Change of plan?

enthusiasticsaver

We retired early at 57/58 in 2016/7 on a mix of DB pensions, DC pots and S and S ISAs. We have always had sufficient income for essentials and a few luxuries (holidays) just on DB income (£38k gross) but our cash buffer is now down to around £10k which doesn’t worry me in itself for us  but I would like to help our children more through this difficult period. Our state pensions pay out in 2024/2026. To help our children we would have to sell stocks which at the current time does not seem like a good idea given market uncertainty. We have an IFA appointment soon to discuss further but thought I would put the question to MSE first. 

We haven’t drawn on our portfolio in 2020, 2021 or 2022 even though the plan was to supplement by drawing out £10-20k a year to cover expensive holidays, help children and family or new cars/home maintenance etc. We have been using our cash buffer but going below £20k worries me.  There is plenty of money still in the portfolio (£200-£300k) but it is 5% down in total from when we invested. 

Would others stick to plan and continue to draw out the £20k a year or just continue to live within income? Has anyone else had a similar dilemma. Our children have not asked for money but they have young families, one has SEN child and the other is buying a new property on her own. 

Linton

From my experience of retirement...

1) Dont allow your life to be driven by The Plan.  Use it as a guide as to what level of expenditure is reasonable but accept that circumstances will change both in how you want to lead your lives and in your finances.

2) Carrying on from (1): Only having £20K in a cash buffer would worry me.  Our buffer of cash supplemented by Wealth Preservation funds is sufficiently large to cover any extra expenses that may come up the medium term such as major holidays, house redecoration, replacement cars etc.  This means that we can decide what we wish to spend in those areas in the short/medium term without worrying about depleting long term investments at the wrong time.  

3) If you adopt our strategy one of the expences covered by the buffer would be gifts to the kids.

Secret2ndAccount

First, I have to chastise you. If your plan is to have a cash buffer, why did you not sell some stocks when the markets were on fire in 20 / 21?  You should have at least maintained, if not grown your cash buffer while the sun was shining.
It appears from the brief info that you have enough resources to be fine anyway, so if you want to help your kids, go ahead and sell some shares. 

It is not compulsory to have a large cash buffer as part of a drawdown plan. By keeping more money invested you increase returns (on average) so you can afford to sell to meet cash needs as they arise. It's just that doing it this way increases volatility, and it's too mentally stressful for most people, as you are finding. Maybe that 15k you left in stocks turned into 25k. Now that's dropped to 16k. You can pull out the 15k, and still be 1k ahead. Just feels worse than it is.

enthusiasticsaver

Linton said:

From my experience of retirement...

1) Dont allow your life to be driven by The Plan.  Use it as a guide as to what level of expenditure is reasonable but accept that circumstances will change both in how you want to lead your lives and in your finances.

2) Carrying on from (1): Only having £20K in a cash buffer would worry me.  Our buffer of cash supplemented by Wealth Preservation funds is sufficiently large to cover any extra expenses that may come up the medium term such as major holidays, house redecoration, replacement cars etc.  This means that we can decide what we wish to spend in those areas in the short/medium term without worrying about depleting long term investments at the wrong time.  

3) If you adopt our strategy one of the expences covered by the buffer would be gifts to the kids.

Interesting that a buffer of £20k would be too low for you.  We have hardly touched it in the last three years in spite of significant gifts to our daughters (£10k each) buying a replacement car and a month long trip to Canada.  Our annual income is almost £40k and we only spend about half of that so we decided wrongly or rightly not to take money out of investments during a market dip in 2020 and due to not needing it again in 2021 we did not take it then.  This gift we are considering is purely to make life easier for our daughters at what is a difficult time for many people so not essential.  However I am not willing to go below £20k cash buffer so if we gift them more it has to come out of investments. 

enthusiasticsaver

Secret2ndAccount said:

First, I have to chastise you. If your plan is to have a cash buffer, why did you not sell some stocks when the markets were on fire in 20 / 21?  You should have at least maintained, if not grown your cash buffer while the sun was shining.
It appears from the brief info that you have enough resources to be fine anyway, so if you want to help your kids, go ahead and sell some shares. 

