Cash buffer?

ali_bear

You should always trust your gut feeling. Your head can be turned, lost. Your heart can be stolen, broken. But your gut is the one thing that reliably comes between you and your !!!!!!.

Ibrahim5

Say you accumulate by paying £x per month into a global tracker, can't you de-accumulate by removing £y per month from a global tracker. Seems reasonable to me.

coyrls

https://forums.moneysavingexpert.com/discussion/comment/82081801#Comment_82081801

You should run that strategy past your IFA.

Ibrahim5

IFAs have no idea.

Secret2ndAccount

https://forums.moneysavingexpert.com/discussion/comment/82081801#Comment_82081801

Yes, you can do this. In order to cope with the worst case scenario (stock market crash the day after you retire), the value of y must be fairly limited. If the early stock market crash fails to materialise you could then end up dying with £1 million that you didn't spend. Of course you could increase your draw after a few years based on stock market performance, but that means:

1. a variability of income that many are seeking to avoid
2. constant monitoring which many are seeking to avoid
3. missing out on spend in the early years which many people would value highly

By moving some of your money to an asset with lower volatility, you can choose a higher value of y without risking running out of money. You give up some potential upside if the stock market roars, but that might be acceptable. You bring the floor up and the ceiling down, which is acceptable to those who are primarily concerned about the floor.

MK62

https://forums.moneysavingexpert.com/discussion/comment/82081801#Comment_82081801

You could, but stock market portfolios (especially equity heavy ones) can behave quite differently in decumulation than they might in accumulation…….though of course, it all depends on the actual numbers, as the previous post illustrates.

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/82081801#Comment_82081801

The largest difference between accumulation and decumulation is that with the former you know roughly how long it is going to last whereas with the latter you do not. For example, for a 65yo female, life expectancy is to 87 years old (i.e., your portfolio would need to last 22 years on a roughly 50/50 basis), there is a 25% chance of living to about 95yo (i.e., portfolio would need to last 30 years), and a 6% chance of living to 100yo (i.e., 35 years).

Just taking a very simple 1/N withdrawal approach, the initial annual withdrawals from £100k would then be £4500, £3300 or £2900 depending on which horizon was adopted.

If the withdrawal is updated every year then, since the portfolio value will vary from year to year, the withdrawals will also vary (whether this is a problem depends on a lot of things). If the amount is kept fixed instead, then there is the possibility that the portfolio will run out prematurely.

To be at least marginally on topic, with variable withdrawals the addition of fixed income (whether bonds or cash) will usually reduce the volatility of the income.

OldScientist

https://forums.moneysavingexpert.com/discussion/comment/82081686#Comment_82081686

I also prefer an algorithmic approach to decumulation. So, for a cash buffer there are three(?) basic rules to be determined:

1. How big should it be (e.g., measured in years of required income)?
2. What is the trigger for spending (e.g., a threshold of how much stocks are down)?
3. What is the trigger for replenishment (e.g., a threshold of how much stocks are up)?

each of which throw open a number of other questions (not least how are 'up' and 'down' going to be measured).

MK62

There is another option, which is to operate the cash as a true buffer rather than a standby cash pile………in other words, all spending comes out of the buffer, and all pension/ISA/GIA withdrawals go into it. The level will naturally fluctuate - down as you spend, and up as you pay withdrawals in. The size of the buffer is a judgement call, but perhaps initially around 2-3 years worth of income would be in the ballpark…….there is no "trigger" for spending from the buffer (since all spending comes from it)……..and the "trigger" for replenishment is whenever you feel it appropriate……but that could be dividends, coupons, maturing gilts/bonds, asset sales etc…….when to sell assets is the same decision whether you operate such a cash buffer or not……but with a lower chance of becoming a forced seller during periods of market stress.

I believe several other forum members also operate their "buffer" this way so it's by no means a novel or unique method, but it works well for me.

mrklaw

yes I’m planning as a buffer mainly for cash flow reasons. If I need to take a small payment to get the tax code settled then maybe the regular payments take a while to come through - I’m expecting it’ll be much less stressful if that lag is just feeding the water butt ready for next year and my tap is already available to use any time