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How would you invest 1,000,000 for income?
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# 1
Mr Dudley
Old 10-05-2011, 5:23 PM
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Default How would you invest 1,000,000 for income?

Hi

I'm new here so please be gentle!

Through some luck and good judgement I will soon be able to say I have 1,000,000 in cash to my name with no mortgage.

I want to stop work and step off the treadmill.

I will be 45 next year so that's my target date.

I have 300k already in a pension separate from the cash and this would be left to accrue until I hit 70.

So my question is where would you invest 1m to provide a steady income from 45 to 70 i.e. 25 years.

I have a wife but we never had any kids so no dependants as such.

We are confident we can be comfortable on an income of around 60k per annum.

Any thoughts gratefully received.

Thanks

Mr D
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# 2
Totton
Old 10-05-2011, 6:11 PM
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Over at Motley Fool a poster by the name of Luniversal has posted some very good information on Income investing. Here is a link to a summary of his posts,

http://boards.fool.co.uk/qn-for-luni...whole#12092648

Basically he suggests three baskets of Investment Trusts for a portion of your portfolio. There is the Basket of 7 for Growth & Income, Basket of 8 for Income and Basket of 10 for similar. He is currently covering Growth IT's (Conviction) but the Income threads are well worth reading.

HTH,
Mickey

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# 3
dunstonh
Old 10-05-2011, 6:13 PM
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We are confident we can be comfortable on an income of around 60k per annum.
So, do you have more than 1million then or are you intending to allow the value to erode to pay the income? (as 1mill cannot sustain 60k p.a. without significant risk)
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.
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# 4
Mr Dudley
Old 10-05-2011, 6:31 PM
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We would like a 60k income without eroding the 1m capital but realise this is unlikely. Hoping someone can suggest better ways to invest than simply putting in the bank at 4%. Regards Mr D
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# 5
Marine_life
Old 10-05-2011, 8:10 PM
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Well lets say you can get a decent return by sticking it in the bank and there are a couple of bonds offering just over 5% now on a long term basis.

However, thats not the real issue is it?

In order to sustain purchasing power over the next 25 years you will need a considerably better return than the 6% your savings objectiv demands or else suffer a gradually deteriorating standard of living.

My question is for a couple with no mortgage and no kids why would you need 60k per annum (5k per month)? That seem like a pretty decent lifestyle? If you wre to drop that to 40-45k you would leave enough headroom with your target rate of return to build in an inflation cushion.

Achieving that return may not be easy and it certainly won't be without risk but you could look at a combination of the following:

1. Long term fixed rate savings.
2. High Yield Bond (funds)
3. High yielding shares (either directly or via a dividen fund)
4. Direct fixed asset investments.

The final one is an area I have just starting dipping my toe in. These are direct investments in things such as shipping containers, Forests, Milk Farms, Solar, Cargo Planes etc. etc. Retruns are attractive (generally 8%+) although there is a risk (however minor) of total loss.
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# 6
Mr Dudley
Old 10-05-2011, 8:23 PM
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Thanks Marine Life

An interesting thought. Yes we need to allow for inflation. Re the 60k requirement we want to be able to ski once a year and have horses so there are costs involved with that.

However I'm not so sure about inflation. If you run the numbers, at 4% inflation, 60k becomes enough to buy you a mars bar only in 20 years but from my memory, 40k was a good salary in 1988 and it's still enough to be comfortable on now - or have I gone mad?

Regards Mr D
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# 7
dunstonh
Old 10-05-2011, 8:58 PM
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We would like a 60k income without eroding the 1m capital but realise this is unlikely. Hoping someone can suggest better ways to invest than simply putting in the bank at 4%. Regards Mr D
1 million with no growth will be worth around 650,000 in 10 years which puts you at age 55. Another 10 years and its 420k at 65. The income will of course be lower too in real terms.

There is no one solution that will fit your needs here. It will be a spread of options, including pensions.
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# 8
Marine_life
Old 10-05-2011, 9:49 PM
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Have been giving it some more thought.

How much is your house worth and do you intend to stay there long term?

How much do you spend at the moment?

