Retirement Investing - Less Risky Bets

Linton

NannaH said:

 
6.5% yields aren’t possible, are they?  

Is a 3% yield a realistic figure,  after charges and inflation?   

Any recommendations for income funds?    

The initial withdrawal rate with be  around 6% (I’m assuming £80k pot but hopefully it will grow),  so a 3% yield would produce half the necessary income. 

 The one inc. fund we have currently yields 1.62% - VLS80 and is £25k at the moment, 30% of the Sipp.  Yield income stays in cash to pay the Sipp charges of approx 0.6% combined. 

 A 6.5% yield is barely achievable with specialist income funds and may be linked with a decrease or sub-inflation increase in the capital value. 
 
The one example where a higher dividend is available  (or has been for the past few years) is European Assets Trust which is actually a growth fund but is run with the objective of providing a 7% yield.  Note that unlike OEIC/UTs IT dividends need not have any connection at all with the dividends they receive from their underlying investments.

I aim for 5.5-6% yield for my income portfolio.  But I do have a growth portfolio in the background to ensure the income remains inflation linked.  Though a top up has not yet been necessary.

A 6% of of initial pot withdrawal rate increasing with inflation whether by dividend/interest or selling of growth is considered unlikely to be sustainable in the long term

Thrugelmir

Linton said:

NannaH said:

 
6.5% yields aren’t possible, are they?  

Is a 3% yield a realistic figure,  after charges and inflation?   

Any recommendations for income funds?    

The initial withdrawal rate with be  around 6% (I’m assuming £80k pot but hopefully it will grow),  so a 3% yield would produce half the necessary income. 

 The one inc. fund we have currently yields 1.62% - VLS80 and is £25k at the moment, 30% of the Sipp.  Yield income stays in cash to pay the Sipp charges of approx 0.6% combined. 

 
The one example where a higher dividend is available  (or has been for the past few years) is European Assets Trust which is actually a growth fund but is run with the objective of providing a 7% yield. 

The dividend is sustained by the trust distributing capital reserves , i.e. by liquidating and selling investments held. In essence investors are being returned part of their capital investment. 

Linton

Thrugelmir said:

Linton said:

NannaH said:

 
6.5% yields aren’t possible, are they?  

Is a 3% yield a realistic figure,  after charges and inflation?   

Any recommendations for income funds?    

The initial withdrawal rate with be  around 6% (I’m assuming £80k pot but hopefully it will grow),  so a 3% yield would produce half the necessary income. 

 The one inc. fund we have currently yields 1.62% - VLS80 and is £25k at the moment, 30% of the Sipp.  Yield income stays in cash to pay the Sipp charges of approx 0.6% combined. 

 
The one example where a higher dividend is available  (or has been for the past few years) is European Assets Trust which is actually a growth fund but is run with the objective of providing a 7% yield. 

The dividend is sustained by the trust distributing capital reserves , i.e. by liquidating and selling investments held. In essence investors are being returned part of their capital investment. 

Exactly thouigh I guess as the 7% yield is a stated objective this may influence the choice of underlying investments.  Getting the money through dividends and paying the manager to do the selling means that the transfer to my current account can be completely automated.  One of my objectives is that ongoing income should just turn up with no effort on my part.

NannaH

The 6% is only for the 1st 4 years until full SP x 2 kicks in.
It will then drop down to sub 3% of approx £4k. 

The whole £80k Sipp could be drained in theory as  DC pension 2 will be used from age 67 but the plan is to take enough to use his full personal allowance + married allowance yearly, DB will be iro £5500, so £8k drawdown x 4 years,  possibly 5 if he can retire at 62.  So max £40k out of pension 1. 

DB commences at 60 and will go into a cash Sipp for 2 years to add to savings of £60k

We will use £10k of savings x 4 or 5 years. 

Thrugelmir

Linton said:

Thrugelmir said:

Linton said:

NannaH said:

 
6.5% yields aren’t possible, are they?  

Is a 3% yield a realistic figure,  after charges and inflation?   

Any recommendations for income funds?    

The initial withdrawal rate with be  around 6% (I’m assuming £80k pot but hopefully it will grow),  so a 3% yield would produce half the necessary income. 

 The one inc. fund we have currently yields 1.62% - VLS80 and is £25k at the moment, 30% of the Sipp.  Yield income stays in cash to pay the Sipp charges of approx 0.6% combined. 

 
The one example where a higher dividend is available  (or has been for the past few years) is European Assets Trust which is actually a growth fund but is run with the objective of providing a 7% yield. 

The dividend is sustained by the trust distributing capital reserves , i.e. by liquidating and selling investments held. In essence investors are being returned part of their capital investment. 

Exactly thouigh I guess as the 7% yield is a stated objective this may influence the choice of underlying investments.  Getting the money through dividends and paying the manager to do the selling means that the transfer to my current account can be completely automated.  One of my objectives is that ongoing income should just turn up with no effort on my part.

Only more recently has it been possible for the investment managers to distribute capital reserves as well as income reserves. Some IT boards use the ability to do so as a means of controlling the share price discount. Recall a while back that EAT often traded at a sizable discount to NAV. 

Audaxer

Linton said:

NannaH said:

 
6.5% yields aren’t possible, are they?  

Is a 3% yield a realistic figure,  after charges and inflation?   

Any recommendations for income funds?    

The initial withdrawal rate with be  around 6% (I’m assuming £80k pot but hopefully it will grow),  so a 3% yield would produce half the necessary income. 

