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A portfolio for life: the natural yield approach to drawdown [Members]
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Very, very interesting and comes at a point in life I am considering doing just this (my numbers are a bit different). 43 with 2 young children and looking to provide an indefinite base income for life… a decent allocation of my pot will go to infrastructure and enhanced yield AICs such as Fair Oaks, SUPR REIT…
Great topic, look forward to seeing the portfolio. A bit of a situation specific comment but for (very) early retirees with a significant taxable portfolio I would add the relatively favourable tax treatment of income vs capital gains as another benefit.
With no earned or pension income you get the £5k “starting rate for savings” so personal allowance + starting rate for savings + regular interest allowance = £18,570 tax free interest income (bonds & REITs)
Then £500 of dividends tax free and £30,930 taking you up to the basic rate threshold taxed at 8.75% so £2,706 payable in tax on the divs.
Arranged like that you receive £50,000 income (each as a couple) at a 5.4% overall tax rate. Compares favourably to 18% basic rate CGT.
Cash in low coupon gilts, ISA allocated 100% to growth.
As an early retiree I have partially followed this route to supplement my pension income. (Nowhere near the amount suggested above, and I have retained a higher proportion of my investments elsewhere.)
I chose 8 Investment Trusts with the higher yields from different sectors of the AIC “Dividend Heroes” and “Next Generation”.
As the article states, the value of (this part of) my portfolio fluctuates but it doesn’t bother me at this early stage of retirement, and the extra income is very welcome.
Could I have done this cheaper? Probably, but most of the intellectual heavy lifting was done for me by the AIC. And this approach leaves me to consider how to deaccumulate the rest of my portfolio.
You say ‘The gold omission does annoy me’.
Why not have half of your cash buffer as Gold ?
Looks interesting, we’re starting in ‘interesting’ times….too.
An investment approach can work for years and then it doesn’t, it takes a while to appreciate that things have really changed and yet perhaps a previous favourable ‘style’ may return in some fashion equally suddenly.
Thanks for this article TA, I will be following it with anticipation over the long term. Whilst I cannot fit it to my personal circumstances so I would not contemplate executing it (I am a sturdy floor and upside kind of guy at this moment), I will be interested to see its progress, especially if we have a comparison to measure it against with regard to volatility, how it works in relation to, say, draw-down 4%, when the waves of the world get the boat rocking to the point of biliousness. Brilliant work as always.
JimJim
@TI – great article and very timely. Thanks.
I too am a floor and upside guy. And I’ve diversified my investments by my needs.
The floor is inflation-linked and comfortable, but not luxurious, for a couple to survive. It should be about double groceries, council tax, electricity & gas and internet services. I don’t need any more bonds.
I plan to use my SIPP (HSBC FTSE World tracker, Gold and some Money Market) to sell down and draw funds for holidays, new car, etc. The Money Market provides a couple of years float. This will provide house deposits and maybe a small inheritance for the children. But if I can provide house deposits, job done. This also gives me a floor for the SIPP – 2×25% deposit on a two bed flat somewhere decent. Bad market? No holidays.
To cover my personal spending I’ve created a dividend income ISA to throw off about £8000 a year. 75% for my personal spending (football, wine, coffee, a few meals out a month, visits to the pub, that sort of thing) and 25% to reinvest in probably an all-world tracker for growth to ‘keep up’. I need to reach for yield a bit at the moment, so too Infrastructure IT heavy, but I might slide into a more broadly based Dividend fund later – Vanguard High Yield maybe? Dividends take a dive? Few less meals out and pub visits, no Barolo EP this year. This, with its ISA wrapper, will be left to my wife who really isn’t interested in managing a portfolio even though she’s far more capable than me. I think of dividend investing as a kind of declining cognitive abilities play.
With the Investment Trusts, I’ve bought them at a good discount to NAV. So although they’re yielding about 8%, I figure if the discounts close I win. Also, the yield measured against NAV is only 6%, so I figure I’ve some safety margin there.
Can’t wait for your candidates in part two. What have I missed?
Now I just need to live another 8 years for the floor to kick in…
Thanks @TI I really hoped you were going to do this. Perfect complement to S&S and No Cat Food and perfect timing to as I’m doing a variation of exactly this in the next 12 months.
I have to shift my main company pension (old with no modern drawdown features but well run by L&G) to a SIPP to access the TFLS for mortgage repayment.
Currently it’s in a low cost diversified lifestyled portfolio of global ESG screened equities, active fixed income and the big L&G Diversified Growth fund.
I plan to transition to something similar but informed by the wisdom of both you and TA. Your rationale above very much resonates with me despite my fully accepting that a total return approach has historically been more effective.
