Balancing Income vs Growth investments during retirement

[Gilgongo]

I retired in April with the following, taking income from divis only:



My "plan" (once I could get my target income from divis) was that I would not to go all-in on income holdings, but have a couple of non-income "growthy" things in the mix so that if I needed to I could either convert them to income holdings, or just sell down. Like a sort of "buffer" if you like to smooth over possible divi dips, expenditure rises and other perturbations.

But it occurs to me I've never actually seen much discussion on this topic - if it is a topic!

In other words - and assuming of course you are of the divi income persuasion in retirement - is there any best practice thinking on the balance here?

PS: The Lyxor money market fund is temporary - was my employers pension until April so I parked it while I'm thinking,

[tacpot12]

Your strategy is exactly what I did when I set up my portfolio for my retirement.

I have a broad portfolio of ITs and EFTs chosen for their income potential, and a couple, Scottish Mortgage and Finsbury Income & Growth, chosen for their growth potential.

When Scottish Mortgage has been doing well, I've sold small percentages of my holdings in it to purchase more of one of the EFTs when the EFT seem to have been undervalued. That way I've been able to ratchet up my income which has helped with the cost of living recently.

I have a couple of Defined Benefit pensions that start in two and five years times, and my state pension starts in seven years. So I will need increasingly less income from my SIPP over the next 10 years, and plan to convert some of my income-producing holdings into other growth funds, but need to think about the extent to which I do so, as I still need to make use of the 25% tax free withdrawals available.

[88V8]

I retired in April with the following, taking income from divis only:...
My "plan" (once I could get my target income from divis) was that I would not to go all-in on income holdings, but have a couple of non-income "growthy" things in the mix so that if I needed to I could either convert them to income holdings, or just sell down. Like a sort of "buffer" if you like to smooth over possible divi dips, expenditure rises and other perturbations.
....

I have an HYP but am leaning more towards ITs nowadays.
Also c 25% in Prefs which I shall reduce when rates bottom out and SPs peak or they are tendered.
And some ITs which specialise in Fixed Interest, BIPS, NCYF, TFIF, SMIF, CVCG. Again, I may reduce these, but not atm.
Meanwhile they all produce a nice income, in addition to our DB and State pensions.

Growth... I have some supposed growth stocks, CLDN, MWY, MNKS, VUSA. The thing with growth stocks is that they are a one-trick pony. If they don't grow, one has nothing, indeed less than nothing as one has lost potential income.
CLDN, much praised around here, has gone backwards for me.

The only totally reliable growth stocks are gilts. Which I have so far viewed from afar.

My view, if you already have enough capital to invest and produce a reliable 5% pretax, then I would not get too hung up on the idea that one must have growth stocks.

V8

[Adamski]

Hi, I'm not of dividend income persuasion, however if I may offer an alternative.

If you need a "buffer" for ups and downs can use a cash savings, either through Internet savings or a cash hub offered by investment providers (such as AJ Bell). Given high interest rates can get up over 4% guaranteed.

Many of us, myself included, have had fingers burnt with growth funds (Woodfood, 2018 correction, covid flash crash, 2022 growth stocks crash).

[monabri]

I retired in April with the following, taking income from divis only:...
My "plan" (once I could get my target income from divis) was that I would not to go all-in on income holdings, but have a couple of non-income "growthy" things in the mix so that if I needed to I could either convert them to income holdings, or just sell down. Like a sort of "buffer" if you like to smooth over possible divi dips, expenditure rises and other perturbations.
....

I have an HYP but am leaning more towards ITs nowadays.
Also c 25% in Prefs which I shall reduce when rates bottom out and SPs peak or they are tendered.
And some ITs which specialise in Fixed Interest, BIPS, NCYF, TFIF, SMIF, CVCG. Again, I may reduce these, but not atm.
Meanwhile they all produce a nice income, in addition to our DB and State pensions.

Growth... I have some supposed growth stocks, CLDN, MWY, MNKS, VUSA. The thing with growth stocks is that they are a one-trick pony. If they don't grow, one has nothing, indeed less than nothing as one has lost potential income.
CLDN, much praised around here, has gone backwards for me.

The only totally reliable growth stocks are gilts. Which I have so far viewed from afar.

My view, if you already have enough capital to invest and produce a reliable 5% pretax, then I would not get too hung up on the idea that one must have growth stocks.

V8

I think I'm more or less of the same mindset as V8 and echo comments on growth stocks.

