Is anyone else feeling a bit dizzy as the markets seem to continue to climb ever upwards? For someone like myself, passively investing for years, 100% in equities across my pensions and ISA’s and forever looking forwards to a five or even ten year horizon, these should be heady times. I should be enjoying the ride, but at my back sits dark anxiety. Why? Because I’m nearing the finishing line.
In a few days I will turn 54 and the final year countdown begins toward cashing in the first slug of one of my DC pensions. This is so that I can take my 25% tax free cash from the pot before the government raids this perk as, I feel, they inevitably will at some point. This pension has, frankly, rocketed in the past 18 months. It’s not totally passive, as I have one or two managed funds within it, but I watch it growing well beyond the goal I’d set for it to achieve about three years ago, and increasingly fret about the markets undergoing a massive reversal.
I’ve lived through such things before – I invested over the dotcom boom and the 2008 crisis – stifling a yawn as the markets collapsed. For me, at that point, this was great news. My regular monthly contributions just gained me more units in the funds I was buying, and I never thought twice about converting to cash, buying gold or looking for value in property. “What goes up must come down”’ I told myself, and stuck to my “pound cost averaging” and my long term view.
I’m not so blase now, I can tell you, and hardly a day goes by without me telling myself that the sensible thing to do right now would be to convert all those equity funds into cash or something more stable than shares. Or at least some of it. Then I could set my 25% lump sum in stone. Okay, I might lose out on some growth, but at least I won’t lose out versus my projected lump sum. After I’ve collected, I can switch the remainder of the pension back into equities while I live off the sum that I’ve cashed – which will last me five years, I reckon, so I’m back to a “safe” investing horizon on the remaining funds.
As I write, I ask myself what’s stopping me doing so? I think a lot of it is that I’m frightened of change – I’ve not really altered the way I invest for over twenty years, and it’s served me very well so far. It ain’t broke, so why fix it? And I don’t really “need” that lump sum either. If the markets do collapse in the next 12 months, well, I can ride it out again. As a passive investor at heart, I’ve set my allocations, I’m following a strategy and therefore the best advice I can give myself is to “do nothing”. Stop worrying and go and do something more useful instead.
But this only gives rise to the next question: “If not now, when?” At what point am I going to relax and cash in some of my chips? I set a goal to cash that pension at 55 and I almost feel obliged to achieve it. If nothing else it might force me to look at other aspects of life that involve a bit more spending than saving because time is finite. Reaching pensionable age is a milestone that’s hard to ignore, much as you might want to tell yourself you’ve years and years left to gather the rosebuds. You haven’t.
Please forgive this “Woe is me” navel gazing. I know I’m lucky to have such problems. I can only justify submitting a post like this because I never knew that choosing to sell would be a hundred times harder than choosing to buy. It’s like in the same way that I found choosing to retire to be a lot harder (for me) than choosing to go back to work. And that was why i started to write this blog in the first place.
sex health money death 
I don’t really get the urge to cash up. If you have overshot your target, as I have too, you can stay in equity and not worry about the vagaries of the market, and overall be better off as time in the market is key, and you are likely to have more luxuries/inheritance.
Only if you cutting things fine do you need to be risk averse and worry about the 5% of trajectories that go negative.
(Full disclosure, my expected inheritance is much more cautiously invested)
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Thanks John, I do try to be rational but this is more an “urge to cash up”, as you say. I’m not sure why I feel the pressure to do it, but I do!
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It’s a valid cause for concern.
Some of the best articles I’ve found on SWR strategies are on the ERN site. Of particular relevance are articles 19 and 20 which cover glidepath strategies to reduce sequence of return risk. To be implemented when approaching and in the years that follow retirement.
https://earlyretirementnow.com/2017/09/20/the-ultimate-guide-to-safe-withdrawal-rates-part-20-more-thoughts-on-equity-glidepaths/
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I don’t think that retirement should trigger a glidepath. If you are retiring early, you need to continue a strong upward trajectory for some time to ensure you have sufficient funds, and those 10 extra years dilute any sequence of return risk. Yes you might be selling at a loss, but a much smaller fraction, so the ravaging is much reduced.
