Early Retired, living initially from savings, how much cash to hold?

BarbaraG2000

I’ll try to be succinct. I’ve failed.

Husband (62) and I (58) retired last year.  We are mortgage-free, the house is recently built, still under guarantee and to modern insulation standards. We have used some capital to switch to an electric car, install solar panels and battery and invest in a windfarm cooperative which gives us a reduction on energy bills.  No borrowings, other than a single credit card used for convenience and monthly “elastic”, cleared by DD every month. Also no kids.

We both have entitlement to full state pension - him at 66, me at 67 - and two partial DB occupational pensions, which we are deferring to normal pension date. Of these, one (each) is payable at 65, the other at state pension age.  We each also have a personal pension pot, which as yet we have not touched.

We both have two ISA’s. In each case, the first is the sum total of our savings before we got together. We are each drawing a monthly sum from these, and that is our “income.”  The second, larger, one, is the residue of my husband’s inheritance from his parents.  It is our safety net and guarantee that if we need to go into a care home, it will be a decent one. We don’t plan to touch it.

Once our DB’s and state pension are in payment, our combined income after tax will be more than we are currently ‘paying’ ourselves from the first ISA’s.

The plan, loosely, is that as the DB pensions come into payment we will reduce the amount we take from the ISA’s so as to keep our standard of living broadly the same.  We have adjusted to a lot of change in the past year, and without going into detail, are still getting used to the spending habits that our current ‘income’ allows us to have.  We are not struggling by any means, but I do need to watch the accounts more closely than when we were working, and have occasionally moved cash from the savings account to avoid an overdraft - and then refunded it later.

But then comes inflation…..

Our DB pensions have index linking, but obviously that is related to the salary at the time we stopped paying in. Part of that is updated by RPI capped at 5%, but the later part by CPI capped at 2.5%.  Both of those are going to suffer from a period of high inflation.  The state pension will not, and that’s about half our expected combined income.

Our investments - the ISA’s and our personal pensions - have taken a big hit thanks to Russia.  For the ones we are not touching, the hope is that in time they will recover.  The ones we are already drawing from will not have the same opportunity, but with a bit of luck, they should still last long enough until all the DB and state pensions are in payment.  If not, we obviously have other resources we could draw on, so I am not panicking that we are going to run out of money.

What I am wondering is how much cash it is sensible for us to hold, without (currently) anything specific that we are looking to spend it on. We have a savings account parallel to our current account, which pays a pitiful amount of interest. I aim to keep one month’s “income” in there, to provide a buffer for an extra expensive month.  We also have accounts elsewhere with various access restrictions - one with 30 days notice, another with limited annual withdrawals.  These give a better but still pretty pitiful rate of interest and there is nearly 5 months’ ‘income’ in there.

For a long time, we were holding cash for the house, or the car, or for things we wanted to do to the house.  Pretty much all that spending has now happened, so I am asking myself whether it is sensible or necessary to hold 6 months’ ‘income’ in cash, when it is devaluing by about 8% per annum. Would it make more sense to hand some of it over to our ISA providers?

Given the age of the house we are unlikely to have any major emergency repairs to consider for a good few years. Any other big ticket items could be planned for - they would not present an immediate need for cash, we could give notice and withdraw from one ISA pot or another at the right time.

How much is it sensible to hold in cash?

Albermarle

We both have two ISA’s. In each case, the first is the sum total of our savings before we got together. We are each drawing a monthly sum from these, and that is our “income.” 

Presume from the rest of your post, these are not 'savings' but Investment in Stocks and shares ISA's? Can you just clarify this?

Our investments - the ISA’s and our personal pensions - have taken a big hit thanks to Russia.

The invasion of Ukraine is only one factor in the recent drop off in the markets. They were due a correction anyway, and over 10 years of governments effectively printing money was going to cause a hangover at some point. 