I'd offer HYP+IT for income and global ETF for long term growth, drip feed...with the ETF being cost effective. I've not had good experience in investing n emerging markets ..no point in funding someone else's yacht lifestyle.

In the last 5 years, say, there have been opportunities to invest in prefs , gilts and short dated gilts especially, bombed out shares during Covid , market reaction to Truss..... there will be other asset classes that might hive into view in the future necessitating a rejigging of funds. I'm also partial to a punt in investing in FTSE100 companies on bad news days, especially income payers.


Edit..I don't plan to sell my prefs unless forced.

[kempiejon]

I have an untidy HYP in an ISA, for a couple of years, it has been throwing off enough income to subsist if I had to, and that capital and annual income is growing and being reinvested.
I also have a SIPP where I accumulated all my orphaned pensions ('cept a tiddly one I might cash in as a small pot). The SIPP is a handful of ETF to approximate the global market, does OK for growth and income.

To prevent having to take capital from equities in a falling/fallen market I've a store in fixed interest, gilts and corporate bonds ready for some scheduled expenses, kitchen, car, house move etc. I add a full new ISA amount each year and currently buy VWRP I have in mind some of this fund can be liquidated to indulge me as income grows and capital accumulates as I already have a couple of years of expenses in cash/cash like I can be flexible.

The ISA and SIPP are about done and when the pensions are accessed it'll be more income than I have earnt for a while. I feel the financial independence bit is done and I now need to plan deaccumulation. When chatting with my sibling recently, talking over our respective pensions plans I said I had based my plans on living to 100+. The chat did turn to the idea of an annuity as an alternative way to guarantee income if we get old and doddery.

[CryptoPlankton]

In other words - and assuming of course you are of the divi income persuasion in retirement - is there any best practice thinking on the balance here?

I think it's really a case of settling on a balance that suits your own personal circumstances and temperament. So, unhelpfully, I would suggest there is no definitive answer regarding best practice. Having said that, sharing our respective approaches may help to clarify our own thinking and bolster self-confidence (though I'm sure the latter isn't needed!). In that spirit, this is my retirement strategy:

I started drawing on my dividend income about five years ago, and have another five years until I reach State Pension age. I aim for the dividend income to produce about 60% of my total income, the rest coming from varying sources which have (or will) include: a modest DB pension, rental income, depletion of a small SIPP, a few bonds, and (I hope!) the State Pension. The 60% figure has been, and should continue to be, fairly stable, though there is scope to increase it if necessary, which is, I guess, what this thread is intended to explore.

Aside from cash (and near cash) reserves, I am in the fortunate position to have virtually all my equity investments in ISAs. Of these, 75-80% (at recent valuations) are "ringfenced" for dividend income, with the rest in a completely seperate account earmarked for growth. I don't like to have too much invested in any one holding, so I probably have far too many for most people's tastes. Less than a fifth of the "income" holdings are in individual (HYPish) shares, with the vast majority in a very diverse portfolio (circa 30) of Investment Trusts. I am currently drawing down about 85% of the dividends generated. Dividend growth is variable, so difficult to predict, but the capital value of this part of the portfolio seems pretty robust, and I have 'ratcheted' the income with occasional sales of companies whose yields have dropped due to growth - AZN and BA. spring to mind (I'm less convinced the latter was a good move at the moment!). Anyway, this all leaves 20-25% in the "growth" portfolio. Most of this is in the likes of FCIT, PCT, SMT and a few others, with a small proportion in what you could call "more speculative investments". Despite my extremely poor record in trying to find the next multibagger, I am fairly confident that this portfolio will be able to feed the income portfolio if and when it is needed. So far, five years in, this hasn't looked like being necessary.

I am nowhere near as wealthy as many on these boards appear to be, and I am often amused when I see posts expressing concern over the author's financial position and whether they are in a position to retire. This is why I stated at the beginning that I don't think there is a "one size fits all" strategy. I am not a great risk taker, but I feel very comfortable with my current position. The "growth" portfolio is the first line of defence; I have three years' income in cash/near cash reserves and, if push came to shove, I could "downsize" to release more funds. This all allows me to sleep well at night, but I have to say that the growth portfolio is an important and reassuring buffer.

CP

[vand]

I have gone back and forth about how I want to structure my investment retirement, and here is my approach that I'm settling on...

