Advice on IFA stuff

Alexland

sixpence. said:

Okay so do people agree with Dunstonh that 2.5% (with costs and inflation covered) is a realistic figure? 

Maybe eventually but at current market valuations I agree with Vanguard so wouldn't expect a balanced investment to deliver much more than inflation after low non-advised fees for the next 10 years so if you didn't want to deplete the spending power of your lump sum then I wouldn't draw anything.

Thrugelmir

sixpence. said:

 I am happy to to put the money away for 3-5 years at least. My goal is to get 8% return per year on average, exclusive of costs. I will use 4% of this for income and the rest to cover inflation. I feel comfortable with a 5 or 6 /10 risk level. All of 

 

Google Credit Suisse Year Book 2019  and have a read.  Only abbreviated version is available for free currently.  I don't think that 2020 is freely available yet. Full version of 2018 can be found for free. 

tropic_of_Username007

There are 2 questions that affect what is a sensible draw rate to use. Do you expect to have little or nothing other than however much you can draw from investing this £700,000 to support you for the rest of your life? And do you want the amount you draw to be reliable, or are you prepared to flex it up or (especially) down depending on how investment returns are going?

Drawing 4% initally might work out, with a little luck from favourable investment returns. But if you're not so lucky, could you drop down to drawing only 2% instead? Or, are you likely to have some earned income in addition, even if isn't very regular?

If you require a pretty bullet-proof draw rate, rising with inflation through thick and thin, then you need to start by drawing a relatively low percentage. With more flexibility, or other likely sources of income, you could be a little more ambitious.

I am nearly 50, and am projecting drawing about 3% from investments (which are about 75% in equities), but I could spend less than that if necessary.

Username999

sixpence. said:

Okay so do people agree with Dunstonh that 2.5% (with costs and inflation covered) is a realistic figure? 
 

No, 2.5% is picked out of thin air. It could easily be negative.
(I was quoted 18% in the 1980's)

sixpence.

tropic_of_Username007 said:

There are 2 questions that affect what is a sensible draw rate to use. Do you expect to have little or nothing other than however much you can draw from investing this £700,000 to support you for the rest of your life? And do you want the amount you draw to be reliable, or are you prepared to flex it up or (especially) down depending on how investment returns are going?

Drawing 4% initally might work out, with a little luck from favourable investment returns. But if you're not so lucky, could you drop down to drawing only 2% instead? Or, are you likely to have some earned income in addition, even if isn't very regular?

If you require a pretty bullet-proof draw rate, rising with inflation through thick and thin, then you need to start by drawing a relatively low percentage. With more flexibility, or other likely sources of income, you could be a little more ambitious.

I am nearly 50, and am projecting drawing about 3% from investments (which are about 75% in equities), but I could spend less than that if necessary.

Yes I was not very specific because didn't want to go into it too much. For various personal reasons, I wasn't able to work in my twenties and therefore don't have an established career now. I work now part-time in the public sector (so it's not too well paid and probably won't ever be). My plan is to do a masters and work part-time to try and get a better paid job that I find fulfilling in the future.

It would frankly be great if I knew that I could live on this money. I am also planning to have kids one day so want to supplement what I earn. But people seem to be saying not to bank on living on this investment (excuse the pun)...

dunstonh

Username999 said:

sixpence. said:

Okay so do people agree with Dunstonh that 2.5% (with costs and inflation covered) is a realistic figure? 
 

No, 2.5% is picked out of thin air. It could easily be negative.
(I was quoted 18% in the 1980's)

It clearly wasn't picked out of thin air as I gave my breakdown on how I came to that figure.   However, like any projection, it is synthetic as it uses assumptions.   It is almost certain that the end result will not be the same as the synthetic projection.  However, it is the best you can do and far better than picking figures out of thin air.

However, you are correct that the figures used in the 80s were much higher.  Very broadly speaking, 10 year investment plans used to return 4 times what was paid in.  Then that fell to three times.   Then it fell to double.  If you get double today, then you are happy but the trend over the last 40 years is that investment returns have been falling.

Alexland

£700k might sound a lot but with current rates of return it's really not enough to give up work at age 30 when you expect kids. We are in our 30s with young kids, a mostly paid family house, a similar S&S investment valuation (in pensions and ISAs) and still have a couple of decades of work ahead. Maybe less if I can keep earning good money a bit longer.

Still we want to build an extension, go on a few nice holidays, help our kids through university and with house deposits. It all adds up.

sixpence.

Alexland said:

£700k might sound a lot but with current rates of return it's really not enough to give up work at age 30 when you expect kids. We are in our 30s with young kids, a mostly paid family house, a similar S&S investment valuation (in pensions and ISAs) and still have a couple of decades of work ahead. Maybe less if I can keep earning good money a bit longer.

Yeah I hear what you're saying. I just want to be clear that my goal isn't to give up work but to get the best possible return I can (within my risk level) to supplement my income. I don't want to sound feckless lol 

Alexland

In which case consider accepting more volatility (circa 40% weighting to bonds is a drag, 20% might be more normal at your age), not drawing income and making good use of S&S tax wrappers such as Lifetime ISA and Pensions.

LHW99

sixpence. said:

tropic_of_Username007 said:

There are 2 questions that affect what is a sensible draw rate to use. Do you expect to have little or nothing other than however much you can draw from investing this £700,000 to support you for the rest of your life? And do you want the amount you draw to be reliable, or are you prepared to flex it up or (especially) down depending on how investment returns are going?

Drawing 4% initally might work out, with a little luck from favourable investment returns. But if you're not so lucky, could you drop down to drawing only 2% instead? Or, are you likely to have some earned income in addition, even if isn't very regular?

If you require a pretty bullet-proof draw rate, rising with inflation through thick and thin, then you need to start by drawing a relatively low percentage. With more flexibility, or other likely sources of income, you could be a little more ambitious.

I am nearly 50, and am projecting drawing about 3% from investments (which are about 75% in equities), but I could spend less than that if necessary.

Yes I was not very specific because didn't want to go into it too much. For various personal reasons, I wasn't able to work in my twenties and therefore don't have an established career now. I work now part-time in the public sector (so it's not too well paid and probably won't ever be). My plan is to do a masters and work part-time to try and get a better paid job that I find fulfilling in the future.

It would frankly be great if I knew that I could live on this money. I am also planning to have kids one day so want to supplement what I earn. But people seem to be saying not to bank on living on this investment (excuse the pun)...

Rethe bolded part - are you in therelevant pension scheme? If not its worth seeing if you can join, because that will give you some income in addition to state pension in future, and could perhaps be taken at a reduced level before state pension age. Also, do you earn enough to ensure you get a year of NI paid / credited per year of work?