How would you plan to create a 'passive income'?

solidpro

Here we are in 2021. I've got a question to other readers of this forum. If you had to make a 10 year plan starting today, lets say you know you'll have £100k a year "working income" to 'set aside' somehow, what would you do with it to have the best passive income in 2031, when you retire and lose that income?

I used to think spending £100k deposits on £250k BTL on 10-20 year mortgages and then using the rent to pay down the expenses and mortgages would mean that in 10 years time you could own 10 properties outright and live off the rent with enough to pay other companies to manage the properies whilst taking home £5k-£10k a month....with the bonus of selling 1 property off every few years as you get closer to the light, so you can spend £250k + value increase on cocaine and prostitutes or donkey sanctuaries....is that la la land now?

To keep things simple, lets say you're 10 years away from taking a pension income, freeing up the choices between B&M, ISA, Pension.....and that you already own your own home.

NedS

Whatever plan you go with, I would suggest a greater degree of diversification than betting it all on BTLs may be wise.

With £100k a year at your disposal, I'd certainly max out pensions (£40k) and ISAs (£20k) before considering what to do with the remaining £40k.

Linton

Dont look at it as a 10-year task but rather as an investment program that could last the rest of your life.  At the start you will be re-investing the proceeds, later on you will be withdrawing them, but that is a secondary detail.

The key question: how much income do you want?  The higher the desired retirement income the more investment risk you will need to take and therefore the greater chance you wont achieve it.  I suggest you aim for meeting your actual requirements at minimum risk rather than going for the maximum possible income.  

As NedS implies, tax should be a major consideration, especially with the amount of money you are proposing.   The government gives extremely good tax breaks for those people who chose to use financial investments such as shares and bonds either directly or through funds.  In my view that is where you should be investing.

If you go down that strategy you will need to decide which shares, bonds and funds.  It will mainly depend on the level of risk you choose to take, hence the question.

solidpro

No predefined income requirement in 10 years, just what could it be.... with £1m over 10 years without the silly risks of putting it all on black.

If you invested £33k per year into pensions with S&S medium/high risk strategy over 10 years, with a guess you could end up averaging out with 5% per year interest over that 10 years, I guestimate you'd end up with circa £500k in your PIP...

When you flip accumulation pension investments to income investments, and allowing for losing the current 2% inflation each year, what do you typically expect to make with low risk investments with £500k in a PIP?

thickasabrick

solidpro said:

Here we are in 2021. I've got a question to other readers of this forum. If you had to make a 10 year plan starting today, lets say you know you'll have £100k a year "working income" to 'set aside' somehow, what would you do with it to have the best passive income in 2031, when you retire and lose that income?

I used to think spending £100k deposits on £250k BTL on 10-20 year mortgages and then using the rent to pay down the expenses and mortgages would mean that in 10 years time you could own 10 properties outright and live off the rent with enough to pay other companies to manage the properies whilst taking home £5k-£10k a month....with the bonus of selling 1 property off every few years as you get closer to the light, so you can spend £250k + value increase on cocaine and prostitutes or donkey sanctuaries....is that la la land now?

To keep things simple, lets say you're 10 years away from taking a pension income, freeing up the choices between B&M, ISA, Pension.....and that you already own your own home.

Might be worth the additional risk for the leverage. Although John Williams shadowstats is suggesting inflation is running much higher than official stats and that's likely to filter through to mortgage rates. US stats so may not be as relevant to the UK.

Also there is the additional overhead of managing properties compared to a stock market style portfolio. Particularly if you want to use tax efficient wrappers like ISA and pension.

Keeping things even simpler, low cost world equity tracker...
Four Pillar Freedom's "The Million Dollar Age Grid" suggests you'll hit a million pounds easily in 10 years investing £100k a year in "normal" linvestments. Although it is assuming 7% growth.
Compound interest calculation with £8330 per month invested over 10 years at 7% will result in something like £1.3 million.

Linton

solidpro said:

No predefined income requirement in 10 years, just what could it be.... with £1m over 10 years without the silly risks of putting it all on black.

If you invested £33k per year into pensions with S&S medium/high risk strategy over 10 years, with a guess you could end up averaging out with 5% per year interest over that 10 years, I guestimate you'd end up with circa £500k in your PIP...

