What is your trigger point to start spending from cash buffer?? + QE, Does it change the game?

Sea_Shell

Interested to see how other people feel about movements in the markets, and what their personal take is on when (or if) they'll stop* spending any drawdown from investments and turn to their cash buffer for a period?

Do you look at what is happening to your pension drawdown fund in isolation?
Do you look at your whole investment portfolio?
Do you look at it on a month by month basis?
Or on a year on year basis?
5% drop, 10, 20, or more?
Do you go by your "gut" or some technical data, if so what "weather vane" are you using?


* I don't necessarily mean suspend D/D but to re-invest that money outside of the pension, for tax purposes, using a similar if not identical fund, and spend cash instead.



***EDITED TO ADD - see page 8 of the thread***

QE - Does it change the game?

Just to add another dimension to this discussion, has any one watched the recent BBC, 2 part, programme "The Decade the Rich Won".

Having watched it, it appears to me that in recent years, Western Governments simply can't entertain the risk that their economies may collapse in the face of a crisis, and so pump the system with QE.   

This then has the effect of stabilising assets, and even increasing them, making those with assets (the rich) even richer.

So even for private investors who aren't "rich" but do hold a modest portfolio of investments, are we in effect being protected from the catastrophic end (30%+) of the downturn scenarios, in that Central Banks, just won't let it happen.

If we have a balanced diversified portfolio, can we lose the shirts off our backs, in the era of QE?

Just look at the Covid drop and bounce back...what would those graphs have looked like without QE, bailouts, loans & furlough.

In one part of the show, they said that the US Treasury tried to announce they were stopping QE, and the markets reacted badly, so they had to row-back on their announcement.

It appears that our financial markets are now like a fractious baby....who won't settle.   Stops crying when you pick it up and rock it gently, but try to put it down, and it just starts screaming again!!!!


 

QrizB

Sea_Shell said:

Interested to see how other people feel about movements in the markets, and what their personal take is on when (or if) they'll stop* spending any drawdown from investments and turn to their cash buffer for a period?

I've wondered if it could be modelled, so you'd take a varying proportion from your investments depending on how well (or badly) they've done in the preceding period. I'm far enough away from having to draw down that I've not gone beyond wondering!

dunstonh

Do you look at what is happening to your pension drawdown fund in isolation?
Do you look at your whole investment portfolio?

Many people have multiple tax wrappers when they are using drawdown.  Pension, ISA, GIA etc.  So, if you look at just one thing in isolation, you will not be operating your retirement planning tax efficiently or with a risk balance.

Do you look at it on a month by month basis?
Or on a year on year basis?

Yearly is fine.  Monthly will just lead to investment paranoia.   If you have set it up right, you will be drawing from your cash float and your cash float will a number of years worth of payments in it.  So, you just need to review it periodically to rebalance the portfolio and adjust the cash float if necessary.    Some will segment their portfolio into further timescale periods.  e..g a cash float handles 3 years worth of income. Then a short term segment, then a medium-term segment and then a long term segment.

There are different ways to do it.

I've wondered if it could be modelled, so you'd take a varying proportion from your investments depending on how well (or badly) they've done in the preceding period. I'm far enough away from having to draw down that I've not gone beyond wondering!

That is effectively what rebalancing does.  You bring the portfolio back in line with your target weightings.   

SouthCoastBoy

When I retire I plan to review my cash on a six monthly basis and only drawdown my pension once a year withdrawing what I feel is suitable for the year. Currently I have around 500k cash and 850k in equities so initially will be using cash and not withdrawing anything

Audaxer

Sea_Shell said:

Interested to see how other people feel about movements in the markets, and what their personal take is on when (or if) they'll stop* spending any drawdown from investments and turn to their cash buffer for a period?

Do you look at what is happening to your pension drawdown fund in isolation?
Do you look at your whole investment portfolio?
Do you look at it on a month by month basis?
Or on a year on year basis?
5% drop, 10, 20, or more?
Do you go by your "gut" or some technical data, if so what "weather vane" are you using?