It is not compulsory to have a large cash buffer as part of a drawdown plan. By keeping more money invested you increase returns (on average) so you can afford to sell to meet cash needs as they arise. It's just that doing it this way increases volatility, and it's too mentally stressful for most people, as you are finding. Maybe that 15k you left in stocks turned into 25k. Now that's dropped to 16k. You can pull out the 15k, and still be 1k ahead. Just feels worse than it is.

You are of course correct in that we should have drawn out cash in 20/21 after the correction in 2020. At the time we had £40k in cash which already seemed to be quite cash heavy and I felt having too much cash sitting in low interest accounts was a waste when we had no immediate use for it.  Since then we have gifted £20k, replaced a car at a cost of £15k (unplanned as DHs car was written off)  and just had a £14k holiday which has depleted the cash buffer. We are  not really on a drawdown plan as we have DB pensions (almost £40k per annum) which more than cover our day to day expenditure and allows some unusual expenditure too. Even if we sell some stocks now we are still ahead on what we originally  invested so I think we may drawdown anyway. 

phynix_uk

I can see and understand the hesitancy to sell down now but I feel you're over complicating this.

Only you can decide what level of cash funds feel comfortable, if you're happy with £10k that's fine but always ensure you have sufficient to cover any spending plans over the next few years (up to 5) which can't be covered from income as well as a buffer/emergency funds on top. 

The reason you invested into S/S ISAs was to achieve long-term capital growth but provide you the ability to draw from them as and when needed. Therefore, if you need it, draw it. The level of withdrawals you're talking about are sustainable for a long time especially given the additional income you'll receive in another couple of years.

If you don't draw from them now, when will you draw from them? When markets recover? How will you know if they're at the top..... and if the ISAs are growing, you'll be even less inclined to draw from them. 

Linton

If you are close to having insufficient wealth to meet your lifetime needs then it makes sense to maximise your returns by investing as much as possible at a moderately high risk.

However I believe that if they have planned prudently most people, most of the time, will after a few years accumulate more wealth than they need to meet their needs for the rest of their lives. Look at the SWR calculations from cfiresim. Most simulations complete with pots larger than when they started.

How then do you manage your finances? Do you still put the effort into maximising your wealth at death leaving perhaps high 6 or even 7 figure estates? Some people will, possibly for their children’s inheritance. But others don’t have children or have children who may not have much need for a life changing large inheritance.

Another option is to maximise your freedom of action and minimise effort and stress while still getting sufficient returns to sustain your standard of living. In these circumstances having a large buffer is very beneficial. Events like the past few months do not matter. You can buy whatever you want within reason without consideration of the long term effect on your equity investments. This in turn allows you to run your long term inflation protection growth investments with 100% equity.

By using interest and dividend funds you can arrange for a steady automatic transfer of cash to your current account with zero effort or need to make decisions on what, when or whether to sell.  Interest rates may now be getting to the level where annuities are more efficient. However because of the need and cost of index linking in the longer term it may be better to delay buying one until one’s 80s.

Sea_Shell

Are you able to calculate how much of your own money you put into ISAs initially (or over the years) along with the current valuations?

Are you still "up" on those figures?

If so, think of it as selling the "old" units you bought years ago for cheap monies!!    It takes the edge off.

Where are you based on this time last year, if you ignore the recent ups and downs of the last 12 months?

enthusiasticsaver

Sea_Shell said:

Are you able to calculate how much of your own money you put into ISAs initially (or over the years) along with the current valuations?

Are you still "up" on those figures?

If so, think of it as selling the "old" units you bought years ago for cheap monies!!    It takes the edge off.

