High dividend yield income funds vs capital accumulation funds in retirement drawdown?

Millyonare

With monthly savers at 5% for 5 years, almost completely riskfree, that's where I'd be looking right now.

Dyor, etc.

tacpot12

I have my retirement portfolio mostly invested in income-producing ITs (and a few EFTs), with a couple of growth funds for long-term total return. My portfolio yeilded £15.3K (4.25% of the £360,000K) last year, and looks like it will improve on that figure this year. I've already had half the dividends I received last year, but only five months have  passed (I measure performance from my birthday at the end of May). I am happy not to have to sell assets at a loss to generate the income I need. I can live comfortably on the dividends. The portfolio was worth £405K just 12 months ago, so it has the potential for capital appreciation as well.

aroominyork

Audaxer said:

I've got some equity income funds and ITs as well as a couple of multi asset funds. I'm retired and feel much more relaxed about taking dividends as income during a loss year like this, than selling capital from multi asset funds or global growth funds that are showing a loss. 

But if your strategy is to sell units rather than take income, you should have enough outside of equities so that you do not - the golden rule - have to sell at a loss. A typical structure would be two years' income needs in cash, three years' income needs in bonds, and the rest in equities. When equities are up, sell them. When equities are down but bonds are up, sell bonds. When equities and bonds are both down, use cash. Rebalance annually.

Audaxer

aroominyork said:

Audaxer said:

I've got some equity income funds and ITs as well as a couple of multi asset funds. I'm retired and feel much more relaxed about taking dividends as income during a loss year like this, than selling capital from multi asset funds or global growth funds that are showing a loss. 

But if your strategy is to sell units rather than take income, you should have enough outside of equities so that you do not - the golden rule - have to sell at a loss. A typical structure would be two years' income needs in cash, three years' income needs in bonds, and the rest in equities. When equities are up, sell them. When equities are down but bonds are up, sell bonds. When equities and bonds are both down, use cash. Rebalance annually.

I agree, although some investors would argue it's better to be fully invested rather than hold a cash buffer. I would always want a cash buffer, but if I didn't have a cash buffer, I would rather rely on dividend-paying ITs and/or funds for income rather than having to sell capital. 

masonic

Audaxer said:

aroominyork said:

Audaxer said:

I've got some equity income funds and ITs as well as a couple of multi asset funds. I'm retired and feel much more relaxed about taking dividends as income during a loss year like this, than selling capital from multi asset funds or global growth funds that are showing a loss. 

But if your strategy is to sell units rather than take income, you should have enough outside of equities so that you do not - the golden rule - have to sell at a loss. A typical structure would be two years' income needs in cash, three years' income needs in bonds, and the rest in equities. When equities are up, sell them. When equities are down but bonds are up, sell bonds. When equities and bonds are both down, use cash. Rebalance annually.

I agree, although some investors would argue it's better to be fully invested rather than hold a cash buffer. I would always want a cash buffer, but if I didn't have a cash buffer, I would rather rely on dividend-paying ITs and/or funds for income rather than having to sell capital. 

I think the argument against bonds and cash is a weaker one now that we have come out of a period of historic low interest rates and cheap credit. Historically, it has been possible to get a real return from bonds, albeit income focused equities tended to deliver a somewhat higher real return with additional risk. 'Active cash' managed outside of tax wrappers also tends to generate above inflation returns more often than not - it is cash trapped within investment vehicles that is to be avoided. The Linton philosophy of considering a blend of these assets seems a very good approach to take. You can then decide based on your own risk tolerance and circumstances which building blocks to use and in which proportions.

NedS

Audaxer said:

aroominyork said:

Audaxer said:

I've got some equity income funds and ITs as well as a couple of multi asset funds. I'm retired and feel much more relaxed about taking dividends as income during a loss year like this, than selling capital from multi asset funds or global growth funds that are showing a loss. 

But if your strategy is to sell units rather than take income, you should have enough outside of equities so that you do not - the golden rule - have to sell at a loss. A typical structure would be two years' income needs in cash, three years' income needs in bonds, and the rest in equities. When equities are up, sell them. When equities are down but bonds are up, sell bonds. When equities and bonds are both down, use cash. Rebalance annually.

I agree, although some investors would argue it's better to be fully invested rather than hold a cash buffer. I would always want a cash buffer, but if I didn't have a cash buffer, I would rather rely on dividend-paying ITs and/or funds for income rather than having to sell capital. 

That's kinda were I am coming from, having a DC pot that really needs to cover a 10 year period between early retirement and DB/SP. If I keep 5 years in cash / near cash - it's a large chunk of the portfolio that is acting as a massive drag. I appreciate things changed very recently, and a few weeks back 4-5% was available on gilts, which wasn't the case when I opted for an income-based solution.
I could just have put the whole 10 years worth in cash / gilts /WP funds, and the remainder in a growth bucket much as Linton has done, and that is probably what I will eventually end up doing / moving towards, as we get closer to DB/SP age (the DC pots will hopefully end up as inheritance with the house earmarked for care home costs if required).

Sea_Shell

All our investments are still in ACC funds.   Even the drawdown pension bit.

We just sell fewer units to achieve £x than we'd have to if they were INC but isn't it as broad as it's long at the end of the day?

Kim1965

So are we saying there is less need for a cash buffer in an income/dividend portfolio to guard against sequence of return risk? 

JohnWinder

Before five people answer five different questions, although that can be interesting, what is an ‘income/dividend portfolio’ and what are we comparing it with for ‘less need ……’?

NedS

Kim1965 said:

So are we saying there is less need for a cash buffer in an income/dividend portfolio to guard against sequence of return risk? 

Looking at it simplistically, if the purpose of a cash buffer is to avoid having to sell any assets in a downturn for X years, then if you have no income producing assets, you would need to hold the full amount in cash to achieve that objective. If you have some income producing assets, you can reduce the amount of cash you hold accordingly to achieve the same goal. If your assets produce enough income such that you never need to sell any assets, the need to hold cash to avoid selling assets is completely diminished, but there may now be a new set of risks to consider such as drops in dividend income etc.