Monthly Income from 120K - Monthly Income Funds

Linton

ColdIron wrote: »

Depends on your circumstances, resources and objectives but there are many ways to skin a cat

I use the 3 bucket or waterfall strategy split across several portfolios (SIPP, ISAs and unwrapped) in 3 layers. 1) Several years of cash 2) Income 3) Growth. I spend from 1 which is replenished monthly/quarterly etc by natural income from 2 which in turn is periodically supplemented by 3 when valuations or requirements suit me (every year or two or whatever). Resilient, low maintenance and copes well with my fluctuating incomings and outgoings

.......

I do much the same with some of the cash replaced by wealth preservation funds/IT. Fortunately it has been possible to keep everything tax-protected.

Splitting the total assets enables each pot to be totally focussed on its particular role. Thus the Growth portfolio is 100% equity with 50% mid range/small. The income portfolio is about 40% directly held dividend paying UK shares and the rest a global range of income generating bond and equity funds. If an investment's income falls below 3.5%-4.0% it is sold.

Audaxer

Linton wrote: »

I do much the same with some of the cash replaced by wealth preservation funds/IT. Fortunately it has been possible to keep everything tax-protected.

Splitting the total assets enables each pot to be totally focussed on its particular role. Thus the Growth portfolio is 100% equity with 50% mid range/small. The income portfolio is about 40% directly held dividend paying UK shares and the rest a global range of income generating bond and equity funds. If an investment's income falls below 3.5%-4.0% it is sold.

I like the bucket approach and I have started an income portfolio in addition to my VLS funds. Although I am adding global funds I have selected it still seems to be too UK focused compared to the like of growth passive funds such as VLS and HSBC Global Strategy.

Linton / ColdIron - would you say that an income fund that is up to 60% UK is not diverse enough? It just seems to me that to achieve a reasonable yield you need a good selection of UK income funds?

dunstonh

Audaxer wrote: »

Malthusian, I know what you mean, but are you saying there is no place for portfolios that just generate income? I think a lot of retirees and others that need income are happier to rely on ITs and funds that pay natural income than having to make capital withdrawls from a fluctuating growth portfolio.

Actually, fixed regular withdrawal is the most common method in the UK. More than natural income. Largely due to the historical position on the main pensioner investment product which was the investment bond. This allowed a 5% p.a. withdrawal with tax deferred. Most people took the 5% and in the vast majority of cases, they used either with profits funds or unit linked life funds on accumulation basis with withdrawals paid by cancellation of units.

Today, the investment bond is a very niche option and the taxation of unwrapped and the larger ISA allowance means they are far more favourable to most. However, its legacy does live on. I did two income portfolios in the week where they are taking a fixed regular withdrawal from the cash account within the platform but are using the natural yield on income units to pay into the cash account. The current yield is somewhat more than the regular withdrawal. The reason for fixed regular withdrawal was certainty of payment each month and not having to rely on monthly distribution funds which may not have the best yield compared to quarterly or half yearly.

Sue58

ColdIron wrote: »

With only 27% UK I wouldn't call Bankers a UK IT

Sorry, I wrongly worded my sentence, I meant to say Global IT's like Bankers, Caledonia, Brunner etc as opposed to solely UK IT's.

ColdIron

Audaxer wrote: »

would you say that an income fund that is up to 60% UK is not diverse enough? It just seems to me that to achieve a reasonable yield you need a good selection of UK income funds?

I'd say it depends. If you're looking for income the UK is hard to ignore. Across layer 2 I'm about 50% UK but this is a mixture of equity, fixed income, property and infrastructure so is a long way from 60% UK equity. For income 60% or 70% equities would be pushing my upper limit regardless of geography, markets have been very kind for some years now but this won't last forever. If I was in my twenties with a forty year investment horizon I'd be less concerned by volatility, particularly currency fluctuations, but I'm not and consistency counts for a lot, layer 1 notwithstanding. My layer 3 is mostly equity and a lot less UK

Linton

Audaxer wrote: »

......
Linton / ColdIron - would you say that an income fund that is up to 60% UK is not diverse enough? It just seems to me that to achieve a reasonable yield you need a good selection of UK income funds?

If the income is a significant part of your retirement plan I believe you need to diversify it geographically, by asset type, and by industry sector as much as possible without too much sacrifice of the % income. Whilst it was around 10% of my income requirment I was happy to have it mostly in UK equity. Now it's 20% and rising the risk is too high in my view. The UK's lack of diversity in industry sectors is a major issue - look at what happened to equity income funds which invested heavily in the high dividend paying banks prior to the 2008/2009 crash. Also BREXIT adds to the chances of UK specific problems.

There is reasonable high income available in European and Far East equity. In areas where equity income levels are lower, in particular the US, corporate bonds can provide a useful return. For EM government bonds may be appropriate.

Audaxer

Thanks guys. I was originally thinking that as I was investing quite a lot over a short time frame, it would be good to have a proportion of income generating funds or maybe ITs, so that if/when there was an equity crash I would have the relative comfort of still getting income coming in, and therefore I would be less concerned about the volatility of the income funds.

However I'm now thinking that in an example where an equity income fund or IT dropped by say 40% in a crash and still paid a 4% annual dividend, the value of your fund would I assume be down by a total of 44% or more, the same as someone with a growth fund which dropped 40% and who made a 4% annual withdrawal from capital. So maybe with more diversified growth funds I would at least have the option of taking the equivalent of the annual dividend from the cash buffer, rather than selling units in a crash and reducing the value of my fund(s) by a further 4%. Does that make any sense?

ColdIron

Audaxer wrote: »

However I'm now thinking that in an example where an equity income fund or IT dropped by say 40% in a crash and still paid a 4% annual dividend

Are you confusing equities with bonds that pay a percentage interest? Consider City of London IT, it pays 4.30 pence per share today and has increased this every year for 50 years. The percentage will be whatever proportion this is of the share price on the day

Thrugelmir

Audaxer wrote: »

I think a lot of retirees and others that need income are happier to rely on ITs and funds that pay natural income than having to make capital withdrawls from a fluctuating growth portfolio.

The problem that underlies this is that the companies invested in. Are suffering a fall in their own dividend cover along with an increasing number resorting to borrowing to fund dividends. As cash generation is insufficient. A situation that has been ongoing for over 5 years now in some instances. No shortage of profit warnings this year. Some companies that pay in US $ haven't actually increased their payouts this year. Any benefit is simply down to £ weakness.

IT's may well hold reserves. Should a crunch bite though. Depleting the reserves will reduce NAV. A double edged sword.

Eco_Miser

Malthusian wrote: »

There is a place - for people who don't trust themselves to choose a level of income that won't deplete the portfolio.

I use ITs as part of my portfolio for two reasons, and the first is the opposite of that. I would choose a level of income just sufficient for my needs (with no chance of depleting the portfolio), instead of taking full advantage of the dividends generated, and actually spending on occasional luxuries.

The second reason is that everything is automatic, with no need to consider how much to sell.