The Lemon Fool

When retired, I aim to have a safety margin and a cash reserve as many here do, however I'm trying to work out how much other cash to keep.
I don't want to build too much, to be frank I'd rather spend it or invest some for inflation protection rather than have it sit in the bank.

So, my cash plans are:
- 1 Year Income Float (starts full and is refilled during the year from dividends/pensions - Live from this)
- 1 Year Spending Reserve (starts full in Premium bonds or similar - do not touch)

I want to keep things simple and don't think that I want lots of other separate pots on top of this (decorating, home repair/replacements, small emergency fund, etc).

So, I was thinking of combining them into a single "extra" pot - name to be decided... and then aim to keep this at a fixed level (say £10,000), spend from it as required and refill from my monthly income until back up to £10,000 then stop.

This doesn't include normal spending categories, like Holidays, etc. - I just want to reduce "wasted" cash, sitting around at 0.01%.

I'd be interested to hear what plans you have for your cash in retirement and how many "pots" you intend to have.

regards,
Darka

Darka wrote: I just want to reduce "wasted" cash, sitting around at 0.01%.

If you aren't bothered by market value fluctuations, a holding of Corporate Bond ETFs paying around 4% may be a decent home. You've got the £ 1,000 tax free interest allowance to utilise.

Alaric wrote:If you aren't bothered by market value fluctuations, a holding of Corporate Bond ETFs paying around 4% may be a decent home. You've got the £ 1,000 tax free interest allowance to utilise.

That's a good idea, and I might so that with some of it but would feel the need to keep some as pure cash, even at the rubbish interest rates we have.

I'm in no way an expert on this stuff as you will shortly see, but I like Premium Bonds too. It started off as a place to put the cash that was piling up that I knew I'd need soon-ish, and the tax-exempt status of the prizes is useful while you're still earning. They are as good as cash for both safety and access, and they do sort-of pay an interest rate - sure it's only about 1% but better than nothing. I think that's where most of mine is going to continue to sit, also because I expect I'll be too lazy/uninformed to try to do anything else with it. How much of the £50k limit is going to be taken up with your Spending Reserve? You do have the lag between buying the bond and having it entered into the draw though, so if you are literally going to be taking out and topping up each month it might not be suitable.

I'm not sure yet whether to carry on circulating cash around Regular Savers. Sure it's not exactly difficult once all the transfers are set up, but now rates have dropped (and if you're not funding them from new income you can effectively halve that annual return) I might give it up and instead consolidate all my current accounts so as to have one less thing to worry about. It's possible my gentle enjoyment of transferring direct debits and double-checking account balances and payment dates for the sake of an extra few quid might reduce once I am no longer doing it on my employer's time.

I haven't yet given much thought to the detail, but my back-of-envelope plans assume I'll leave the rest to ride the markets (i.e. spend down all the cash and PB before starting on the GIA), even though you're not supposed to do that if you are going to need it within the next few years. Still, the good thing about these plans are that you can always re-do them if the first year sends things askew - and if stuff doesn't go wrong until Year Four or whatever, chances are the gains in between times will exceed the fall. Unless we actually get zombies and stuff, in which case we should all have bought tins, bullets, remote islands etc.

Snakey wrote:I'm not sure yet whether to carry on circulating cash around Regular Savers. Sure it's not exactly difficult once all the transfers are set up, but now rates have dropped (and if you're not funding them from new income you can effectively halve that annual return) I might give it up and instead consolidate all my current accounts so as to have one less thing to worry about. It's possible my gentle enjoyment of transferring direct debits and double-checking account balances and payment dates for the sake of an extra few quid might reduce once I am no longer doing it on my employer's time.

To be honest, I never had much patience for this and have stuck to just 3 accounts, one that receives all of our income and then pays out in two standing orders, one to our Bills account and the other to Savings.

Anything else was too much effort and I got sick of opening/closing accounts.

Snakey wrote:Still, the good thing about these plans are that you can always re-do them if the first year sends things askew - and if stuff doesn't go wrong until Year Four or whatever, chances are the gains in between times will exceed the fall.

True and our plan is pretty flexible, with lots of wiggle room here and there, so should be good unless the Zombies do come, and then we probably won't care too much about investments at that point

average year i spend £13k
pretty solid IT income -£9k
less solid income -£1.1k
so in normal years i sell about =£2.9 of my growthy investments.

