CASH

[MaraMan]

Last year I rather abruptly "retired" at the age of 56 and have been waiting for the dust to settle on my finances at the end of the tax year and work out exactly what I have to live on now I am in full FIRE mode. I have often heard the gurus on the HYP boards writing about having a significant cash reserve to ride out any market wobbles, which I have always struggled with conceptually, but I think I get the wisdom of it and do hold a lot in equities. Anyway I now have a combination of DB pensions, SIPP, HYP portfolio and a growth portfolio (the latter two are almost all in ISAs I am pleased to say) to fund me and Mrs MM, but I also now have a largish chuck of cash, probably about 18 months at normal living costs or probably over 24 months without too much belt tightening.

This lump of cash is currently earning 0.2% interest in a high street bank easy access account. I have looked at the best available savings accounts and saw that the Kent Reliance BS is offering 1.3%, but given this will be taxable income it diminishes the net I will get and make it a little less accessible. I would appreciate info on how others in my situation deal with their cash floats.

Thanks for any thoughts

MM

[swill453]

One option is Premium Bonds. The prize rate is 1.4%, it's tax free, and you get a frisson of excitement every month.

Scott.

[Itsallaguess]

Anyway I now have a combination of DB pensions, SIPP, HYP portfolio and a growth portfolio (the latter two are almost all in ISAs I am pleased to say) to fund me and Mrs MM, but I also now have a largish chuck of cash, probably about 18 months at normal living costs or probably over 24 months without too much belt tightening.

This lump of cash is currently earning 0.2% interest in a high street bank easy access account. I have looked at the best available savings accounts and saw that the Kent Reliance BS is offering 1.3%, but given this will be taxable income it diminishes the net I will get and make it a little less accessible. I would appreciate info on how others in my situation deal with their cash floats.

As Scott has already pointed out, Premium Bonds are a relatively benign 'almost cash' option, with an average payout roughly equal to the Kent Reliance savings account, and of course the possibility of actually being luckier than that.

An alternative, or at least a store of some of the cash, might be something like these NS&I Gauranteed Growth Bonds, which run for 1 or 3 years, and currently pay our a taxable rate of 1.5% and 1.95% respectively -

https://www.nsandi.com/guaranteed-growth-bonds

In terms of accessibility, they will allow withdrawals at any time, with a loss of 90-days interest, which seems a fair balance in terms of this cash being for emergencies only, and depending on your tax position, it opens the possibility of using up the £1000 tax-free savings-allowance.

I'm still working, and currently have around 14% of my investible capital in cash. Most of this was sat in my non-ISA broker account earning nothing, so I've recently split most of it up into a Premium Bond / NS&I Growth Bond allocation, so at least it's working for me at some level that it simply wasn't doing previously.

I think that worrying too much about it 'losing money' in technical terms (and I think the level of back-up income that you're holding is a reasonable level, and certainly around the level that I'd consider myself to think suitable), it's an insurance at the end of the day, and any insurance that you don't actually 'claim on' has ultimately 'lost you money' as well, at the end of the term, but all the while you were 'insured', and this is entirely the same with regards to this lump of cash, or near-cash capital. Try to see any potential 'inflation-related-loss' as simply an insurance payment, and it then begins to make much more sense.....

Well done on the retirement by the way. I personally take a great deal of encouragement when I read stories of retirement like yours. For those of us still in paid employment, it certainly provides a real grain of hope to see some of these long-term plans come to fruition!

Regular updates would be great, to hear how you're getting on, and if you can pass on any learned wisdom once your dust has settled, then all the better.

Cheers,

Itsallaguess

[swill453]

FWIW I'm going to have a big wodge of cash very soon, when I'll be "between houses", and I've chosen Kent Reliance to store the cash.

Scott.

[vrdiver]

The best use of cash is to buy something of real value. Treat the wife/significant other for a top weekend and a slap-up meal to celebrate your retirement.

I was with you for the first sentence...

