£10,000 annual income from investment trusts

Linton

BLB53 wrote: »

This is the reason for my cash buffer..no need for sleepless nights.

But honestly, how many times have we seen 3 consecutive years in the past 30 years when global markets have not delivered a positive return?

That isnt the problem - the greater issue is a large crash followed by the need to rebuild your assets. If you had taken your income from IUKD, an occasionally recommended nice cheap ETF based on dividend paying FTSE350 shares, since early 2007 you would still be 30% down in capital value ten years later. In 2007 each IUKD share would have returned £5.8, in 2015 it was £4.3, a 40% drop in real terms. Even re-investing your dividends and taking no income your investment in IUKD would not have broken even until mid 2014.

BLB53

If you had taken your income from IUKD, an occasionally recommended nice cheap ETF based on dividend paying FTSE350 shares, since early 2007 you would still be 30% down in capital value ten years later. In 2007 each IUKD share would have returned £5.8, in 2015 it was £4.3, a 40% drop in real terms. Even re-investing your dividends and taking no income your investment in IUKD would not have broken even until mid 2014.

But to be fair, I was suggesting Vanguard Lifestrategy which is a global fund holding a mix of around 20,000 securities and therefore should not be compared to a UK income ETF with 30 shares.

ColdIron

BLB53 wrote: »

But honestly, how many times have we seen 3 consecutive years in the past 30 years when global markets have not delivered a positive return?

I suppose you're right, if only there was an investment vehicle that could withhold up to 15% of earnings in good years to supplement dividend distribution in lean years and supply smooth returns throughout the whole business cycle

I do wonder about the way that VLS is regarded by some as a panacea for all investing ills. Sometimes it's just a question of using the right tools for the job

BLB53

I do wonder about the way that VLS is regarded by some as a panacea for all investing ills. Sometimes it's just a question of using the right tools for the job

I am not suggesting it is a panacea, just that low cost index options such as VLS should not be dismissed by the seeker of income merely due to its low natural yield.

Linton

BLB53 wrote: »

I am not suggesting it is a panacea, just that low cost index options such as VLS should not be dismissed by the seeker of income merely due to its low natural yield.

Of course nothing should be dismissed. But it does help to have investments compatible with your objectives.

The OP was after income to supplement a pension. Dividend/interest paying investments held on an appropriate platform can automatically generate income into your current account with zero effort, you just need perhaps an annual check on capital values, to rebalance and to weed out those investments which have ceased to deliver. It may well make sense to have capital gain based investments running behind the income generators for the occasional top-up.

The advantage of dividend/interest paying investments is that given broad diversification the income is much more stable than the capital value. Short/medium term capital value movements dont matter. Skimming capital for your income requires much more active management and a larger cash buffer to handle volatility: each drawdown requires an investment decision as to what and how much to sell or whether to sell at all.

Biggles

BLB53 wrote: »

Not a problem, just sell 4% of your units each year to give your 'income'. This is what I have done for the past 2 years since purchase. Of course you will need a cash buffer for the bear years but don't overlook the low cost index funds just because you need 3% or 4% income from your portfolio.

This is, in effect, what will happen when your holdings go ex-dividend, their price will fall by 4%, so no 'real' gain, it's your own money. I've always felt that high yield investing is overrated versus targeting total gain.

And, as they won't be in an ISA, you should be safe from tax by selling £10k of shares. By taking £10k in dividends, however, half of that will be subject to tax (only 7.5% currently, but still tax).

Also, I don't agree that you need a cash buffer for bear years; the bull years will make up for it, just keep your drawings within your needs and always keep any gains within the CGT limit.

Linton

Biggles wrote: »

This is, in effect, what will happen when your holdings go ex-dividend, their price will fall by 4%, so no 'real' gain, it's your own money. I've always felt that high yield investing is overrated versus targeting total gain.

And, as they won't be in an ISA, you should be safe from tax by selling £10k of shares. By taking £10k in dividends, however, half of that will be subject to tax (only 7.5% currently, but still tax).

Also, I don't agree that you need a cash buffer for bear years; the bull years will make up for it, just keep your drawings within your needs and always keep any gains within the CGT limit.

It depends on how much income you want, how much you want it and how much effort you are willing to make.

As a retiree one needs a steady replenishing of one's current account. Pensions can provide that but they may well not be adequate. Ideally income should be as high as possible but steady, inflation adjusted, sustainable and appear automatically month after month with minimal effort. In these circumstances maximising long term capital gains beyond that needed for sustainability of income is a secondary concern.

Without a cash buffer you are forced to sell steadily. Selling when prices are down can have a major limiting effect on the maximum inflation adjusted sustainable income you can take as it cuts into the base capital you need to provide future income. Look at firesim which gives safe drawdown as about 3.5% of initial capital. Being able to say it will all even out in capital gains in the next 20 years is no compensation.

Taking the natural income from dividends broadly meets much of the objectives. Dividends are far more steady than capital value, they tend to roughly rise with inflation, and they happen regularly throughout the year. With a diverse portfolio the monthly income is reasonably constant. And very importantly, you never need to make a decision - it all happens automatically. In practice I have been able to take about 5.5%-6%/year from an S&S ISA for the past 8 years with minimal effort.

There is some management needed to replenish the capital if required, to rebalance, and to replace those investments which have ceased to provide sufficient income. But this need only be done perhaps once a year.

Thrugelmir

BLB53 wrote: »

But honestly, how many times have we seen 3 consecutive years in the past 30 years when global markets have not delivered a positive return?

Historically markets fall once in every 4 years.

BLB53

Of course nothing should be dismissed.

I agree but this was the impression I got from your first response to my earlier post yesterday.

Just because a fund has a lowish yield should not rule it out as an option for those needing income. It may have all the other aspects such as globally diverse, low costs, auto rebalanced, low volatility, etc. etc. and all that is required is a little thinking 'out of the box' so to speak to get your 4% income.

BLB53

Historically markets fall once in every 4 years.

.....and falls for 3 consecutive years occur how often?