Selling multi-asset funds for retirement income

[AppleCrumble]

If you have multi-assets funds such as Vanguard LS60 and you're selling some units regularly for retirement income during a drop in the market then isn't it possible you're selling the equities at a lower price than you paid for them? Which isn't ideal. With this in mind wouldn't it be better to have separate equities and fixed-income investments so you can decide what to sell when?

[Dod101]

If you have multi-assets funds such as Vanguard LS60 and you're selling some units regularly for retirement income during a drop in the market then isn't it possible you're selling the equities at a lower price than you paid for them? Which isn't ideal. With this in mind wouldn't it be better to have separate equities and fixed-income investments so you can decide what to sell when?

Or maybe even better to consider income funds so that you are at least not so dependent on sales to generate the income you need. How do you know that the equities and fixed income funds will not drop at the same time? No law to say they can't or won't.

Dod

[xxd09]

You are technically correct but the whole point of having this type of fund is that you do not have to micromanage your investments.Vanguard does that for you.
As you say -you just sell a certain number of units each time you need cash
It makes life very simple, easy to understand and is very cheap to run
These 3 factors ensure that you will outperform 90%of active managers who think that they can time the stock market ie Mr Woodford!
xxd09

[Dod101]

I am mystified by the response fromxxd09. What is 'technically correct' about the OP's comments? Either they are correct or not.

And Mr Woodford is not and never was 90% of the active managers.

Dod

[xxd09]

I was trying to help AppleCrumble who has managed to get hold of a cheap ,easy to understand,high performing index fund from a reputable fund manager but who has not fully understood all its benefits especially for long term returns ie retirement
Timing the market-judging when to sell/buy equities and bonds ie active management-is a unsuccessful procedure for most investors
Index funds like this one will beat over 80% of equivalent active funds
Reading John Bogles books on Index Fund investing plus Lars Kroijer book-Investing Demystified-plus accompanying video’s on his website will give further explanation
xxd09

[sloth]

If you have multi-assets funds such as Vanguard LS60 and you're selling some units regularly for retirement income during a drop in the market then isn't it possible you're selling the equities at a lower price than you paid for them? Which isn't ideal. With this in mind wouldn't it be better to have separate equities and fixed-income investments so you can decide what to sell when?

Which is why you should have 2 or 3 years' living expenses in cash as a buffer.

[Dod101]

I was trying to help AppleCrumble who has managed to get hold of a cheap ,easy to understand,high performing index fund from a reputable fund manager but who has not fully understood all its benefits especially for long term returns ie retirement
Timing the market-judging when to sell/buy equities and bonds ie active management-is a unsuccessful procedure for most investors
Index funds like this one will beat over 80% of equivalent active funds
Reading John Bogles books on Index Fund investing plus Lars Kroijer book-Investing Demystified-plus accompanying video’s on his website will give further explanation
xxd09

OK the way I read the op he is doing just the opposite of trying to time the market. There is a place for index fund investing I suppose but it is not for me. That is though another argument. The op is looking for income for retirement. Income funds are usually a good way to get that. I have never seen raising capital as a great way to get income.

Dod

[Arborbridge]

I was trying to help AppleCrumble who has managed to get hold of a cheap ,easy to understand,high performing index fund from a reputable fund manager but who has not fully understood all its benefits especially for long term returns ie retirement
Timing the market-judging when to sell/buy equities and bonds ie active management-is a unsuccessful procedure for most investors
Index funds like this one will beat over 80% of equivalent active funds
Reading John Bogles books on Index Fund investing plus Lars Kroijer book-Investing Demystified-plus accompanying video’s on his website will give further explanation
xxd09

Maybe I'm ignorant of what this Vanguard fund is doing, but hasn't the OP put a finger on the problem of "capital harvesting" to provide an income? You either need a large cash reserve (earning next to nothing) , or risk having to "harvest" when the unit price is down.

The Vanguard funds are arguably good for "pot building" but it does not seem a "simple" solution in retirement if one has to worry about whether or not the unit price is down. The "simple" solution is to invest in an income fund with a suitable yield, and then sit back and watch the dividends roll in, drawing a regular salary as they do.

This is what I've been doing for ten years, and I must say it suits me well. I couldn't be doing with all that deciding when or what to sell - that is certainly not simple.

Arb.

[Wuffle]

There is clearly a mirror image to the OP's dilemma.
Cross your fingers and get on with it.
With retirement planning you don't know when you're going to die either.....
The 'income only' school of thought isn't a universal solution, most people have to chew through the capital eventually.