The thing my cash pile buys is peace of mind. Slap up meals, weekend breaks etc come out of the regular income that my investments provide. Should they stop providing it for a while, then the cash pile's job is to fill the gap until normal service is resumed!

VRD

[Alaric]

Thanks for any thoughts

Shortish Corporate Bonds are an option that will pay more than cash and equivalent Gilts. Perhaps in ETF form or fund form to avoid individual Company risk. You have a risk to capital if interest rates rise.

Preference Shares and PIBS are other higher yielding alternatives to cash at a higher level of risk.

[MaraMan]

Thanks all for the replies. I have already put a largish lump in premium bonds, so may put some more in as not maxed out in them yet and had had a fairly good return (well over 1.4% anyway). We have also been splashing out a bit; 7 weeks in Aus and NZ, plus a rather nice eternity ring for my better half at our recent anniversary.

Thanks for pointing out NS&I bonds, I may get some of those and/or stick in it all in Kent Reliance to keep it simple. I will also look into short dated bonds and gilts.

Thanks itsallaguess for your comments on retirement. I am very pleased that it gives some encouragement to others, I never thought I would make it after an expensive divorce left me with less than nothing in 2001. So if I can do it anyone can, given a fair wind, good luck, good decisions and a bit of hard work.

MM

[xxd09]

Hi
Most would keep a cash float only if this is required to finance day to day spending
Only half my required income is covered by Pensions -State and Government
I am 72
Therefore keep a cash float in Tesco Bank-instant acess-1.2% interest
Amount-varies-at least 1 years requirements-often 1.5 years
Everything else invested and accessed within a month.
Seems to work-used for 15 years !
xxd09

[TUK020]

Anyway I now have a combination of DB pensions, SIPP, HYP portfolio and a growth portfolio (the latter two are almost all in ISAs I am pleased to say) to fund me and Mrs MM, but I also now have a largish chuck of cash, probably about 18 months at normal living costs or probably over 24 months without too much belt tightening.

MaraMan,
I suspect that you may have too much in cash.
You probably don't need 18-24 months worth of income as a cash buffer - perhaps more like 18 months of equity income buffer. Put another way, you do not need to de-risk the effect of a market crash on your DB income.

If you calculate your equity income, hold 18 months of this level as a buffer, take 90% of the equity income as 'take home' (remaining 10% goes to increase the level of buffer, to allow your 'take home' to rise with equity income), this probably comes to a lot smaller buffer than 18 months total living. Remainder you can plough back into equity portfolio.

This is how I am trying to plan things. I do have another reserve chunk in an ETF bond ladder as a 'buy another car' pot in case my current one dies at a market inopportune moment

[MaraMan]

Thank you xxd09 and TUK020. I think you are both correct, I am probably holding too much cash. An equity income buffer is probably sufficient, so could probably make a reasonable reduction.
TUK020 thanks for mentioning a bond ladder, I will need to read up on those and refresh my memory. I haven't really looked at bond mechanics since my MBA about 15 years ago. Would you be willing to share the name of the ETF you use?
MM

[TUK020]

the two that I have used are ISXF and IS15.
The former is a corporate bond ladder, excluding financial companies
IS15, is a shorter term corporate bond ladder (1-5 years to maturity) and includes financial companies.

Although ISXF has a higher yield, 2.81% distribution yield according to Blackrock (link below), I have been running it down to shorten my bond maturity exposure I expect rising rates may impact long term bond prices more.

https://www.ishares.com/uk/individual/e ... -ucits-etf

[Alaric]

The former is a corporate bond ladder

Elsewhere on this site, that term has been used to refer to a structure whereby you buy bonds maturing each future calendar year. So if you used a 5 year ladder, you would have one maturing each year from 2019 to 2023. Next year you would receive the proceeds from the 2019 maturity and reinvest in a 2024 maturity.