What are you doing (work wise) now that is so unpalatable?

Why are you assuming the pension will not pay until 70?

I would compare to my own situation - I am slightly older (46) but also slightly less wealthy!

I plan to retire be able to retire at 50 (not that i definitely will but I will have the option).

By them I expect to have around 1 million in cash with additional property worth around 750k (two properties). We will sell both properties and release around 300k in cash (todays values).

I have pension schemes that will pay around 50k per annum from age 62 and a further chunk of money (800-900k gross) that will be taxable but will mature between ages 60-65.

I plan to draw around 90k per annum (in real terms) for the first 3-4 years of retirement and then drop to 60k thereafter. The first years are higher as my son will still be at Uni. That will involve me eating into my savings. However after 10 years I expect my pensions to pick up the slack!

Where does that leave you?

I think a million sounds a lot but probably if you want to continue your 60 k spending through retirement in real terms you will need more money in your pension fund.
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# 9
Annisele
Old 10-05-2011, 10:12 PM
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Quote:
Originally Posted by Mr Dudley View Post
However I'm not so sure about inflation. If you run the numbers, at 4% inflation, 60k becomes enough to buy you a mars bar only in 20 years but from my memory, 40k was a good salary in 1988 and it's still enough to be comfortable on now - or have I gone mad?
I think you're overegging things a little

40k was a very good salary in 1988!

If inflation was 4% over 20 years and you got no growth on your 60k, I reckon it would be worth about 27k in today's money - which is a lot of Mars bars!

However, these estimates are all very sensitive to inflation rates. Halve your inflation estimate to 2% and your 60k turns into more like 40k in today's money, but double your inflation estimate to 8% and your 60k dwindles to 13k or so.

45 is pretty young, and you might well live another 45 years - if you're lucky enough to do that, inflation is going to bite you at some point.
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# 10
chucknorris
Old 11-05-2011, 6:38 AM
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Quote:
Originally Posted by Mr Dudley View Post
Hi

I'm new here so please be gentle!

Through some luck and good judgement I will soon be able to say I have 1,000,000 in cash to my name with no mortgage.

I want to stop work and step off the treadmill.

I will be 45 next year so that's my target date.

I have 300k already in a pension separate from the cash and this would be left to accrue until I hit 70.

So my question is where would you invest 1m to provide a steady income from 45 to 70 i.e. 25 years.

I have a wife but we never had any kids so no dependants as such.

We are confident we can be comfortable on an income of around 60k per annum.

Any thoughts gratefully received.

Thanks

Mr D

Our plan when we retire is to move to a tourist area (possibly Cornwall or Devon, but still exploring) and buying a few holiday cottages, the rest would be split between stocks, bonds and savings accounts.
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# 11
Mr Dudley
Old 11-05-2011, 9:11 AM
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Originally Posted by Marine_life View Post
Have been giving it some more thought.

How much is your house worth and do you intend to stay there long term?

How much do you spend at the moment?

What are you doing (work wise) now that is so unpalatable?

Why are you assuming the pension will not pay until 70?

I would compare to my own situation - I am slightly older (46) but also slightly less wealthy!

I plan to retire be able to retire at 50 (not that i definitely will but I will have the option).

By them I expect to have around 1 million in cash with additional property worth around 750k (two properties). We will sell both properties and release around 300k in cash (todays values).

I have pension schemes that will pay around 50k per annum from age 62 and a further chunk of money (800-900k gross) that will be taxable but will mature between ages 60-65.

I plan to draw around 90k per annum (in real terms) for the first 3-4 years of retirement and then drop to 60k thereafter. The first years are higher as my son will still be at Uni. That will involve me eating into my savings. However after 10 years I expect my pensions to pick up the slack!

Where does that leave you?

I think a million sounds a lot but probably if you want to continue your 60 k spending through retirement in real terms you will need more money in your pension fund.
Hi. Through hard work we have managed to own a house worth around 1.6m. We have a 500k mortgage on it. We have never been very good at stocks and share but have always concentrated on buying the biggest house we could possibly afford, refurbishing and paying down the mortgages as fast as possible with all excess cash.

