Should you hold a cash buffer in drawdown, and how big?
A cash buffer is one to two years of planned withdrawals held outside the invested portfolio, so a market fall never forces you to sell units at depressed prices. It buys time rather than return, and the trade is explicit: some expected growth given up in exchange for removing the mechanism that turns a temporary fall into permanent damage.
- The size: one to two years of net withdrawals, held in cash or a money market fund.
- The purpose: to avoid forced selling during a fall, not to improve returns.
- The cost: the return the cash does not earn, which is real over a long retirement.
- The discipline: refilling it in good years is what makes it work more than once.
01 What the buffer is for
The buffer exists to break the link between a market fall and a sale. If the next twelve or twenty-four months of withdrawals are already in cash, a 30% drawdown is something you read about rather than something that liquidates units at the worst possible price.
That is a narrow job and it should be judged narrowly. A cash buffer does not improve returns, does not reduce volatility in the portfolio, and does not protect against a permanent decline in asset values. It protects against the specific harm of selling into a fall.
Most bear markets in developed equity indices have recovered their previous level within a few years. A buffer sized to that history is sized to the problem; one sized to a worst case is sized to fear.
Source: Retirement income market data
02 How big, and why not bigger
One to two years of net withdrawals is the usual range. Below one year the buffer runs out before a normal downturn has resolved; above two, the drag starts to matter. On a £500,000 portfolio withdrawing £20,000 a year, two years is £40,000 — 8% of the portfolio permanently out of the market.
Over a thirty-year retirement that drag compounds. Holding five years of withdrawals in cash feels much safer and measurably shortens the life of the portfolio, because the money is not earning the return the plan depends on. The instinct to hold more is the main way this strategy goes wrong.
Cash should also be earning something. A money market fund or an easy-access account paying close to base rate is a different proposition from a current account paying nothing, and over two years of withdrawals the difference is not trivial.
Shows: the size of a buffer at your chosen number of years, and the long-run cost of the return it does not earn. Ignores: interest earned on the cash, tax, inflation, and whether a downturn actually occurs.
On the defaults above, the worked example shows £89,736. A buffer of £40,000 costs about £89,736 of forgone growth across 30 years — the price of never being forced to sell into a fall.
Source: Bank Rate and how it works
03 Refilling it
A buffer used once and never rebuilt has protected you from one downturn. The discipline that makes it a strategy is refilling in years when the portfolio is up: take the year's withdrawal from the portfolio as normal and top the buffer back to its target at the same time.
The rule needs to be written down before it is needed, because the decision to sell into a rising market to rebuild cash is psychologically harder than it sounds. A simple trigger — rebuild whenever the portfolio is above its level at the last rebuild — is enough.
The buffer also interacts with tax. Holding it inside an ISA keeps the interest tax free; holding it inside a pension keeps it out of your taxable income until drawn. Where it sits is worth deciding deliberately rather than by default.
Two years. Not five, not one. One year runs out halfway through a normal bear market and leaves you selling at the bottom anyway, which is the outcome the buffer existed to prevent. Five years is eight or ten per cent of the portfolio sitting out of the market for three decades, and that costs more than the protection is worth. The part people skip is the refilling: a buffer you spend and never rebuild has bought you one downturn, and retirement usually contains several. Write the refill rule down before you need it.
FAQ
How big should a cash buffer be?
One to two years of net withdrawals. Less runs out before a typical downturn resolves; more imposes a return drag that compounds across a long retirement and shortens the life of the portfolio.
Where should the cash sit?
Somewhere earning close to base rate — a money market fund or a competitive easy-access account — and ideally inside a tax wrapper. Holding it inside the ISA keeps the interest tax free; inside the pension it stays outside your taxable income until drawn.
Does a buffer replace a lower withdrawal rate?
No. It removes the forced-selling mechanism; it does not make a withdrawal rate sustainable that otherwise is not. The two work together, and the buffer is what lets a variable withdrawal rule be applied calmly rather than in a hurry.
Sources
Regulator references
- Retirement income market data · Financial Conduct Authority · 2025What UK savers actually do at retirement, measured rather than assumed.Last verified: 2026-09-07
- Bank Rate and how it works · Bank of England · 2025The policy rate that drives the mortgage and cash comparisons here.Last verified: 2026-09-07
- Individual Savings Accounts (ISAs) · GOV.UK · 2025The annual subscription limit and the rules on transfers between ISAs.Last verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-09-07 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.