[xxd09]

I keep it simple
A Global Equity Index Tracker and Global Bond Index Tracker (hedged to the pound)-very cheap-less than 30 Basis Points-0.3%
Asset Allocation of your choice-made my pile so I am 30/70 Equities/Bonds
Sell lumps of units as required to top up cash float when necessary
Simple Cheap My wife might even master it!!!
xxd09

[AleisterCrowley]

I keep it simple
A Global Equity Index Tracker and Global Bond Index Tracker (hedged to the pound)-very cheap-less than 30 Basis Points-0.3%
...30/70 Equities/Bonds
xxd09

So more or less a Vanguard LifeStrategy? - OCF 0.22%
(They don't do LS30 as far as I know, but you can achieve that by blending LS20 and LS40)

[xxd09]

Hi
Life Strategy appeals as I get older and less compos mentis-will mean holding one Fund only and selling bits as required-even more female friendly-probably where I will end up!
Currently however LifeStrategy is too UK biased .I have 4% only of the 30% Equities in UK and 26% the Rest of the World -mostly US.
Better balance for me at the moment.
xxd09

[Pipsmum]

Re:-cash. The recent demise of tsb's reputation means it carries interest @ 5% up to 1.5k and you can have three acs between you and Mrs MM. Same with Tesco to 3k x 3 @3%. (nothing to do with personal gain in the slightest at all re recent posts)

[Degsy67]

I haven’t hit FIRE yet. Possibly 5 years away. I have been giving the subject of my cash buffer quite a bit of though however as I plan for hitting the button.

At the moment we have a large negative cash holding - it’s called a mortgage. My original plan was to coincide our point of retirement with complete paydown of the mortgage. This would mean overpaying the mortgage significantly during the run up to retirement. If we leave our payments unchanged it will take us 14 years to pay off the mortgage which is just before state retirement age - a condition of the mortgage. To pay off the mortgage in 5 years we would need to triple the monthly mortgage payments. As our ongoing retirement investment is coming from my income that would mean reducing the amount we invest on an annual basis over the next five years by approximately half or alternatively using tax free PCLS to pay off the outstanding mortgage. Lots of things about this plan didn’t make sense so I ran some numbers and I’ve now settled on an alternate approach. I won’t bore everyone with the details but reducing income tax in the first 10 years of retirement until state pensions kick in by using up PCLS through UFPLS drawdown was a major factor in the calculation.

Our ‘negative cash’ is in the form of an offset mortgage. I’ve therefore decided to take advantage of this and consider it to be what FIRE advocates in the US would call a HELOC - a Home Equity Line of Credit. I’ve rearranged our various cash savings accounts and current accounts with the aim of having the outstanding mortgage debt in five years time completely offset by cash in the savings and current accounts. This will mean that ‘negative cash’ (outstanding mortgage balance) and ‘positive cash’ (current and savings account balances) match off giving us a net cash balance at retirement of approximately zero. This will mean no mortgage interest payments - ie, the same situation if the mortgage was paid off.

Our ‘HELOC’ will then run for the first 10 years of our retirement. During that time it’s highly likely that we will have a significant stock market correction which could take 2 to 3 years to recover. If this is the case then we will stop or significantly reduce equity drawdown and drawdown from the HELOC, paying a small amount of interest at mortgage rate levels for the use of this line of credit secured against the equity in our home. This helps to address sequence of returns risk in drawdown. We will avoid selling equities when they are dropping during a market correction.

So my answer to the question about where will we put our cash buffer is utilising the equity in our property during the early stages of retirement. After that we will probably keep a couple of years of cash just sitting in a savings account earning whatever paltry interest rate the market is offering at the time and not worry about it. My major concern regarding a cash buffer is sequence of return risk in the first 10 years of retirement. The above approach covers this risk.

Comments welcomed.

Degsy

[melonfool]

but given this will be taxable income

MM

Only if you are a higher rate tax payer and it earns more than £500, or a basic rate tax payer and it earns more than £1,000. I've not managed to hit the former limit for the last tax year, my interest ex-ISA is around £300. This 'current' tax year will be better.

Mel