How much cash is too much?

Albermarle

Stocard said:

I don’t get why so many people hang on to half a million in cash. 

There are many people who do not trust the stock market, and see it as a huge casino where they are going to get burnt if they get involved. 

I used to think having a huge buffer would make me sleep better but after a while it just felt like watching money slowly rot away with inflation. 

At one point I had about 200k in cash and every time I checked the interest rates I’d feel annoyed because it was obvious the banks were making more out of me than I was making out of them.

For me the turning point was when I needed to replace the car and pay for some home repairs all in the same year. 

I realised I didn’t need anywhere near that much sitting in a current account. Since then I’ve kept roughly two years of expenses in easy access and the rest goes into global equity trackers. I still get that feeling of security but the money actually works instead of just sitting there.

I know some people will say keep five or ten years in cash to protect yourself but I think that’s too cautious if you already have guaranteed income streams like pensions. It probably is too cautious, but a lot of people are cautious by nature and the thought of their money slipping away in a big crash petrifies them. 

At the end of the day it depends how much risk you can stomach, but I honestly think people massively overestimate how much cash they really need once the mortgage is gone and the pensions are paying out.

What I’d be more interested in is how you feel about watching the value of your cash pot shrink in real terms every year. Does that bother you or do you see it as the price of peace of mind?

Many people do not really understand ( or underestimate) how inflation affects their spending power in future . In any case for about two? years now savings interest rates have been beating inflation. Hence the huge popularity of short term money market funds in recent times. 

What you say makes sense financially, but after being on this forum for a while, it is clear that not everybody thinks in the same way.
I am sure a few people still keep their money under the bed !

Yorkie1

OP, I think you said you were retired?

If so, you're probably already aware that if you don't have any earned income (pensions do not count), you are limited to how much you can put into a pension - it's not much each year (£3600 gross)

DRS1

rothers said:

poseidon1 said:

Low risk tax free gains on direct investment into low coupon UK government gilts.

I have no idea what you've just said there 

It was excellent advice  (sorry guidance) though

thunderroad88

HHarry said:

Stocard said:

I don’t get why so many people hang on to half a million in cash. 

 I guess how you invest may answer that question.  I hold £250k cash, which is about 30% of my pot.  But the rest is invested in 100% equities.  Overall that’s not far off a VLS60 or GS Balanced - which are often cited as sensible funds to hold to reduce volatility.

 

I’m similar to you Harry… got £400k in cash/mmf/bond funds generating average yield of over 5%. Still 7 years from getting all our db and state pensions so we are drawing most of our income from this cash buffer. It’s probably much more than will ultimately be needed, and we’ll not get close to running it down unless we go mad with our spending, but it means we don’t worry at all about how our £600k in equities is faring, so no sleepless nights. As we get nearer those pensions, we shall probably slowly transfer some cash to equities at opportune moments. What cash provides is options and I like that given the uncertainty in the world over the next few years…

Eco_Miser

rothers said:

Circs are that I have an index linked pension after tax of around £42k, my wife retires next month and she will have an index linked pension of around £5k. Our total income is around £3,900 per month after tax. We currently allow ourselves £5k per month to pay for all bills (mortgage is paid off), spending money, holidays and everything else.

Any advice?

Cheers

Your wife can pay 100% of her earnings this year into a pension, and get the tax relief, and increased pension.

It's a way of getting some of your cash into tax-advantaged investments.

jimjames

Linton said:

Holding a significant amount in cash can be highly beneficial.  For example I was recently able to get a late booking for a winter cruise (small ship!) at half price.  

Although (I hope!) you don't need £500k for a cruise! Even £20k should be sufficient for those types of purchase but I'd normally just pay with credit card and that gives time to pay it off.

shortseller09

With £47k in guaranteeed income, and over half a million in cash, you've won the game.

4% on the cash is another risk-free £21k per annum. You don't need to take any risk as long as your cash return keeps up with inflation.

Have a punt with the S&S ISA, and don't forget the minimum £25k for your state pensions will kick in down the line. 

HHarry

shortseller09 said:

With £47k in guaranteeed income, and over half a million in cash, you've won the game.

4% on the cash is another risk-free £21k per annum. You don't need to take any risk as long as your cash return keeps up with inflation.

Have a punt with the S&S ISA, and don't forget the minimum £25k for your state pensions will kick in down the line. 

“you’ve won the game” sums it up nicely for me.  Once you’ve got enough you don’t NEED to do anything more. You might choose to so you can leave a bigger inheritance, or seven zeroes on your balance makes you happier than 6.  But if you want to keep it nice and simple then you’re almost certainly going to be Ok.

rothers

Thanks everyone, I really appreciate you taking the time to offer your thoughts and you have certainly given me food for thought. 

My main goal is to live as full a life as possible whilst at the same time leaving as much as possible for my kids, that's no different to anyone else I suppose  Thanks again.

OldScientist

rothers said:

Circs are that I have an index linked pension after tax of around £42k, my wife retires next month and she will have an index linked pension of around £5k. Our total income is around £3,900 per month after tax. We currently allow ourselves £5k per month to pay for all bills (mortgage is paid off), spending money, holidays and everything else.

Between us we have around £225k in stocks and shares SIPPs and ISAs and around £540k in cash.

I am aware that we hold far too much cash but how much do you think we should actually hold bearing in mind that I am 53 (retired) and my wife will be 55 next month when she retires?

I am comfortable with fairly high risk investment due to the relatively low extra amount I need each month to cover our spends. I only invest in low cost multi asset funds due to a lack on knowledge on the subject.

Any advice?

Cheers

Your withdrawal rate currently appears to be about 1.7% which, as you say, is fairly low.
Your current overall allocation depends exactly on what you are holding in the SIPPS and S&S ISAs, but assuming a multi asset fund with a lot of equities then no more than 30%.

Historically (see https://www.2020financial.co.uk/pension-drawdown-calculator/ ), a low withdrawal rate of 1.7% and 30/70 equity/cash allocation lasted for more than 45 years (i.e., taking you and/or your OH to nearly 100yo). Of course, in roughly 15 years time you will have SP(?) and your expenditure will then be entirely covered by guaranteed income.

If you will get the SP, then one initially moderately complex way (which will require some study) to secure index linked income over the 15 years or so beforehand is to construct a index linked gilt ladder*. According to the tool at https://lategenxer.streamlit.app/Gilt_Ladder this would currently cost around £180k to provide £13k per year (tax requires a bit of further thought, but gilts are currently free of capital gains tax, but do draw income tax on interest). To be honest, it would be easier to set aside about  £200k in cash to cover this 15 year period and hope that interest rates broadly keep up with inflation.

The rest of your portfolio could then, eventually, be invested to provide legacy and emergency expenditure not covered by your other sources of income.

* Gilts are UK government debt that mature at a given date. If they held to maturity they share some of the characteristics of a fixed rate savings account.