What are the principles of deaccumulation?

FatherAbraham

I need to supplement my employment income with money drawn from my investment assets for several years (due to wanting to use salary exchange to maximize my pension contributions before I get too close to retirement - I've got "too much" outside pensions).

I realize now that I am unfamiliar with efficient deaccumulation, and am trying to work out the first principles of drawing on a investment portfolio.

Some of the principles seen to be:

• aim to maintain the asset allocation
• however, one's cash deposits should probably become a larger proportion of the portfolio as it sinks, just as it became a smaller proportion as the portfolio grew
• stopping regular Investments into the portfolio reduces the expenses one has, and thus the amount needing to be drawn down
• transaction costs can be reduced by selling several months' worth of assets in one go, at the expense of investment growth of the liquidated assets
• consume taxable assets first, before giving ISAs
• look at the value generated by the existing portfolio (normally reinvested), and use that to reduce the amount of capital which needs to be consumed

This is just stuff I've thought up - it really is a new mindset for me, after decades of saving and investing.

Is any of it valid?

What have I overlooked?

AnotherJoe

Well, hopefully your portfolio won't stink
Are transaction costs really significant? If they are funds there's usually no charge to sell. Even shares it will be say £10 a time or so. Not going to break the bank.
Reason for selling several months would be more to avoid risk if having to sell assets at a low point.
Otherwise seems reasonable.

dunstonh

aim to maintain the asset allocation

Important but also remember that allocations are fluid over time.

stopping regular Investments into the portfolio reduces the expenses one has, and thus the amount needing to be drawn down

No. Unless you are using less common assets, that is not an issue. The vast majority of people use unit trust/oeic funds. So, no dealing costs.

transaction costs can be reduced by selling several months' worth of assets in one go, at the expense of investment growth of the liquidated assets

Again, not in issue if you are using UT/OEICs.

consume taxable assets first, before giving ISAs

That is not a good rule. There may be times you use ISA before unwrapped. Plus, ISA is one of the tax wrappers but not the only one.

look at the value generated by the existing portfolio (normally reinvested), and use that to reduce the amount of capital which needs to be consumed

Does it matter? Total return is total. Whether you draw it from growth or income, it is still part of the return.

Linton

- Maximum diversification in sources of income. Use dividend income, bond income (at the moment mainly corporate bonds) , property income (eg REITs) and capital growth.
- Large cash buffer to tide you over major crashes when you may not want to sell assets. It also reduces stress to know you wont run out of money for a number of years no matter what happens.
- Use your tax allowance to its maximum. If you will be in any danger of being a higher rate tax payer at any time drawdown the maximum you can at basic rate and put any excess into ISAs.

Linton

dunstonh wrote: »

Does it matter? Total return is total. Whether you draw it from growth or income, it is still part of the return.

In my view it does matter. During stock market falls interest and dividend income are much less affected than capital values. Having significant income from these sources reduces the need to sell assets at temporarily cheap prices and enables one to operate with a smaller cash buffer. As is always the case with investing diversification should be a major component of your strategy.

Linton

Another principle...


Look at drawdown as a positive process to be planned to meet your objectives as important as the accumulation, if not more so. Dont regard it merely as spending which uses up your hard-won wealth.



My objective is to drawdown the maximum I can at basic rate tax and spend it whilst retaining a defined lump sum more than sufficient to meet care costs and limited bequests.

dunstonh

Linton wrote: »

In my view it does matter. During stock market falls interest and dividend income are much less affected than capital values. Having significant income from these sources reduces the need to sell assets at temporarily cheap prices and enables one to operate with a smaller cash buffer. As is always the case with investing diversification should be a major component of your strategy.

Most people operate with around 18-24 months cash buffer when drawing income. So, falls in the market are not going to be an issue in the majority of cases as you can delay refloating the cash account in all but sustained loss periods.

Yielding portfolios have their own issues too. Remember how HYP was very popular before the credit crunch. Indeed, it was almost cult like. Many following the HYP method found their portfolios decimated after the credit crunch.

There are many methods and each has pros and cons.

Linton

dunstonh wrote: »

Most people operate with around 18-24 months cash buffer when drawing income. So, falls in the market are not going to be an issue in the majority of cases as you can delay refloating the cash account in all but sustained loss periods.

Yielding portfolios have their own issues too. Remember how HYP was very popular before the credit crunch. Indeed, it was almost cult like. Many following the HYP method found their portfolios decimated after the credit crunch.

There are many methods and each has pros and cons.

Agreed, so surely it makes sense to use a range of different income provision strategies. Relying on only one seems unnecessarily risky to me.

bostonerimus

FatherAbraham wrote: »

Some of the principles seen to be:

• aim to maintain the asset allocation
• however, one's cash deposits should probably become a larger proportion of the portfolio as it stinks, just it became a smaller proportion as the portfolio grew
• stopping regular Investments into the portfolio reduces the expenses one has, and thus the amount needing to be drawn down
• transaction costs can be reduced by selling several months' worth of assets in one go, at the expense of investment growth of the liquidated assets
• consume taxable assets first, before giving ISAs
• look at the value generated by the existing portfolio (normally reinvested), and use that to reduce the amount of capital which needs to be consumed

There is a school that advises that you increase the percentage of equities in your allocation as you get older. That's what I'm doing.

Budget, budget, budget. Yes as you will probably not be contributing as much to your pension after retirement then that amount can come out of your budget. But you might also have paid off the mortgage, not be commuting every day or eating out as much. So do a realistic budget so you can plan properly.

Have a plan to reduce spending in bad times.

Take a "total return" approach to income so you will be spending dividends, interest, capital gains and maybe some capital tool. Have a cash buffer to spend in down turns so you can avoid selling at a loss. How you set up your asset allocation is going to be determined by your income needs, size of pot, and risk tolerance.

FatherAbraham

Linton wrote: »

- Maximum diversification in sources of income. Use dividend income, bond income (at the moment mainly corporate bonds) , property income (eg REITs) and capital growth.
- Large cash buffer to tide you over major crashes when you may not want to sell assets. It also reduces stress to know you wont run out of money for a number of years no matter what happens.
- Use your tax allowance to its maximum. If you will be in any danger of being a higher rate tax payer at any time drawdown the maximum you can at basic rate and put any excess into ISAs.

Eh?

I'm salary-sacrificing down to just above National Minimum Wage, in order to get as much as possible into my pension while I still have the opportunity to avoid 12% National Insurance.

This means I need to use my non-pension wealth to cover living expenses.

There isn't any surplus to put into ISAs, there's an income deficit, which means drawing on GIAs and ISAs to get by.

Do you need to reconsider your suggestions in the light of this?

FatherAbraham

Linton wrote: »

Another principle...


Look at drawdown as a positive process to be planned to meet your objectives as important as the accumulation, if not more so. Dont regard it merely as spending which uses up your hard-won wealth.



My objective is to drawdown the maximum I can at basic rate tax and spend it whilst retaining a defined lump sum more than sufficient to meet care costs and limited bequests.

There isn't any income tax to pay on withdrawals from ISAs.

Perhaps you meant to say that one should try to use one's capital-gains tax allowance each year if necessary, when withdrawing from GIAs?