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Best draw-down strategy: Growth or Income Portfolio?

Steve_s1
Posts: 33 Forumite

Hi all,
I'm close to retirement and in the process of transferring my workplace pension from Scottish Widows to Interactive Investor (better customer service / lower fees). The pot is worth about £520k. I'm wondering how to build my portfolio once the money lands in my SIPP.
As I understand, if I go for an income strategy (due to the nature of the companies that pay dividends) there should be less volatility than a pure growth porfolio. Another option is a blend of growth and income. I'm also planning to hold maybe 5% in a money fund, Lyxor Smart Overnigh Return (CSH2) and 5% in a physical gold ETF. Not sure about bonds....I'm still nervous after their bad performance in recent years.
Any thoughts?
Thanks
I'm close to retirement and in the process of transferring my workplace pension from Scottish Widows to Interactive Investor (better customer service / lower fees). The pot is worth about £520k. I'm wondering how to build my portfolio once the money lands in my SIPP.
As I understand, if I go for an income strategy (due to the nature of the companies that pay dividends) there should be less volatility than a pure growth porfolio. Another option is a blend of growth and income. I'm also planning to hold maybe 5% in a money fund, Lyxor Smart Overnigh Return (CSH2) and 5% in a physical gold ETF. Not sure about bonds....I'm still nervous after their bad performance in recent years.
Any thoughts?
Thanks
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Comments
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Go and watch pensioncraft if you haven't already. Ramin does a (somewhat sensational at points) piece on the "dividend trap" and why "total return" (capital growth + dividends) is a better and safer philosophy for most people much of the time both in accumulation and for retirees vs focusing on pure income / "high dividend funds" and choosing on historic dividend yield. These can include the desparate dogs as well as the reliable old consumer goods staples with great histories of paying and increasing the dividend. Dividends are optional to pay and can just vanish at a point of crisis in liquidity. And old zombie dogs that lived too long on low cost debt can die creating capital losses. So speculative risk from a high dividend focus fund can be excessive.
Also given different countries have very different cultures on dividend vs share buyback I don't find much to fault with the core point for the globallly focused pension investor.
This has nothing to do with acc vs inc on fund unit types - same return for vanguard developed world equities whether you let the dividends come to cash for some of th income in drawdown or let them roll up in acc units. And sell units at whatever frequency for cash for income.
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Thanks for the feedback. I'm familiar with pensioncraft so I'll go and see what Ramin has to say on this. Cheers!0
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As I understand, if I go for an income strategy (due to the nature of the companies that pay dividends) there should be less volatility than a pure growth porfolio.High yielding companies tend to mean you have a UK bias and are investing more in older industries (energy and financial)
The first decade of the millenium saw income as the best option. The second decade saw growth as the best option. More recently it has been income but its too early to say if thats longer term and only hindsight will tell.I'm also planning to hold maybe 5% in a money fund,Is that because you are drawing out a very small amount (i.e. less than 5% over 3 years)?
you haven't mentioned your income draw rate. So, its unclear as to why you need such a high equity ratio.Not sure about bonds....I'm still nervous after their bad performance in recent years.And how nervous are you going to be when the stockmarket suffers a 40-50% loss?
I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.3 -
As in all such investment questions, in my view the optimal answer is both, in this case growth and income. You need the greater stability of income funds and the potential for matching/exceeding inflation provided by growth funds. I find the "Total Growth" mantra somewhat misleading since it can be taken as focusing on maximum growth at maximum risk which will cause someone needing ongoing income to meet basic expenditure serious stress when the inevitable major crash occurs.
My guiding principle is sufficient steady income in the long term at minimum risk. That needs an appropriately balanced portfolio.1 -
If you had some firm idea, I won’t call it a delusion, that a growth or an income portfolio approach would be better, I don’t think it matters so much which you choose as long as you keep the fees low and are well diversified. An income focused investment trust charging 0.6%/year with 50 carefully chosen dividend shares, not for me thanks.
An income portfolio, if it has less volatility is good (insert your own reasons here), but you need growth to overcome inflation and spending, and you’re forgoing some growth by choosing income. How do you choose the optimal in that framework? Just hold both.
5% physical gold? Yes, but a lot of buts….Gold in a crisis is for bribing your way across national borders, but your ETF won’t give you that option. Gold in a non-life threatening financial crisis: is £26000 going to make sufficient difference, maybe? Gold as an investment: a gold bar pays no interest, and doesn’t grow a tiny bit each year (or shrink in bad years).
Bad performance of bonds? It’s a dream to hold different assets that always only reward you. A diverse portfolio, offering a bit of protection against this storm or that crisis, will often have some assets doing well and others doing poorly. Does that help?
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If means allow it's probably worth not to overthink it and keep time and effort spent on pension planning and administration to a minimum. Here's how a few years back I put together an income/growth strategy along very pragmatic lines for an elderly relative: their risk appetite was very low so it was out of the question to plan out drawdowns from a growth portfolio. So we started the other way around: what they regarded as their minimum monthly spend. We built up to that by gradually putting together a diversified income portfolio: bank the state pension, add a small rental portfolio, a couple high dividend ETFs, and keep some in yield generating cash to be prepared for onset of care costs (half MMF, half fixed interest). Whatever was left after hitting the income target we threw into a S&P500 ETF, to aide with capital preservation. Has been doing what it says on the tin ever since, with quite tolerable income fluctuation across the economic cycle. Admittedly though, the relative has always lived a pretty frugal life so the income target was easily achievable with this somewhat haphazard approach.1
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THis may be an interesting thread OP, if you haven't already seen it:
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Great feedback all - thanks.
I'm tending to think the best way forward is a diversified approach. The growth funds are mostly tech / US heavy whereas the income funds tend to be different sectors.
I like the "3 bucket" strategy described in the above link, with (1) Cash / bonds, (2) income funds and (3) growth funds, where you draw-down from (1) and top-up from (2) and (3).0 -
Sounds good on paper, but be aware that there might then be little difference to selling directly from bucket 3 to fund your withdrawal........pretty much the opposite of the bucket strategy's main aim.1
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MK62 said:Sounds good on paper, but be aware that there might then be little difference to selling directly from bucket 3 to fund your withdrawal........pretty much the opposite of the bucket strategy's main aim.1
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