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This thread has been split off from this one so as to keep the original thread focused. Thanks, Chris
This thread has been split off from this one so as to keep the original thread focused. Thanks, Chris
cash in retirement and how many "pots"
Depends upon your preferred asset allocation and circumstances.
Own a home and don't have to find/pay rent, liability matched.
Predict your lifetime expectancy, say 85.
Note down present day rates for each year of anticipated pension payments. Perhaps £13K/year pension paid as of age 60, supplemented with a £9K/year state pension at age 67.
Subtract the desired spending amount, perhaps £36K/year, and in this case that has a £23K/year shortfall for age 60 to 66 and then a 14K/year shortfall thereafter. Tallying all the pensions and £510K, tallying the shortfall = £427K. i.e. the pensions are like £510K in bonds that pace inflation. For the shortfall of £427K if you have that in liquid asset wealth then great, you just need a investment that paces inflation for that. In the absence of current choices for inflation pacing or better via 'normal' means such as index linked gilts, you might go with a reasonable 'safe' alternative.
Broadly the economy tends to move in a saw-tooth manner, two thirds of time doing well, one third of time in decline. Two thirds in positive real yields, one third in negative real yields. A reasonable choice of asset allocation for that is two thirds stocks, one third gold. Additionally we tend to see around equal amounts of occurrences of rising as falling interest rates. Long dated gilts do well during falling rates, 1 year gilts/cash does OK during rising rates. Split stocks 50/50 between domestic small cap and foreign large cap and that's 5 total assets. Allocating equal amounts to those and ... 20% in each of FT250, S&P500, gold, 1 year gilts, 20 year gilts. Historically that was resilient, relatively consistent and broadly 5% type real (after inflation) gains.
Swapping out 20% each in 1 and 20 year gilts for a 10 year bond bullet might equally achieve similar results. As might swapping a 10 year bullet for a 10 year ladder, where when we hold each bond to maturity we don't need to mark to market and can just calculate each years gain as the average of the prior 10 year gilt yields. With 40% allocation to that and one bond maturing each year = 4% of portfolio value from a maturing gilt each year, supplemented with some dividends from the 40% stock holdings. Perhaps 5% in total. Reviewing/rebalancing yearly, perhaps in March (fiscal year ends/starts so we can opt to action a change in the old or new year (or a combination of both) according to whichever may be the more tax efficient) and as part of that you put aside the anticipated cash you'll need for the year. i.e. at current low interest rates might as well just dump it all into your cheque/regular account.
Playing things safe, and if we assume a 3% real rate of return we can calculate that would need £320K of capital to cover our needs as per the above example case. Or otherwise jig around with the figures. For instance lowering the yearly spend rate down from £36K to £30K and at a 3% real rate we only need £200K. Or at £24K/year spend it drops to £100K. At £22K, well the £13K occupational and £9K pension entirely covers that from age 67, so we just need to fill the £9K/year gap between age 60 and 67. Again that portfolio is a relatively safe choice as it is less prone to sequence of returns risk - is unlikely to lose a lot shortly after having lumped £72K or whatever into it i.e. is well placed to likely offset counter inflation for the £9K x 8 years of 'filling the hole' between age 60 and 67.
For any of those situations when using that style of asset allocation no cash bucket/reserve is required, it automatically throws off the cash consistently (on a yearly basis). The cash for each year is handed to you at the start of each year.