[hiriskpaul]

If you have multi-assets funds such as Vanguard LS60 and you're selling some units regularly for retirement income during a drop in the market then isn't it possible you're selling the equities at a lower price than you paid for them? Which isn't ideal. With this in mind wouldn't it be better to have separate equities and fixed-income investments so you can decide what to sell when?

You may be selling either shares or bonds below the price you recently paid. Over a typical retirement period I think it highly likely that this will happen. There will also be times when you sell recent purchased above the price you paid. Over a prolonged period it is likely to average out.

There are potential problems with all approaches to drawdown. If you want a simple systematic drawdown process, it does not get much simpler than selling units in a Vanguard LS fund. Hold separate bond and equity funds if you want though. You will probably find it cheaper in terms of fund ongoing charges, but there are no guarantees that you will get a better outcome than sticking with a single Vanguard LS fund.

[tjh290633]

The 'income only' school of thought isn't a universal solution, most people have to chew through the capital eventually.

Speak for yourself. If you have enough dividend income and it grows faster than inflation, this situation does not arise.

If you don't own any property and you need to fund care, then you will have to realise capital to pay your way, if the income is not enough. If the care goes on for a long time, then you may have to dig into capital other than that released from your home.

TJH

[Alaric]

If you have enough dividend income and it grows faster than inflation, this situation does not arise.

Hence the possible attraction of shares, funds or ITs that whilst having a lower dividend yield than market averages, increase their dividends at a faster rate. If their dividend yield stays fairly constant, increasing dividends means an increasing share price as well.

[EthicsGradient]

The 'income only' school of thought isn't a universal solution, most people have to chew through the capital eventually.

Speak for yourself. If you have enough dividend income and it grows faster than inflation, this situation does not arise.

If you don't own any property and you need to fund care, then you will have to realise capital to pay your way, if the income is not enough. If the care goes on for a long time, then you may have to dig into capital other than that released from your home.

TJH

But the reality of investing is that most stocks, over time, make a capital gain above the rate of inflation, and so do funds invested in them. If you ignore this, and say "I'll only ever take true income", you're building up an inheritance (which may be what you want), and giving yourself less to spend. If your aim is to spend the gain while you're alive, you'll be looking at selling some shares/units at some time. If you're confident the dividend income will grow faster than inflation over the long term, selling units occasionally in the periods when it doesn't keep up makes sense.

[xxd09]

I do think that Dividends and Capital gains are two sides of the same coin .It is a semantic difference to the average investor
If Dividends go up the Capital gain goes down
Most should use Accumulation units and sell Capital as required
I am 72-16 years retired-been through 2001-2 and 2008
Made my pile -currently 2 Vanguard index funds only-a Global Equity Tracker and a Global Bond Index Tracker Fund hedged to the Pound
All investments in SIPPs and ISAs-sell £20000 to £30000 worth of fund units as required to top up a Cash fund which always has 2years living expenses
Often just I transaction per year required-simple,cheap and easy to follow
30% Equities,65% Bonds,5% Cash seems to do it for me-3 to 3.5% withdrawal rate pa
Simple ,easy to follow,cheap and does the business
LS60 is a good fund that could simplify my portfolio further and I have considered it-replacing both my current funds
Having only one fund to deal with is ideal as I get older and wife/children (executors) may have to handle my finances
It is however too UK biased for me at the moment but as I reach 80+ -might be the way ahead
xxd09

[tjh290633]

I do think that Dividends and Capital gains are two sides of the same coin .It is a semantic difference to the average investor
If Dividends go up the Capital gain goes down
Most should use Accumulation units and sell Capital as required
I am 72-16 years retired-been through 2001-2 and 2008
Made my pile -currently 2 Vanguard index funds only-a Global Equity Tracker and a Global Bond Index Tracker Fund hedged to the Pound
All investments in SIPPs and ISAs-sell £20000 to £30000 worth of fund units as required to top up a Cash fund which always has 2years living expenses
Often just I transaction per year required-simple,cheap and easy to follow
30% Equities,65% Bonds,5% Cash seems to do it for me-3 to 3.5% withdrawal rate pa
Simple ,easy to follow,cheap and does the business
LS60 is a good fund that could simplify my portfolio further and I have considered it-replacing both my current funds
Having only one fund to deal with is ideal as I get older and wife/children (executors) may have to handle my finances
It is however too UK biased for me at the moment but as I reach 80+ -might be the way ahead
xxd09

It's not a semantic difference. If you are withdrawing the dividends they arrive in your bank account without any effort on your part. If, on the other hand, you are selling some units or shares every so often, be it monthly, quarterly or annually. You run the risk of there being a sharp fall in the market just when you wish to sell.