Where are you based on this time last year, if you ignore the recent ups and downs of the last 12 months?

It is managed by our IFA but we can see the valuation figures daily and from time of investment the total portfolio is 0.93% down from when we invested in 2018/2019 although some of it had been in Vanguard LS from 2015 so difficult to be precise. If it had been in cash it would be reduced further in value than that due to inflation so I am looking at it like that. It is about 15-20% down I think from the last high valuation so yes I am kicking myself I did not withdraw last year. As always though we have had some unusual things thrown at us meaning more drawn out of savings than anticipated 

I think I have to take the approach that we will draw based on need for now as that is why the pot is there. I also think you are right in that looking at it as selling old units bought cheaper several years ago is the way to think of it.  My husband also takes the view if we need the money either for us or our family and we saved for a buffer to our pensions in our early retirement years so we access it regardless of the valuations. In 2 years time our income increases as our state pensions start to pay out so we should not need to access it at all then. 

enthusiasticsaver

phynix_uk said:

I can see and understand the hesitancy to sell down now but I feel you're over complicating this.



If you don't draw from them now, when will you draw from them? When markets recover? How will you know if they're at the top..... and if the ISAs are growing, you'll be even less inclined to draw from them. 

You are completely right. We have discussed it and decided if we need to draw on it we will. We are not going to run out of money.  Our income is due to increase in two years anyway.  

The problem is in anticipating spending plans with any accuracy and that is what has thrown us out.  The NHS is difficult to access right now so we are drawing on cash to pay to go private. That is difficult to anticipate.  We planned to change my husbands car in 2024 and were saving for that but someone wrote his off and the payout was not enough to get him a similar but newer car so we added to it from savings.  Our younger daughter and son in law needed to convert their garage to provide a second home office both during and now after the pandemic and we gifted them money to do that.

Three years ago we had £60k in cash which our IFA suggested was too high and I agreed so took advantage of the ISA allowance and invested £20k.  Now it is £25k but £10k earmarked as a gift to our other daughter to  move house. 

enthusiasticsaver

Linton said:

If you are close to having insufficient wealth to meet your lifetime needs then it makes sense to maximise your returns by investing as much as possible at a moderately high risk.

However I believe that if they have planned prudently most people, most of the time, will after a few years accumulate more wealth than they need to meet their needs for the rest of their lives. Look at the SWR calculations from cfiresim. Most simulations complete with pots larger than when they started.

How then do you manage your finances? Do you still put the effort into maximising your wealth at death leaving perhaps high 6 or even 7 figure estates? Some people will, possibly for their children’s inheritance. But others don’t have children or have children who may not have much need for a life changing large inheritance.

Another option is to maximise your freedom of action and minimise effort and stress while still getting sufficient returns to sustain your standard of living. In these circumstances having a large buffer is very beneficial. Events like the past few months do not matter. You can buy whatever you want within reason without consideration of the long term effect on your equity investments. This in turn allows you to run your long term inflation protection growth investments with 100% equity.

By using interest and dividend funds you can arrange for a steady automatic transfer of cash to your current account with zero effort or need to make decisions on what, when or whether to sell.  Interest rates may now be getting to the level where annuities are more efficient. However because of the need and cost of index linking in the longer term it may be better to delay buying one until one’s 80s.

Interesting thoughts and I have pondered this many times.  We have more than sufficient wealth for our needs (albeit some is invested) but we are certainly not going to run out of money or have to adjust our standard of living and are also likely to receive a large inheritance at some point in the next 10 years although I don't rely on that.  Much of the money we are spending is going to our children anyway so you could argue we are giving them some of their inheritance early. I don't really worry too much about maximising wealth on death and that is one reason we got an IFA and I rarely check the valuations these days.  Some mantras are difficult to ignore though and one of those is buy low and sell high. 

I am going to explore the option of drawing monthly or quarterly from April 2023 to rebuild our cash buffer.