Due to a sale of a business we have also been able to buy a house in Devon which will be fine for us to downsize to. It also comes with a separate holiday let cottage that has consistently produced a gross return of around 16k pa (circa 10k pa after costs). We have no mortgage on the Devon property.

So our plan is quite simple really. We will sell the house in Surrey which produces around 1m in profit net of costs. We will then move to Devon and live in the house there. We will have around 10k from the holiday let so need 50k from the cash.

I see from other sites there are several banks / BS's that offer 5% on fixed term savings with monthly payouts. It would be easy for me to do just that and get 50k without any risk whatsoever.

My original question was if it's possible to get, say, 6% return without serious risk? I'm always reading about investing in shares and bonds as well as cash but this advice seems to come form companies that have a vested interest in me investing in shareas and bonds!

We have around 300k in a pension scheme as at today's date. We are proposing to keep this fully invested for the 25 years from 45 to 70 so it provides a decent pension for us then as annuities pay out a much higher amount the later you take your pension.

So to go back to the original question is the best thing to do just simply put the money in the bank??

Thanks - Mr D
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# 12
Linton
Old 11-05-2011, 9:27 AM
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Originally Posted by Mr Dudley View Post
.......
I see from other sites there are several banks / BS's that offer 5% on fixed term savings with monthly payouts. It would be easy for me to do just that and get 50k without any risk whatsoever.

My original question was if it's possible to get, say, 6% return without serious risk? I'm always reading about investing in shares and bonds as well as cash but this advice seems to come form companies that have a vested interest in me investing in shareas and bonds!

......

So to go back to the original question is the best thing to do just simply put the money in the bank??

Thanks - Mr D
Various points

1) Dont forget your 5% would be subject to higher rate tax. With care much of the tax on share based investment (which in any case is currently lower than income tax) can be avoided.
2) You cant do anything with some risk. eg 5% from a bank sounds good but inflation will halve the value of both the income and the capital well within your lifetime. Over the long term the value of shares should increase with inflation.
3) To answer your final question - No

For 1M you should definitely be talking to a good IFA.
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# 13
Mr Dudley
Old 11-05-2011, 9:30 AM
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Quote:
Originally Posted by Linton View Post
Various points

1) Dont forget your 5% would be subject to higher rate tax. With care much of the tax on share based investment (which in any case is currently lower than income tax) can be avoided.
2) You cant do anything with some risk. eg 5% from a bank sounds good but inflation will halve the value of both the income and the capital well within your lifetime. Over the long term the value of shares should increase with inflation.
3) To answer your final question - No

For 1M you should definitely be talking to a good IFA.
Thanks Linton

To answer you:-

1) There will be 2 of us so 2 x tax free allowance = 20% tax on remainder - we will also be using the holiday let to offset some costs.
2) Agreed - I probably need a mix
3) Agreed

How do I find a good IFA? The wealth managers at the Bank seem to know less than I do!!

Mr D
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# 14
chucknorris
Old 11-05-2011, 9:32 AM
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Originally Posted by Mr Dudley View Post
So our plan is quite simple really. We will sell the house in Surrey which produces around 1m in profit net of costs. We will then move to Devon and live in the house there. We will have around 10k from the holiday let so need 50k from the cash.
Further to my earlier post we are also in Surrey and may retire to Devon after selling our 8 properties in London and our house in Dorking. We too will have a substantial sum of money to produce an income from, but of course the problem with savings accounts is the capital depreciation.

Since you already have experience with holiday lets would you not fancy 2 or 3 more? Or would you consider that too much effort in your retirement?
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# 15
Reaper
Old 11-05-2011, 10:15 AM
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Originally Posted by Mr Dudley View Post
How do I find a good IFA? The wealth managers at the Bank seem to know less than I do!!
The first thing to realise is bank advisors are not IFAs and are best avoided.

Ideally get a recommendation from a friend who has used an IFA. Failing that have a look for some near you on http://www.unbiased.com/

The initial meeting ought to be free, so don't be afraid of seeing more than one to find one you are comfortable with who is good at explaining things.

