Cash buffer dilemma

kempiejon

A SWR isn't about not eroding capital, it's about not running out of money completely.

@coyrls of course, thanks for catching that.

kempiejon

@Veloflyer I think we broadly agree, I might quibble and see dot come being sub 10 years

I think the important point is to at least have a cash buffer if you believe you may draw on any equity based pot. How much to have as a buffer is largely down to the risk tolerance of the individual, but a multiple of annual draw from it based on how many years any recovery may take would seem sensible.

Pretty much as soon as I started with a salary I worked on building a buffer, once that built up to a year or two, I was able to walk away from work for a year or so and do something ore fun before signing up to the nose grinding to start the process again. I spent a while self-employed, my income was lumpy and seasonal. I can't see retirement being much different unless I annuitize my investments. As @dunstonh illustrated above (i think) with a mix of equities and bonds it's not just the cash buffer protecting from being a forced seller of depressed equities

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81992638#Comment_81992638

Not entirely sure what dunstonh is trying to say, but my broad philosophy is to try and be aware of the risks at least. My cash buffer is solely there as cover for the equity risk, or more accurately, the risk of drawing down on the equity pot during a downturn. For sure if I also had an annuity in lieu of part of the equity pot, that would reduce the risk even further, and hence the cash buffer required.

Swings and roundabouts. For me it is about finding that happy medium of acceptable risk vs potential equity growth.

Bostonerimus1

People who look at 100% equities as a retirement asset allocation are generally thinking about maximizing their SWR and final pot to pass on as a legacy. What they should be maximizing is the probability of success for a sensible SWR and you do that with a portfolio that is more diverse than 100% equities. If you have a DB pension then that can take the place of some of your bond/cash allocation.

michaels

Seems to be a lack of understanding of what an SWR is in this conversation.

Any strategy where you adjust asset allocation depending on your perception of the level/value of equities, bonds or whatever is effectively the same as timing the market: you think you know better than the average opinion which is driving the market price level. You might get lucky using your own particular brand of variable draw down strategy but you are not really de-risking.

However as a psychological crutch it clearly has a lot to be said for it.

MK62

In reality, there is no such thing as SWR......all you can say is what WAS a safe withdrawal rate - one which would have succeeded in all X year periods in the last Y years. There is no guarantee that such a WR will be safe in the future though......it's really nothing more than a guideline/baseline in the end.

As for adjusting asset allocation, either you do it, or the markets will do it for you.......it's practically impossible to maintain any given multi asset allocation, over time, without intervention of some kind. Also, in drawdown, it's hard to avoid market timing too, at least in some form, as at some point you must sell assets to cash.......you must decide what to sell and when to sell. True, you could use a single multi-asset fund to avoid some of these decisions, but all you are really doing then is passing (some of) those decisions on to someone else.

On drawdown strategy, you could take the view that x% has been safe over every, say, 30 year period in the past, so start with that and simply adjust your withdrawal each year by inflation.......the 4% rule (or whatever % you choose at the start)......but that strategy is based on an outlier outcome, worst case......what would you do, say 10 years in, if it became highly likely that your portfolio was going to run out well before the 30 years, or, perhaps more likely, was going to end up higher than when you started?

For anyone operating the vanilla SWR strategy over say 30 years, I would ask this........after say eg10 years, are you going to take whatever level your income is then, and test that against your remaining portfolio's SWR for the remaining 20 years?........and what would you do if the "new" 20 year SWR suggests a significantly different income to your then current income?

ali_bear

As someone says above it also depends on whether you intend your funds to survive you as a legacy for inheritance or use them all up before you croak.

Veloflyer

https://forums.moneysavingexpert.com/discussion/comment/81993024#Comment_81993024

I'd agree that any SWR is a guide only and not to be relied upon. As my basic spend is covered by bond and possibly annuity later on, I am assuming SWR does not really apply?

Simplistically perhaps, I base projections on my basic spend which in turn is funded presently by an ILG ladder as a bridge to SP and perhaps by an annuity later on. I assume zero growth on the ILG/annuity, and post SP age, I reckon some sort of annuity (at today's rates) plus SP will cover basic spend. I don't envisage my basic spend changing that much - inflation excepted - but clearly this assumption relies on things out of my control remaining reasonably stable. In these strange times that may be an assumption too far.

The equity pot will just trundle along. If my basic spend starts to exceed the SP plus annuity income, then I could feasibly cash some in to purchase an additional smaller annuity else use up some of the cash pot. Otherwise it will be only be used/drawndown on as a luxuries pot as and when.

RogerPensionGuy

As a previous poster mentions, SWR is just looking backwards and we all read so often that previous performance information was in the past and may not reflect future performance etc.

History shows markets spend most time trending up in value and lately any pull backs and dips have been pretty short before the uphill slog starts again and it appears to be "Happy Days" most of the time and hopefully nothing or little units sold in the dipp.

However there have been a few deep long pull backs in history, 1929, 1970s, 1999/2000 and the GFC are always in my mind.

I have always been weary of being deep and dependant on markets in the first 10 to 15 years of retirement and we experience something like the dates I mention above, in my mind a disaster, after working hard(?) for 40 odd years and in the Go~Go years of not working only to augment, cut desired spending due circumstances.

I hope markets keep surging to the moon personally, but I won't be surprised when the bumpy times arrive and hopefully I'll even buy more equities if my hard cash sources stay as I expect/planned and enough liquid cash for the Go~Go and beyond years.

Time will tell and the history books will get updated like they always do.

mrklaw

are you planning together? You don’t have cash but your wife has a lot of cash so if you consider the combined portfolio you may be more than fine. You can have too much cash which can reduce your growth too.