Money market funds

Justso65

Hi

I have never invested in money market funds.  However, my SIPP provider sends me news letters and a recent one involved money market funds.  For example, the L&G Cash trust currently yields 5.2%.  I understand this yield will fall as interest rates fall but it is currently better than the inflation rate by a few percent.  I intend to retire in the next year or two and would like to protect my current pension pots from any potential market downturn.  I would be interested in anyone’s opinions as to why I should or shouldn’t move parts or all of my pots into money market funds.  I’m not a adventurous investor and don’t seek to chase high yields.  I’m happy with lower but safer returns. When I look at these funds I see a straight line of increase in value as opposed to the peaks and troughs of stock based funds.

I have a pension pot target that I may retire if/when I get to it and I’m about 3% short of that target.  

So really I’m looking for opinions on money market fund investing especially for someone nearing retirement. 

As an aside when I say I’m 3% short of my pot target that’s actually changed.  I had lower pot target which I reached.  At that stage I thought “maybe another year or two” and since then my pot is up nearly another 20% with aggressive pension contributions and investment value increases.  So I may keep going for a bit even if I reach my new target.  One more year as they say.  However, I’m no longer a long term investor and retirement will come in the near future.

Thank you for any contributions.  

JS.

cloud_dog

They have their place in an investment strategy, but they are not a fund to hold significant amounts in for longer periods (cash (equivalent) savings will always be eroded by inflation over the years).

I (we) are fast approaching early retirement (Dec this year), in fact I did exactly as you described, working out our income level(s) and extrapolating a pot value and linking the R-Date to achieving the target), and we currently hold a significant amount in a fund that tracks SOIA / SONIA (Sterling Overnight Interest Average) in order to mitigate the potential of sequence of returns risk.

We are in a fortunate position whereby the vast majority (all possibly) of our income requirements will be covered by guaranteed sources (DBs, SPs) at age 68, and so our drawdown pots only need to support the next 10 years, but if I had a more significant drawdown pot to cover me untill I pass I would certainly consider using these specific short term money market funds to hold cash/cash equivalent amounts ready for drawdown or as part of s volatility mitigating methodology.

Justso65

Thanks you.  

I am in a similar position.  My wife and I have DB pensions that, in addition to the state pension, will cover our needs within 10 years.  So my drawdown pot will fill the gap from early retirement to state pension age.  Currently an 8 year gap and closing faster than I would like.  

I have created a spreadsheet with my target drawdown rate, inflation rate and investment appreciation rate to model what happens as the rates change and my drawdown pot survives, with quite a bit left over, until 67.  So I would generally be more than happy with a money fund return of greater than inflation and if that changes I would look to move the money funds into other investments or stocks with good dividends

JS

OldScientist

Short term money market funds (there are also different sorts with longer duration investments in them) are typically going to (roughly) track the SONIA rate which, in turn, is roughly aligned with the base rate (and hence with interest rates in savings accounts).

Over long periods of time, 3 month treasury bills (another proxy for cash) have had a real return of about 1% (i.e., they keep up with inflation plus a little bit extra in the long term - however, in the short term this may not be the case), so there is a place for them in retirement portfolios as part of an allocation to fixed income.

However, note that we are currently in the relatively unusual situation that short term fixed income (like cash and STMMF) is giving higher returns than longer term fixed income (like gilts) but at some stage this will almost certainly reverse (we only have to go back two or three years, so see returns on MMF of less than 0.5% although I doubt that they'll go back that low again).

While their behaviour is similar to that of cash savings accounts (whether easy access or fixed rate), there are some differences that you should be aware of - a useful read is at  https://monevator.com/money-market-funds/

dunstonh

I would be interested in anyone’s opinions as to why I should or shouldn’t move parts or all of my pots into money market funds.

There is a place for short term money market funds but less of a case for money market funds due to liquidity concerns.

So really I’m looking for opinions on money market fund investing especially for someone nearing retirement. 

As part of a bucketing strategy when drawing income, then STMMs have a good place.  Their returns are typically higher than platform cash.   So, if your platform supports targetted withdrawals to fund the income, then using an STMM instead of platform cash can be a good option.

Obviously, STMMs have looked good recently due to interest rate rises but they will follow SONIA downwards.

BoxerfanUK

My OH retired and opened a SIPP, transferring her DC pensions into it earlier this year.  She (we) deliberated over where to invest the money and ultimately it will no doubt end up in a passive index fund, but for now, and due to the current uncertainty going on in the world and stocks being at or near all time highs, we have put it into a STMMF.  Yes she may do better invested in stocks but equally she could also do worse.  We are not risk averse as we don't need to rely on this money, but not greedy either.

For the time being, even in the money market fund the growth of her pot is easily outstripping what she is drawing down each month, so for now we will just sit tight, monitor and take the plunge into stocks when she feels the time is right.  We monitor the situation on an ongoing basis and as interest rates fall (or there is a stock market correction) we will re-evaluate where to invest it.

Roger175

BoxerfanUK said:

My OH retired and opened a SIPP, transferring her DC pensions into it earlier this year.  She (we) deliberated over where to invest the money and ultimately it will no doubt end up in a passive index fund, but for now, and due to the current uncertainty going on in the world and stocks being at or near all time highs, we have put it into a STMMF.  Yes she may do better invested in stocks but equally she could also do worse.  We are not risk averse as we don't need to rely on this money, but not greedy either.

