What do you do when there is not enough money?

jamesd

Linton wrote: »

Please could you explain how you come to that conclusion when they would appear not to have the cash reserves to go for a higher drawdown rate strategy.

They have £180k of accessible pension money available via either the serious ill health or beneficiary pension routes. Plenty of cash buffer potential from that. Of the P2P places I mention, one has next working day easy access as a standard feature, RateSetter, another has a monthly income option, BondMason, and most of the rest can provide access within a few days. Quite modest cash buffer combined with regular income withdrawing can do the job.

If for some reason you want to completely ignore P2P, the UK 90% success rate safe withdrawal rate using the Guyton-Klinger rules is 5.5% and that would deliver £9,900 a year over a 40 year plan. Since that ignores the state pension she can start far above that and drop back after state pension deferring.

Their problem is far from being as challenging as it might seem and even something as basic as taking a lodger after his death can do lots of extra good.

Thrugelmir

jamesd wrote: »

I put together a lowuish risk combination of P2P lending that could be expected to pay about 7% interest. So £12,600 a year. More is possible, I recon on around 10% for the sort of mixture I use. Some of those options require ongoing work by a person who understands investments,

Chasing yield is like driving every day at a 100 mph down the motorway. One day your luck will run out. Risk is relative. Interest rate offered is a red flag indication. There'd be no confidence in P2P providers if they got their pricing hopelessly wrong.

jamesd

Thrugelmir wrote: »

Chasing yield is like driving every day at a 100 mph down the motorway. One day your luck will run out. Risk is relative. Interest rate offered is a red flag indication. There'd be no confidence in P2P providers if they got their pricing hopelessly wrong.

The rates I've given are after generous bad debt allowances and well below what I actually achieve. It's how I have been and expect to continue to generate tens thousands of Pounds a year of income for myself, expecting a rate of around £30,000 a year from this summer. It's not speculation like yours about something you've never used but what someone who's been using P2P for ten years knows from doing it is easy enough.

Longer term I think the return advantage of P2P over bonds will erode but it's here and working today.

Linton

jamesd wrote: »

They have £180k of accessible pension money available via either the serious ill health or beneficiary pension routes. Plenty of cash buffer potential from that. Of the P2P places I mention, one has next working day easy access as a standard feature, RateSetter, another has a monthly income option, BondMason, and most of the rest can provide access within a few days. Quite modest cash buffer combined with regular income withdrawing can do the job.

If for some reason you want to completely ignore P2P, the UK 90% success rate safe withdrawal rate using the Guyton-Klinger rules is 5.5% and that would deliver £9,900 a year over a 40 year plan. Since that ignores the state pension she can start far above that and drop back after state pension deferring.

Their problem is far from being as challenging as it might seem and even something as basic as taking a lodger after his death can do lots of extra good.

A lodger would make a lot of sense.

How big a buffer would you have to permit Guyton Kilinger to work effectively without leaving the survivor with nothing during the bad times? - it would need to come out of the £180K and be replenished from time to time.

If you go for P2P you need to allow for keeping some back for inflation - say 2% or more. You cant leave the survivor with no inflation matching for 30+ years.

In both cases it would indicate your headline returns are optimistic, and as we know taking too much out of a drawdown pot early on can be disastrous.

redux

atush wrote: »

yes, given the warnings here on the site not to give 'Advice'. And given th Op appears to be running the finances and prtfolios of numerous people. Who may or may not be paying him in some form be it barter, cash, or services. We dont know, they ahvent said.

I can just see a major crash or correction coming along and all these 'friends' not being so friendly when they've lost a lot of money. AS he may not be able to acertain 'their' true risk level. And invest for them according to his own risk level.

Your friends and family could sue you in those cases.

I have sat in a meeting with a family member and her financial adviser. Not independent, tied to a certain company

When I was talking about some bank and regular savings accounts she has (set up helped by me on the internet), because he wanted to know a rough total, he said he had some other clients who ought to talk to me. I thought, but didn't say, why doesn't he drop hints about that, at least tell them where to start looking around.

His predecessor, who retired about 18 months ago, advised her about the NSI 'granny' bonds, go for the one year version, to be cautious, in case you unexpectedly need the cash. I said go for the 4% on the long ones, as even losing some interest on early withdrawal you are better off for any period except the first few months, and who knows these might not be relaunched every year.

I hope I won't be sued for giving better advice about the savings rates than either adviser, but now I'm looking at the fund the old adviser switched her into, from 3 or 4 he had previously recommended, all into one of the firm's own. If I carry on with my feelings about this it would look like hijacking the thread.

Joey_Soap

zagfles wrote: »

They could use part of the £70k cash you were talking about earlier. See this (long) thread: https://forums.moneysavingexpert.com/discussion/5580163

Thank you, I shall give that serious consideration. Though, seeing as I won't be running this portfolio, simply presenting what I find and perhaps assisting in the set up of the plans I'm not sure the person has the level of financial savvy to do this. However, it is potentially of great interest, so thanks for pointing it out.

Joey_Soap

Linton wrote: »

Having looked again at your figures it seems to me you are being inconsistent with regards to risk management and may be taking insufficent account of inflation.......

