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Different ways of taking income

General discussions about equity high-yield income strategies
Itsallaguess
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Re: Different ways of taking income

#417420

Postby Itsallaguess » June 5th, 2021, 7:02 am

UnclePhilip wrote:

What's the received wisdom - most active fund managers cannot beat the market long term - those that can are lucky.
There are much worse plans than holding global tracker(s) taking any income thrown off and adding to that with sales in good times or drawing from a cash float to lessen any hit from down years. How big does the float have to be becomes your question and will you hold it cash or bonds or something else?


In practice I hold about two years. In cash.

Do you think bonds would be a good idea? And am intrigued, what do you mean by 'something else'??


Pemium Bonds seem to be a fairly popular method of holding emergency funds, and I plan on utilising that method in some way too for near-term cash requirements once retired, but it's sometimes not clear when people might talk about 'cash' in the above sense whether they might already group 'Premium Bonds' into that 'cash' description..

Given that an adult can hold up to £50,000 in Premium Bonds, then it opens up a relatively safe option for this type of emergency funding, especially for couples, but of course there may be an element of inflation-risk sat alongside the reduced chances of the capital actually being at risk itself...

Cheers,

Itsallaguess

kempiejon
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Re: Different ways of taking income

#417442

Postby kempiejon » June 5th, 2021, 11:04 am

UnclePhilip wrote:
What's the received wisdom - most active fund managers cannot beat the market long term - those that can are lucky.
There are much worse plans than holding global tracker(s) taking any income thrown off and adding to that with sales in good times or drawing from a cash float to lessen any hit from down years. How big does the float have to be becomes your question and will you hold it cash or bonds or something else?


In practice I hold about two years. In cash.

Do you think bonds would be a good idea? And am intrigued, what do you mean by 'something else'??

Uncle


I'm still constructing my route out of permanent, full-time, paid employment; my cash is held in current and savings accounts, I also like premium bonds. I have some preference shares and other fixed interest and ishare and vanguard bond and gilt ETFs which I guess are part of that "cash like".
I think 3 years of cash/cash like is where my head is at but I guess that's a live experiment and as I have a backstop of the state pension and a local government defined benefit pension as I get nearer to claiming them I think the float can come down a bit.

88V8
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Re: Different ways of taking income

#417481

Postby 88V8 » June 5th, 2021, 3:00 pm

Itsallaguess wrote:Given that an adult can hold up to £50,000 in Premium Bonds, then it opens up a relatively safe option for this type of emergency funding, especially for couples, but of course there may be an element of inflation-risk sat alongside the reduced chances of the capital actually being at risk itself.

If one has the full holding one stands a better chance of achieving the average return, currently c1%.
Not a great parking place for a few thousand, but for £50,000 not too shabby compared to 'cash'.

V8

AshleyW
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Re: Different ways of taking income

#417742

Postby AshleyW » June 6th, 2021, 7:55 pm

I back both horses - an income portfolio and a total return drawdown portfolio. The most satisfying from an emotional point of view is the income portfolio. No worries about choosing a safe withdrawal rate, no worries about selling during market returns, no worries about the money running out. But there are lots of buts... I use an 8 constituent Income Trust portfolio broadly in line with that analyzed on RetiremntAce. Dividend income has increased since 2007 by more than the rate of inflation but one has to accept that these are actively managed investments with all that this implies - managers change, managers underperform (Mark Barnett, Neil Woodford ...) so it cannot be a fit and forget portfolio some changes over time will be necessary so maybe Ok at the beginning of retirement but less so as one´s mental faculties decline.

Investment Trusts smooth out the dividend payments and as far as I am concerned are the only way to go for dividend income as income ETFs and funds have significant volatility in payouts. One also has to accept the volatility of a 100% equity portfolio and the consequences of essentially investing only in dividend-paying companies that tend to be more mature and in specific sectors and geographies. For these reasons, I run both income and total return portfolios in order to have a significant proportion of my investments in a balanced low volatility portfolio.

FooledFrog
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Re: Different ways of taking income

#417976

Postby FooledFrog » June 7th, 2021, 7:40 pm

the matter was recently addressed by "pensioncraft" on youtube

https://www.youtube.com/watch?v=w_cPHn9U-Ik

1nvest
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Re: Different ways of taking income

#418510

Postby 1nvest » June 10th, 2021, 3:04 am

UnclePhilip wrote:there seems to be a continuing debate around whether it is more profitable to follow a 'total return and sell a few when needed' versus 'live off the dividends and/or yield'.

Another alternative that is more commonly employed by the very rich is to never sell. Have no regular income being produced (so no income tax) combined with not selling = no capital gains tax, and when you die the value is 'stepped up' i.e. heirs can sell the assets at a cost basis of the asset value at the time of your passing.

For income loans are taken out against the asset/portfolio value. Your executors following your passing can sell enough asset value to pay of those debts.

Consider £1M of asset/portfolio value, a inflation adjusted £20,000/year 'income' (additional loan) taken (borrowed) yearly where inflation rises at 3% and the portfolio/asset value rises at 5% (2% real) and the ongoing cost of borrowing/debt is also 5%. Comparable to a 2% SWR. Run that for 30 years (retirement years before passing) and heirs inherit a wealth near comparable to the inflation adjusted start date value after paying off the loan/debt. i.e. the asset value rises from the £1M start date value to £4.1M after 30 years, loan to asset value risen to 46% (£1.9M of debt including compounded interest) and the inflation index rises from 1.0 to 2.47. So £4.1M value - £1.9M debt = £2.2M, which relative to a 2.47 inflation factor = 89% of the inflation adjusted start date value available. In the 30th year when the asset value = £4.1M and debt is £1.9M the inflation adjusted 'withdrawn' amount (additional amount borrowed for 'income/spending') = £49K, 1.2% of the asset value, but as £1.9M is owed/debt = 2.2% of net asset minus debt value.

A more layman's approach might be to take out/expand mortgage loans/debt as the source of income. If home value is £500K and stock portfolio value is £500K then £20K of income is like a 4% SWR relative to just the stock value. And rather than arranging that yearly you might clump perhaps 4 or 5 years of spending at a time.


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