A relative of a roughly similar age to me asked a question that I’ve heard several times over the last few years:

“How do I know how much income I’ll receive in retirement?”

From which you’ll infer that he – like most of us these days – can’t rely on a defined-benefit final salary pension scheme, which would have made answering such a question relatively straightforward.

No: my relative has a well-stuffed SIPP and a fast-growing ISA, but no final salary pension scheme of any consequence.

Traditionally, my answer to such questions has involved explaining the idea of annuities (about which most of people are shockingly ignorant), pointing people to handy ready-reckoners such as the one published in The Sunday Times each week, and explaining the benefits of impaired health and dodgy lifestyles. (Beneficial, that is, from the perspective of an annuity!)

But with the government’s impending changes in how individuals can access their pension savings, all that is history—at least for investors with a reasonable savings pot.

Because from April there’s an alternative solution, and one which will suit my relative down to the ground.

Pension freedom

As I’ve written before, from next April it becomes possible to effectively treat SIPPs as bank accounts, withdrawing pension savings from them at will.

Forget government-imposed GAD limits, forget drawdown regulations: take out what you will, when you will.

Conceptually, the idea is to give individuals the freedom to work out their own drawdown level, enabling them to pace the consumption of their pensions to match their own anticipated remaining lifespan.

So if the doctor gives you the news that the Grim Reaper will be calling in a year or so’s time, booking that first class cabin on your final world cruise becomes a realistic prospect.

But frankly, for wealthier pension savers like my relative, there’s another prospect, which is eating into capital only very modestly – if at all – and simply withdrawing the SIPP’s natural income.

Income transparency

In which case, the answer to the question “How do I know how much income I’ll receive in retirement?” can have a different answer.

Namely, in the immediate run-up to retirement, I think it’s sensible to actually begin building that income, switching investments from things like growth funds and index trackers into income-focused shares, investment trusts, and funds.

At which point, it becomes very straightforward to estimate the retirement income generated by a SIPP. It’s basically the income that is already being generated, plus the natural growth in income that is (hopefully) delivered by rising dividend payments.

That – to me, at least – seems a much better way of going about things. No more hawking your SIPP around various annuity providers, rate-tarting your way to the biggest annuity payout you can get.

An annuity payout, it is worth stressing, which has seen a considerable decline in recent years as gilt and bond yields have plummeted earthwards.

Annuity rates may at some point start to climb up to levels seen ten or more years ago.

But frankly, Euro-deflation, negative interest rates, and lacklustre global growth make the prospect seem increasingly remote to me.

Risk reminder: The income from an annuity is guaranteed. Dividend income from shares or investment trusts is not. There are many income investment trusts that have delivered a rising payout for decades, but that is not a guarantee they will do so in the future. So one pragmatic response to creating a secure retirement plan could be to look for a minimum income floor from safer investments, and then to augment it if you’re able to with higher risk / higher reward investments such as investment trusts.

Eat your own dog food

As it happens, I was able to impart one other piece of information to my relative.

Which was that this was the very strategy that I was pursuing myself.

Beginning this year – and partly impelled by the various post-RDR changes that we have seen in platform fees – I have been gradually switching my SIPP out of funds and index trackers, and into income-focused investment trusts.

Less urgently, I’ll also be doing the same with the ETFs and direct shareholdings that my SIPP contains.

(Why less urgently? Only because the fee structure of the platform in question penalises these less onerously.)

Longer term, I anticipate that income-focused investment trusts will be the prime constituent of my SIPP, thanks to their inbuilt diversification and income-smoothing properties.

Put another way, that is certainly where all my reinvested income is going, plus any capital that’s freed-up by cashing out of individual shares and recovery plays. (Message to Tesco: hurry up, please!)

Data desert

But which investment trusts to buy? Therein lies another interesting tale.

The paucity of hard data with which to readily compare investment trusts is shocking. Citywire has recently launched an online tool comparing investment trusts’ prevailing discounts and premiums, but I’ve found nothing really similar with respect to the data I’m most keen on – comparative costs.

Moreover, there’s another problem with the materials found on-line regarding investment trusts, which is that Citywire (and other online sources, such as Baillie Gifford and Hargreaves Lansdown) tend to celebrate individual managers a bit too much for my liking.

For an investor brought up to regard active management as zero sum snake oil, that slightly sticks in the craw.

Although, that said, I am prepared to accept that some managers seem better than others at devising resilient income strategies, which isn’t quite the same thing as zero sum active management.

Work in progress

So over the Christmas break, I began building my own data source.

Yep, a spreadsheet.

Naturally, it isn’t yet complete – real life, alas, invariably gets in the way.

But I’ve made a start.

Moreover I’ve begun the process of switching, based on what the spreadsheet is telling me.