I'm 86 and am roughly 2/3rds in individual shares and 1/3rd in collective investments, all equity oriented, and a reasonable cash balance. Most of the dividend income gets reinvested, because my state and occupational pensions are more than adequate. I occasionally withdraw some dividend income for a particular purchase, like a cruise or a new car.

I am not invested in them at this stage, but there are a number of investment trusts which have given increases in their dividends for up to 50 years. If that is sufficient for you, there is no need to have to think of drawing capital.

One thing that would worry me is the reliance on a single fund, share or trust. Having all your eggs in one basket is not a good idea, as Woodford's investors can testify. 10 or more investment vehicles will also give a more regular flow of income, so that something arrives each month.

Prudence and security go hand in hand.

TJH

[Dod101]

I could not agree more with TJH. I have been retired since the end of 1994 without any occupational pension and I use my state pension as a traveI fund am almost entirely in equities and ITs and live off my dividends. I have never ever used capital for day to day expenses although I have used some to assist with house purchase some time ago. AS TJH says, dividends arrive in your account with not the slightest effort and are spendable there and then, subject to the possibility that they are not tax free in an ISA or a SIPP. Otherwise they are even tax free.

I am not adventurous enough to rely on one or two funds and certainly not to rely on selling capital to create an income.

Furthermore I have never before heard 'If the dividends go up the Capital gain goes down'. I suppose that may apply to accumulation units but I do not know and it seems a strange thing to claim but I have never owned accumulation units so I do not know the mechanics.

Dod

[SalvorHardin]

I am not adventurous enough to rely on one or two funds and certainly not to rely on selling capital to create an income.

Me too for using more than one or two funds. I have 15 investment trusts and 18 operating company holdings. Putting everything in one basket to me is crazy if you're retired. It's not just market risk, what if there's fraud at the manager or custodian or registrar? Or even just bad record keeping? Give me the extra administration work for dealing with multiple funds any day.

I know of a friend of a friend whose sole stockmarket investment is a holding in Woodford's suspended fund. They're still working and it isn't a life changing amount, but if like me they were retired and lived off their investments they'd be screwed.

[AppleCrumble]

Made my pile -currently 2 Vanguard index funds only-a Global Equity Tracker and a Global Bond Index Tracker Fund hedged to the Pound
All investments in SIPPs and ISAs-sell £20000 to £30000 worth of fund units as required to top up a Cash fund which always has 2years living expenses
Often just I transaction per year required-simple,cheap and easy to follow

How do you decide how much of each fund to sell? Is it always the same proportions? Does it depend on the markets at that time?

You mean that you always have a minimum of 2 years expenses? i.e. When you get down to 2 years, you do your annual sell and bump it up to 3?

[xxd09]

The amount you sell is the amount you need to keep your Cash fund up to the level you require ie in my case 2 years of expenses
In practice I have often let the expenses run down to 1.5 years expenses then sell enough fund units to restore me to the 2 years level-may end up with 2.5 years expenses for a short time in the Cash fund
Which fund you sell depends on your Asset Allocation ie the amount of Equities to Bonds that you have set in your Investment Plan
As you see in my case I require 30% Equities/65% Bonds .Therefore if at time of cash requirement Bonds are at 70% -sell Bonds .If Equities rise to 35% -sell Equities. If Asset Allocation proportions haven’t changed-then you can sell some of both.As you say it depends on the market at the time of selling.
Always sell so as to maintain/ restore your desired Asset Allocation
xxd09

[JohnB]

The problem with a having cash buffer to smooth market volatility is that its unproductive capital. If you keep it topped up at all times, it is meaningless, you need to allow it to drop from 3 years to 6 months during a crash, but then decide how quickly to replenish it. All decisions.

The simple approach: Have 2 brokers each with accumulating global index funds from 2 providers (to protect you from risk a broker or fund might be suspended). Have a years spending in your current account. Each 6 months, sell units from each provider in turn to top it up. Yes some years you will be selling when the market is down, but most years the market will be up, so it averages out. Have cheap holidays when the market is down. Start with 10% more than you think you need. Stop worrying about it.

There are more complicated strategies, and people have written books about them, and written modelling software that shows they do give slightly better outcomes, Or you can chose Investment Trusts, or funds that are poorly correlated with the market, or build bond ladders. But all this is complicated, and involves lots more work on your part, and higher fees. Then investing becomes your hobby.