How to calculate the worth of a fixed income product?

Linton

DT2001 said:

Linton said:

Can you explain compartmentalising assets for an objective or give an example as I am unsure of how the approach works. Thank you

Care fees: I do not use SWRs.  Instead  financial management is based on a year by year model assuming 3% inflation and 4% investment return.  The maximum steady ongoing inflation-linked annual expenditure is calculated to provide a fixed sum more than enough for a few years care home fees for both of us at the end of the plan period.  As long as our ongoing expenditure is below this maximum all is well.

As the maximum  expenditure from the plan has grown over time and is now much greater than actual I am derisking by moving excess returns from the Growth Portfolio into the Wealth Preservation/Cash portfolio.   Excess money in the WP/Cash portfolio is available for major extravagences.   My intention is to continue doing this as we get older.  There is no point in taking extra risk for more return than can be reasonably used in our lifetimes.  However should our expenditure approach the maximum then it may be necessary to move wealth the other way.

This nicely shows the advantages that having separate compartments, portfolios, tranches or whatever you want to call them, can bring. The allocation to growth can be reduced by a specified % and the money freed up used for other purposes.  In this case it was to increase the pool of relatively safe assets.  It could alternatively have been moved to the Income Portfolio to increase dividend/interest income by a known amount,  or of course some chosen mixture of the two.

At the other extreme adopting the view that the only investment decision one needs to make is the value of xx in VLSxx would have made this level of control much more difficult.  You simply dont get the number of levers you need to manage your investments to meet your needs.  The main lever would be to adjust expenditure, something I never want to be forced to do. 

Thank you for the explanation. The link you provided later on helped me better understand, I hope, the logic. I can see it's merits -


1)the purpose is achieving an income goal first and foremost with lower risk followed by wealth preservation/growth?

2) Just to check can you comment on the example below
number £50k
DB £20k  
Create à portfolio to produce an ongoing £30k + CPI assuming growth at say CPI + 1%
Balance in a portfolio to preserve/grow wealth
Then at SPA move funds from income/growth portfolio to wealth preservation portfolio.
You could also create a portfolio to utilise IHT relief via excess income.

3) Each pot has its own asset mix and has doesn’t influence any of the others?

4) Does this presume someone has a larger pot than they need at the start of retirement or is it an adjustment one makes if your income/growth pot exceeds expectations after a few years?

5)The OP doesn’t then need to place a value on any DB/SP just use MK62’s idea above?

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Costabit

MK62 said:

Costabit said:

I am having a bit of a mind block on this as am unsure how to include my fixed income products (final salary pension and state pension) in my overall asset allocation alongside SIPPs ISAs cash etc.

If I have a £10K per annum pension which I am drawing on now, with RPI increases and 2/3rds widow benefits, what £ figure could you allocate to this?

And the same with a full state pension which I will get in 4 years, what £ figure would you give this?

I realise that it is not a definite finite science but am really not getting how to calculate this, is there a way of doing it that anybody knows.

Grateful for any thoughts.

Back on topic........

Personally I wouldn't assign a fixed £ value, any more than I'd do that with a salary.

They are income streams.......use them to decide how much income you need to take from your other assets (SIPPs ISAs cash etc)

The  more I look at this, the more I think that the way to go, is to deduct the yearly fixed income from my yearly needs and structuring the rest of my assets to provide this need rather than using a made up figure to boost my non-equity total in my portfolio.

As you say @MK62 they are an income stream