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

Sea_Shell

I've edited my post, and we've crossed post, I think.

billy2shots

So, let's imagine my 4% needs to give me said £40k per year. 

I have 3 years in cash £120k and £880k in equities (these are all made up numbers and ratios)

Let's also say we have just had a 50% market crash. In this awful scenario let's say we straight line for the next 3 years with no market gain. Nightmare?

If we use our cash buffer then that would be emptied in those 3 years. We now have £0 cash and £440k equities

I'm not great with the complexities so can't look at all the impacts but my suggestion is in the scenario above is-

In a 50% crash instead of taking the full £40k needed for your annual spend (the 4% swr you decided upon at the outset) you would take

46% from equities (accounting for the 50% in value plus the 4% you needed your portfolio to grow) and 54% from cash.

The advantages

- The cash pot would go far longer in years than taking 100% of your drawdown needs from the pit in a downturn.

- Taking 46% in equities works out the same as taking 100% if there was no crash , you have not depleted your equity holding any more so you still will hopefully been in a good position when markets recover. 

I'm not sure the maths hold up and I'm too simple to look deeper. Just a thought on how to do it that pops into my brain randomly sometimes.

Audaxer

billy2shots said:

Example

Portfolio of £1m
£40k per annum drawdown needed.
Equities £880k
Cash £120k

10% drop in portfolio leaves £900k 
You still need to withdraw £40k

Instead of taking that from the cash pot you would only take the difference so you needed a 4% return but this year saw you get a -10% return so a 14% shortfall. 

In my scenario you would take that difference our of the cash pot not so £34,400 from equities and £5.6k from cash 

This allows your cash buffer to go a lot further and you are only selling the same amount of equities that you would if the market had returned you +4% so win win?

Interested in opinions in this. 

I think your example is along the right lines if you want your equities and cash pots to stay at the same fixed percentages of the total after the withdrawal, i.e. rebalancing back to 88% equities and 12% cash.  My calculations on that are:

• Equities after 10% drop = £792k
• Total including the cash now = £912k
• After £40k withdrawal total will be £872k
• Equities to be 88% of new total = £767,360
• Cash to be 12% of new total = £104,640

To get to these percentage with the £40k withdrawal you draw £15,360 from cash and sell £24,640 of equities.

I think these calculations are correct if you want to rebalance back to original percentages, but I think in that situation I would rather take the whole £40k from the cash buffer and reimburse when equities rise again.

billy2shots

Audaxer said:

I think these calculations are correct if you want to rebalance back to original percentages, but I think in that situation I would rather take the whole £40k from the cash buffer and reimburse when equities rise again.

I was trying to come up with a solution incase equities don't recover so fast. It might not be a case of a COVID crash where equities rebounded in no time. 
A period of 3 years could easily go by exhausting all cash reserves.

I don't want to hold 10 years cash so was trying to come up with something in the middle between exhausting all cash and being hit by £ cost raverging. 

Audaxer

billy2shots said:

Audaxer said:

I think these calculations are correct if you want to rebalance back to original percentages, but I think in that situation I would rather take the whole £40k from the cash buffer and reimburse when equities rise again.

I was trying to come up with a solution incase equities don't recover so fast. It might not be a case of a COVID crash where equities rebounded in no time. 
A period of 3 years could easily go by exhausting all cash reserves.

I don't want to hold 10 years cash so was trying to come up with something in the middle between exhausting all cash and being hit by £ cost raverging. 

I was agreeing that your example was a reasonable solution, especially if holding only 3 years cash. I would tend to be a bit more cautious and hold more cash, especially if I didn't have other sources of income, like DB and/or State Pension.

In my figures, you will see that I worked out that it needed a bit more from cash than your £5.6K and a bit less equity sales than your £34,400 to rebalance back to your 88% equities and 12% cash after the withdrawal.

billy2shots

Audaxer said:

billy2shots said:

Audaxer said:

I think these calculations are correct if you want to rebalance back to original percentages, but I think in that situation I would rather take the whole £40k from the cash buffer and reimburse when equities rise again.

I was trying to come up with a solution incase equities don't recover so fast. It might not be a case of a COVID crash where equities rebounded in no time. 
A period of 3 years could easily go by exhausting all cash reserves.

I don't want to hold 10 years cash so was trying to come up with something in the middle between exhausting all cash and being hit by £ cost raverging. 

I was agreeing that your example was a reasonable solution, especially if holding only 3 years cash. I would tend to be a bit more cautious and hold more cash, especially if I didn't have other sources of income, like DB and/or State Pension.

In my figures, you will see that I worked out that it needed a bit more from cash than your £5.6K and a bit less equity sales than your £34,400 to rebalance back to your 88% equities and 12% cash after the withdrawal.

That's what's interesting about this topic, so many ways to skin the cat. 

I'm happy with a cash pot in retirement (hoping to fire at 40/41 so I feel it's incredibly needed) but I'm scared of poor SOR eroded that pot at the beginning.

3-5 poor investment return years at the beginning is what I'm trying to find a solution for. 

The answer is cash but the right balance is the problem to avoid opportunity loss   

NedS

billy2shots said:

Audaxer said:

billy2shots said:

Audaxer said:

I think these calculations are correct if you want to rebalance back to original percentages, but I think in that situation I would rather take the whole £40k from the cash buffer and reimburse when equities rise again.

I was trying to come up with a solution incase equities don't recover so fast. It might not be a case of a COVID crash where equities rebounded in no time. 
A period of 3 years could easily go by exhausting all cash reserves.

I don't want to hold 10 years cash so was trying to come up with something in the middle between exhausting all cash and being hit by £ cost raverging. 

I was agreeing that your example was a reasonable solution, especially if holding only 3 years cash. I would tend to be a bit more cautious and hold more cash, especially if I didn't have other sources of income, like DB and/or State Pension.

In my figures, you will see that I worked out that it needed a bit more from cash than your £5.6K and a bit less equity sales than your £34,400 to rebalance back to your 88% equities and 12% cash after the withdrawal.

That's what's interesting about this topic, so many ways to skin the cat. 

I'm happy with a cash pot in retirement (hoping to fire at 40/41 so I feel it's incredibly needed) but I'm scared of poor SOR eroded that pot at the beginning.

3-5 poor investment return years at the beginning is what I'm trying to find a solution for. 

The answer is cash but the right balance is the problem to avoid opportunity loss   

It's not the only answer. Could you reduce spending or increase other income streams (get a part time job / consultancy work) in those circumstances?

zagfles

Prime harvesting is worth looking at, I'm considering it. Basically, you always withdraw from cash/bonds, and you sell equities once they've risen a certain amount to top up your cash/bonds. Usually start with quite a high % in cash/bonds, in extreme circumstances you could end up in 100% equities. Details here and a link to download the start of McClung's book: https://monevator.com/review-living-off-your-money-by-michael-mcclung/

stephenadarglas

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.

Plus inflation has eaten away at the 40K

Thrugelmir

Which is why annuities were invented i.e. to provide a secure guaranted income. Not everyone can afford to be exposed to the vagaries of the stock market. Cashing in amounts to attempting to time the market.