holiday or buy a new car without having to worry about rebalancing and whether it would jeopardise the retirement plan.   So adding that to the buffer of 4-5 years cover for crashes could give a total of 5-10 years expenditure.

I'd certainly agree with having 5 to 10 years worth of cash for emergencies and major one-off expenditure for those that can afford it. For example, for those retirees that have other sources of income such as DB and State pensions that covers most of their expenditure, and they just need to withdraw relatively small percentages from their investments as a top-up. In these circumstances, their investment pot is probably going to continue to grow significantly over the long term anyway, so they don't need to plough more cash into their investments unless they want to increase their pot for inheritance.  

How do you work out the amount if they are one off/emergencies?

If, as in your example, people have most of their expenditure covered by DB and/or SP and are only normally withdrawing a small % of their pot is there not a case for keeping less in cash?

If you have excess money there are cases for either reducing risk and maximising flexibility by keeping a much larger cash buffer than required for crash protection or keeping cash to a minimum in order to maximise return.

There is the need for an initial allocation to provide for inflation matching normal expenditure in the long term.  Beyond that there is the question of how to manage one-off expenditure and any requirement to provide for one's beneficiaries.  So it depends on your circumstances.  If there are no beneficiaries who could reasonably expect a very large lump sum there is no great need to maximise investment return.

An alternative objective is to shield oneself from equity movements as much as reasonably possible to ensure future one off expenditure plans can be met regardless of the economic situation.  The expected costs could include such things as a regular foreign holiday, replacement of cars, possibly a new kitchen or other house refurbishment. On the other hand there is no point in keeping cash that could never be used.

To keep ongoing manaement simple I aim to have sufficient cash to max out his and hers PBs and then keep much the same amount of money in lower risk investments intended to match inflation. Anthing extra can be invested in equity at higher risk.  This should ensure that any foreseeable future expenditure at current prices can be made met without touching the equity portfolio which can be left in peace to do its job.




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Albermarle

As they have managed to accumulate such a big pot, I'm suggesting they may want to get round to spending some of their hard earned cash rather than just investing more and never actually spending it.  

It is a good point . Sometimes people forget that spending more and enjoying it, can be a very good part of your investment/retirement strategy . It is a lesson I am slowly learning myself , especially as the less I spend then the more the taxman will benefit !

Linton

Audaxer said:

DT2001 said:

Audaxer said:

Linton 

A cash buffer is also useful for emergencies and major one-off expenditure.  It means one can take a relatively expensive holiday or buy a new car without having to worry about rebalancing and whether it would jeopardise the retirement plan.   So adding that to the buffer of 4-5 years cover for crashes could give a total of 5-10 years expenditure.

I'd certainly agree with having 5 to 10 years worth of cash for emergencies and major one-off expenditure for those that can afford it. For example, for those retirees that have other sources of income such as DB and State pensions that covers most of their expenditure, and they just need to withdraw relatively small percentages from their investments as a top-up. In these circumstances, their investment pot is probably going to continue to grow significantly over the long term anyway, so they don't need to plough more cash into their investments unless they want to increase their pot for inheritance.  

How do you work out the amount if they are one off/emergencies?

If, as in your example, people have most of their expenditure covered by DB and/or SP and are only normally withdrawing a small % of their pot is there not a case for keeping less in cash?

They do not need to keep more in cash, but I'm suggesting in that example they may want to keep more in cash rather than risk more in investments than they need to, as they are already more than covered for their regular income needs by their DB pension, SP and investments. In that example, as they are only needing to draw a little from their investments, their pot will most likely increase over time anyway. As they have managed to accumulate such a big pot, I'm suggesting they may want to get round to spending some of their hard earned cash rather than just investing more and never actually spending it.  

Yes.  One option is gifts either to charity or to young relations who would have more use for the money now rather than in possibly 20-30 years time.

NannaH

NedS said:

DT2001 said:

Audaxer said:

Linton 

A cash buffer is also useful for emergencies and major one-off expenditure.  It means one can take a relatively expensive holiday or buy a new car without having to worry about rebalancing and whether it would jeopardise the retirement plan.   So adding that to the buffer of 4-5 years cover for crashes could give a total of 5-10 years expenditure.

I'd certainly agree with having 5 to 10 years worth of cash for emergencies and major one-off expenditure for those that can afford it. For example, for those retirees that have other sources of income such as DB and State pensions that covers most of their expenditure, and they just need to withdraw relatively small percentages from their investments as a top-up. In these circumstances, their investment pot is probably going to continue to grow significantly over the long term anyway, so they don't need to plough more cash into their investments unless they want to increase their pot for inheritance.  

