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

gm0

I find the easiest way to think about this is to think about two numbers. 

First the gap between income to cover essential spending without discretionary things so CTAX, heat, electricity, water, food etc.) and the guaranteed income sources - SP, DB etc.  How much is this number for one year. Income support to not sell investments for income when markets have slumped. 

Then consider how many years essential income protection you wish to buy by holding cash like assets. 
Actual short government bonds held to term, PBs, cash deposit etc.  That number can be 2,3,,7,10 per the responses up thread.

Backtesting data can show you that markets can take a long time (7-10) to regain nominal value or real value highs after a revaluation slump and overshoot.  Or a 1920s.  Or it can happen super quick as with 2020.  <1 year.

The market shape could still deceive post slump and you take the cash inflation hit to hold say 2-3 years cash, delay sellling and then there is worse to come after you ran out.  But you had the 2-3-n years grace to let things unfold and also to make and execute other contingency plans - downsizing house, take in lodger, etc.  whatever it is.  No panic.

Having to sell on a fixed date or lack essential income - 6-12 months away every year will eventually be an April 2020 or a 2007/8 situation.  Probably once or twice over 30-40 years. Causing you to sell in an initial dip.

If you do sell in a revaluation dip for 2-3 years at full speed early on in the retirement (where DB or SP may not have cut in) and the depletion of invested assets becomes severe.  When the market recovers - you do not.  You no longer own those assets.  Your path is locked in by the excess unit sales to support income

kidmugsy

BarbaraG2000 said:

kidmugsy said:

Your account makes it sound as if you are not using your personal allowances against income tax. ...

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.

I can see that his argument, however irrelevant, applies to your money purchase pensions.  I don't see how it can apply to the idea of drawing your DB pensions early.  Not using personal allowance seems to me to be throwing money away thought that will depend partly on how severe the reductions are for drawing the DB pensions early.

Retireinten

Many on here plan their finances in retirement to make use of their tax allowances for as long as possible. 

Are you in danger of drawing from your ISAs early, only to pay tax on your pension funds when you start to take an income from those in later years?  Maybe I'm selfish, but I'd rather spend less tax on MY money when I'm alive and whoever is lucky enough (in my case, my kids) to inherit what's left, will have to lump it if a portion of my remaining estate is subject to tax.  Given the current market conditions this is another way of preserving your funds, ensuring they last the distance. 

I can't answer the question on cash amounts held, unfortunately I am still in the acculumation phase of my retirement planning😁

cfw1994

jim8888 said:

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! 

Very similar to us 💪
We wanted that buffer to be able to mitigate any ‘Sequence of Returns’ risk in the early years (I stepped away from the monthly wage around 14 months ago…great timing 🤣).

We have a little more - around 3-4 years in cash (PBs/cash ISA).    For those carrying more, maybe now is a reasonable time to drip-feed some back into investments, unless you fear a 1920s-style recession.  Inflation will eat into those cash funds ferociously 🤷‍♂️

We decided at the start of this calendar year to draw on them instead of the declining DC funds.  

Psychologically it felt right to ‘act’ on our strategy, although it does mean a little more month-to-month management.  

I’d love the markets to climb back so I can comfortably draw down the tax-free allowance before next April, but I suspect that may not happen.  Still possible, of course, but the world is very broadly in a bit of a mess, eh!

zagfles

BarbaraG2000 said:

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.

One important point about DB pension uprating. The cap on revaluation (ie increases BEFORE you start drawing it) is always (I believe) capped on average inflation over the entire period of revaluation. This means that as inflation was well under 5% in recent years, if you've been deferred a few years you will probably get the benefit of the full 10% or whatever RPI is, as long as average inflation over the deferred period is under the cap. Or, if the DBs have only been deferred recently, if inflation drops in future years and you remain deferred you could get the full/most benefit of 10% this year if future years are lower.

However, if you start drawing the pension, then inflation increases are applied each year, and the cap (sometimes a different cap) applies to individual years. Bear this is mind if you're thinking of taking the pension early, now could be a very bad time to start taking a DB pension!