* I don't necessarily mean suspend D/D but to re-invest that money outside of the pension, for tax purposes, using a similar if not identical fund, and spend cash instead.

I wouldn't be selling investments that have fallen in value. In your position I would take your income from your cash buffer and drawdown from your SIPP the maximum you can tax free, and reinvest the proceeds in a similar fund within your S&S ISA. Once markets have recovered, I would then reimburse the cash buffer back to it's original weighting in your portfolio.

NedS

QrizB said:

Sea_Shell said:

Interested to see how other people feel about movements in the markets, and what their personal take is on when (or if) they'll stop* spending any drawdown from investments and turn to their cash buffer for a period?

I've wondered if it could be modelled, so you'd take a varying proportion from your investments depending on how well (or badly) they've done in the preceding period. I'm far enough away from having to draw down that I've not gone beyond wondering!

I wondered exactly the same reading a similar thread recently.

My initial thoughts were if one were to deploy one of the dynamic drawdown rules (guardrails, pausing inflationary increases etc) which dictate when and how to reduce drawdown in order to safeguard against SoR risks, one could draw upon the cash buffer to make up the shortfall dictated by those rules to maintain spending levels whilst still avoiding selling equities, and also using the same model to know when to top slice equities to replenish cash buffers in the good years. In this type of example, one would still sell equities during a market crash, but at a reduced rate and topped up by the cash buffer. This may also help total returns as one would not need to hold such a large cash buffer acting on a drag on performance, and would allow the cash buffer to support more draw out bear market periods (I assume no one wants to hold 7+ years of cash). I think this is the approach I would take when using a total return drawdown strategy.

It would be great if it could be modelled and a standard percentage market drop determined where it becomes beneficial to deploy the cash buffer (similar to SWR although it's probably never that simple). Presumably the sole purpose of the cash buffer is to mitigate SoR risks and prevent the portfolio from running of money if the drawdown rate is maintained and not reduced. As I understand it, a portfolio is at greater risk to SoR risks during the early years, so it may be that the cash buffer would be utilised earlier in the early years than further into retirement, for example after a 20% market drop in years 1-5, a 33% market drop in years 6-10, but only after a 50% market drop in years 11 onward (percentages arbitrarily chosen for illustrative purposes)

Stubod

..would love to see some sort of "calculator" to work the "optimum time / amount"...

I have come to the conclusion that I am to blame for all the recent stock market downturns since we retired 4 years ago as every time I actually decided to start taking money from our S&S ISA's the maket nose dives and I end up leaving it where it is and burning cash instead. We put any drawdown on hold over the last couple of years due to covid, and not really needing any "excess" money. After a 2 yr "break" we planned to start drawing down again as from this month and low and behold the markets have tanked agfain so we have now put any drawdown on hold again...

Sea_Shell

Audaxer said:

Sea_Shell said:

Interested to see how other people feel about movements in the markets, and what their personal take is on when (or if) they'll stop* spending any drawdown from investments and turn to their cash buffer for a period?

Do you look at what is happening to your pension drawdown fund in isolation?
Do you look at your whole investment portfolio?
Do you look at it on a month by month basis?
Or on a year on year basis?
5% drop, 10, 20, or more?
Do you go by your "gut" or some technical data, if so what "weather vane" are you using?


* I don't necessarily mean suspend D/D but to re-invest that money outside of the pension, for tax purposes, using a similar if not identical fund, and spend cash instead.

I wouldn't be selling investments that have fallen in value. In your position I would take your income from your cash buffer and drawdown from your SIPP the maximum you can tax free, and reinvest the proceeds in a similar fund within your S&S ISA. Once markets have recovered, I would then reimburse the cash buffer back to it's original weighting in your portfolio.

That's pretty much our plan, word for word.

Interested in what other people's plans are though, in case we're missing something.

DT2001

dunstonh said:

Do you look at what is happening to your pension drawdown fund in isolation?
Do you look at your whole investment portfolio?

Many people have multiple tax wrappers when they are using drawdown.  Pension, ISA, GIA etc.  So, if you look at just one thing in isolation, you will not be operating your retirement planning tax efficiently or with a risk balance.