How do you work out the amount if they are one off/emergencies?

If, as in your example, people have most of their expenditure covered by DB and/or SP and are only normally withdrawing a small % of their pot is there not a case for keeping less in cash?

Yes, especially if drawdown could be reduced or stopped completely in a market crash, relying on DB/SP only. Under those circumstances there seems little need for a pensions cash buffer (assuming the existence of a cash emergencies fund).

I'll be in a similar position when I retire, and I've gone for an income fund approach to supplement DB/SP pensions, so I'm never planning to sell investments, only ever draw the natural yield. In a market crash I could tighten belts a little and reinvest dividends to take advantage of lower asset prices, or just keep taking the dividend and ignore the crash completely.

I’m starting to look at that option,  I just don’t know when is the optimum time to change over to income funds,  drawdown is 6-7 years away and all funds bar one ( in 2 sipps which hold just over £100k  and 1 work pension) are currently acc. funds.  

I could change my investments going forward now (HL Sipp) but I’m only adding £3600 a year and will hopefully be £45-50k in 6 years. 

We will need to draw income in the 4 years before SPA to the tune of £40k (but replacing £28k for the tax relief)  so will use his Sipp to draw £8kish to go with his DB pension and use up his personal allowance so £2k will come from mine,  plus £8k from savings, giving us around £24k a year,  hopefully his Sipp will still have £50k+ in it at 67,  but not really an issue if it’s all gone. 

 So he would have to sell £30k of funds on retirement - the yield on £80k ( if there is little to no growth in the next 5 years) won’t produce anything like the £5k needed (in real terms after adding £2880/ removing the £3600 - which will be pre loaded the year before).  6.5% yields aren’t possible, are they?  

DH’s work pension fund - there is only £30k in there with £7500+  going in yearly for the next 6 years,  won’t be drawn until SPA in 11 years so no need for income funds yet?  We will probably take a TFLS.

We will only draw £3k (+ the extra £720 of mine to 75) from age 67 and can easily turn it off if needs be. 

Thrugelmir

NannaH said:

NedS said:

DT2001 said:

Audaxer said:

Linton 

A cash buffer is also useful for emergencies and major one-off expenditure.  It means one can take a relatively expensive holiday or buy a new car without having to worry about rebalancing and whether it would jeopardise the retirement plan.   So adding that to the buffer of 4-5 years cover for crashes could give a total of 5-10 years expenditure.

I'd certainly agree with having 5 to 10 years worth of cash for emergencies and major one-off expenditure for those that can afford it. For example, for those retirees that have other sources of income such as DB and State pensions that covers most of their expenditure, and they just need to withdraw relatively small percentages from their investments as a top-up. In these circumstances, their investment pot is probably going to continue to grow significantly over the long term anyway, so they don't need to plough more cash into their investments unless they want to increase their pot for inheritance.  

How do you work out the amount if they are one off/emergencies?

If, as in your example, people have most of their expenditure covered by DB and/or SP and are only normally withdrawing a small % of their pot is there not a case for keeping less in cash?

Yes, especially if drawdown could be reduced or stopped completely in a market crash, relying on DB/SP only. Under those circumstances there seems little need for a pensions cash buffer (assuming the existence of a cash emergencies fund).

I'll be in a similar position when I retire, and I've gone for an income fund approach to supplement DB/SP pensions, so I'm never planning to sell investments, only ever draw the natural yield. In a market crash I could tighten belts a little and reinvest dividends to take advantage of lower asset prices, or just keep taking the dividend and ignore the crash completely.

 6.5% yields aren’t possible, are they?  

In real terms, adjusted for inflation , somewhat unlikely given the macro economic outlook currently. To achieve may require a drawdown of an element of capital. 

Albermarle

6.5% yields aren’t possible, are they?  

Some Infrastructure funds pay around that level , but that is before inflation of course .

Thrugelmir

Albermarle said:

6.5% yields aren’t possible, are they?  

Some Infrastructure funds pay around that level , but that is before inflation of course .

Generally trading at premiums to NAV though. The underlying capital value of assets held will be depreciating/diminishing in value. 

NannaH

Is a 3% yield a realistic figure,  after charges and inflation?   

Any recommendations for income funds?    

The initial withdrawal rate with be  around 6% (I’m assuming £80k pot but hopefully it will grow),  so a 3% yield would produce half the necessary income. 

 The one inc. fund we have currently yields 1.62% - VLS80 and is £25k at the moment, 30% of the Sipp.  Yield income stays in cash to pay the Sipp charges of approx 0.6% combined.