Bonds or Cash?

[AsleepInYorkshire]

I have a draft strategy for retirement

1. Accumulate - equities 100%
2. Upon retirement reduce equities to 75% and keep 25% inside pension wrapper as cash
3. Cash will be equal to 4 years income requirements
4. Keep cash at 4 years income always
5. If equities fall substantially invest 50% of cash in equities
6. Rinse & repeat

I believe I have built robust protection into the plan by

1. Keeping 4 years income in cash - an annual roll over through withdrawal of equity (tax efficient)
2. Doubling the size of the pension pot needed to retire - thus providing for a market shock of up to 50%
3. Draw down on cash could be cut by 50% if needed.
4. Paying for big stuff before retirement - new kitchen as an example

I've kept it simple because I am simple. However, I've a couple of questions I can't really answer.

1. If I keep roughly 25% of the pension in cash can I draw this down monthly if so does this count towards crystallisation?

2. Why do many pension investors buy bonds when they retire?

Thank you

AiY

[JohnB]

There is no point keeping 4 years in cash always. The whole point of a cash buffer is to smooth market movements, so you should expect to draw from it rather than equities when the market is down, and replensih it when the market rises. Too many people say they plan to have 3 years in cash when they mean 1-3 years.

[77ss]

I have a draft strategy for retirement

1. Accumulate - equities 100%
2. Upon retirement reduce equities to 75% and keep 25% inside pension wrapper as cash
3. Cash will be equal to 4 years income requirements
4. Keep cash at 4 years income always
5. If equities fall substantially invest 50% of cash in equities
6. Rinse & repeat

AiY

Now in retirement, my current 'strategy' is:

Keep 2% in cash
Keep 98% in equities
With about 60% in ITs

Much of what one does depends upon variable factors:

Dependants & pensions in particular.

There is no 'right' answer.

[swill453]

1. If I keep roughly 25% of the pension in cash can I draw this down monthly if so does this count towards crystallisation?

You can keep it in and make regular UFPLS (uncrystallised funds pension lump sum) withdrawals. Each withdrawal is a BCE (benefits crystallisation event).

A provider like AJBell would make no charges for these withdrawals. Income tax may be due.

An alternative would be to crystallise the pension and take the 25% cash out and deposit it somewhere. You'd have to investigate interest rates and tax implications.

Scott.

[defbref]

How do you intend to always keep 4 years of cash always but then also sell half of cash into equities when they drop ? You now have two years of cash and so need to sell equities to get back to the always have 4 years of cash.

[AsleepInYorkshire]

How do you intend to always keep 4 years of cash always but then also sell half of cash into equities when they drop ? You now have two years of cash and so need to sell equities to get back to the always have 4 years of cash.

Yes that's right. At the point that the pension cash buys additional equities the drawdown on cash will be reduced.

3. Draw down on cash could be cut by 50% if needed.

My thought process is that by keeping 4 years in cash available it provides a reasonable period of protection against downside. However, once the market has dipped (for example covid) there's no real reason to keep four years cash as the market rises afterwards. At the same time by reducing cash use there's a belt and braces approach. I can't time the market and I'm not trying to. I'm trying to make sure I can exploit opportunity when it arrives. I don't think it's a perfect plan. I do feel it's got some merits though.

AiY

[defbref]

So you actually mean you will always only drawdown 25% of the available cash. I understand now, the 4 years of income requirement made it seem like the drawdown was a fixed amount.

You need a plan to increase the drawdown (and thus available cash) back up at some point then as well ?