Growth: global equity tracker (acc) 50% / global gov bonds tracker (acc) 10%
Income: Pimco Income (inc) 20% / global property (inc) 5% / UK equity income tracker (inc) 5%
This split helps me manage my own biases and crucially plot a path away from the pension where this is all decided for me. EG the Pimco fund – whether I like it or not I already own a lot of it – so sticking with it feels a more comfortable choice starting out on my own.
I fully expect this to evolve into a simpler xxd09 style 3 fund portfolio eventually. But sometimes you have to learn things by doing not just reading the wisdom!
Thanks again and really look forward to the series.
@all — Thanks for the great comments, glad to see this article has hit an area of interest for my fellow Moguls. 🙂
@Mark — I’m almost certain to include some REITs in TLIY portfolio. There’s a lot of choice out there but it’s also a bit of a minefield when you go down the size spectrum. (Annoyingly I missed SUPR when it started to move after Christmas and I waited for a pullback… 😉 )
@AoI — Interesting comments. Tax is indeed an all-important issue, but I won’t be able to go into it with this portfolio as it’ll vary so widely from individual to individual. I’ll effectively be assuming the whole portfolio and the cash is in a SIPP / ISAs. That’s no unreasonable for someone at this stage in their life. It also makes the tracking easier! 😉
@MogulMarkR — Great to hear from someone who has gone down this route. Are you comfortable that eight trusts are enough? I think I’d want a minimum of 10-12 personally, especially if there’s a lot of crossover between them. I just remember things going wrong too many times. (Split cap scandal, anyone? 😉 ) Of course many of these trusts have excellent long term records as you know.
@Algernond — The cash buffer needs to be stable and ideally to earn a yield. Gold gives us neither. If I was going to include it, it’d have to sit in the main portfolio, probably drawn from the ‘middling risky’ bucket that contains infrastructure trusts, REITs, and high-yield bonds.
@Hariseldon — Agreed, though who knows which way it will turn… the market moves to make fools of us all and cause maximum pain! Certainly feels like value/income is due a time to shine, but we’ll see and it’s not the main motivation here.
@JimJim — *cough* @TI *cough*
@Brod — I like your flexible spending strategy. It’s almost like you’ve gamified the potential for fluctuating dividends! But why not use a cash buffer? Don’t want to lose the potential returns from having more in shares?
@AndyJ — Yes, there’s nothing like doing something to learn the lessons, which is of course all a reason why I always say nobody should go all-in on anything. (I don’t so much mean a strategy here as “I’ve swapped all my shares for BTC” or similar). Let us know how it gets on, and hope you enjoy the ride!
Good luck & bon voyage!
@TI – oh no, plenty of cash. Just reduced Premium Bonds from £50k to £30k to move an extra wodge into the ISA. I’ve also a £3k “float” that will smooth out monthly spending. Hopefully next year I can max out the ISA again and finally close the 0% balance transfers I’ve still got.
And resign.
Then I’m set.
Btw, I’m sure you’ve seen the VPW Forward Test on Bogleheads:
https://www.bogleheads.org/forum/viewtopic.php?t=284519&sid=845e2b985a6352c2b185f6dd06321c7b
Longinvest thinks only a 6 month buffer is necessary. Any particular thinking about 12 months? (I love cash, by the way!) will you be updating monthly or quarterly like longinvest?
Adding a graph of capital values of the dividend heroes would be great, to understand what potential capital losses we can be looking at. The covid period would especially be useful given the sudden drop and even the subsequent ‘missing out on mag7 rally’ period will be interesting.
There were some comments about buying these trusts at a discount, so another table to show how discounts actually moved and whether we should be concerned about timing the buying would be helpful.
This is my current (reasonably aggressive) target allocation for the GIA:
Supermarket Income REIT 7.5
TwentyFour Income 7.5
Fair Oaks 2021 5.0
GCP Infrastructure Investments 5.0
HICL Infrastructure plc 5.0
Alliance Trust plc 20.0
Schroder AsiaPacific Fund plc 7.5
European Assets Trust plc 10.0
Schroder Japan Trust plc 7.5
Canadian General Investments 5.0
JP Morgan US Smaller Companies Investment Trust 7.5
Doric Nimrod Air Three 1.0
Cash / individual dividend shares not yet selected: 11.5
I may be tweaking this somewhat as returning to the UK after 14 years in Switzerland I am keen to maximise my FIG exemptions for the next 4 years…
(There are also 6 BTLs covering core income requirements, main house without mortgage, a classic 70/30 SIPP, and a 2 year “emergency fund”) – and plan to work until 55 ish when youngest goes to university (currently 43 and arguably FI, not ready to RE)