BarbaraG2000

zagfles said:

BarbaraG2000 said:

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.

One important point about DB pension uprating. The cap on revaluation (ie increases BEFORE you start drawing it) is always (I believe) capped on average inflation over the entire period of revaluation. This means that as inflation was well under 5% in recent years, if you've been deferred a few years you will probably get the benefit of the full 10% or whatever RPI is, as long as average inflation over the deferred period is under the cap. Or, if the DBs have only been deferred recently, if inflation drops in future years and you remain deferred you could get the full/most benefit of 10% this year if future years are lower.

However, if you start drawing the pension, then inflation increases are applied each year, and the cap (sometimes a different cap) applies to individual years. Bear this is mind if you're thinking of taking the pension early, now could be a very bad time to start taking a DB pension!

Oh, that’s very interesting - and suggests the opposite course of action to poster’s concerned about not using our personal allowances!  I think if we were going to use them, it would be from the DC pots - from which we can in any case take 25% of each withdrawal tax free.

One of my DB pensions has been deferred for 23 years already, the other just since last year.  I am in fact wondering about that first one.  It’s a very traditional scheme from the employer I started with straight from university. Joining the scheme was compulsory, it was based on 60ths for each year, I completed 11 and a bit and got an extra contribution as part of my redundancy payment.  When I joined, retirement age for women under the scheme was 63. A few years later, we were invited to change our retirement age to 65, but told it wouldn’t make any difference if we wanted to go at 63, we would still get the same amount (I would have had 40 years’ contribution before then).  I couldn’t see a downside, so I signed.

I’m now wondering if I may be able to take my pension from that scheme at 63 without an actuarial reduction - which would clearly be a good thing for me!!

That scheme also comes with a spouse’s pension, and the option of 25% lump sum. I’m tending to think I wouldn’t take the lump sum as we have plenty of capital already (see earlier comment about IFA’s advice to reduce our estate), I’d rather have the larger pension, and a larger spouse’s pension if I outlast the husband.  But that’s one to be gone over with the IFA nearer the time - they do have a tendency to say “always take the lump sum”, at least our previous one did.

Of my husband’s DB pensions, one is not an occupational one as such, but it had a guaranteed payment option which is worth a lot more than what he could get as an income from the pot - like 3x more. But that has to be taken at 65 for the guarantee to apply, so it’s sitting tight.  The other one has been deferred for 6 years and he has another 4 to go before NRA for that scheme.   Neither of those pensions are massive, but he does have more in his DC pot than I do, so broadly speaking our positions are similar.

Somebody

I think the spouse’s pension on your DB scheme is the same whether you take the PCLS or enhanced pension.

Albermarle

Somebody said:

I think the spouse’s pension on your DB scheme is the same whether you take the PCLS or enhanced pension.

Normally that is the case, but with DB pensions you always have to read the individual scheme rules to be sure about these items.

leosayer

It sounds to me like you're not making the most of the opportunities that your savings can provide but it's not too late to sort this out. The amount of cash you hold is a minor consideration in comparison.

My advice is to make a cashflow plan that aims to maximise your quality of life before you become too old to enjoy it.

A good financial advisor / planner will have cashflow modelling software like Voyant that can help do this. 

It's possible to do this yourself but from your post I think you'd get a better outcome by getting a professional to help you plan.

BarbaraG2000

leosayer said:

It sounds to me like you're not making the most of the opportunities that your savings can provide but it's not too late to sort this out. The amount of cash you hold is a minor consideration in comparison.

My advice is to make a cashflow plan that aims to maximise your quality of life before you become too old to enjoy it.

A good financial advisor / planner will have cashflow modelling software like Voyant that can help do this. 

It's possible to do this yourself but from your post I think you'd get a better outcome by getting a professional to help you plan.

Our IFA did cash flow modelling, including scenarios in which we both went into care when my husband reaches 80.  Also stress tested it against a major market shock within the first year - which we have in fact had.

She says we will be fine.