In bad years i could quite easily reduce my spending to £12k so if i'm left with £9k income i would need about £3k of cash per year. so i've decided to keep about £8k in cash to last me about 2.5 years of not having to sell capital at a nadir in markets. i know i'm really just fooling myself with the IT solid income as in reality they will be selling capital to fund the income but it feels better to me. the virtually yield free part of my portfolio currently stands at about 23% so not the end of the world if it halved and took more than 2 years to recover. i could still sell some if i had to. and my solid IT income will hopefully rise so with any luck the amount of capital i sell each year should go down.

so quite a low amount of cash. nowhere near the 2 years of spending i hear sometimes. a bit too risky? probably. i'll see how it goes.

My plan is very similar to yours Darka.

1 year average spending as a cash float. Topped up with dividends from GIA and ISAs as these are paid out. Any dividends above spending would get reinvested.

1 year in cash equivalents, focused on premium bonds at the moment.

I have savings pots for:
House maintenance and depreciation of major household items such as boiler replacement.
Car replacement

Intent is to live off of natural yield from GIA and ISAs for around 10 years until SIPPs are accessible. If spending spiked, or dividends were significantly reduced and these cash buffers were also significantly reduced then we would sell down accessible investments to bridge to personal pension age. Ideally the capital value will remain untouched.

Cheers,

Juan.

I don't believe in the cash buffer theory for FIRE, especially initially. If you are investing on a 40 year timeframe, you will be only selling a small fraction each year to top your dividend stream, even in such rare events as last years crash. So the sequence of withdrawals is going to make little difference. And if you do have a buffer to weather market falls, it must be a variable one, built up during 7 fat years and shrunk to nothing in 7 thin years. Maintaining a fixed size buffer just means that much is always out of the market.

Darka wrote:I want to keep things simple and don't think that I want lots of other separate pots on top of this (decorating, home repair/replacements, small emergency fund, etc).

We have a cash pot along similar lines as yours, with dividends dripping in one end and cash dripping out the other, which covers spending, whilst reserves are held as premium bonds or savings.

Then comes the "lumpy" spend where you might want to dip in and out beyond your monthly or even annual budget, for things such as you mentioned.

I have a laundry list of these in a spreadsheet, and a target amount to hold for each, which is based on my assumptions around these future costs. The whole lot ends up as a single lump sum called "pigeon-holed funds" as they are not savings, but planned future spending.

If you do the model once, (what, how frequently, when next due, how much) you can end up with a target cash float and the amount you need to top it up by each month. Then you just sit back and get on with life, knowing the new kitchen, car, etc. is covered.

For expenditure that's likely more than 5 years out, I'll "save" the money as shares. For expenditure that's due in less than 5 years, I prefer cash. The five years is malleable, as is the actual expenditure date, if necessary.

My actual cash holding is held at 3x annual expenditure. The pigeon-holed funds are included within that figure, so the cash works twice for me, knowing I have quite a high reserve if things turn south investment-wise, but happy to dip in and out of that reserve if things are looking OK.

VRD

vrdiver wrote:We have a cash pot along similar lines as yours, with dividends dripping in one end and cash dripping out the other, which covers spending, whilst reserves are held as premium bonds or savings.

I think this is the simplest solution of dealing with the float.

vrdiver wrote:Then comes the "lumpy" spend where you might want to dip in and out beyond your monthly or even annual budget, for things such as you mentioned.

I have a laundry list of these in a spreadsheet, and a target amount to hold for each, which is based on my assumptions around these future costs. The whole lot ends up as a single lump sum called "pigeon-holed funds" as they are not savings, but planned future spending.

If you do the model once, (what, how frequently, when next due, how much) you can end up with a target cash float and the amount you need to top it up by each month. Then you just sit back and get on with life, knowing the new kitchen, car, etc. is covered.

Good idea, will have a play with Excel as I already have most of this in my head anyway.

vrdiver wrote:For expenditure that's likely more than 5 years out, I'll "save" the money as shares. For expenditure that's due in less than 5 years, I prefer cash. The five years is malleable, as is the actual expenditure date, if necessary.

