Whilst cash transactions may soon be a thing of the past, the old saying cash is king hasn’t gone anywhere. Cash reserves and cashflow are front of mind for us planners when reviewing our client’s investment plans and portfolio’s.
Both are equally important, and if I had a dollar for each time I had a discussion with a client about how much is enough cash in a portfolio, I’d be a wealthy man.
Today’s challenging periods have reminded us why it remains so critical our clients maintain a cash reverse and have a sound understanding of their cashflow positions (both personally and within their investment accounts).
Over the last few years our clients have avoided selling growth assets in a downmarket and we want to keep it this way for as long as we can. We’ve managed to do this by putting in place cash reserves for our retired clients so they can continue to meet their pension payments and by putting in personal cash reserves to meet any unexpected expenses and avoid the need to make withdrawals from their investment accounts at an unfavorable time and at a discount. Our accumulators have been maintaining cash at bank to support any disruptions to their employment income.
So back to the question, how much cash is enough? Everyone has a safety blanket number, however when determining cash allocations for our clients it really depends on their life stage. Accumulators may only need to hold 2% - 5% of cash in their portfolio’s whereas retired clients will need to hold much more than this.
Min cash holdings for our retired clients can range from 1 – 3 years pension payments. The biggest trade off being the low return generated by cash exaggerated by interest rates being at an all-time low. A high cash allocation will have a larger drag on the long term return of your investment portfolio and ultimately impact the longevity of the account. So generally speaking, the higher the account balance the less cash allocation necessary (as a % of account balance).
The Government has continued to help people preserve cash positions by reducing the minimum pension requirements by 50% for retirees drawing from their accountbased pensions again for the 2022/23 financial year. The minimums are:
Age |
Normal Rate |
New rate for 2022/23 |
|---|---|---|
| Under 65 | 4.00% | 2.00% |
| 65-74 | 5.00% | 2.50% |
| 75-79 | 6.00% | 3.00% |
| 80-84 | 7.00% | 3.50% |
| 85-89 | 9.00% | 4.50% |
| 90-94 | 11.00% | 5.50% |
| 95 and over | 14.00% | 7.00% |
With limited opportunity for travel and a reduction in discretionary spending we’ve seen many of our clients requiring less cash to meet their living expenses. This has provided us with an opportunity to reduce payments to our pension clients over the past 12-24 months.
However, with inflation looming we expect to see an increasing pressure on the need to increase pension payments as the cost of living increases over the next 12 -24 months.
Most of our clients have been fortunate to save more in their personal bank accounts which will help to fund travel and discretionary spending as the world continues to open up post covid. This will alleviate pressure on making large increases to pension payments in the short term. We have prepared and factored a risking cost of living into your financial plan and investment portfolios as our financial modelling allows for a CPI increase in pension payments annually.
For our retired clients, or those transitioning to retirement its prudent to review the cashflow within your pension account. This is the cornerstone conversation at all our review meetings. Money in (distributions from our investments) and money out determine our cashflow position with pension payments making up the bulk of money going out. If there’s an opportunity to hold or even reduce your pension payments this coming year before we see significant inflation, we will be discussing this with you at your annual review meeting.
Do you have the right amount of cash reserves?
Speak with one of our Investment and retirement specialist about the best strategy for your circumstances, either book a meeting or get in contact with us on 02 9328 0876.
Article by Gary Winwood-Smith | Senior Financial Planner
General Disclaimer: While every care has been taken in the preparation of this document, Sydney Financial Planning and Charter FP make no representations or warranties as to the accuracy or completeness of any statement in it.This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Please seek personal financial advice prior to acting on this information.