I have 3 strategies -

HYP 45%, currently yields about 8.7%
Passive multi-asset portfolio - 35%, naturally yields 0% (all acc funds)
Macro plays - 20%, current yields about 2%

Overall yield is about 4.2%

My plan is just to spend down the natural yield across the entire 3 strategies- this comes mainly from the HYP, and a little from the macro - my two active portfolios. I am also happy to eventually spend down the capital from these portfolios too, although of course I hope that I will not need to... this will hopefully mean the passive portfolio can remain untouched and continue growing, so that in time it will grow to be largest portfolio while I live off the income from the active strategies.

This suits me as, while I am happy to run and manage my active strategies for now, I can see a time when I am less incline to manage them and gradually shift over to more passive strategy overall. I am not idealogically wedded to a HYP and accept that I do it because I enjoy active investing, but I'm not going to threaten by financial wellbeing by putting all my eggs in that basket. The passive portfolio is my insurance against my own incompetence.

[FieldsofFire50]

My plan when I retired 6 years ago had an element of “Uk for income, World for growth” but in both cases I assumed a 7% total return

Mar’19 position £650k of investments

Sipp £250k in UK dividend shares yielding c5% with the intention to draw dividends only and cover my personal allowance

Isa1 - £170k, his and her pots of £85k each also in UK dividend shares

Isa2 - £170k as above but in non-UK funds/trackers

Buffer £60k in premium bonds to cover ~2 years expenses

Any surplus in the £85k pots to be taken as “income” with dividends drawn as a minimum

Mar’24 position 5 years in was £669k of investments

Sipp £222k after drawing £62k of which £59k was dividends earned

Isa1 £168k having drawn £65k

Isa2 £201k having drawn £15k

Cash buffer £78k

So big picture I have a little more than I started retirement with. I haven’t needed to dip into my buffer and have been able to increase it so it still covers 2 years expenses. My returns have been lower than I had in my plan.

I guess my main advice would be prepared to be flexible as investment growth, dividend income & expenses will all be more bumpy than you might have imagined. I certainly didn’t expect the pandemic year 1

Review your plan each year and adapt as required e.g I now assume 6% growth and am stricter in limiting drawings to within 4% of the non-buffer element

[scrumpyjack]

I have just started drawing from my Sipp, aged 76, because Ms Reeves has shot down the IHT benefit of not drawing it and has moved it from last to first in the queue of assets to be used in retirement.

I have not considered at all what dividend income is produced by the Sipp, but rather what percentage of it I should draw each year. I then occasionally sell something to make sure there’s enough cash to meet the next few months drawings.

I really can’t see any point in constraining my investment decisions by how much in dividends will be paid. (In fact 26% of it is in Scottish Mortgage which has done stupendously well over the years in spite of the setback from which it is now recovering)

[Newroad]

Hi Gilgongo.

I have mused on this again recently, looking forward to how to approach the decumulation phase. In the back of my mind was this article, which may have originally been linked to by GeoffF100

https://monevator.com/lars-kroijer-onhedge-fund-mimicking-etfs-checking-your-portfolio-and-minimal-risk-assets/

and specifically, the third section - "What is the point of owning the minimum risk asset?"

I suppose this way of thinking is attractive to me, as in some ways, the thinking rhymes with Carver's "Smart Portfolios" and his top-down approach to portfolio design. In this case, Kroijer's suggesting for most people that mixing

A Global Equity Tracker, with
A Local Government Bond product with maturity according to anticipated need

in proportion to suit one's risk tolerance, is all that most people need. Seems a good starting point to me and perhaps a good finishing point for many. Seems very similar to the thinking of FieldsOfFire50 above too.

I then thought if and how it might need adapting to my own future situation. I'll likely retire between about 4 and 10 years from now, with about 6 years being the most likely. At 6 years, I'll likely have a defined benefit pension of c£25K per annum in addition to the various investments. So, maybe my version of Kroijer's idea could be

A Global Equity Tracker, with
A Local "Bond Proxy"

in proportion to my own risk needs. For me, the ratio between the two would vary over time, based on an existing rule I operate, but would be just under 60/40 at that point. The guaranteed £25K perhaps allows/suggests the "Bond Proxy" component might be allowed some sort of kicker, e.g. high yield, equity component or whatever?

We're spoilt for choice re the Global Equity Tracker, let's say VWRL for arguments sake - but what about the "Bond Proxy" with kicker? Ideal perhaps would be something that tracks the FTSE 350 High Yield ex Investment Trust index, but I don't think it exists. Maybe it will by then!