When you flip accumulation pension investments to income investments, and allowing for losing the current 2% inflation each year, what do you typically expect to make with low risk investments with £500k in a PIP?

The usual rule of thumb used on this forum is that an annual income of around 3.5% of initial pot size increasing with inflation is sustainable, so for £500K that is £17.5K/year.  Historically this would have worked out though of course there are no guarantees as to the future.

But you would not be using particularly low risk investments as they would leave you open to the risk of not keeping up with inflation.  Better to have a range of investments some of which would be moderately high risk.  You may then wish to maintain a cash buffer of say £50K to enable you to take an income during a crash when you would not want to eat into the core investments that you need to produce future returns.

By "PIP", I assume you mean "SIPP", self invested personal pension.  Though an S&S ISA is nearly as good from a tax point of view and the range of investments are the same for most practical purposes.

dunstonh

When you flip accumulation pension investments to income investments, and allowing for losing the current 2% inflation each year, what do you typically expect to make with low risk investments with £500k in a PIP?

Nowadays, more people have moved away from yield to total return.  So, no need to flip accumulation units. Just go with inc units to begin with.

Not sure what a PIP is.  I am guessing it is something to do with pensions. PPP, SHP and SIPP are the three usual abbreviations for the three main pension types (or AE for auto-enrolment schemes).

What do you mean by low risk investments? Context is needed as one person's low risk is another person's high risk.

DireEmblem

If you are 10 years away from pension age, and have 100k after tax/NI, then pension must almost 100% be the way to go.

The tax relief alone is probably worth it.

This must be a hypothetical question thread surely?

NedS

solidpro said:

lets say you know you'll have £100k a year "working income" to 'set aside'

Please can you clarify what you mean by "working income". Is this income from employment? Any pension contributions must be covered by relevant earnings from employment (and are also subject to the £40k per year Annual Allowance limit)

bostonerimus

I had a 10 year plan to create a retirement income portfolio. Here's what I did.

1) I took a job with a DB pension.
2) I aggressively paid down the mortgage on my house and a rental property.
3) I used all the tax advantaged investments I could and put the money into a bond and equity tracker portfolio.
4) I made sure I had no high interest debt and went over my budget to understand my spending and make savings.

As you can see half of my strategies are not about producing income, they are about lowering my need for income.

The result was that I retired at 54 and the DB pension and rental now provide $40k/year which is more than enough for me to live on. This income is largely decoupled from the stock market so I can stay aggressive with my investments. I now have a mid seven figure index tracker portfolio that I don't actively manage that has seen significant growth over the last few years. It produces a passive income of between 2% and 3% mostly from large cap dividends. I reinvest some of it and the rest is given to charity and my nieces. In a few years, US social security and UK state pension will generate another $40k.

I think the key is to have diverse income sources that can take you through bad times.  As an example during Covid my tenant wasn't able to work so I cut her rent in half for a few months so she was able to afford it on unemployment. I could afford to do that because of the DB pension and my other investments.

csgohan4

bostonerimus said:

I had a 10 year plan to create a retirement income portfolio. Here's what I did.

1) I took a job with a DB pension.
2) I aggressively paid down the mortgage on my house and a rental property.
3) I used all the tax advantaged investments I could and put the money into a bond and equity tracker portfolio.
4) I made sure I had no high interest debt and went over my budget to understand my spending and make savings.

As you can see half of my strategies are not about producing income, they are about lowering my need for income.

The result was that I retired at 54 and the DB pension and rental now provide $40k/year which is more than enough for me to live on. This income is largely decoupled from the stock market so I can stay aggressive with my investments. I now have a mid seven figure index tracker portfolio that I don't actively manage that has seen significant growth over the last few years. It produces a passive income of between 2% and 3% mostly from large cap dividends. I reinvest some of it and the rest is given to charity and my nieces. In a few years, US social security and UK state pension will generate another $40k.

I think the key is to have diverse income sources that can take you through bad times.  As an example during Covid my tenant wasn't able to work so I cut her rent in half for a few months so she was able to afford it on unemployment. I could afford to do that because of the DB pension and my other investments.

Never all eggs in one basket is a good example you have, Spread your investments and hammer that debt where needed. 

Some people on her chose to have I/O mortgage as their investments made more than the interest lost to the lender is another extreme. 

Personal preference but good to diversify income


How do you split your pension? In terms of Wp, Income, growth ?