How Much Cash you Should Hold In Retirement

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so if you've watched a few of my videos in the past you'll know that I believe passionately that the only way you're going to survive retirement and ensure you don't run out of money is by investing the vast majority of your retirement Savings in global equities the great companies of the world but holding cash in retirement is still really important and actually could really enhance your overall investment strategy it could still be the difference between you running out of money in retirement or having far more than you'll ever need but how much cash should you be holding well there is actually a really simple formula to it and in this video I'm going to share that formula with you my name is KL Roberts I'm a chartered financial planner and a regulated financial advisor so when we talk about cash what we mean is money that you can easily access within a day or two money that in your bank account or in a savings account or possibly even premium bonds money that's not locked away and is not subject to the fluctuations of the investment market now of course you want to try and get the best interest rate you can on this cash but you don't want to be locking it away for a fixed year or two because you might not then be able to access this money when you really need it so to understand how much cash you should be holding in retirement you firstly need to work out what you next two years worth of spending commitments are so this could be your normal monthly outgoings so things like your bills your food the amount you spend on fuel uh then you also need to cost in what you sort of spend each month on socializing and going out and having fun um then of course if you've got holidays what do you spend on holidays in an average year uh and then any gifts to friends and family that you might be making and then once you've got that monthly figure you need to times that by 12 so you've got a yearly amount and then times that by two so you've got a 2 years worth of ongoing commitments and then add that to any one off spending commitments you've got in the next two two or three years so this could be big outlays that you've got to you know fix part of your house or you might do an extension or you're going to have a new kitchen um also add things like you know super holidays you might be going on it might be a big birthday coming up and you're going to do a big oneoff holiday much more expensive than you'd normally spend um and then also any early inheritances you plan to give to the kids add this amount to your ongoing commitments that we've just worked out previously so now you should have your total spending figure for the next two years and what we need to do next is to deduct any secure income that you'll be have coming in over the next two years so when we say secure income we mean things like your state pinion the government state pension is secure because it will be paid to you for the rest of your life and you'll know roughly what you're going to get each for four weeks or so so State Pension also pension annuity if you've already got a pension annuity coming in that's secure as well for the rest of your life and also any defined benefit pensions that are in payout so add all those forms of secure income so if you know the monthly amounts again times them by 12 and then times them by two so you've got the 2-year figure so we're going to deducts that income from the spending figure we worked out previously so now you have it now you have the figure that you need to ensure that you holding cash at all times and let's just make that a bit clearer by going through an example so here we have Richard he's 68 and he's recently retired his monthly outgoings and all his bills and things are 3,000 £500 per month which over the two years will cost £84,000 he's got a big holiday planned to Australia in the next year which he budgets will cost £5,000 and he wants to replace his kitchen in his house at a cost of £18,000 so in total over the next two years Richard plans to spend 117,000 now we need to look at Richard's income over the next two years his secure income he's currently receiving his State Pension which is £815 every 4 weeks so that works out to be £1,600 per year and has a small defined benefit pension paying £5,400 per year so we can deduct the two years of income which comes to £32,000 from Richard's required spending figure and this leaves him needing to hold $85 £5,000 in cash for the next two years so why the 2-year figure why hold two years worth of spending commitments in cash whilst you're in retirement well once you're in retirement you're going to be using your retirement savings to top up the secure income you've got in retirement so you're going to be selling units in the funds inside your pension and Investments to release cash to provide you with a regular income or top up your other secure income so that you can live and have fun now the unit price of your pension Investments is going to fluctuate on a daily basis because it's invested and if you've seen the other videos you'll know that we recommend you know investing in global equities but they're volatile so the price is going to fluctuate on an ongoing basis and sometimes that price is going to drop dramatically we're going to enter what's called a bare Market where the price of stocks have fallen 20% below the previous High and when we enter these periods because they will come they always come uh they're a feature not a bug of the global investing system when they come you're going to need to sell more units just to release the same amount of cash that you require because the price has fallen so much now if we go back to January 1926 in the UK stock market we can see that the average bare Market lasts one year and 6 months now some bare markets have lasted a bit longer than this and many are a lot shorter than this but the average is about 1 year and 6 months so by holding 2 years worth of cash if we enter one of these bare markets or when we enter one of these bare markets we don't really want to be selling lots more units in your pension investment funds because remember there's no more money coming in that can top these funds back up you're not earning anymore you've retired so we don't really want to be selling units at that point but because you've got this cash safety emergency fund on the side we can stop withdrawals from your retirement savings your pensions and your Investments and start to use withdrawals from cash and what this will do is it allow us time or you time for your pension Investments to recover in price because as long as you stick with the investment strategy ultimately you the Market's always going up eventually so will recover we don't know how long but it will recover as long as you stick to the plan so by having that two years worth of cash you can be confident and safe um that you don't need to withdraw from your pension Investments and you've got the money there to use from cash instead and once the market recovers you can stop taking money out of your cash go back to making withdrawals from your pensions and Investments and potentially if growth is good you can top then the cash fund back up so some of you may be thinking that you know if if investments in the stock markets you fluctuate so much and we into these bare markets on a regular basis why invest all why not hold all of your retirement Savings in cash well you may think you're safe by holding all your money in cash in retirement but there's actually two very real risks that you need to be aware of your first one is when you enter retirement you're likely to be in retirement for a very long time possibly longer than 30 years so your money needs to last at least 30 years and the problem is over time money is going to face inflation so prices of things that you use and buy over time will rise in value potentially sort two and a half times over that 30-year period and cash does not have a very good track record of beating inflation what does have a good track record of beaten inflation is investing in global equities over the long term so whilst in the short term Global equities will be volatile and can fall significantly over longer periods of 5 10 15 20 years the chances of success are very very high um that returns will beat inflation even the dividends so the profits of the great companies of the world tends to rise more than two times the rate of inflation over the long term and the stock market does generally go up around 75% of the time you can see some our videos on the on the way the stock market works and the probabilities of a success and the beauty of having the cash buffer is that it will give you the confidence that you don't need to worry about what's going on in the stock market yes you need to be aware of when these bare markets these these dramatic Falls happen because that's when we're going to use our cash buffer but by having the cash buffer there and knowing it's there you can feel confident investing in these Global equities because you know that you can stop withdrawals from them when the market does fall I hope you found this video useful please don't forget to subscribe to the channel because there's lot lots more videos coming soon
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Channel: Carl Roberts
Views: 3,973
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Keywords: Cash, Cash savings, Retirement, How much cash to hold in retirement, Pensions, State Pension income, Investments, Carl Roberts, RTS Financial Planning
Id: WXXN6TuzroQ
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Length: 10min 20sec (620 seconds)
Published: Fri Feb 23 2024
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