Also I strongly suggest you ask to work on a fees basis, not commission.
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# 16
Mr Dudley
Old 11-05-2011, 10:25 AM
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Originally Posted by chucknorris View Post
Further to my earlier post we are also in Surrey and may retire to Devon after selling our 8 properties in London and our house in Dorking. We too will have a substantial sum of money to produce an income from, but of course the problem with savings accounts is the capital depreciation.

Since you already have experience with holiday lets would you not fancy 2 or 3 more? Or would you consider that too much effort in your retirement?
Hi Chucknorris

I have worked in property (commercial) for over 20 years.

I never really "got" the allure of BTL.

What nobody ever seems to allow for is a sinking fund to pay for a full refurbishment every 10 years or so. A 2 bed flat in London would need new kitchen, bathroom, decoration and floorcoverings every 10 years to keep the rent at decent levels. This would cost around 20k as a minimum I would have thought. That means you need to set aside (in rough terms) 2000 per annum of your income from rent to pay for this so your net return after including and other costs this is well below 4%.

The only real money to be made from BTL was from capital appreciation. That was the big story of the last 10 years but I don't see that kind of real house price growth over the next 10 years; lack of credit simply won't allow it.

The issue with holiday lets is you need to keep them looking really good to get the lettings and you have to fully furnish and equip them. Add into that the seasonality of the income and I certainly would not want to rely on that alone for my income.

It's useful having at least one holiday let as you can offset all sorts of stuff against your income - useful perhaps to subsidise your own lifestyle...

Another problem with property is that it is inherently illiquid. It has a high cost of entry (stamp, fees etc) and has substantial maintenance issues associated with it.

Regards Mr D
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# 17
chucknorris
Old 11-05-2011, 10:43 AM
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Originally Posted by Mr Dudley View Post
Hi Chucknorris

I have worked in property (commercial) for over 20 years.

I never really "got" the allure of BTL.

What nobody ever seems to allow for is a sinking fund to pay for a full refurbishment every 10 years or so. A 2 bed flat in London would need new kitchen, bathroom, decoration and floorcoverings every 10 years to keep the rent at decent levels. This would cost around 20k as a minimum I would have thought. That means you need to set aside (in rough terms) 2000 per annum of your income from rent to pay for this so your net return after including and other costs this is well below 4%.

The only real money to be made from BTL was from capital appreciation. That was the big story of the last 10 years but I don't see that kind of real house price growth over the next 10 years; lack of credit simply won't allow it.

The issue with holiday lets is you need to keep them looking really good to get the lettings and you have to fully furnish and equip them. Add into that the seasonality of the income and I certainly would not want to rely on that alone for my income.

It's useful having at least one holiday let as you can offset all sorts of stuff against your income - useful perhaps to subsidise your own lifestyle...

Another problem with property is that it is inherently illiquid. It has a high cost of entry (stamp, fees etc) and has substantial maintenance issues associated with it.

Regards Mr D
Hi, I'm a chartered surveyor (although I work as a university lecturer these days), we usually refurbish around every 8 years or so but it can stretch to 10, whilst you are correct about the capital growth, the rental growth has been very good too, since I invested 20 years ago)

Whilst I obviously agree about the fees I like the idea because of the income and capital growth (I only anticipate keeping pace with inflation, I agree with you regarding lack of significant 'real' growth, it's more about avoiding depreciation for me, rather than achieving profit via capital appreciation).
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# 18
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Old 11-05-2011, 10:56 AM
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I think you need to speak to an IFA who understands investments and tax. For instance, you should be looking to split the money between you and also (as observed by others) concentrate on dividend income rather than interest income. Assuming you can both remain basic rate tax payers, then dividends are taxed at 10% before you get them and there is nothing more to pay. This will be particularly important when your pensions kick in at 66 as these chew most of your personal allowance.