It depends what you mean by 'big hit' . Most medium risk investment portfolios are down around 15% , which is not big by historical standards. Of course it could get worse/get quickly better/ stagnate for a long time. Nobody knows.

As you probably have some excess cash, it might make sense to supplement your income with it for a while, and reduce your income from your investments, so you are not selling so much when values are down.

6 months income in cash is probably more than you need from an 'emergency ' point of view, but it can come in handy when markets are down. For this reason many retirees hold up to 5 years income in cash, especially if they are very reliant on investment performance for their income. Not everybody would agree with this strategy though.

SouthCoastBoy

I think the answer to the holding cash question is very personal and not one size fits all, for me I have over 10 years of cash in today's money, obviously inflation will burn through a lot of that if it stays at 10%+, but I will assess as time goes on. Having said that I hold 60% of my investments in equities so still have quite a bit of exposure to the markets, and I have lost more on the equities than I have on inflation over the last 6 to 8 mths.

gwynlas

Obviously your monthly  outgoings can be easily tallied and beyond that are personal spends which you are in control of it all depends what your tastes are re leisure activities holidays etc.

BarbaraG2000

@Albermarle thank you, that’s really helpful.

Yes, I do mean stocks and shares ISA’s.  The ones we are drawing from are invested in a broad fund which matches our attitude to risk.  The bigger ones are in a discretionary managed portfolio.

It seems the ‘hit’ from Ukraine is not at big as I had in my head - we are down about 8% over the past 3 months.  Prior to that, we had just about recovered the COVID losses and got a little bit ahead.

The suggestion of reducing what we take from ISA’s and supplementing our monthly expenses from the cash is interesting. I shall discuss that with the other half.

jim8888

Personally I decided to hold two years expenses in cash. I work my way through this and then cash in another year's worth of shares in my SIPP to top back up (I do this in line with tax years, so I'll next sell in April 2023). I did this to reduce my exposure to the markets, thinking that as I'm living off cash I don't have to worry so much about what they're doing on a quarterly, weekly or daily basis. Of course the markets could be really awful in April 2023, but worst case I can survive another year before having to sell investments. Ditto April 2024, but at some point you need to grab the falling knife. 
I mulled over loads of variations on this strategy. Should I hold 3 years cash? Should I top up monthly instead of annually? Should I bother holding cash at all? Needless to say, I don't have answers to these questions, but the relief of taking a decision and acting upon it did bring a bit of monetary psychological relief! 

Albermarle

It seems the ‘hit’ from Ukraine is not at big as I had in my head - we are down about 8% over the past 3 months

If you check performance from January 1st to today, they will have probably dropped a bit more than 8%, unless your investments were quite 'defensively positioned' to use the jargon. 

kidmugsy

Your account makes it sound as if you are not using your personal allowances against income tax.  In your shoes I would use them, perhaps by using your personal pensions or perhaps by drawing one or more DB pensions early.

tigerspill

I hold 7 years in cash.  I know my yearly spend and my projected income from pensions.  I calculate the income top up needed for each of the seven years.
Currently I am a bit high, but will sort this out.
I accept the inflation risk on this.
This may not be the most perfect strategy, but it works for me.

DT2001

tigerspill said:

I hold 7 years in cash.  I know my yearly spend and my projected income from pensions.  I calculate the income top up needed for each of the seven years.
Currently I am a bit high, but will sort this out.
I accept the inflation risk on this.
This may not be the most perfect strategy, but it works for me.

When will you top up your cash or do you have another income stream starting in 7 years time?

May I ask, as a %, how much your income top is of your total expenditure/income?

BarbaraG2000

kidmugsy said:

Your account makes it sound as if you are not using your personal allowances against income tax.  In your shoes I would use them, perhaps by using your personal pensions or perhaps by drawing one or more DB pensions early.

That’s correct, we are not using our personal allowances.  Our IFA’s advice was to do it this way to reduce liability to inheritance tax on the estate of whoever goes last.  Though since we’ll be dead, I’m not sure that we really need to care that much.