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Read the ERN post. I think you’re assuming a path starting at 100% equities then moving towards a lower percentage throughout retirement (as per traditional retirement strategy). The latest research (with ERN being one of the best in class I’ve seen) shows a 60% equity allocation going into retirement, moving back up to 100% via a glidepath is more optimal for wealth preservation.
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Jim isn’t retired though, he’s working (and it sounds like, still saving).
So the questions are:
-what is the plan/objectives for the 25% PCLS? To my mind, no point withdrawing it on an arbitrary date just because you can, if there is no use for the funds. It will simply end up in a taxable investment account creating taxable income and gains. If the PCLS becomes taxable (in my judgement unlikely, as politically toxic, but of course possible like any tax change) then there is likely to be notice/transition period and action can be taken then.
– secondly, and to my mind separately, is the asset allocation appropriate? Only Jim can answer that, for him. A useful question is to consider how you would feel if your invested assets halved. If that makes you feel sick, consider dialling down equity allocation. Another useful question is, if you’ve won the game, why are you still playing? Because you feel more secure with more funds? Because you have specific goals for the additional funds? Because it’s what you’ve always done? (Nothing wrong with those answers, just useful to reflect on and understand).
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I sleep at night by telling myself that if the Government makes changes to pensions that will materially affect me, then they’ll give about five year’s notice. But when I see the mess they’re making of everything else, I do wonder.
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Thanks for the link, I’ll have a read at that because it’s a glidepath strategy that I need!
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Wow! Just had a quick look and I’ll need to return to it when my Saturday morning hungover brain is more primed to cope with the info.. Looked really interesting though.
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Fair play for writing this. As you say easy to dismiss as “rich guy problems” but for readers of your blog a very real and difficult quandary. Keep writing about what feels relevant to you, because that’s what makes a go to read for me….
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Cheers Rob, someone once blogged that it’s difficult to write about this without coming over as smug, which I’m always conscious of. But like with Early Retirement, I tell myself that I can’t be the only one struggling with the fact that you might have finished the race, but what now?
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I don’t mind selling and missing some upside. I much prefer that to not selling and then watching a down slide. As someone who is only 25% invested in stocks and early retired, I can tell you without hesitation that I do not rue the loss of the “extra” money that I might have made if only I were more heavily invested in the markets.
To me, the decision to sell depends on whether or not you have “enough” (and only you can define that). If you have “enough”, then “more” will not make you any happier.
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I tend to agree with you Ed, the pain of losing cash, even if it’s just on paper, seems much more real than gaining it! When I see my funds go up, I tend to feel that it’s a bit of an illusion until the point I sell. But when I see them drop, I feel the pain like I’ve really lost the money.
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My SIPP is 100% cash, will drawdown april 19, April 20 the final drawdown april 21. 24k drawdown each year so 16k ish tax free. Also have cash to make up to my 2.5k monthly need ( me and wife). My teachers pension kicks in May 2022, no actuarial reduction. Wife ( 6 years younger) will do the same with SIPP until teachers pension at 60, still invested. We also have IS As fully invested in income bearing investment trusts. Would rather be a bit cautious to get out of the trauma that teaching has become.
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Hope you’re teaching your kids about compound interest and paying themselves first!
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I would move 25% into cash in preparation for tax-free lump sum, irrespective of what I believed markets would do.
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I really am considering this. I checked my pension options, but they don’t offer a cash fund that I can switch funds into, otherwise I’d have done it last week.
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Short term bond fund? Probably the best you can manage in terms of cash like investments
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Thanks RK, that’s what I’m mulling over this weekend. I think I’m going to do it though – 25% into bonds, and damn the torpedoes.
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ERN talks a lot of sense, perhaps glidepath is the wrong term, as he allows for plenty of equity thermals. I wonder if I would be in his glider or a jet with the engines gone. Its good he talks about 40-50 year terms, as most SWR stuff is aimed at the conventional retiree with a 30 year term.
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Others have mentioned that you can stop playing the game if you’ve won: there has to be a share of your money that ensures your retirement following the 4% rule, and that’s what you keep invested in stocks. The remainder, move into something with less return but more guarantee: CD, annuity, or whatever equivalent works for you.
