Should you switch from accumulation to income funds when decumulating?

JohnWinder

'In other words there is no free lunch?  To follow Liniton's approach in the end you need a bigger starting fund as a fund that yields 6% year on year is unlikely to grow much in capital terms and might actually shrink.'

Diversification is said to be the only free lunch, so 'no' I guess. I don't know how big a starting fund you need for the '6%/year dividend' approach we're discussing, someone else might. And I wouldn't say it's necessarily the wrong approach, but I can't see that it's assured protection against bad times. If it constrains you to owning higher expense funds like 'wealth preservation' funds it seems a second rate choice to me; and if that also means needing funds which have no useful benchmark against which to evaluate their performance, then I'm further dissuaded. Furthermore, REITS if unlisted should bring better returns for the liquidity you give up, but you have to be content with funds that can freeze redemptions during bad times, and have questionable values since assets which infrequently trade can be priced to suit whoever is pricing them. While REITS that are listed on a stock exchange are liquid, but they're just another segment of the whole market like miners or industrials, and why over-represent one sector of the market in an otherwise market weighted portfolio? You'd have to imagine REITS would be better than other sectors, and anything but a huge holding of REITS would increase your returns very little.

Shimrod

JohnWinder said:

'In other words there is no free lunch?  To follow Liniton's approach in the end you need a bigger starting fund as a fund that yields 6% year on year is unlikely to grow much in capital terms and might actually shrink.'

Diversification is said to be the only free lunch, so 'no' I guess. I don't know how big a starting fund you need for the '6%/year dividend' approach we're discussing, someone else might. And I wouldn't say it's necessarily the wrong approach, but I can't see that it's assured protection against bad times. If it constrains you to owning higher expense funds like 'wealth preservation' funds it seems a second rate choice to me; and if that also means needing funds which have no useful benchmark against which to evaluate their performance, then I'm further dissuaded. Furthermore, REITS if unlisted should bring better returns for the liquidity you give up, but you have to be content with funds that can freeze redemptions during bad times, and have questionable values since assets which infrequently trade can be priced to suit whoever is pricing them.

Investing for income is something I've also been considering so this I've found this conversation interesting. I do have some income investments within my ISA, but the bulk of investments are within pensions that are all ACC funds - as the pensions don't allow for income units.

If the aim is to try and reduce the need to sell units in a downturn, is investing in income units of growth funds a halfway house? The income will be much lower (around 1%) - but you are still hopefully seeing a reasonable growth in the fund as well. The income can still give a breathing space to allow for spending adjustment if required without the need to sell units.

Ideally of course we'd all have enough money we could completely derisk into gilts (or annuity) and not have to worry about anything.

gm0

To the original question.  I consider inc units rather than acc a harmless convenience in deaccumulation to partly refill the income (and sequence risk buffer) between rebalancings. 

And so on platforms (I already use) where fund screening turns up valid choices for these - I use them.  But I don't bend the asset allocation or the approach much in order to get them.  I view it as a secondary consideration.


On the 2nd point - the specific targeting of high yield / dividend focus funds / high yield. 

I find this much less convincing as an approach.  I could be convinced by a carefully constructed Buffett type of company stock screening around "well run companies with strong brands making something consumers will always need".  But mechanical passive tracking of which stocks in a country index are currently paying a high dividend perhaps during death throes as management and key stakeholders cash out - feels like something that could be passively filtering too many dog invesmtments out of the whole index into my portfolio.  This perspective while based on some reading and research is probably more instinctive than data driven.   As with all else in investing - adjust the assumptions and date range of the "test" and make the point you wish.

JohnWinder

'If the aim is to try and reduce the need to sell units in a downturn, is investing in income units of growth funds a halfway house? The income will be much lower (around 1%) - but you are still hopefully seeing a reasonable growth in the fund as well. The income can still give a breathing space to allow for spending adjustment if required without the need to sell units.'

I don't think you've bought the position I've been trying to put. Of course, take any position you wish, but if your view is because my explanations weren't clear I'll try again. Some background first.

You mention 'growth funds'.  You might mean funds intended to show more growth, by holding mostly equities or other similar assets like property rather than holding bonds or cash which are not growth assets (because cash doesn't grow in value nor do nominal bonds). But you might mean funds holding growth rather than value stocks; stocks can be/are classified as 'growth' (like Tesla) or 'value' (like Coca Cola which doesn't have great growth potential but certainly churn out the dividends). Growth stocks like FAANG and other acronyms have out-performed value stocks in recent years, but there are periods when value stocks do better. You can take a bet on either, but be prepared to hold your nerve during periods of under-performance, or you can just hold both in market proportions (the no-brainer, cheapest, safe option). When one reads more about the 'dividend fallacy' idea it starts to appear that the only reason to favour a dividend focussed policy in retirement (apart from any tax, convenience, paperwork etc reasons) would be because 'value' stocks are a good choice. But 'value' stocks are classified thus, not just by the dividend they pay; so you could find a stock paying 10% dividend because its price has fallen so low because investors correctly think it's on the ropes, not because its profits are so brilliant. If they were so brilliant, enough people would know, thus buy the stock, thus pushing up the price and pushing down the dividend yield.

Any other reason to choose a 'dividend' policy for retirement investing seems to ignore the reality that whether profits are handed out in dividends or profits are retained thus increasing the value of the company whose stock you then sell to fund your spending, it just doesn't matter to the returns an investor gets. https://www.evidenceinvestor.com/confusion-about-dividends/ 

Some people might take exception to the benefit or educational value found in that link, written by the same person behind the 'find an adviser' site some of us have been so worked up about recently. You can decide.