Cash buffer dilemma

MK62

https://forums.moneysavingexpert.com/discussion/comment/81994459#Comment_81994459

Yes.....it did......and it will very likely happen again, but will that be next year, the year after, 5y, 10y?........nobody knows, which is the point I was trying to make....🙂

michaels

Here is some analysis on using a 'cash cushion'

More in later sections of this website too

The Ultimate Guide to Safe Withdrawal Rates – Part 12: Six reasons to be suspicious about the "Cash Cushion" - Early Retirement Now

Linton

https://forums.moneysavingexpert.com/discussion/comment/81994211#Comment_81994211

Yes, our his and hers current accounts are regarded as part of the cash buffer. Other parts are his and hers PBs and cash currently held in his and hers SIPPs and S&S ISAs. Which one is used is purely a matter of convenience at the time though direct expenditure is taken via the current accounts.

Albermarle

https://forums.moneysavingexpert.com/discussion/comment/81994427#Comment_81994427

For the record, personally I would not go into drawdown with a 100% equity portfolio, but others obviously see things differently........that's fine though, there's no way to know today which will turn out to have been the optimal way.....

According to this new Morningstar research, it is safer to have only have about 30% equities in Drawdown.

Is 4% Still a Safe Withdrawal Rate for UK Retirees in 2026? | Morningstar UK

I also vaguely remember some Vanguard SWR tool where you could change equities/bonds/cash % around. As long as equities were no lower than 30%, then outcomes were all very similar IIRC.

Bostonerimus1

I don't touch my DC pension because my DB pension, rent, SP etc. cover my spending with a fair bit to spare. When I retired my asset allocation was around 65/30/5 (equity/bonds/cash) and I decided to stop rebalanced and let the equity percentage increase over time…well hopefully. I'm now around 85/10/5. I keep the cash allocation for basic spending and to have a good amount of cash immediately available to my executors to pay expenses.

tigerspill

https://forums.moneysavingexpert.com/discussion/comment/81993332#Comment_81993332

True. But for me, this is where ILGs help enormously.

When I stopped work, I did my numbers assuming zero real growth. I really didnt want my retirement to be worried about chasing or worrying about growth. So the result was I worked very hard at building enough across savings and pensions to try and achieve this.

So for short term (top up on any DB and SP pension) - I have 5-7 years of cash (accepting inflation risk on this). Then looking to 15 years away, I have ILGs to guarantee my income while retaining the flexibility should I wish to trade these, but the plan is to hold to maturity. These ILGs will give me a small level of growth as they have all been bought below par. These ILGs increase each year in real terms as when I took my pension, I chose an initially larger pension, but not all was index linked, and the part that is, is capped at 5% so a bit of a risk to cover there. So I have cash and ILGs to cover all my expected spend rather than just essential spend.

And the rest in equities for the 15+ year horizon. Now I have this all set up, my plan is to move some equity money each year to another year of ILGs. I can obviously miss a few years if equity markets drop, but I have time for them to recover.

So I didnt really use an SWR, but worked everything out in absolute terms rather than %ages. These change as other pensions kick in. And a cash and ILG buffer suits me as it reduces risk and that is important to me.

Any real growth is a bonus.

I stopped work a few years ago, and this strategy allows me to not worry at all about my finances thankfully.

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/81994004#Comment_81994004

The functional differences between 'cash' and bonds is one of duration and, possibly, liquidity (assuming you count fixed rate savings accounts as 'cash'). So, an easy access savings account is fixed income with zero duration. IIRC, the correlation coefficient between US equities and bonds is around +0.15 or so - in other words, they are very weakly correlated (almost non-correlated). But I agree that the 'cash buffer' has often been considered to be separate to the main portfolio, so, as I said in my previous post, my modelling is not quite a cash buffer.

In years where equities are down, with a target allocation in place withdrawals will definitely be taken more from cash than equities.

To take an example, assume a target allocation of 90% equities and 10% cash.

For a portfolio with £90 in equities and £10 in cash before withdrawal and a withdrawal of £5, the withdrawal will be £4.50 from equities and £0.50 from cash in order to maintain the target allocation (i.e., leaving £85.50 in equities and £9.50 in cash).

Instead, let's now assume that equities fell by 50%, so the portfolio before withdrawal was £45 in equities and £10 in cash. In order to maintain the target allocation after the withdrawal of £5, £0 will be taken from equities and £5 from cash leaving £45 in equities and £5 in cash. In other words, in this example, all of the withdrawal was taken from cash. Had the fall in equities been greater than 50%, then cash would have been moved to equities to rebalance (which is the difference between the buffer and a rebalanced portfolio).

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/81994057#Comment_81994057

to be clear, I’m not suggesting any kind of physical combination - my wife and I have separate pensions and separate bank accounts, but we budget as a household and allocate bills based on salary coming in.

so for retirement planning I’m using both sets of savings but they’ll be held separately. they’ll each be inherited by the other anyway.

Veloflyer

It seems a few of us here have a broadly similar strategy. I don't use SWR or even %, rather my basic annual spend as a guide as to how much in ILGs/annuity I should have. The equity pot is a bonus. However, I do have an equity pot, so annual withdrawal from that is covered with a cash pot. For sure I need far less of a cash pot given basic annual spend is covered, but for me, the cash pot means I can justify holding the equity pot in terms of risk and enjoy any growth arising from it without worrying whether it is sustainable or about to crash and burn.

mrklaw

interesting youtube video from fidelity today. They modelled some SORR examples using historical data (limited set but for illustration) and various approaches - 100% equities along with different sizes of cash buffer - 3 years/5 years income.

worth watching, but the general summary was : the 100% equities outperformed both cash buffer options in absolute return terms, but it also had significantly larger drawdowns - I think the maximum was a 40% drop at one point. The cash buffer returned less money (becuase a chunk of the cash is not invested so there is drag), but did provide smoothing of that volatility so maximum drawdown was reduced.

so - as I’m sure many are likely understanding - cash doesn’t help the fund last mechanically but it does help you avoid panic selling or not getting a good nights sleep, so it helps your retirement psychologically which has a significant value of its own.