How would you build a perpetuity?

Triumph13

One for the brains trust on here if I may!
Half of my DC funds will go on early retirement, the rest as a top up to our DB and state pensions.
What I would like to do once retired, is invest this latter portion in as low stress a manner as possible such that it effectively yielded an indexed income for ever that would be passed on to the kids when we die.
I can tolerate significant (say +/- 50%) fluctuations in the annual income and would like not to have to care at all about the capital value fluctuations. I'm not prepared to spend all my time studying the markets to try and get every last .1%, but nor do I want to pay an arm and a leg to advisers / managers and have to keep an eye on them all the time.
My target average income is 3% pa indexed.
I'm thinking in terms of a mixture of equity income funds and equity index trackers, both global and UK, to give an average dividend yield across the whole portfolio of around 3%. I may have to do a bit of rebalancing at some point, but fundamentally I'm a buy and hold kind of person. Does that make sense to people? Any better ideas?

atush

I dont think you can invest it in anything to get an indexed income. That is really annuity territory and nothing would be left for inheritiance/ You could look at fixed term annuities but not sure they sell indexed ones, they might do?

Otherwise, I would invest the money in a series of good investment trusts, that have a good record of increasing their divends each year for many decades.

The income would be steady and grow, but the underlying assets value could fluctuate. But this would not matter to you as you would be leaving the capital to heirs. Although over decades there will still be capital growth.

Triumph13

Sorry, I didn't mean a guaranteed indexed income. I meant an average income that would be expected to increase in line with inflation.


I'm working on the principle that the income from the income trusts probably increases at less than inflation, but the trackers should have capital growth ahead of inflation and so every few years you sell trackers and buy income trusts.

System

Another approach might be to invest your pension in commercial property. You could safely pocket all the rental income (less expenses, insurance, etc etc) and whatever happened assume that the property would retain its value or appreciate.
You could leave managing agents to handle everything.

Occasionally you might have rental gaps, but if you could stand that then surely the plan would be perpetual?

Triumph13

I could imagine putting a small percentage into an REIT for diversification, but putting a huge lump into a single property would be an ENORMOUS gamble. It is most definitely NOT a one way bet as numerous derelict properties up and down the land bear witness.


I'm looking at a 40 to 50 year time horizon so I'm quite clear that almost entirely equities is the way to go.


I'm hoping that with the increased popularity of drawdown there will be some suitable products coming onto the market in time for when I hit 55, but I need to be prepared to do it manually if there aren't.

enator

http://www.msn.com/en-gb/money/mutualfunds/buy-and-hold-fund-prospers-with-no-new-bets-in-80-years/ar-BBi1XlL

80 years & counting...

jamesd

Your plan seems reasonable for your objectives. While it's not guaranteed you can reasonably expect to take around 4% of the initial value increasing with inflation and have a low chance of having to substantially decrease the income nearer to end of life. If you want to priorities inheritance over maximising your income you would need to lower that by 1% or so until you find out how markets do in the two to five years after retiring. If they don't have a substantial and sustained drop in the Great Depression style you could go to 4% and probably be fine on the inheritance objective.

Are you familiar with the market performance and inflation based rules I've mentioned here that improve the chance of drawdown success by reducing income when appropriate? Success in this context means in part increasing the amount to be preserved for inheritance. Options using those rules on US returns would go to 5% or even close to 6% and still have 90% or so chance of success, higher chance at lower levels.

PeacefulWaters

You might find achieving inflation linked returns is higher than you need.

Your DB scheme and state pension will deliver this, but your spending may well reduce in the later years. Having part of the income non-indexed in return for a higher starting level may be beneficial.

Me? I'm dull. I'd consider giving the kids an advance on the inheritance, get to see them benefit from it and buy an annuity without indexation with the rest.

Triumph13

jamesd wrote: »

Are you familiar with the market performance and inflation based rules I've mentioned here that improve the chance of drawdown success by reducing income when appropriate? Success in this context means in part increasing the amount to be preserved for inheritance. Options using those rules on US returns would go to 5% or even close to 6% and still have 0% or so chance of success, higher chance at lower levels.

Thanks for this James.


I've looked at some of these rules and they are definitely interesting, but all the modelled scenarios seem to be against the objective of not running out of money rather than maintaining the value of the pot, with a 'perfect' solution being to pop your clogs with just enough left to pay for the funeral.
I'll take another look though and see if I can adapt them.


The key question I've been struggling with is whether to skew the portfolio to income to get the yield naturally, or just have a diversified portfolio and do a mini rebalance one a quarter to get my cash holding to .75% (or 1% if things go well) and draw it out. The latter probably gives a higher long term return, but more income volatility, more hassle and probably more dealing charges - although I'm hoping that it is the kind of product that will start to emerge for the drawdown market.

Triumph13

PeacefulWaters wrote: »

You might find achieving inflation linked returns is higher than you need.

Your DB scheme and state pension will deliver this, but your spending may well reduce in the later years. Having part of the income non-indexed in return for a higher starting level may be beneficial.

Me? I'm dull. I'd consider giving the kids an advance on the inheritance, get to see them benefit from it and buy an annuity without indexation with the rest.

I'm not budgeting for a significant drop in spending before 80 and with a planned retirement age of 53 that means I really do need to be looking indexed rather than flat - and indexed annuity rates for a 53 year old don't even bear thinking about.


I have separate plans for 'giving with warm hands' to the kids. My £10k pa DB scheme allows for the 25% lump sum to come from the DC section so I'll leave enough in there to get the maximum tax free and hand that over for house deposits. Plus I'm budgeting that any inheritance from our own parents should largely go straight to the kids.

PeacefulWaters

Triumph13 wrote: »

I'm not budgeting for a significant drop in spending before 80 and with a planned retirement age of 53 that means I really do need to be looking indexed rather than flat - and indexed annuity rates for a 53 year old don't even bear thinking about.


I have separate plans for 'giving with warm hands' to the kids. My £10k pa DB scheme allows for the 25% lump sum to come from the DC section so I'll leave enough in there to get the maximum tax free and hand that over for house deposits. Plus I'm budgeting that any inheritance from our own parents should largely go straight to the kids.

Yup. I get that. Well thought through.