Investing 400k for income

fizio

I will resist the line 'asking for a friend' but I genuinely am... 
I am looking into how to invest 400k to generate a regular/secure-ish income from the stock market after a BTL exit so similar to replacing the rental income. The home of the money (and tax) are not really relevant (isa/pension/etc) so I am finding out about 'total income', high yield' etc type unit trusts, investment trusts and trackers - its a bit of a minefield with so many options and I haven't really found a useful guide to help navigate the options. On top of that, some recommend sticking with a global tracker and just selling units as and when needed for income but I am after a monthly income type investment. 
I am leaving out 'savings accounts' as interest rates are going down and some savings are already in place.
Forgot to say something around 4-5% return after fees would be a good result

Any pointers appreciated...

kempiejon

Do you mean a 5-6% income after fees or 6% total return after fees? A global tracker is a fairly good average return of perhaps 8-12% over the long term before fees. You might be able to find a fund that pays out about 4% monthly but most funds do not give monthly income distribution so you're limiting your investment choices. You're probably also limiting potential returns doing it that way
I have a system that basically sells once a year. I started with 2 years expected expenditure in a feeder account, I take 1/24th out each month. Each year I sell an amount equivalent to 1 year of expenditure plus inflation to top up. I can increase the monthly amount by inflation each year too.

fizio

My mistake I meant monthly 4-5% after fees and 5-6% total return. There does seem to be a debate over buying a selection of income investment trusts and buying a tracker and simply selling once a year - I ill keep investigating 

martinbainbridge1975

where to invest comes down to attitude to risk, there are accounts out there will pay 5-6% currently but for how long is questionable if the base rate starts to drop.

with that volume of capital I would seek professional advise.

kempiejon

You might find something here.
https://www.hl.co.uk/funds/help-choosing-funds/shortlists/seeking-retirement-income

Linton

4 key questions
1) For how long is the income needed?  The rest of their lives?
2) Does it need to match inflation?
3) Does 4-6% return mean 4-6% of initial pot (eg £20K/year ) or 4%-6% of whatever the pot happens to be at the time? So if the pot halves in size so does the income?
4) How old are they?

Some pointers off the top of my head
1) 4%-6% of initial pot rising with inflation lasting for the long term is almost certainly not possible. 3%-3.5%  is often quoted as reasonable.  Taking increasing amounts of money from a pot that is falling in value during a crash can eat into the core investments needed to generate future income.
2) Total return from equity (share) based investments (eg a global tracker), income funds of various types, an annuity or some mixture of these is possible.  Each has advantages and disadvantages. Which is chosen depends on the requirements and on your friends' ability to manage their portfolio.
3) Other than an annuity there are no guaranteed out-of-a-box, hands-off solutions.  Some understanding of investing will be required. With a £400K pot, if they dont have this understanding paying for advice from an IFA could be worthwhile.
4) If the solution has a very high % equity they must be prepared to ride a 40% fall in value in their pot once a decade or so without panicking and selling everything.

kempiejon

Linton said:

4) If the solution has a very high % equity they must be prepared to ride a 40% fall in value in their pot once a decade or so without panicking and selling everything.

A very good reminder. Those not used to investing need to get the mindset and it's difficult. That financial crisis hurt me to the tune of around 40% it was early in my investing lifetime. Covid knocked about 50% of my investment pot in value, the income it generated that year was down by 40%. I kept investing, picking up bargains and now the income and pot value are higher than ever.

eskbanker

martinbainbridge1975 said:

where to invest comes down to attitude to risk, there are accounts out there will pay 5-6% currently but for how long is questionable if the base rate starts to drop.

OP already discounted savings accounts:

fizio said:

I am leaving out 'savings accounts' as interest rates are going down and some savings are already in place.

fizio

Appreciate the feedback and some additional info
- person involved is mid 50's and has no workplace pension so relying on state pension in the future.
- has other savings in ISA/bank/premium/bonds approx 200k
- The BTL property  is returning 2.9% after agents fees but exc all other costs like repairs/tax/etc
- I'm ignoring inflation at the moment 
Basically he is looking to get a better return (and less risk) than BTL - especially with current and incoming govt's attitude towards landlords when it comes to tax and regulations - also long term capital growth is not as important to him as income. 
It may well make sense to put more in a savings account while interest rates are high but thats likely to be a year or 2 I reckon. Ideally the income taken will leave the principle sum around the same but drawdown is an option.

I am reasonably familiar with investing in both stocks and BTL but never really looked at either as an essential income stream due to having a DB pension, so I am getting myself educated on this aspect to get a better understanding of the options. 

Thanks 

fizio

kempiejon said:

You might find something here.
https://www.hl.co.uk/funds/help-choosing-funds/shortlists/seeking-retirement-income

very useful information so thanks 

tacpot12

In my experince, you can expect to easily get about 4% return (after fees) if you invest in funds pay dividends and about 6% (after fees) if you invest in a funds that automatically reinvest their dividends. However, there will be more volatility with the funds that automatically reinvest their dividends.

I choose to invest about 90% of my retirement fund in funds that pay dividends, and 10% in fund that automatically reinvest their dividends. When the latter of these do well, I sell a few percent to buy more of the funds that pay dividends, so that my income keeps pace with inflation. It's one method, and almost certainly not optimal, but I'm happy with it and it's my money and my life that are affected.

You could, if your friend wants to try both approaches, invest 50% of their assets to produce a dividend stream and 50% to grow (but be sold along the way), and then review how things have done after 7 years. This should be long enough to see if there is a material advantage (for them) of one approach over the other; which might depend on the particular funds that are selected. If the arrangement has worked well, you don't need to change anything, but if one half of the experiment has done much better than the other, you can switch assets over to the other method.