My actual cash holding is held at 3x annual expenditure. The pigeon-holed funds are included within that figure, so the cash works twice for me, knowing I have quite a high reserve if things turn south investment-wise, but happy to dip in and out of that reserve if things are looking OK.

Agree with the cash/shares depending on when the money might be needed and I think 3x sounds about right if dipping in/out.

thanks
Darka

Darka wrote:

vrdiver wrote:We have a cash pot along similar lines as yours, with dividends dripping in one end and cash dripping out the other, which covers spending, whilst reserves are held as premium bonds or savings.

I think this is the simplest solution of dealing with the float.

vrdiver wrote:Then comes the "lumpy" spend where you might want to dip in and out beyond your monthly or even annual budget, for things such as you mentioned.

I have a laundry list of these in a spreadsheet, and a target amount to hold for each, which is based on my assumptions around these future costs. The whole lot ends up as a single lump sum called "pigeon-holed funds" as they are not savings, but planned future spending.

If you do the model once, (what, how frequently, when next due, how much) you can end up with a target cash float and the amount you need to top it up by each month. Then you just sit back and get on with life, knowing the new kitchen, car, etc. is covered.

Good idea, will have a play with Excel as I already have most of this in my head anyway.

vrdiver wrote:For expenditure that's likely more than 5 years out, I'll "save" the money as shares. For expenditure that's due in less than 5 years, I prefer cash. The five years is malleable, as is the actual expenditure date, if necessary.

My actual cash holding is held at 3x annual expenditure. The pigeon-holed funds are included within that figure, so the cash works twice for me, knowing I have quite a high reserve if things turn south investment-wise, but happy to dip in and out of that reserve if things are looking OK.

Agree with the cash/shares depending on when the money might be needed and I think 3x sounds about right if dipping in/out.

thanks
Darka

When all this turmoil started, I had similar worries about keeping a bit of cash safe. I have an account with Monzo and with AJBell (Youinvest) that both offer fixed term savings accounts with lots of banks. So what I did was to start to divert funds there instead of into my usual holdings. The idea was to build up a monthly ladder of 1 year fixed-rate savings that can then be either used or recycled. The percentages are not quite as high as the banks themselves, but I feel the small difference is worth it for the ease of using their services.

Naturally, given the tiny interest rates available, it makes sense to keep some as cash at home. Safely hidden in the sock drawer, where no burglar would ever look.

Steve

I too am pondering how much cash to keep. I resigned in March, and have three weeks remaining until I finish. I opened a SIPP, transferred my personal pension into it and put all of it into drawdown after taking the 25% tax free cash. With the tax-free cash plus the savings I already had, I reckon my living costs are covered for five years and this assumes that I need around £24k per year, although during the pandemic my costs have been around 50% lower. I also have some investment trusts in a nominee account which generate about £12k per year, and I intend to live off that for now and see how it goes. As a back up I have a stock and shares ISA - I haven’t calculated its yield lately, but there’s over £15k in accumulated dividends at the moment.

So far, I have invested about 60% of the drawdown pension in investment trusts and will leave the dividends to accumulate for now. I will try to hang on to the remaining 40% as cash within the pension - there is no shortage of predictions about the market tanking and I don’t think it will do any harm to keep a bit of the pension in cash, although perhaps 40% is a bit much.

I have to be careful as I have a tendency to rush into things and in the past I have been known to make rash decisions. I wasn’t sure what to do with the tax free cash and my first thought was to move house. I like where I live now, but nearby traffic has become heavier and noisier, something that I have noticed a lot with working from home. After resigning, I initially set out to look for a quieter home, viewed a few houses but ended up pulling out of one last week when I realised it was a potential money pit. The property market feels frenzied right now and I have a concern that my propensity for rash decisions is being inflated by the fact that I have lymphoma, a slow growing type of blood cancer. I finished chemo in January and a PET scan in March was good, but the results could have been better. There is a bit of active cancer left and although I achieved a good partial response, I am not in remission. Neither my haematologist, nor another expert who I consulted, has been able to give me any real idea of my prognosis, it could be ten years or longer, or it could be less. I resigned the day after I received those results, despite the fact that by and large I enjoy my work and only work three days a week. I am finding it hard to decide what I should do with my money, and what is sensible. The post-resignation mania for house buying has passed and I am coming to see the benefits of staying put - despite the noise. I still feel inclined to splash a bit of cash now, but a new house might be a step too far and a new car might be the thing.