 The one inc. fund we have currently yields 1.62% - VLS80 and is £25k at the moment, 30% of the Sipp.  Yield income stays in cash to pay the Sipp charges of approx 0.6% combined. 

I aim for 5.5-6% yield for my income portfolio.  But I do have a growth portfolio in the background to ensure the income remains inflation linked.  Though a top up has not yet been necessary.

A 6% of of initial pot withdrawal rate increasing with inflation whether by dividend/interest or selling of growth is considered unlikely to be sustainable in the long term

@Linton as you are getting a 5.5% to 6% yield from your income portfolio without needing a top-up, it sounds like it is sustainable? That surprises me as I thought overall portfolio income had to be around the 3.5% to 4% level, in line with the SWR often quoted, to be sustainable over the long term?

Linton

Audaxer said:

Linton said:

NannaH said:

 
6.5% yields aren’t possible, are they?  

Is a 3% yield a realistic figure,  after charges and inflation?   

Any recommendations for income funds?    

The initial withdrawal rate with be  around 6% (I’m assuming £80k pot but hopefully it will grow),  so a 3% yield would produce half the necessary income. 

 The one inc. fund we have currently yields 1.62% - VLS80 and is £25k at the moment, 30% of the Sipp.  Yield income stays in cash to pay the Sipp charges of approx 0.6% combined. 

I aim for 5.5-6% yield for my income portfolio.  But I do have a growth portfolio in the background to ensure the income remains inflation linked.  Though a top up has not yet been necessary.

A 6% of of initial pot withdrawal rate increasing with inflation whether by dividend/interest or selling of growth is considered unlikely to be sustainable in the long term

@Linton as you are getting a 5.5% to 6% yield from your income portfolio without needing a top-up, it sounds like it is sustainable? That surprises me as I thought overall portfolio income had to be around the 3.5% to 4% level, in line with the SWR often quoted, to be sustainable over the long term?

SWR is based on the historically worst case scenarios of crashes.  Under most circumstances it is likely to be very pessimistic. IIRC many simulated outcomes show the portfolio larger at death than at the start of retirement.  I dont like SWR and dont use it as a basis for ongoing drawdown.  Though I accept it may be useful for determining the appropriate pot size prior to retirement.

My experience has been that since the Great Crash with 6% dividends/interest capital appreciation has been fairly low as the value investments that normally produce income have performed much less well than growth investments. But inflation has been low and my personal inflation has been lower than CPI.  So the Income portfolio has done its job with no intervention beyond internal adjustment of asset allocation.

To help ensure that inflation isnt a problem in the future I maintain a portfolio of higher risk equity which should over the long term significantly exceed inflation.  Put the two portfolios together and the % drawdown from income is less than 3%. But the growth portfolio does have other jobs to do such as producing lump sum drawdowns and maintaining the cash buffer.

Prism

Audaxer said:

Linton said:

NannaH said:

 
6.5% yields aren’t possible, are they?  

Is a 3% yield a realistic figure,  after charges and inflation?   

Any recommendations for income funds?    

The initial withdrawal rate with be  around 6% (I’m assuming £80k pot but hopefully it will grow),  so a 3% yield would produce half the necessary income. 

 The one inc. fund we have currently yields 1.62% - VLS80 and is £25k at the moment, 30% of the Sipp.  Yield income stays in cash to pay the Sipp charges of approx 0.6% combined. 

I aim for 5.5-6% yield for my income portfolio.  But I do have a growth portfolio in the background to ensure the income remains inflation linked.  Though a top up has not yet been necessary.

A 6% of of initial pot withdrawal rate increasing with inflation whether by dividend/interest or selling of growth is considered unlikely to be sustainable in the long term

@Linton as you are getting a 5.5% to 6% yield from your income portfolio without needing a top-up, it sounds like it is sustainable? That surprises me as I thought overall portfolio income had to be around the 3.5% to 4% level, in line with the SWR often quoted, to be sustainable over the long term?

The problem historically seems to occur if and when inflation kicks in. In the 70s the yield needed to be 7%+ to keep up with inflation and over 10% to keep up with cash. I think its telling that our dividend heroes trusts date back to this point with their yearly increases but I can't find a single one that survived through this high inflation, high interest rate time period. The Bengen SWR of 4% was based around this period too I think.

JohnWinder

However, with inflation heading toward maybe 5%, I feel that having £100k in cash, earning almost nothing in interest, is daft.

As always it's the magnitude of the issue that should be considered also. Have a look at these informative charts of different countries over different periods to see the inflation effect on cash savings....

'As you can see, while there are certainly a few times when cash lost money to inflation it actually provided a small return above inflation the vast majority of the time.  And lest you think this is an isolated phenomenon, it works this way in every country and currency and even holds up in times of very high inflation.'

https://portfoliocharts.com/2017/05/12/understanding-cash-will-make-you-a-better-and-happier-investor/

Langtang

JohnWinder said:

However, with inflation heading toward maybe 5%, I feel that having £100k in cash, earning almost nothing in interest, is daft.

As always it's the magnitude of the issue that should be considered also. Have a look at these informative charts of different countries over different periods to see the inflation effect on cash savings....

'As you can see, while there are certainly a few times when cash lost money to inflation it actually provided a small return above inflation the vast majority of the time.  And lest you think this is an isolated phenomenon, it works this way in every country and currency and even holds up in times of very high inflation.'

https://portfoliocharts.com/2017/05/12/understanding-cash-will-make-you-a-better-and-happier-investor/

Excellent read, thanks for posting. We do plan to have a cash buffer/emergency fund. This has strengthened my resolve to make it as large as I had initially planned.