Cash buffer?

GenX0212

How do you manage/utilise yours?

Having retired a couple of months ago have been living on my final salary and bonus payments in the interim but now need to think about what's next.

The overall value of my main DC pension has been largely static from when I retired hovering between £740 / £750k (nice problem I know). If however I start to drawdown then I'm committing myself to potentially reducing the longer term pot value due to SORR whilst there is still ongoing turmoil with Iran and Trump tariffs etc.

Theoretically I can take money from the DC across short durations but with the admin complexity that brings with regular/repeat drawdown requests.

Alternatively I can spend for some while longer by reducing our cash reserve ( currently ~ 3* annual spending) without accessing the DC yet.

Just wondering how others with a cash reserve are managing theirs and what your 'rules' for when to use your cash reserve or not?

On-the-coast

”ongoing turmoil with Iran and Trump tariffs etc.”

And yet markets are pretty much at all-time highs still - often a good time to derisk by moving a little out of funds (but not too much). At least make sure you take out enough to max out your 0% tax allowance each April.

Smudgeismydog

With a DC pot of £750k, I would be looking to withdraw up to your 20% income tax threshold and using any surplus to top up ISAs.

Once your State pension becomes payable, your headroom in the 20% bracket is reduced, restricting your ability to withdraw at 20% income tax.

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/82080522#Comment_82080522

thats a liquidity/access choice and makes sense for a lot of people. but you could keep those ISA funds invested i the same things they were in the pension for similar asset allocaiton - you’re just trading lower tax now for hoping no high tax later.

but also I think OP is talking about volatility and drawdown rules. I don’t know if that changes things. You should absolutely try and have a set of rules to follow. when to drawdown on equities, when to hold and draw on cash.

most seem to recommend if stocks are up or at least not down, draw from there. If you have a mix of bonds/stocks at a target ratio, it doesn’t really matter where you pull from, if you then rebalance back to eg 60:40.

and saving cash for down markets - size of how ‘down’ likely tied to the size of your cash buffer. Small buffer, wait for larger drop

Linton

https://forums.moneysavingexpert.com/discussion/6677529/cash-buffer

Our ongoing income is based on SP, Annuities, a small DB pension, and interest/dividends from income generating investments. Holding the income funds in S&S ISAs avoids any risk of higher rate tax.

All ongoing income goes into the cash buffer, all expenditure comes out of the cash buffer. Since (if one is prudent), income > expenditure the buffer naturally increases over time leaving money available for one-off unplanned items.

Rebalancing by moving cash between cash and long term investments is very rarely necessary, perhaps once every few years. To increase income, long term growth investments are sold to buy more income generating investments.

Managing one's finances in this way avoids fears of not being able to maintain one's standard of living in a crash. It also removes the need for any regular (eg monthly) management activities as all income is automatically paid into our bank accounts, which are regarded as part of the buffer.

kempiejon

We all have our own challenges in dealing with the change from employed to deaccumualtion of pots. Thhose with guarenteed income perhaps have a few less worries well different. My only income is from ISAs, later SIPP and in the run up to ending work I hoard cash in savings/premium bonds about 3 years spending, then a rolling 3 to 5 years of corporate bonds and conventical gilts laddered topped up; slightly less than £50k for now. I have a further sum in >10 year index linked gilts. I use absolute vales for spending but percentages when looking at asset allocation, great or terrible years might force rebalancing but careful extraction tax efficiently make major rebalances less likely. Come state pension age hopefully all my spending is amply covered, well under current rules so I can look at indulgences, largess and philanthropy: should I make it that far without financial or personal catastrophe.

zagfles

I don't have one. I have cash but not for market timing purposes. From the analyses I've read a short term (few years) cash buffer doesn't really help, except as a psychological comfort blanket, but there may be value in longer term market timing strategies such as Prime Harvesting.

michaels

I guess if you are going for a timing the market (variable cash buffer) strategy then it probably makes sense to have some rules relating to relative stock market performance to guide your asset mix strategy but his is obviously a lot more complicated than just sticking to a fixed stocks/bonds/cash split.

Have you seen research that such a strategy can give a higher swr than simply following simple fixed asset allocation plus rebalance rules? What rules did the research you have seen follow?

Albermarle

 whilst there is still ongoing turmoil with Iran and Trump tariffs etc.

Once this turmoil ends, another one will start. There are always global tensions/wars/events etc . Most have little or no effect on financial markets, although sometimes they do. Normally the main danger to financial markets come from within them . Excessive debt/stock market bubbles etc.

GenX0212

I suppose its trepadation knowing that I'm no longer accumulating. I became very used to seeing the balance growing month on month above the amount I was paying in.

The point made by @Smudgeismydog is well made, thank you for the reminder re maximising the 20% tax band.

I have earnings of about £18k this year so about £32k headroom to 40% tax band. Expecting to start taking a DB pension from February next year and also have some expected savings interest to take into account. Probably around £36k withdrawable from the DC this tax year including the 25% tax free. I have some number crunching to do to try and nail the exact final figures but cant do this until the DB scheme comes back to me with an updated quotation.

bownyboy

FIRE'd in April 2022. We had approximately one year in cash spending. The rest in vanguard global equities. However we do both have full new state pensions coming online later, so we consider those our 'bonds' or equivalent.

Four years later we're now comfortable with one year on cash and then each year we sell some equities to live off.