With my current cash pile, I could probably put £50k into premium bonds, perhaps spend £15 to £20k on updating and improving where I live now, and perhaps splash out £10k or £12k to upgrade my car but otherwise take it easy and see how things go. Apart from the premium bonds, this would probably leave me with around £50k in the bank, plus the accumulating dividends in the ISA as a rainy-day back up. Perhaps this is a bit too much cash?

Also, I have an old frozen final salary scheme and the most recent project for what this would pay arrived in the post today. If I want it to start paying out on 01 June 2021, it will give me a maximum tax-free cash sum of nearly £44k, plus an annual pension of £6.5k. Or I could opt for no tax-free cash but an annual pension of £8k instead. During the house-buying frenzy I had been on the verge of accessing the final salary scheme, but I wonder if it might be better to leave this as well. The previous valuation of my frozen final salary scheme was based on a retirement date of 01 January 2021, and the values it gave were just over 2% lower than the one I received today for starting on 01 June - so this is growing. I’m itching to get my hands on it and have some benefit from it, but I might well do something stupid with it. My haematologist suggested a round-the-world cruise, but then he remembered that we are still in the middle of a pandemic and suggested that I should wait a bit.

Motor home? Not everyone’s cup of tea, but it’s a thought (you may not have had).

Rituximan wrote: The previous valuation of my frozen final salary scheme was based on a retirement date of 01 January 2021, and the values it gave were just over 2% lower than the one I received today for starting on 01 June - so this is growing.

Frozen is a misleading word to describe final salary schemes where you have left the employment. The amount you get at the scheme's normal retirement age is fixed, except for revaluation. However if you periodically ask for transfer values and early retirement options, the amounts you are quoted should increase with time. That assumes the scheme doesn't change its method of calculation.

GrahamPlatt wrote:Motor home? Not everyone’s cup of tea, but it’s a thought (you may not have had).

My partner has suggested this. It's a possibility, although I am not that taken with it since I suspect that I will be the one who ends up driving it everywhere. It could be an interesting idea, she keeps wanting to extend her house and the answer might be to knock the garage down, make room for a motor home which we can use for holidays and could double as an extension for her when we are not on holiday. I will have to look into it.

Mike4 will be along shortly, proposing a narrowboat!

I'd suggest going to see an IFA (one who will provide advice for a one-off fee), to help you think through your and your partner's overall financial position. Given that you're prone to (self-confessed) impetuosity, have recently had unwelcome news and just resigned from your job, it might help to have an independent perspective.

re the DB pension, as already mentioned the yearly payments are subject to statutory annual revaluation, they may also be subject to an early retirement discount factor if you take the pension before your normal (scheme dependent) retirement age. When thinking about whether it's worth waiting before you take the pension, it's worth estimating the cash flow. You may get a few percent more by waiting a year, but you've also missed out on a year's payments. Tax may make a difference if delaying pushes you into a tax year where you'll have a lower marginal rate. It's also worth understanding any additional benefits, such as a spouse's pension and whether your partner would qualify.

Rituximan wrote: ...I like where I live now, but nearby traffic has become heavier and noisier, something that I have noticed a lot with working from home...

...With my current cash pile,... perhaps spend £15 to £20k on updating and improving where I live now, ...

I would suggest investigating whether soundproofing (eg triple-glazing) would be helpful with the noise problem. Traffic noise while sitting in your garden can be masked to some extent with a water feature with sprays or trickling water depending on the type of noise.

Any amount of cash is a drag on returns. Early Retirement Now has carried out extensive research on this. Well worth a read.

However, I've also read research that shows that holding cash makes an investor feel better, so purely for psychological reasons, I hold 2 years' of non-discretionary spend in Premium Bonds. I consider the resulting drag on my portfolio to be money well spent.

ERN also concludes that holding cash as part of your bond allocation won't in any event make much of a dent in your returns.

Joe45 wrote:However, I've also read research that shows that holding cash makes an investor feel better, so purely for psychological reasons, I hold 2 years' of non-discretionary spend in Premium Bonds. I consider the resulting drag on my portfolio to be money well spent.

I think that's a reasonable amount to keep and is roughly what I'll be aiming for, I think of it as insurance.