Income questions

Pat_Fleming

What type of sum would be a reasonable sustainable income obtainable from a £200k investment? The money is currently about 50/50 between an S&S ISA & a SIPP. The investments at the moment are mostly VLS 60 & 80.


I would like to be able to preserve most of the capital equity if possible . I suppose my risk tolerance would be low to moderate.


How can I achieve the best balance at the lowest cost?


I am almost 60 & already receiving a Final Salary pension after taking redundancy/early retirement.



Thank You.

mgdavid

short answer - 4% is often mentioned as a good rule of thumb.
Long answer - a very complex area; do a forum search on Drawdown rates and settle down for a good long read!
Presumably your drawdown won't be smooth as you probably need more now and less after SP kicks in.

Bravepants

I have VLS 60 in my ISA and my retirement plans (hopefully just over 4 years away), include a SIPP and DB pension, AND an annual drawdown of 3% from my ISA.



If you look at various investment blogs and sites they seem to quote 4% per year as a standard withdrawal rate that will enable your money to last forever - but this is all full of caveats and talk of sequence of return risk, and how much of the fund is invested in equities compared to bonds. Then you have talk about the Guyten-Klinger method, which is probably worth taking a look at.



I'm using 3% as a safer and simple assumption, and perhaps I'll look at Guytten-Klinger when I retire.

Pat_Fleming

mgdavid wrote: »

short answer - 4% is often mentioned as a good rule of thumb.
Long answer - a very complex area; do a forum search on Drawdown rates and settle down for a good long read!
Presumably your drawdown won't be smooth as you probably need more now and less after SP kicks in.

Maybe simpler that you think. My FS pension has a "smoothing" element whereby a higher pension is paid now but this reduces when I reach SP age. I believe that it doesn't go down my quite as much as the SP but it's fairly close.


Another slight worry is that due to rules on pre 1997 service, only about half of my FS pension is eligible for index linked rises.

Pat_Fleming

Bravepants wrote: »

If you look at various investment blogs and sites they seem to quote 4% per year as a standard withdrawal rate that will enable your money to last forever - but this is all full of caveats and talk of sequence of return risk, and how much of the fund is invested in equities compared to bonds. Then you have talk about the Guyten-Klinger method, which is probably worth taking a look at.



I'm using 3% as a safer and simple assumption, and perhaps I'll look at Guytten-Klinger when I retire.

I've looked at the Guyten Klinger stuff before & it just made my head ache......
:eek::eek::eek:

Prism

Pat_Fleming wrote: »

I've looked at the Guyten Klinger stuff before & it just made my head ache......
:eek::eek::eek:

Yeah its complicated, however what its designed to do is give you a greater withdrawal rate without running out of money if possible, and enabling you to run the capital down when you get older. So somewhere between 3% and 8% depending on the performance.

kidmugsy

Pat_Fleming wrote: »

What type of sum would be a reasonable sustainable income obtainable from a £200k investment? The money is currently about 50/50 between an S&S ISA & a SIPP. The investments at the moment are mostly VLS 60 & 80.

I would like to be able to preserve most of the capital equity if possible . I suppose my risk tolerance would be low to moderate.

The much-quoted 4% p.a. is based on a period of good performance of the US stock market. A UK equivalent might be 3%. But if you think that the currently highly valued US stock market might be about to bring the world's stock markets a mighty crash, then 3% would very possibly be too optimistic.

Your risk tolerance of low to moderate (with, I assume, the intention of drawing down soon) is incompatible with the VLS80 and perhaps also the VLS 60.

You need to study the writings of Dirk Cotton, spending a few weeks going through his archives of blog posts.
http://www.theretirementcafe.com

westv

kidmugsy wrote: »

The much-quoted 4% p.a. is based on a period of good performance of the US stock market. URL="http://www.theretirementcafe.com[/QUOTE"]/QUOTE[/URL



Is it? Even though it includes the Wall Street crash plus 2 World Wars?

westv

Pat_Fleming wrote: »

I've looked at the Guyten Klinger stuff before & it just made my head ache......
:eek::eek::eek:

From my basic understanding the important bits are:-


No inflation increases if your fund drops in value in the previous 12 months.
Reduce spending if withdrawal percentage gets to high.
Increase spending if withdrawal rate gets too low.

kidmugsy

westv wrote: »

Is it? Even though it includes the Wall Street crash plus 2 World Wars?

Investopedia:

"Origins of the 4 Percent Rule
The 4 percent rule was created using historical data on stock and bond returns over the 50-year period from 1926 to 1976."

No first world war there. And about a century's worth of earlier data not used, which would not have supported the 4% conclusion.

Added: take a look at
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2201323

In the authors' view the 4% rule is far from safe in our era of very low interest rates.

bostonerimus

The Trinity and Bengen studies used US data going back to the 1920s to derive the 4% rule. It's pretty conservative as the vast majority of scenarios with 4% inflation linked withdrawals leave you with large balances when you die.....the 30 year withdrawal success rate is often set at 95%. By actively adjusting your withdrawals down in hard times a la Guyton you should be able to improve on that. It has to be noted that the UK market is not the US so the underlying data for a UK retiree will be different and no accounting was made for fees in these studies so if you are paying 1% to a financial manager and/or platform that will reduce your spendable income considerably.