Retirement drawdown: Use cash buffer first or drawdown proportionally?

Bostonerimus1

Pat38493 said:

Bostonerimus1 said:

My approach at retirement was to start with one year's spending as cash in the bank and have three years in money market funds. That's the extent of my bucket strategy. The plan was to have my rental income and eventually DB pension deposited to the cash spending account and then at the end of the year to replenish the cash if necessary. The source of that replenishment would depend on current circumstances, but in order of preference it would be dividends and interest; then from capital gains; next the money market buffer and finally sales of equities and bonds etc. After 10 years retirement I find myself in the enviable position of having more than I need from rental income and DB pension and I am doing a few hours of work a week for the company of an old colleague and so I can actually take money from the cash account to invest.

This is an unintended side effect of having a system which makes people save up individual DC pension pots to fund a large part of their retirement - anyone who actually takes the trouble understand these things and has the financial means to do so, will likely save up a lot more than they actually end up needing in the long run to protect themselves against the worst case.

This probably has a significant impact on economies with huge amounts of capital tied up in these pension funds, especially with more and more people going to tracker funds where the investors do not care a hoot about which individual company they are investing in.

The tax advantages and ability to save into DC pensions and ISAs certainly benefit the higher paid who have the means to take full advantage of them. The people who can't afford to lock away their money for 40 years are not well served by DC pensions...and it's a double hit for them as before they could well have been in non-contributory DB pension plans. My father was in such a plan and he and my mother retired with a paid off mortgage and a comfortable income and never worried about an "asset allocation" or "retirement drawdown". What they did worry about was their budget and a large part of any financial security I've managed to build is from lessons they taught me in frugality and basic money management like never spending more than you earn.

coyrls

SVaz said:

Do people not replenish their cash buffer with income from funds?
That’s my plan, although once at SP age we will only need to draw 1.5% of our pots,  the average dividend income being 2%. 

If your withdrawal rate is 1.5%, you will find it very hard to fail with any drawdown strategy. 

Pat38493

SVaz said:

Do people not replenish their cash buffer with income from funds?
That’s my plan, although once at SP age we will only need to draw 1.5% of our pots,  the average dividend income being 2%. 

No because I suspect that many of us would rather stop working earlier than carry on working to build up the amount of cash needed to provide a continuous income like that (plus what are you going to do with all that money when you are gone?).

SVaz

I’ll be retiring at 63/64. Wife already retired at 58, although I employ her at £7k for bookeeping / admin duties ( and to reduce my tax bill 😉). 
We’ll drawdown £20k yearly between us from 64-67 to utilise our Personal allowances ( I get a military pension at 60. 

The 1.5% draw rate from SP age is only whilst there are two of us,  losing one or the other changes things quite a bit,  especially if I go 1st, she will only get half my RAF pension so will have to draw more like 4% to get an income of £25k gross. 

The plan is to conserve our Sipps for old age,  sheltered housing / care annuity / whatever.
If we don’t need to use it then our Daughter and Grandson will benefit. 

jim8888

GazzaBloom said:

jim8888 said:

I've followed Scenario A which is working okay, although I keep putting off cashing equities to rebuild the three year buffer in the hope the market improves. But who knows what the market will do? There's no perfect drawdown strategy, there never will be, so to an extent I'm "playing it by ear" and staying flexible. After all, if I'd taken a five year cash buffer I'd now be fretting about inflation. I dithered over drawdown strategies for a year before deciding on what to do that was best for me. As ever, the relief of making a decision and taking action on it went a long way to putting my mind at ease.

Thanks @jim8888 where are you in terms of depletion of your cash buffer so far if you don't mind me asking?

Hi Gazza the way I tend to look at it is by asking myself when I need to dip into the market and cash some shares to keep my cash pot with at least a year's coverage in it. At the moment, I reckon I've at least a year before I need to do that, but I am now drawing down from a SIPP and taking income from a DB pension too so I suppose technically I'm already cashing in some equities to do that. 

Qyburn

jim8888 said:

Hi Gazza the way I tend to look at it is by asking myself when I need to dip into the market and cash some shares to keep my cash pot with at least a year's coverage in it. At the moment, I reckon I've at least a year before I need to do that, but I am now drawing down from a SIPP and taking income from a DB pension too so I suppose technically I'm already cashing in some equities to do that. 

How are you drawing down, are you specifying which assets to cash in?

GazzaBloom

I am leaning towards Scenario B proportional drawdown between cash and equities and annual rebalancing

However, Scenario A could be the way to go if you planned to use all the 3 years cash first then rebalance at the start of year 4 and draw proportionally as per Scenario B thereafter. That would defer equity drawdown for 3 further years after starting retirement and potentially allow for further growth or help mitigate and early sequence of returns risk should there be a downturn at the start of retirement.

Now, If only someone could tell me exactly what global equity returns will be in those first 3 years please, broken down by region and sector it would make this a whole lot easier 

Qyburn

GazzaBloom said:

However, Scenario A could be the way to go if you planned to use all the 3 years cash first then rebalance at the start of year 4 and draw proportionally as per Scenario B thereafter. That would defer equity drawdown for 3 further years after starting retirement and potentially allow for further growth or help mitigate and early sequence of returns risk should there be a downturn at the start of retirement.

Surely the same risk exists, just three years down the line. If equities take a hit late in year three and you've not taken the opportunity to replenish the cash while equities were doing well.

My plan was to vary drawdown. A "buffer" isn't actually acting as a buffer unless it's used to smooth out an irregular input into a regular output.

GazzaBloom

Qyburn said:

GazzaBloom said:

However, Scenario A could be the way to go if you planned to use all the 3 years cash first then rebalance at the start of year 4 and draw proportionally as per Scenario B thereafter. That would defer equity drawdown for 3 further years after starting retirement and potentially allow for further growth or help mitigate and early sequence of returns risk should there be a downturn at the start of retirement.

Surely the same risk exists, just three years down the line. If equities take a hit late in year three and you've not taken the opportunity to replenish the cash while equities were doing well.

My plan was to vary drawdown. A "buffer" isn't actually acting as a buffer unless it's used to smooth out an irregular input into a regular output.

I'm not sure I follow you. What do you mean? Scenario B does that through rebalancing doesn't it?

Qyburn

GazzaBloom said:

Qyburn said:

My plan was to vary drawdown. A "buffer" isn't actually acting as a buffer unless it's used to smooth out an irregular input into a regular output.

I'm not sure I follow you. What do you mean? Scenario B does that through rebalancing doesn't it?

Maybe, I haven't worked the detail for B. My "buffer" comment was referring to the idea of drawing cash for three years until none is left, in which case as I say it is a straight delay and not a buffer.

Quick thought is that B won't quite do the same thing. Let's say you have growth assets of £400k and need £12k per year. Your three years cash is £36k. Proportion drawdown year one would be roughly £11k from growth and £1k cash. Say growth takes a 50% hit, your proportional drawdown would be around £10,200 growth, and £1,800 cash.

Whereas in my half formed scheme if my growth asset was down 50%, I'd draw £6k from growth and £6k cash. Not selling so much of the asset at it's low price.