How much can I afford to invest?

MQA

I am a newbie to DIY investing and have 12 years to invest. i am reviewing my SS ISA and a private pension which had 2 years of contribution. Both SS ISA and pension have high fees and appreciation is low,  mostly 1% and a few are 4%
I have worked out my annual spend. I would like to know whether I should get the funds/ money to cover my spending from the investment or from  my savings or both? As my income will ends in two months time due to selling my BTL.  Also, I want to start DIY ivnesting using  my savings and the sale proceeds from the BTL. (my aim is to beat inflation)
The options I can think of  to fund my spending:
1. Keep 5 (?) years of spending money (in bank accounts ?  I have been doing this and lost out to inflation) and invest the rest and hopefully, in 5 years time there will be some growth and I can draw out as an income?  Previously I do not think it should be my only source of income as i will eat into my investment.
2. Keep 1 year spend and invest all the rest of the savings and draw income from it after 1 year ?  I think this is unrealistic as not enough time for the funds to grow
3. Whether there are options and would welcome your thoughts?
As the future is unknown and I would still like to be able to plan with a balance between having enough to spend and investing the rest.
ie when is the earliest I can take an income from my investment and is there a way to see how much expected average return will be ?

Roger175

You don't given any indication of the sums involved so it's difficult to comment in any detail, but we were in a similar position a year ago, having just sold our BTL. In our case we had a net surplus of around £240k after the sale. The problem we faced was that my wife had already taken early retirement and I am in the process of winding down to early retirement, therefore our relevant earnings for the purposes of pension contributions are rather modest. Furthermore, the max we can get into ISAs is £40k per year (2 x £20k). Most of our money was therefore put into cash savings and we will gradually shelter it into pensions/ISA over the coming years. I should point out that we are aware that this was not good planning, but we hadn't originally intended selling the BTL, it was just that we began to see the writing on the wall and made a break, we're convinced we did the right thing even if we could have planned it better

Fortunately we have found that we have been able to create a savings ladder which is averaging 5.25% this is spread over 1, 2 and 3 year fixes and as luck would have it that is now beating inflation by a reasonable margin.

Roger175

I should also add that you need to be reviewing your current pension and ISA charges and investments - those figures sound pretty dire. I use a couple of DIY SIPP platforms and have very low costs and have been averaging around 8%-9% growth over the last decade or so. I use a combination of mainly tracker funds and a large basket (30+) of individual high yield shares - not for everyone, but I enjoy the process! 

EthicsGradient

As Roger175 says, without knowing the sums involved, we can't say too much.

But your plan (1) of a few years' annual spending in savings, and the rest in investments that you then start to draw down after those savings are used up may not be a bad one.

What you want to avoid is "sequence risk", or "pound cost ravaging". This is when there's a sudden drop in the investments, right after you've bought them, and you have to sell some at the low price to get your income. This leaves a lot less than you'd hoped for, and the money runs out before your investment can recover fully, even if the market recovers.

Starting by having some in savings which you use for a few years lessens the chances of sequence risk - if there's a big drop early on, then your investment has a few years to recover before you need to start selling part of it; or if there's a big drop just before you need to start selling it, then you hope it had grown decently before then, making up for the drop.

If you did it with 5 years, there's no guarantee you'd avoid a market loss - I had the figures for the F&C Investment Trust handy (a reasonable global investment), and since 1996, about 9% of the time, it's been worth less than it had been 5 years before (during the period leading up to 2002-2005), with the worst moment 21% down. It's only been worth less after 6 years for about 2% of the time, with the worst 7% down. But, as they say, past performance is not a guarantee of future performance.

Whether it's feasible to get the income you want/need for the full 12 years depends on the amounts.

MQA

Roger175  - well done with selling your BTL,(I am having issues) but will focus on my savings

Appreciate helpful informaiton - how do you select the SIPP platform ? is there a comparison site or do the comparison manaully? ie compile a list and then go on to their webiste?

MQA

The cash amount I have to invest is £200,000  and hopefully the proceeds from the sale of my property (hoping to sale for  £260000 (before deducting any fees and CGT).  and separate to my ' investment' which I need to review..

Squence risk !

It seems better to keep at least 5 years spending money and invest the rest as the minumum investing time is 5 years and no guarantee a gain?

Krakkkers

From my experience you should be able to turn your £200k into £150k in about 10 years.
Not one single investment, UK, Global, Asian, Woodford, etc has ever made me a single penny in the last 20 years.
I am lucky enough to have made money on AIM but i would not recommend that for a beginner.

eskbanker

Krakkkers said:

Not one single investment, UK, Global, Asian, Woodford, etc has ever made me a single penny in the last 20 years.

Sounds like a pretty extraordinary case study of what not to do, how did you manage that?

Krakkkers

I trusted other people with my money. 

masonic

Krakkkers said:

I trusted other people with my money. 

Those people must have had a raw talent for losing money in a market when it was almost impossible to do so. Or did you chop and change advisers/strategies over those 20 years?

eskbanker

Krakkkers said:

I trusted other people with my money. 

Are you saying that you were defrauded by people not actually investing your money, or simply that they made some poor choices?  Taking 'global' as one of your examples, which global funds were you invested in and over what periods?