Regards, Newroad

[xxd09]

All retirees arguably would want to replace their workplace earnings with another income stream
Dividends can do this but………
It requires a relatively larger savings pot than a total return portfolio where fund units are sold as required
Fund units are of course made up of dividends and capital
If the retiree has managed to amass the required savings portfolio for a dividend only income-well done
Personally I went for total return with a one global equity and one global bond index trackers and sell fund units as required
I also keep 2+ years living expenses in cash
Simple ,easy to understand and manage
xxd09
PS hopefully all investments are in tax free wrappers-ie SIPPs and ISAs

[Newroad]

Hi xxd09.

That seems pretty sensible, all things being equal.

Regards, Newroad

[dealtn]

But it occurs to me I've never actually seen much discussion on this topic - if it is a topic!

I am an income investor. Only the income I am interested in is the income to the company that it receives from its business that I own a share of. The (dividend) income paid out is irrelevant.

Similarly (dividend) yields are a function of 2 inputs. The current share price, where that (company earnings) income stream can be bought at, and the level of dividend set by the directors, which is irrelevant to me.

I suspect there is even less discussion on this (income) topic.

I am yet to retire, but when that day comes, should I need any requirement for cash that isn't satisfied by what is in my bank account, I will liquidate the required by disinvesting in something.

I can accept that for some people the "ease" with simply receiving dividends is such that this default approach is attractive. It strikes me as odd though that (particularly for those that invest via collectives) that holding accumulation units and selling when you need (and not when a FD decides to pay you) is at least as easy if not easier. That also concentrates the mind on enjoying and spending your capital to suit your requirements, not living off dividends only and leaving behind a capital inheritance if that's not what you want.

I accept I am likely in the minority though.

[1nvest]

All retirees arguably would want to replace their workplace earnings with another income stream
Dividends can do this but………
It requires a relatively larger savings pot than a total return portfolio where fund units are sold as required
Fund units are of course made up of dividends and capital
If the retiree has managed to amass the required savings portfolio for a dividend only income-well done
Personally I went for total return with a one global equity and one global bond index trackers and sell fund units as required
I also keep 2+ years living expenses in cash
Simple ,easy to understand and manage
xxd09
PS hopefully all investments are in tax free wrappers-ie SIPPs and ISAs

Similar here. DIY dividends out of total returns (of which dividends are just one part). When a company pays dividends it has less remaining than had it retained earnings/profits. Is worth less which is generally reflected in the share price. When you sell shares someone else funds that 'dividend' ... maybe at twice or more of the stocks book-value, other than a change of stocks shareholders records the stock is otherwise unaffected. With DIY dividends (selling shares) you get to set how much and when those dividends are paid. I spend using credit card(s) and once/month sell some of whatever is the most up (above target weighting) to fully cover paying off the credit card(s). No cash drag (short term borrowing cash at 0% rates for immediate spending purposes). No need for any cash reserve that otherwise drags the portfolio down. Yes in some months you may be selling when everything is down, but in other months everything is up ... washes. Much of investing is about average in over many years, averaging out over many years.

[1nvest]

When you look at things from a DIY dividends basis (taken out of total returns) ... reducing withdrawals risk viewtopic.php?p=707857#p707857

[BoomBustInvest]

All retirees arguably would want to replace their workplace earnings with another income stream
Dividends can do this but………
It requires a relatively larger savings pot than a total return portfolio where fund units are sold as required
Fund units are of course made up of dividends and capital
If the retiree has managed to amass the required savings portfolio for a dividend only income-well done
Personally I went for total return with a one global equity and one global bond index trackers and sell fund units as required
I also keep 2+ years living expenses in cash
Simple ,easy to understand and manage
xxd09
PS hopefully all investments are in tax free wrappers-ie SIPPs and ISAs

Out of interest, if we do see another resurgence of inflation, would you consider selling out of the global bond tracker which would suffer in that scenario?

[xxd09]

23 years retired-wife and I now 78
Asset Allocation has changed over retirement from initially 30/70 to currently 35/59/6 where 6 = 2 years living expenses in cash
Really just stayed the course through thick and thin and never traded except for selling fund units for withdrawals
Will probably continue this investment policy to the finish using this Asset Allocation
Seems to have worked so far
xxd09

[1km1km]

I have a 'full on' income investment strategy for my mother's portfolio, which I manage for her. So safe FTSE 100 shares like LGEN and AV. which currently pay good dividend income. I would even buy shares that have the potential to leak capital value in exchange for higher income, as Phoenix have done until recently.

The reason for this is to generate income, even if it erodes some capital, so the surplus can be gifted every year with no IHT liability. And the loss of capital can only help with the IHT bill.