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Thanks Stockbeard, I’ll have a look at that 4% rule, see if I have enough to do it….
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I tend to think of it the other way round – cash/bonds/guaranteed pensions provide my floor income for essentials, and the equity portion is left alone to provide growth and hopefully therefore better inflation proofing.
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Afternoon! You write: “…hardly a day goes by without me telling myself that the sensible thing to do right now would be to convert all those equity funds into cash or something more stable than shares.”
Okay, so you go on to qualify this.
But I would say *never* think this way. Why are you even asking yourself if you should convert ALL those equity funds into cash? Why are you thinking in such an absolute way Jim?
That’s the language of anonymous blog commentators and Twitter pundits, not investors. 😉
I’d think about “should I convert 25% into cash” and see how that feels. Having 100% in shares is taking a lot of risk at your age. As others have already said, if you’ve made it, why take the risk?
Even 75% in shares will enable you to capture most of the future upside, and add hugely to protecting the downside.
Let’s say you have £1m. (Just for ease of maths).
Think about a market fall of 50% (which you’ve seen twice before). With 25% in cash you’d go to £625K, versus a fall to £500K if you stayed all-in the market.
Say the market goes UP 50%, on the other hand.
With 25% in cash you’re portfolio would rise to £1.375m versus £1.5m if you stayed all in shares.
Which outcomes feel more important to you, at this stage in your life?
Not advice, just a way to think about it. I haven’t got 100% in shares or anything like it, and I’m much younger than you. Things feels super complacent to me. Lots of people (not you!) some to have forgotten how it feels when markets fall.
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Thanks for that, I like the options you’ve laid out in terms of how to look at gains and losses. I wasn’t thinking of converting the whole fund to cash, to be honest, much more like 25% of it and keeping the rest in equities. But, as far as I know, my 25% tax free sum will be calculated on the total pot when I crystalise it, so I can’t really “ring fence” the cash element as I was kind of hoping I could!
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I’d be careful about conflating the PCLS issue with asset allocation (though I can see the intuitive appeal given that its 25%). They are separate issues. In particular you need to understand the implications of crystallising your pension pot – it restricts future contributions for one thing.
Have you taken advantage of your free pensionwise appointment? It won’t tell you what to do but does go through the basics of the options and, well it’s free and they aren’t trying to sell you anything….
Can you really not just sell some investments and sit in cash in your pension? I could do that in my SIPP, without crystallising.
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Worth reading William Bernstein”-If you have won the game stop playing “
If you keep playing-does that qualify as just greed?
Can you live with yourself if the stock market continues to rise after you have cashed in?
A Portfolio downturn as you retire is every retirees nightmare because your Portfolio has no time to recover before you are dead or too old to care
You have won -adjust your Porfolio accordingly now!
xxd09
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Those years between being “too old to care” and meeting the Grim Reaper – I wonder how much cash I’ll need for then? Quite a lot, as I hope to spend it on wine, women and song.
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Hope it is not spent in an expensive care home!
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Have you checked out porfoliocharts.com. to review your current portfolio allocations and how these have performed historically during downturns over the last 30 years. I am 53 and had the same feelings with the current market and planning to retire from full time work next year. Exploring portfoliocharts I have now diversified my allocations to what looks like a less riskier allocation, using some hedged gold allocations for the first time. I don’t intend on changing my allocation strategy that much after I crystalise as I hope to be in the market for at least another 30 years. Also I plan to crystalise in waves as If I do this all at once I will be left with a large 25% lump sum and nowear to stash it tax free. So intend to crystalise enough so that the lump sum = 1 years living costs + 2 x ISA allowance (me +wife) for the first few years. Then after this be left with a diversified portfolio to run in flexible drawdown.
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If you don’t need the full 25% of your total pension pot, taking a series of separate withdrawals as Robert suggests over a few years will mean your still (for now) benefiting from the 25% on any future gains made in your SIPP which over a long retirement could end up being significant
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Crikey Cassandra the stock market has dropped every day since you posted this!!!!
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I may not have many readers, but they are heavy hitters.
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