Do you look at it on a month by month basis?
Or on a year on year basis?

Yearly is fine.  Monthly will just lead to investment paranoia.   If you have set it up right, you will be drawing from your cash float and your cash float will a number of years worth of payments in it.  So, you just need to review it periodically to rebalance the portfolio and adjust the cash float if necessary.    Some will segment their portfolio into further timescale periods.  e..g a cash float handles 3 years worth of income. Then a short term segment, then a medium-term segment and then a long term segment.

There are different ways to do it.

I've wondered if it could be modelled, so you'd take a varying proportion from your investments depending on how well (or badly) they've done in the preceding period. I'm far enough away from having to draw down that I've not gone beyond wondering!

That is effectively what rebalancing does.  You bring the portfolio back in line with your target weightings.   

If you drawdown from your cash float throughout the year and at your annual review it shows a need to rebalance by selling bonds and/or equities do you do so if the equities market is down?
I ask as I see the ‘cash’ element of the overall pot as being used to ride out a bear market (as far as possible) and to give your pot the best chance to recover. In the past bonds have tended to work well as a counter balance to equities but it does not appear so now so everything could be going South!
As two others have suggested waiting before replenishing I’d be interested to hear your thoughts.

QrizB

dunstonh said:

That is effectively what rebalancing does.  You bring the portfolio back in line with your target weightings.  

Let's give this a spin.

Imagine you've got a £100k portfolio split 60:40 equities:cash and you're planning to withdraw £4k pa.

You find your £60k of equities have grown 10% and are now worth £66k, while your cash hasn't grown at all and is still worth £40k. Your portfolio is now £106k split 66:40 or 62.26:37.74. You want to reduce your portfolio to £102k (withdrawing £4k) and return to a 60:40 split, which would be £61.2k:£40.8k.

So you need to sell £4.8k of equities and put £0.8k of that into cash, keeping the £4k as your spending money.

Does that work for everyone?

Edit: Or, if the market is down.

You find your £60k of equities have shrunk 10% and are now worth £56k, while your cash hasn't grown at all and is still worth £40k. Your portfolio is now £96k split 56:40 or 58.33:41.67. You want to reduce your portfolio to £92k (withdrawing £4k) and return to a 60:40 split, which would be £55.2k:£36.8k.

In this case you need to sell £0.8k of equities and take £3.2k out of your cash in order to generate £4k spending money.

Audaxer

QrizB said:

dunstonh said:

That is effectively what rebalancing does.  You bring the portfolio back in line with your target weightings.  

Let's give this a spin.

Imagine you've got a £100k portfolio split 60:40 equities:cash and you're planning to withdraw £4k pa.

You find your £60k of equities have grown 10% and are now worth £66k, while your cash hasn't grown at all and is still worth £40k. Your portfolio is now £106k split 66:40 or 62.26:37.74. You want to reduce your portfolio to £102k (withdrawing £4k) and return to a 60:40 split, which would be £61.2k:£40.8k.

So you need to sell £4.8k of equities and put £0.8k of that into cash, keeping the £4k as your spending money.

Does that work for everyone?

Edit: Or, if the market is down.

You find your £60k of equities have shrunk 10% and are now worth £56k, while your cash hasn't grown at all and is still worth £40k. Your portfolio is now £96k split 56:40 or 58.33:41.67. You want to reduce your portfolio to £92k (withdrawing £4k) and return to a 60:40 split, which would be £55.2k:£36.8k.

In this case you need to sell £0.8k of equities and take £3.2k out of your cash in order to generate £4k spending money.

The calculations work, but I think of that more as having £60k invested in a 100% equity portfolio and a cash buffer of £40k. If I wanted to be able to draw £4k per year rising with inflation, I think I would need £120k in total - £100k invested with say 60% equities and 40% bonds, with the addition of a £20k (equivalent to 4 years) as a separate cash buffer. I think providing you can afford to keep that much of a cash buffer, you should not need to sell investments at the year end if markets have fallen.