For the time being, even in the money market fund the growth of her pot is easily outstripping what she is drawing down each month, so for now we will just sit tight, monitor and take the plunge into stocks when she feels the time is right.  We monitor the situation on an ongoing basis and as interest rates fall (or there is a stock market correction) we will re-evaluate where to invest it.

Same here, I've recently transferred two pensions to get it all in one place and I'm reluctant to commit it all at this point in time, I did invest approx half of it but have the remainder sat in a STMMF. I know long terms it's not a great idea but with inflation allegedly at 2%, earning near 5% on it is not going to be too bad. 

BoxerfanUK

Roger175 said:

BoxerfanUK said:

My OH retired and opened a SIPP, transferring her DC pensions into it earlier this year.  She (we) deliberated over where to invest the money and ultimately it will no doubt end up in a passive index fund, but for now, and due to the current uncertainty going on in the world and stocks being at or near all time highs, we have put it into a STMMF.  Yes she may do better invested in stocks but equally she could also do worse.  We are not risk averse as we don't need to rely on this money, but not greedy either.

For the time being, even in the money market fund the growth of her pot is easily outstripping what she is drawing down each month, so for now we will just sit tight, monitor and take the plunge into stocks when she feels the time is right.  We monitor the situation on an ongoing basis and as interest rates fall (or there is a stock market correction) we will re-evaluate where to invest it.

Same here, I've recently transferred two pensions to get it all in one place and I'm reluctant to commit it all at this point in time, I did invest approx half of it but have the remainder sat in a STMMF. I know long terms it's not a great idea but with inflation allegedly at 2%, earning near 5% on it is not going to be too bad. 

Yes, we are happy to sit with it for now, although dunstonh does have a point in terms of potential liquidity issues.  I take it that he means that were the stock market to crash on Monday it might not be so easy or quick to just bail out of a MMF in order to buy into stocks if everyone else in MMF's are all trying to rush to do the same.  Will see how it goes.

Bostonerimus1

I'm retired and typically keep a couple of years spending in cash and cash like things. Some of that cash is in my bank account for everyday expenses and the rest is in a money market yielding 5.28%. That nice yield is a bonus as I use the money market more for cash management and a place to sweep sales etc than for its return. I have perhaps 30 years of retirement ahead of me so I invest in equity and multi-asset funds for long term growth. If I sell my home I will park the proceeds in the money market account as it's almost as safe as cash in the bank, gets some return and is easily accessible.

Bostonerimus1

BoxerfanUK said:

My OH retired and opened a SIPP, transferring her DC pensions into it earlier this year.  She (we) deliberated over where to invest the money and ultimately it will no doubt end up in a passive index fund, but for now, and due to the current uncertainty going on in the world and stocks being at or near all time highs, we have put it into a STMMF.  Yes she may do better invested in stocks but equally she could also do worse.  We are not risk averse as we don't need to rely on this money, but not greedy either.

For the time being, even in the money market fund the growth of her pot is easily outstripping what she is drawing down each month, so for now we will just sit tight, monitor and take the plunge into stocks when she feels the time is right.  We monitor the situation on an ongoing basis and as interest rates fall (or there is a stock market correction) we will re-evaluate where to invest it.

You have a plan that is working for you which is good. However, I would encourage you to pin down the criteria for you to re-entering the market if that's your plan. What happens when the markets go up, will you wait for them to fall and how low do they need to fall for you to buy back in? Personally I wouldn't wait, I would develop your long term asset allocation and implement it now.

BoxerfanUK

Bostonerimus1 said:

BoxerfanUK said:

My OH retired and opened a SIPP, transferring her DC pensions into it earlier this year.  She (we) deliberated over where to invest the money and ultimately it will no doubt end up in a passive index fund, but for now, and due to the current uncertainty going on in the world and stocks being at or near all time highs, we have put it into a STMMF.  Yes she may do better invested in stocks but equally she could also do worse.  We are not risk averse as we don't need to rely on this money, but not greedy either.

For the time being, even in the money market fund the growth of her pot is easily outstripping what she is drawing down each month, so for now we will just sit tight, monitor and take the plunge into stocks when she feels the time is right.  We monitor the situation on an ongoing basis and as interest rates fall (or there is a stock market correction) we will re-evaluate where to invest it.

You have a plan that is working for you which is good. However, I would encourage you to pin down the criteria for you to re-entering the market if that's your plan. What happens when the markets go up, will you wait for them to fall and how low do they need to fall for you to buy back in? Personally I wouldn't wait, I would develop your long term asset allocation and implement it now.

Hi and thanks for your comment, I tend to agree.  Tbh at first we couldn't really decide which fund to put it in and what risk profile so we put it in the MMF pending that decision and so far happy to leave it be, but I totally get what you are saying.  When we do make that decision we aim to keep it simple, stick some or all in a global index fund and just leave it where it is whatever happens.  We are not skilled or knowledgeable enough to attempt to play or time the market.

My OH has another 4 years to SP and although we don't really need to use her SIPP due to my DB (and SP in a few months) ideally we want to drawdown the £16,760 for the next four years to maximize her personal allowance.  Once her SP kicks in any DD will all be taxable, so the question then is do we slightly increase our risk profile due to not really needing it??!!  Worse problems to have I guess.