Other observations.
1) Do "Bed and ISA" every year to use your CGT allowances. Reinvest some but also put max into S&S ISAs. Over 20 years, you should be able to get half of your money moved away from HMG's beady eye, which will make tax a lot easier.
2) Consider continuing to pay into pensions. Even if not earning, you can both put 2880 each into a pension every year, which HMG gross up to 3600 for you. However. pension income is taxable, so you do need to try and model your income situation from 55 to 66 and 66 onwards. This can be done easily with a simple spreadsheet. Put in assumptions for capital growth after fees (I use 6%), annual drawdown (I use 4%), cpi of maybe 3.5% (which erodes the value of your money but also increases personal allowances and and state pension income), and see what the picture looks like.
3) Over any long period, trying to get greater than about 4% pa from capital will tend to erode it. You're either going to need a larger pot, lesser expectations, or very good luck.

Because you have 2x personal allowances, and because dividends aren't taxed further, you should be able to get 40k into your pocket, after tax. Have you produced a spreadsheet showing all of your current and projected expenses, and tried dividing them down into those that are fixed, those you can adjust during lean years (don't change car, cheaper holiday, fewer shoes) and those that will disappear when you retire?

BTW, I can second going to the Motley Fool and looking at the "basket" IT approach and also the "HYP portfolio" approach. Both are hard work, and neither are risk free, but it sounds like you'll have time on your hands.

Good luck!
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# 19
dunstonh
Old 11-05-2011, 11:00 AM
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How do I find a good IFA? The wealth managers at the Bank seem to know less than I do!!
If they knew what they were doing they wouldnt be at a bank. Banks are generally the training ground for advisers nowadays. You typically end up with either a newbie adviser who hasnt got to grasp with things yet or one that has been there a long time and become brainwashed into thinking their commission based limited options are the best thing going.

An IFA is a no brainer in this respect and on fee basis as that will be cheaper (fee basis means you get the commission rebated. So fee option nearly always works out cheaper than commission .e.g 1mill at 3% commission + 30,000 commission. Whereas fee basis at 2000 means you get 28,000 commission rebated assuming 2000 is used to pay the fee. If the advice includes pensions then the fee can be collected via the pension which means you effectively get tax relief on that fee as well).

The term IFA ensures that they have to offer a fee option and be whole of market. However, there are loads of different business models and IFAs will focus on different types of client. e.g. some may focus on the mortgage market more. Others corporate. You also have transactional advisers and servicing advisers. Transactional will give one off advice. They will give you advice now and thats the end of it. Servicing advisers will give ongoing advice. You need to decide which you want (servicing is good for larger amounts invested where portfolio rebalancing and reviews are desirable - for smaller amounts the types of investment used are likely to be different and its not cost effective to have frequent reviews)

There are some rule changes coming in at the start of 2013 and around 1/3rd of advisers are expected to leave. So, if you want on-going advice make sure you find out if the person you are using is going to be there post 2012.

Quote:
For instance, you should be looking to split the money between you and also (as observed by others) concentrate on dividend income rather than interest income. Assuming you can both remain basic rate tax payers, then dividends are taxed at 10% before you get them and there is nothing more to pay. This will be particularly important when your pensions kick in at 66 as these chew most of your personal allowance.
And using capital withdrawals as well to utilise the annual CGT allowance. With over 10k allowance there each year, you can use capital withdrawals to reduce tax (part of which including the annual bed&ISA and bed&pension transactions). Not all income has to be natural generated (dividends) or interest. You can use some of the growth as income to reduce the tax.
I am a Financial Adviser. Comments are for discussion purposes only. They are not financial advice. Different people have different needs and what is right for one person may not be for another. If you feel an area discussed may be relevant to you, then please seek advice from a Financial Adviser local to you.

Last edited by dunstonh; 11-05-2011 at 11:03 AM.
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# 20
CLAPTON
Old 11-05-2011, 11:07 AM
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Thanks Marine Life

An interesting thought. Yes we need to allow for inflation. Re the 60k requirement we want to be able to ski once a year and have horses so there are costs involved with that.

However I'm not so sure about inflation. If you run the numbers, at 4% inflation, 60k becomes enough to buy you a mars bar only in 20 years but from my memory, 40k was a good salary in 1988 and it's still enough to be comfortable on now - or have I gone mad?

Regards Mr D

if inflation runs at 4% for 20 years then 60k will only be worth 26,000 in 20 years time

try living on 26k pa now with your desired lifestyle
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