Thank you, but I'm talking entirely in today's GBP, I don't think discussing what infaltion may/may not do is appropriate here, it's unknown and extremely complex.

a) In the next 11 years
You are proposing extreme caution with the £70K by keeping it all in cash for the whole of the 11 years. On the other hand you are expecting to create a pot of £180K in that time. Is this at current prices or simply in £ terms? If the former relying on an average return of 5%+inflation is risky and probably would not be achieved with "a steady and relatively secure investment" and could well be missed anyway. On the other hand if it is in £ terms £180K would be worth only around £135000 in today's money in 11 years time with 2.5% average inflation.

Thank you, your point is well made. Again, I am talking in todays GBP and I have not talked about a possible 5% real return being possible. I have no "expectation"
as such. Just trying to be fairly realistic at potential outcomes. There is only a 50% of being right whatever happens.

b) 20-30 years of drawing down 4% of starting lump sum every year
Presumably this is increasing with inflation? If so, again, you will probably not be able to achieve this with investments that produce a steady return. You will need a significant % equity with the risk of occasional major falls in value.

Thank you again, I have no idea what the effect of inflation will be over a retirement lifetime. Your point is well made about market volatility. That's why at the outset I said there is not enough money in the pot for those kinds of outcomes.

Modelling the £180K/£7600 proposal on http://www.cfiresim.com suggests (based on historical US data) that with these numbers there is around a 50% chance that the pot size will drop below 60% of its initial value at some stage even with a relatively cautious 50% equity/bond split. Might your relative be getting a little worried were this to happen?

If you are intending to set expectations perhaps you should be rather less ambitious.

Indeed, this is quite possible. See above about there not being enough money to start with to attain any kind of security beyond the best you can manage. I have no intention of setting expectations. I intend to outline what I have found and to try to encourage some self education around this. Though after a lifetime of blissful ignorance of my relative's part, it could be a big ask.

And finally - a £180K drawdown portfolio will require ongoing management for the rest of your relative's life, say for the next 30-40 years Who is going to provide this?

Thank you very much. This is indeed a concern. And not only for this pot of money. my current thoughts are to suggest the majority of the pot that is invested for 11 years goes into a low cost, very broadly based tracker along the lines of the Vanguard LS 80 fund.
And maybe a diversifier into a well run REIT for some property exposure. It's quite possible such a portfolio can run itself. However, this in itself is likely to be a serious and in depth discussion.

Joey_Soap

Just a general thanks for the kind thoughts and information freely given here, it has helped me to see a way forward.

Regarding the other stuff about running investments for people, if my kids and my wife think I'm doing a rubbish job investing the money that I gave them, then they are perfectly free to do something else with the money. Though, somehow, I doubt they will. But yes they can if they wish. Sue me for negligence? See them in court.

Clearly, nothing written here is advice and I won't be giving advice either. A large part of the conversation will be along the lines of - "For the last 30 years you have sailed blissfully along in life taking no regards for your financial well being in the future. That has to seriously change and it has to change right now. I'll help you as best I can but you really do need to get a grip of this stuff because it really, truly, is extremely serious and you can be blissfully ignorant no longer about your circumstances".

Malthusian

Joey_Soap wrote: »

Clearly, nothing written here is advice and I won't be giving advice either. A large part of the conversation will be along the lines of - "For the last 30 years you have sailed blissfully along in life taking no regards for your financial well being in the future. That has to seriously change and it has to change right now. I'll help you as best I can but you really do need to get a grip of this stuff because it really, truly, is extremely serious and you can be blissfully ignorant no longer about your circumstances".

That's extremely good advice. It's the bit that follows after "but don't use a regulated independent financial adviser because they will rip you off by asking to be paid for a service" that is problematic. It is easy to say "get a grip" but their only [STRIKE]two[/STRIKE] three options to "get a grip" have now narrowed to either

1) conduct extensive research until they fully understand all their options and the tax / legal implications as you or an IFA would - which is second nature for 95% of this forum, but a much smaller percentage of the general population

2) leave everything up to you and trust everything you say implicitly

3) muddle along and accept sub-optimal outcomes.

jamesd

Linton wrote: »

How big a buffer would you have to permit Guyton Kilinger to work effectively without leaving the survivor with nothing during the bad times? - it would need to come out of the £180K and be replenished from time to time.

Guyton-Klinger takes income first from cash (some is acquired by selling during up times), then bonds and if both of those are exhausted, equities. So the only time a person could be left with no cash is when there's nothing left, during the time it takes to sell and withdraw or a typical emergency fund event. So the cash requirement is a normal emergency fund plus a few months to smooth and provide a buffer while withdrawing.

Linton wrote: »

If you go for P2P you need to allow for keeping some back for inflation - say 2% or more. You cant leave the survivor with no inflation matching for 30+ years.

You do if you're trying to maintain a level inflation-adjusted income for life but that's not the need here. Instead, this need is higher income with capital drawing to boost income until state pension age followed by a more sustainable inflation-adjusted one.

So I wrote orf both deliberately not allowing for inflation and the option of using some equities for that when desired.

Linton wrote: »

In both cases it would indicate your headline returns are optimistic, and as we know taking too much out of a drawdown pot early on can be disastrous.

As I've explained, neither is too optimistic because of the low cash need and ability to choose the desired mix of capital drawing or sustaining.