Holding cash in drawdown

Since stopping work, my strategy has been to hold four years of non discretionary spend in cash. This allows me to sleep at night, and not worry about the day to day volatility of the stock market.

Some might view this as excessive (although annual non discretionary spend is much smaller than you might think), but I don’t hold bonds or other assets.

Holding this amount of cash also allows me to layer it into four components so I can put my hands on cash for foreseeable needs. I have also dipped into it for large discretionary purchases (such as a car). Again, this means I don’t have to put off purchases if the market happens to be down at the moment.

In short, having access to sufficient cash during draw down allows me to significantly reduce the risk of not being able to put my hands on money when I need to in the short term.

Topping up

I do a quarterly review of my overall portfolio, and a key part is looking at the current cash position to decide if I want to top up or not. So although the aim is to keep four years of spend, the actual multiple will vary on how I feel and what might be coming up. I have been as low as 1.7x in the past, particularly after a big purchase, but usually I like to be at least above 2.8.

I never want to go below 1x – that would be a red line for me and regardless of what the market was doing, I’d make an immediate full or partial top up.

Depending on how the market is doing, I’ll either top up the full amount back up to 4x, or if it’s looking a bit slumpy I might go for a smaller amount. This just consists of selling an appropriate amount of units from an index fund.

At the moment, i’m selling FTSE100 units, which will cause my S&P holdings to tick up as a percentage of allocation. Of course, that may alter in the future if my portfolio strategy should change.

The other thing to note is that my target of four years happens to be applicable now. I’m in my mid fifties at time of writing, and I don’t have any information that leads me to conclude I need to hold a buffer bigger than four years. However, that may change in future. If I’m lucky enough to make it to mid eighties, maybe I’ll feel more comfortable by holding ten years of cash.

Cash inside SIPPs

I started to draw down in 2019, aged 51. When I stopped work, I had ample cash for the target, and didn’t need to do the first top up until 2021.

However, since reaching 55, I’m able to access SIPP funds as well for cash withdrawal. This gives another layer of flexibility for the cash management strategy.

You don’t have to hold all your cash in normal, taxable savings accounts (although you will want a good portion there just to aid cash flow). You can sell units inside ISA or SIPP and keep the cash balance there, under the wrapper before withdrawal.

This has the advantage that interest that you earn from your platform’s cash balances is tax free. It also allows you to more easily park it in money market funds if you wanted to notch up the return a bit.

Keeping mid-term cash inside a SIPP has the added benefit that you can choose the most tax efficient way to extract when the time is right … either through UFPLS or FAD. Between the ages of 55 – 67 you can withdraw 16K tax free (25% as tax free lump sum and the remainder within your personal allowance).

Managing cash in draw down is probably the most important financial activity you will undertake – only then will you find out if you’ll actually run out of money before you die.

Being intentional about the process right from the start will produce the best outcomes over those hopefully many years.