Next month, I’ll hopefully be in a position to post the spreadsheet here. But in the meantime, if you’ve thoughts to share regarding your own favourite income-focused investment trusts, feel free to share them in the comments below.

Further reading:

• The Government has produced a handy guide to the new Pension Flexibility changes, which you can download as a PDF and read with a cup of hot cocoa.

Saving is the rocket fuel of investing. You can achieve big goals quickly if a hefty slice of your income is being invested and put to work for future you.

Simultaneously, your ability to live lean reduces the strain on your investments to deliver a massive crock of gold at the end of your rainbow.

Win-win.

Living on less is a badge of honour for me these days, but most people I talk to view the word ‘less’ as if it’s mortal peril.

What do they see? Misery, poverty, a fall from social grace? In a world of boundless choice, imposing limits feels like being clapped in irons.

But Thoreau said, “A man is rich in proportion to the number of things which he can afford to let alone.”

The reality is we can’t cope with all the world makes available to us. We will only ever taste a fraction of the goods and services on offer at Department Store Earth.

Not spending your money on one thing means you are creating an opportunity to use it for something of greater value. The trick is working out what is truly valuable to you.

This means practising the art of substitution.

Nay, the martial art of substitution!

At times it feels like ninja assassins emblazoned with the logos of Apple and Starbucks are coming at me with shuriken stars and Kendo sticks. They beat my brain into wanting their stuff. Hell, even my local pub wants to up-sell me to a three-course meal every time I fancy a quiet drink.

But the art of substitution is not just about liberating a few pennies by buying own-brand soap.

It’s about discovering what you really want. It’s about scraping off the layers of make-up slapped onto your face by consumer society and uncovering who you truly are.

The simple life

When you were a kid you were happy playing with a stick in the mud. My baby niece just wants food, cuddles, and someone to play with.

Much of what we bolt onto the list of essentials comes from a growing and fearful consciousness of our place in the pecking order.

Driving a BMW, ordering a latte with heart-shaped foam, skiing the same slopes as Martine McCutcheon, they’re just ways to reassure ourselves that we’re not a failure.

Never mind whether we’d be happier with a Seat, caffeine independence, a few days in Devon, and financial freedom.

It’s strange isn’t it, that everyone loves a bargain but when you pick up the own-brand items in the supermarket, the very packaging seems to be mocking you.

It literally makes me feel unhealthy, cheap, unable to provide. But it’s designer humiliation and it is a trick. A trick to make me hand over my money so that I can ‘win’ another round of the social comparison game.

Conspicuous consumption makes me feel like I’m winning when what I’m actually doing is surrendering. Surrendering my limited life’s energy to meet someone else’s values, expectations and prejudices. Half of which I’m probably imagining because of my own insecurity.

The only way to win is to disconnect your self-worth from your consumption.

There are probably sophisticated techniques to help you do this. I don’t know what they are, but they must work because apparently these guys are among the happiest in the world…

I’m not advocating poverty as a route to bliss. But this famous graph tells you everything you need to know about whether money buys you happiness:

The only technique I know is to remind myself every day of simple truths that make sense to most of us but that we sometimes find it hard to remember:

Independence, purpose, love, respect and social interaction is what really makes us happy.

Goods like these can be acquired in large quantity remarkably cheaply. But mostly they’re bought through a barter system where you give of yourself in equal or greater measure. They can’t be bought with trinkets.

I don’t have that much time left to make a difference to myself and the world.

No way I’m going to squander it on stuff that doesn’t matter.

Take it steady,

The Accumulator

Good reads from around the Web.

The last time I featured Under The Money Tree as my sporadic blog post of the week, it was because I was taken with the neat way he’d tabulated just how much money was needed as capital to generate an income to pay various household bills.

Now he’s done it again, except this time his table shows the loot you’d require to generate an income to match various earnings brackets assuming a yield of 4.5%, and also how many ISAs you’d need to fill:

He Who Dwells Beneath The Canopy of Currency notes:

Upon first glance it might seem quite daunting that you have to save the equivalent of 31 NISA allowances in order to produce a tax free income equal to the take home pay of the average UK salary (£1,748 per month).

It’s no lie that filling ISAs for 31 years to achieve the average UK wage doesn’t sound like a fast track way to financial independence.

Fear not, various things will speed it up. Check out the full post for five of them.

In making the intangible tangible, this table is such a cool idea. Okay, it’s essentially the same idea as last time, but then personal finance is a bit like Teletubbies or In The Night Garden – repetition is effective and reassuring, and there’s not much that’s new to be said anyway.

The same can be said of investing, as I’m sure ever-repetitive Monevator exemplifies (“Yes, okay, index funds, we get it” shout the crowds) but I’ve still gathered three dozen exciting fresh articles for you to peruse below.

Enjoy!

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