Cash Can Be King!
It is remarkable how quickly one on one online conversations have become normal. Of course, they are not the same as meeting up in a restaurant, bar or cafe. In fact, in several important aspects they are much better. No travel is involved which leaves more time to chat. There are no distractions. Most of the places where I used to meet up are pretty noisy and it was sometimes difficult to find somewhere to sit. They are also quite expensive and online is free. I am amazed how much money I am saving! But the main difference in my experience is that the nature of the conversations has changed.
Many of my friends, acquaintances and, by definition, colleagues are in some way connected to financial services. And I have had some interesting conversations with them over FaceTime, Zoom, Teams and other applications whose names I have already forgotten. Interestingly some routines have evolved, and I am now “meeting for drinks” much more regularly than before. Unlike when in bars, we no longer have any concerns about being overheard. And guess what? We have been talking about money!
In bars there was always the possibility of being overheard so private matters tended not to be discussed. Now they are. We never discuss our own financial situations although younger pals talk about the cheap mortgages they have been offered and older folk about interest rates on their cash or mention the investments in their portfolios. Needless to say, the market meltdown earlier in the year crops up in every conversation and as many of the people with whom I meet are retired or semi-retired you would not be surprised if they were worried. But they are not worried at all. Like me, they have been holding cash sufficient to tide them over for two or three years in anticipation of such an event. And, like me, they have chosen not to share the extent of that cash with their financial adviser. Why not? Because we have been told that sitting on significant cash is a bad idea. That may well be the case. But you know what; we don’t care.
Clearly, sitting on cash over the past few years with virtually no interest does look foolish. Indeed, it would be commercial suicide if inflation was high. In my online conversations this is well understood. As is the fact that you only lose money if you sell at a loss. So why not have a solid buffer to mitigate that risk; even though it costs you in the long term. How much is piece of mind worth? From my conversations, quite a few people consider it priceless. And, so do I. Actually, it is pretty cheap.
If we look at a pension fund of say, £500K, in drawdown with 4% withdrawals, we see £20K gross income, say £15K net. If we decide to put £50K in cash to tide us over in the event of a serious and sustained fall in the portfolio value, our initial pot is reduced to £450K and our net income is reduced to £13,500. That equates to a reduction of £1500pa – £125 a month – about £4.00 a day. Of course, the cost could be a little more if interest rates fall further and we have to pay banks to hold our deposits!
Other conversations I have been enjoying have been around how the lockdown has caused quite a few people to take stock of their lives and their financial plans. One friend in full time work has calculated that working from home has been saving her about £250 a month. That is the equivalent of a pay rise of £4,000 pa and it also releases nearly three hours spent on unpleasant travel every working day. That adds up to about sixty hours a month. I sense she will be asking for significant adjustments to working arrangements in due course. I have no doubt that thousands of others will be doing the same and thousands of employers will be pleased to say yes.
Finally, I think lockdown and increased time to think, pensions freedom and attractive defined benefit transfer values are combining to alter some previously held views on what “retirement” actually means. On the one hand these developments create uncertainty. On the other hand, opportunity. It seems to me that financial advisers also have an opportunity and, perhaps, a responsibility to help clients with these life changing decisions. I can’t think of anyone else who is better equipped.