Last stages of retirement accumulation and adjusting portfolio mix ready for retirement - thoughts?

Pat38493

I must admit I've never fully grasped the importance of holding a 1 or 2 year cash float - I know it's always the recommended way to go about things, but I'm always wondering whether statistically you will be more likely to end up worse off over a 30-40 year period if you keep 1 or 2 years of extra cash aside all the time - you are basically always assuming that the coming year will be a bad one when this is often not the case.  I'm no financial expert though. 

Albermarle

Pat38493 said:

I must admit I've never fully grasped the importance of holding a 1 or 2 year cash float - I know it's always the recommended way to go about things, but I'm always wondering whether statistically you will be more likely to end up worse off over a 30-40 year period if you keep 1 or 2 years of extra cash aside all the time - you are basically always assuming that the coming year will be a bad one when this is often not the case.  I'm no financial expert though. 

There are two main reasons to hold a cash float/buffer (in addition to emergency cash ) One is to top up income, to avoid/reduce selling investments when they are down. Especially early on any drawdown due to sequence of returns risk.
The second reason is to aid getting a good nights sleep/not worry too much about market movements.

On the other hand others would agree with your observation, that overall the effect of holding a lot of cash maybe be negative with regard to the final outcome in purely money terms.

JohnWinder

A couple of thoughts….
I don’t think the person you envisage needs to keep the cash float ‘all the time’, as after the first decade or so of that person’s retirement the sequence of returns risk has diminished a lot.
Those whose withdrawal rate is in the 1%/year area also don’t need a cash float in my view.
Thirdly, you need to tell us what your ‘statistically’ is; but if it is saying that for a large ‘most of the time’ you would have been better off with no cash, which I accept, then I’d say you have a cash float because you need to plan for the once in 80 years sh#t-storm than can spoil you day otherwise. Two years worth of cash might not save the day, so perhaps it just goes back to helps you sleep well for another two years.

Linton

Pat38493 said:

I must admit I've never fully grasped the importance of holding a 1 or 2 year cash float - I know it's always the recommended way to go about things, but I'm always wondering whether statistically you will be more likely to end up worse off over a 30-40 year period if you keep 1 or 2 years of extra cash aside all the time - you are basically always assuming that the coming year will be a bad one when this is often not the case.  I'm no financial expert though. 

By holding n years cash you arent assuming there will be a crash of n years duration.  You are setting the money aside so whenever you make a financial decision you dont need to consider, worry about  and take appropriate precautions to cover what happens if there is such a crash.

It can affect your other investments.  For example if you hold zero cash you may want to set a risk level in your investments to reduce volatility, thus minimising worry and avoiding inappropriate reactions to an equity crash.  So it is often recommended that people hold a 60/40 equity/bond multi-asset fund.  On the other hand if you kept say 30% of your pot in cash and very low risk investments you may be happy with 100% equity for the rest knowing that if necessary you would be able to wait 5-10 years without needing cash from elsewhere.  Holding significant cash makes configuring your other investments much easier as your core pension pot does not have to compromise between the two different requirements of providing a steady income and producing inflation beating returns in the medium to long term.

When you have sufficient wealth to maintain your desired standard of living, extra returns from your investments may be of little benefit.  You may prefer to have the flexibility to spend possibly large amounts of money when you wish without having to think about and reorganise your investments. Enjoying life is more important than dying rich.

bostonerimus

Have you considered some guaranteed income from an annuity. With rates rising they might be worth a look...of course inflation is the big question. I basically took a large part of my fixed income allocation and bought into a DB plan, and if I hadn't had access to that I would have probably bought an annuity. It now provides a solid income floor and when SP starts that floor will be even higher. With my basic needs met by monthly deposits I keep the rest of my money in 2 equity trackers and a multi-asset fund. It's simple, lets me sleep well at night even in bear markets and is easy to manage.

Linton

bostonerimus said:

Have you considered some guaranteed income from an annuity. With rates rising they might be worth a look...of course inflation is the big question. I basically took a large part of my fixed income allocation and bought into a DB plan, and if I hadn't had access to that I would have probably bought an annuity. It now provides a solid income floor and when SP starts that floor will be even higher. With my basic needs met by monthly deposits I keep the rest of my money in 2 equity trackers and a multi-asset fund. It's simple, lets me sleep well at night even in bear markets and is easy to manage.

Annuities look increasingly attractive.  As you say inflation matching is a problem.  Guaranteed inflation matching is expensive and may not be necessary if most of one's needs are covered elsewhere.  Could be sensible to leave buying an annuity until ones 80s.

Also, Gilts could replace some of the cash.

MK62

JohnWinder said:

A couple of thoughts….
I don’t think the person you envisage needs to keep the cash float ‘all the time’, as after the first decade or so of that person’s retirement the sequence of returns risk has diminished a lot.
Those whose withdrawal rate is in the 1%/year area also don’t need a cash float in my view.
Thirdly, you need to tell us what your ‘statistically’ is; but if it is saying that for a large ‘most of the time’ you would have been better off with no cash, which I accept, then I’d say you have a cash float because you need to plan for the once in 80 years sh#t-storm than can spoil you day otherwise. Two years worth of cash might not save the day, so perhaps it just goes back to helps you sleep well for another two years.

If that "once in 80 years" event does happen though, you need to deal with it......there's no going back in time and doing things differently (not that I accept the 80yrs bit though tbh.......this century we've already had several such events, and could possibly be at the start of another the way things are currently shaping up).
In the end though, there is no drawdown strategy which is best in all scenarios......

Qyburn

GazzaBloom said:

Blimey - that's a lot of funds! We currently hold 3, one each per pension and one in the ISA. 

Which three funds, if you're prepared to say?

bostonerimus

Qyburn said:

GazzaBloom said:

Blimey - that's a lot of funds! We currently hold 3, one each per pension and one in the ISA. 

Which three funds, if you're prepared to say?

You're not asking me, but as I also have most of my money in just 3 funds I'll reply. I have a US equity index fund and an International equity fund, you could reproduce those with a single, cap weighted equity index fund. My third fund is a multi asset income fund with 60% bonds and 40% dividend stocks. The total portfolio is about 85% equities as I have a DB plan and can take a lot of risk. If I didn't have the DB plan I'd have more in the multi-asset fund and probably be close to 30% or 40% bonds.