Cash Buffer after markets downturn?
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thriftytracey
Posts: 632 Forumite
This is a right numpty question and I think I know the answer but would appreciate confirmation or not.
I plan to retire in May aged 59 and delay going into Pension Drawdown for a couple of years if there are prolonged falls in the markets. I was going to sell my modest share portfolio and use that as cash to live which would last for 2 years max. I do have modest savings and I had a mindset not to touch savings as they are for "emergencies" or necessary capital purchases, but I guess keeping the share portfolio would be better as even in a downturn they may have a better return?
Thanks
I plan to retire in May aged 59 and delay going into Pension Drawdown for a couple of years if there are prolonged falls in the markets. I was going to sell my modest share portfolio and use that as cash to live which would last for 2 years max. I do have modest savings and I had a mindset not to touch savings as they are for "emergencies" or necessary capital purchases, but I guess keeping the share portfolio would be better as even in a downturn they may have a better return?
Thanks
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Comments
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Why do you think shares would hold up better than cash in a downturn, typically they would lose value in a downturn where as cash would hold its value, albeit it wouldn’t keep up with inflation.0
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Have a read of this thread: https://forums.moneysavingexpert.com/showthread.php?t=5948700The comments I post are my personal opinion. While I try to check everything is correct before posting, I can and do make mistakes, so always try to check official information sources before relying on my posts.0
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I dont think you should distinguish between your pension and share portfolio. Your main distinction is simply equity, government bonds (if any), and cash. What you should avoid doing is selling equity in shares or funds of shares to use as cash when prices are low, no matter where they are held. The problem being that if you took your normal annual income when say prices had halved you would be selling twice the number of shares or units compared to previously and risking depleting the core investments you need for future income.
The other aspect to consider is tax. If you are not going to be earning anything for the next 2 years you should at least take the opportunity to drawdown sufficient taxable pension money to use up your tax allowance. Any drawdown you dont need in the short/medium term could be invested in an S&S ISA.
I cannot suggest precisely what you should do as you havent said how much money you have in each pot and how much you need to live on. However one option could be to drawdown each year under UFPLS whereby the corresponding 25% tax free lump sum is added to the taxed amount. Another option could be to take the full 25% immediately, put aside sufficient cash to cover your 2 years living expenses (plus a few more years) and reinvest the rest in an S&S ISA. Then, as before, drawdown sufficient each year to use up your tax allowance reinvesting it all in your S&S ISA. As you would be reinvesting, perhaps in the same funds, selling would be much less of an issue.0 -
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Have a read of this thread: https://forums.moneysavingexpert.com/showthread.php?t=5948700
Yes reading that thread prompted me to post my question. The thread was rather complicated though. It wasn't so much about holding cash in an investment product but just using savings as opposed to using cash generated from selling shares.0 -
I dont think you should distinguish between your pension and share portfolio. Your main distinction is simply equity, government bonds (if any), and cash. What you should avoid doing is selling equity in shares or funds of shares to use as cash when prices are low, no matter where they are held. The problem being that if you took your normal annual income when say prices had halved you would be selling twice the number of shares or units compared to previously and risking depleting the core investments you need for future income.
I was thinking of selling them now rather than waiting until FTSE dropped further.
The other aspect to consider is tax. If you are not going to be earning anything for the next 2 years you should at least take the opportunity to drawdown sufficient taxable pension money to use up your tax allowance. Any drawdown you dont need in the short/medium term could be invested in an S&S ISA.
I thought about delaying converting pensions to drawdown for another 2 years. I wasn't going to take enough per year to qualify as a taxpayer.
I cannot suggest precisely what you should do as you havent said how much money you have in each pot and how much you need to live on. However one option could be to drawdown each year under UFPLS whereby the corresponding 25% tax free lump sum is added to the taxed amount. Another option could be to take the full 25% immediately, put aside sufficient cash to cover your 2 years living expenses (plus a few more years) and reinvest the rest in an S&S ISA. Then, as before, drawdown sufficient each year to use up your tax allowance reinvesting it all in your S&S ISA. As you would be reinvesting, perhaps in the same funds, selling would be much less of an issue.
I wasn't going to take the 25% TFLS anyway if I had converted my pension to drawdown. I was going to include that as part of the drawdown to make it last longer.
The Pensions were worth @ £300k (but less now too depressed to look!)0 -
What fraction of your retirement savings (pension fund and the rest) is in equities, what fraction in bonds, what in cash, commodities, property, gold, FX?
Will you have any guaranteed income in retirement e.g. State Pension, DB pension, annuities, ....?Free the dunston one next time too.0 -
What fraction of your retirement savings (pension fund and the rest) is in equities, what fraction in bonds, what in cash, commodities, property, gold, FX?
I don't know exactly. I chose not to rebalance when invited to do so by the various pension providers at 5 years before retirement. i.e. move most of it to Cash.
Will you have any guaranteed income in retirement e.g. State Pension, DB pension, annuities, ....?
State pension in 7 years, partner receives income from DB pension and Drawdown (State Pension in 3 years')0 -
You need a drawdown strategy. A strategy is designed to prevent selling equities when the markets drop and ensures that you withdraw a 'Goldilocks' amount (not too much, not too little) annually. Typically, shares are only sold when markets have gained, and income is drawn from the less volatile assets (cash and/or bonds).
jamesd has an excellent thread on drawdown strategies. I'll see if I can find it. There are many strategies to choose from. Once you acquaint yourself with the basics you will not worry about short-term market drops. You will also feel in control of the pot as the strategy dictates how much you should withdraw regardless of fluctuations.0 -
James's thread on safe withdrawal rates/strategies:
https://forums.moneysavingexpert.com/showthread.php?t=5466114&highlight=drawdown+jamesd0
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