How much spendable income would you get from £5 million of savings?

pierre179

Hello,

I have been trying to calculate the amount of income you can spend when having a principal saving of £5M while maintaing the same wealth over time. The principal needs to grow to cover inflation to provide for long term (or perpetual) income.

I have read a lot of opinions on this, and the 2 primary variables seem to be 1) interest rate and 2) tax on interest.

I am considering annual inflation to be 2%, and I am assuming a low risk hands-free strategy.

I have read about a "1% rule" around various forums (i.e. you can spend 1% of the principal while maintaining the same wealth over time) - and my own rough calculations below seem to agree with this.

Below I am assuming interest of 4.5% and a tax on top of this of 30%


PRINCIPAL SAVING £5,000,000.00
Interest earned (4.5%) £225,000.00
Earnings after tax £157,500.00

Input to the principal to cover inflation (2%) £100,000.00

Amount to spend freely after tax* £57,500.00
*this amount increases in line with inflation



I'm wondering if you guys have any input on this, and whether you think my calculations are about correct, or have I totally missed something?

Many thanks

Totton

I've previously read that 4% is a safe sum to take as income without destroying capital over the long term. Not sure that 200,000k is enough to live on for a year though :-)

HTH,
Mickey

MoneySaverLog

Totton wrote: »

I've previously read that 4% is a safe sum to take as income without destroying capital over the long term. Not sure that 200,000k is enough to live on for a year though :-)

HTH,
Mickey

OP wants to maintain the spending power of the £5M going forward and would not be able to draw £200K a year as that's not taking into account inflation and tax. I suspect taking the above into account would actually leave a modest income but nothing like 200K

Linton

pierre179 wrote: »

Hello,

I have been trying to calculate the amount of income you can spend when having a principal saving of £5M while maintaing the same wealth over time. The principal needs to grow to cover inflation to provide for long term (or perpetual) income.

I have read a lot of opinions on this, and the 2 primary variables seem to be 1) interest rate and 2) tax on interest.

I am considering annual inflation to be 2%, and I am assuming a low risk hands-free strategy.

I have read about a "1% rule" around various forums (i.e. you can spend 1% of the principal while maintaining the same wealth over time) - and my own rough calculations below seem to agree with this.

Below I am assuming interest of 4.5% and a tax on top of this of 30%


PRINCIPAL SAVING £5,000,000.00
Interest earned (4.5%) £225,000.00
Earnings after tax £157,500.00

Input to the principal to cover inflation (2%) £100,000.00

Amount to spend freely after tax* £57,500.00
*this amount increases in line with inflation



I'm wondering if you guys have any input on this, and whether you think my calculations are about correct, or have I totally missed something?

Many thanks

Why only 30% tax on £225000 savings income??? Its 40% on income above £34370+allowance and 50% on income over £150K + allowance. Or have you given half the £5M to your spouse? In which case 30% would seem to be about right. Of course in 500 years you could get it all into cash ISAs.

2% inflation seems rather optimistic. After all the BoE is charged with keeping the rate at 2% so the average will be rather higher. You could try 3%. You would then have £7.5K to spend!!

Investments should do a lot better than a savings account with a lower tax take and a chance of some inflation matching.

Conclusion: if you have a large pot of money dont put it in savings accounts.

grey_gym_sock

if you keep it all on deposit, 1% might be about right on average. at the moment, your interest is probably less than inflation, but sometimes it's more.

if you put it in a sensible investment, i'd have thought at least 4% is safe. if you put it all in blue chip dividends payers, averaging (say) 4% dividend, you'd get £200,000 income before tax, about £150,000 after tax. you'd hope the capital growth would exceed inflation (though there would probably be CGT). a more sensibly diversified portfolio might have a lower yield, but a similar expected total return. unless you suddenly received all this money, you'd hopefully have been contributing to ISAs for many years.