Years ago, I worked with a guy who we all called “Uncle Pete”.
Salt of the earth, had seen it all in financial services and had the scars of battle to prove it.
Uncle Pete was over 70 years of age and was still working, mainly because he liked taking the P out of us younger pups.
He oozed wisdom that, quite frankly, we didn’t. One of his many financial mantras was “cash is king”.
Uncle Pete said this phrase daily before the 2008 financial crisis when you didn’t have to look too hard to find bank deposits paying well over 5% interest. Happy days.
Those happy days for some have been gone for a while, with next to rock bottom interest rates now the norm.
So is cash still king?
Yes, I think it still is—sort of.
Any decent financial plan should start with someone having a suitable amount of cash in the bank. I’m often asked, what’s a suitable amount?
There are no hard and fast rules, but these are my thoughts:
If you’re still working
The ideal is to have at least six months’ essential living expenses in the bank, plus any known significant items of expenditure that you have coming up.
By essential expenditure, I mean money for stuff that you will have to cover if, for example, you lost your job; the mortgage, bills, food etc.
Not necessarily luxuries that you could live without if you had to batten down the hatches for a while.
If you think your job is very secure, perhaps this could be reduced to 3-4 months’ essential expenditure.
If you are within five years of retirement
A decent financial plan should give you a retirement “number” to aim for, which is the total amount you need to save for and reach to live a decent retirement. A financial planner should be able to calculate this for you and help you to achieve it.
You won’t get there quickly by investing solely in cash. It needs to be invested sensibly in pensions and investments; I appreciate that buy-to-let may play a part in this for some.
Even if you don’t know much about investments, you’re likely to know that they go up and down.
So, what happens if I’ve given a retirement “number” to someone to aim for and the market falls at the time they’re close to retirement, as it did in early 2020 when the economic impact of Covid-19 began to emerge?
There’s always a possibility that you could retire at a bad time as far as your pension and investments are concerned. For example, the internet/tech boom (and bust) in early the 2000’s the 2008 Financial Crisis and, of course, the pandemic.
A good retirement plan should have stress tested this and be alive to the possibility of it happening and planned for.
This is a situation where having some cash is king. Having say 2-3 years’ annual living expenses covered in cash helps give people comfort in this situation. This gives the market time to recover, which has generally happened within this timeframe after major falls.
If you’re retired and taking income from pensions / investments
Our advice has been to cover five or more years’ living expenses in cash for some cautious clients we work with. This guards against them having to continue to take withdrawals from their pension/investments when markets have fallen and has given them peace of mind.
Taking withdrawals at a market low point is never good.
All this said about market falls, it’s important not to overdo cash and remember that throughout history, the markets have advanced around 75% of the time and declined approximately 25% of the time.
The odds of positive financial outcomes are stacked well in favour of long-term, patient investors.
Holding too much cash over the long term means that the slow, steady drip of inflation will kill cash over time.
I saw something recently saying at the time of Euro 96, a pint cost approx. £1.75 and a first-class stamp 26p.
This football tournament doesn’t seem that long ago and puts inflation into focus when you think what it could do to a largely cash-based retirement pot over time.
Think of it as a gin and tonic!
We all know that life is a balance. Think of investments and cash like a G & T.
The investment is the good stuff but can sometimes be volatile. The cash is the tonic, providing the balance and stopping your night from becoming a disaster!
Financial planning for retirement is about getting the right blend of gin and tonic for you.
How we can help
If you’re on the run-up to retirement or have recently retired and need some help understanding what this blend should be for you, please feel free to get in touch.
Guiding people through a multi-decade retirement with all the twists and turns that there will inevitably be, is what we do.