Any point in a Cash buffer in Pension Drawdown Account?
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dunstonh, I know you usually run with a cash buffer of 18-24 months. I'd be interested to know whether you would use the cash buffer following a year like the past year when most medium risk portfolios have made a small percentage loss, or would you keep the cash buffer intact to be used in a full blown crash?
Yes this is another interesting point. Oft quoted advantage of having cash sumis ability to buy equities when cheap, but surely that means you having to time the market which the same people will suggest can’t be consistently done.0 -
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There are scenarios where 100% equity would be bad and it doesn't entirely depend on market returns or sequence of return risk, but also your income needs relative to your pension pot.
I'm retired and have about 70% of my pension pot in equities. I have regular income form rent and a small pension, but I still keep a two year cash buffer on hand for convenience. I'm not bothered about potentially maximizing my investment returns, it's worth more to me to have the cash flow available to quickly cover large outgoings. I can then top up the buffer at my leisure.
I don't rebalance anymore as I think a rising equity glide path is a good retirement strategy.“So we beat on, boats against the current, borne back ceaselessly into the past.”0 -
In this case I was meaning a cash buffer to draw on when markets were down and you didn't want to sell investments at a loss. You would replenish the cash buffer by selling investments in good years when they have increased in value. However 18-24 months does not seem a big cash buffer in my view as there is no guarantee you will not have 3 or 4 loss years in a row.Yes this is another interesting point. Oft quoted advantage of having cash sumis ability to buy equities when cheap, but surely that means you having to time the market which the same people will suggest can’t be consistently done.0 -
But how many years of near zero interest rates and anything similar to the current economic climate? Like I said, it all depends on your personal view of risk. I am very risk averse and am happy to keep lots of cash so that I can sleep at night, especially as we are headed into more volatile times and i just retired. I still have plenty of money invested for the long term that will give enough scope for retirement income and care home fees. Don't forget about them either.Well the reasearch is based on 146 years of data with one or two fairly significant events therein;)
If you are genuinely interested in research-based approaches to all of this, the best information I have found is "Living off your money" by Michael McClung. It is the most thorough analysis of historic data I have found (and also includes UK, Europe and Japan data, not just US). I use his recommendations for my equity/bond mix on my investments. I just like the safety of a healthy cash buffer right now.0 -
You might enjoy this article on cash in portfolio drawdown
whatever the historical facts are, behaviour and peace of mind have to be a part of the consideration. You don't mention your context which might give you some better responses.
I'm not working anymore and living off investments until a db in 6 years and sp in 14 so I have to look after my portfolio with care. I was 80 to 100% equities while I was working with a pay check coming in every month, but now I am around 55% equities (although will increase equity % slowly) because 1) I sleep better knowing I can handle a long bear market without touching equities and 2) wealth preservation /risk management is more important than chasing an extra % or 2 of returns. I know I have a little too much in cash and other non equity assets for the optimal return, but for me and my situation that's ok.0 -
Or you'll have a good chance of running out of money if you have a bad sequence of returns early on, and withdraw higher withdrawal percentages than is safe to do.
I assume he knows that. But SWR enthusiasts often don't realise that if the luck breaks their way the capital they'll end up with won't be much use to them anyway since it typically makes them rich only as they approach the grim reaper.
A writer I follow thinks that SWR is the most expensive retirement investment strategy.Free the dunston one next time too.0 -
I assume he knows that. But SWR enthusiasts often don't realise that if the luck breaks their way the capital they'll end up with won't be much use to them anyway since it typically makes them rich only as they approach the grim reaper.
A writer I follow thinks that SWR is the most expensive retirement investment strategy.
SWR is often set up with a 95% success probability over 30 years. The vast majority of model runs produce large portfolio values at death if the SWR is maintained. So you don't have to be lucky to end up rich, you have to be unlucky not to.“So we beat on, boats against the current, borne back ceaselessly into the past.”0 -
The over-riding purpose of SWR is to avoid dying in poverty. If you die rich it has succeeeded. As a planning aid it is very useful. The mistake I think is to actauslly believe one can calculate it once prior to retirement and then keep to it regardless of what happens.
If one does use SWR, during retirement it should be sensible to recalculate it on a regular basis, say every 5 years, taking into account the fewer years one has left. This should substantially reduce the problem of excess wealth on death.
This ties in with keeping a significant though minor portion of ones assets in cash as it reduces the psychological pressure to modify expenditure at every temporary boom or bust of the market.
Personally I do not use SWR along with Guyton etal in the form often advocated for determining my actual withdrawals. Basing ones life on probabilistic simulations of the past seems highly questionable and inflexible leading perhaps to excessive caution. I find continual relatively detailed simulations of the future on based on pessimistic assumptions provides a more convincing and controllable risk management as is it enables ongoing comparison with reality.0 -
I'm with Linton on this. I think SWR is a useful tool for retirement planning but I personally will not use SWR and Guyton Klinger in retirement. But that's because I am very risk averse. For others, it may work fine for them.
I did find all of the information on here about SWR, cfiresim and more very helpful in deciding if I could retire early. However, the most important lesson I have learned since being on here is that the best investment strategy is the one that lets you sleep at night.0
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