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Retiring and living off investments
uhm
Posted: 10 February 2017 11:55:40(UTC)
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I am in my mid fifties and considering - or more rightly, being forced to - retire from running my part owned business. I have built up assets including my main residential home, SIPP, ISAs and cash savings. I am planning to eventually downsize my residential home and move to a cheaper part of the country. In the meantime I would be living off the other investments, starting with the cash savings. Does using the cash savings first and leaving the investments untouched for as long as possible make sense?

I have read the Morningstar paper from May 2016 on safe withdrawal rates for UK and European investors. I basically suggests that the 4% per annum rule is too high and a safer withdrawal rate of between 2.5 and 3.0% would put one at less risk of eventually running out of money.

I would therefore look at withdrawing 2.75% a year from my total investment pot (excluding the house). I have not factored in state pension as this still seems too far off to think about for me.

It would be interesting to hear how others in a similar position manage - especially regarding withdrawal rates and methods. For example, do you just draw off natural yields (dividends etc) or do you use a combination of yield and growth to draw on?

Thanks for reading this
ermine
Posted: 10 February 2017 12:39:56(UTC)
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You typically want to hold about a year to two year's worth of cash if you are living off investments. This is to avoid being a forced seller in a down market.

So yes, you would want to use the cash first up to about that sort of limit, though you also want to take a big picture look at your asset allocation, it may be that you have too much in cash - if you had ten years' worth you would be open to the hazard of inflation, which needs balancing against the hazard of volatility
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Catch The Pigeon
Posted: 10 February 2017 12:50:24(UTC)
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I think a gross withdrawal rate of 4% is fine, after investment and platform costs, you are looking at a net 3%.
uhm
Posted: 10 February 2017 13:05:20(UTC)
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ermine -

I agree with you on the cash aspect. I wish I had invested my cash many years ago rather than holding on for that "rainy day". I have my reasons for this - mainly that as I run my own business, unlike my employees I am never guaranteed a wage at the end of the month. There have been periods in the past when I had to forego wages in order to keep the company going. I suppose I over compensated for this by over weighting cash.

Now of course I would be loathe suddenly to plough say, several years of cash into equity / bonds in one go. I may be better putting a year's worth in per year, for example, until I reached a lower level as you suggest.

Tug Boat
Posted: 10 February 2017 13:52:06(UTC)
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I'll tell what I do as I am now in the position of being retired and living off investments.

Mrs Boat has a pension which we draw.

We have ISAs and take the natural yield.

I have a SIPP where I draw the max to keep me from paying tax about £900 a month. The SIPP has a cash buffer of two years income.

I have been doing this for two years, the ISAs and SIPP have increased in value even after taking the income.

I can't advise you what to do other than to say think very hard before drawing all your cash.
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Keith Hilton
Posted: 10 February 2017 14:10:41(UTC)
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I'd work on a withdrawal rate of about 3%, which should be sustainable. This should be reviewed periodically to ensure that you're not drawing down too much. After a few years you might find that you can increase this amount, if your fund is performing well.

You don't state whether you want to leave an inheritance or deplete your fund over your lifetime. If the latter, then you would be able to withdraw slightly larger amounts. Your SIPP can be passed on exempt of IHT, so if you have beneficiaries, you might wish to drawdown from this last (following point excepted).

Don't ignore your state pension, since you might want to balance your retirement income, by drawing down a larger amount initially, then scaling back when the state pension kicks in. Pay attention to income tax and ensure that you use your full tax free allowance each year, even if this means re-investing some of the income back into ISA's etc.
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Mr Helpful
Posted: 10 February 2017 14:18:19(UTC)
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The ideal goal in retirement is to live within the ‘natural yield’ of the Investment Portfolio.
For others where this is not the case, and capital has to be drawn-down in retirement, then one of the better plans is outlined in Frank Armstrong’s book ‘The Informed Investor’, chapter 18. (second hand copies quite cheap and a useful read for any investor).

The simple two bucket approach :-
Bucket 1 : 5 years (better 7 years) of income needs in cash and/or short term bonds.
Bucket 2 : Global Stocks
Designed to prevent selling stocks at distressed prices (£ cost ravaging) while maximising reasonable exposure to the long term outperformance of stocks.
When stocks are hitting a rough patch the retiree draws from Bucket 1.
When stocks are surging (e.g. hitting all-time highs as at present) the retiree draws income from stocks (Bucket 2) and replenishes Bucket 1.
Very few other retirement plans seem to offer as satisfactory a solution to side-step the Sequence of Returns Risk problem.

Frank has a (new?) on-line book ‘Investment Strategies for the 21st Century’ at ‘Investorsolutions.com’, from which below is an extract :-

“I assumed that the investor would re-balance the portfolio so that in good years he would replenish his hoard of short-term bonds, and in bad years he would draw it down. This idea isn’t entirely new. A similar technique was used by Pharaoh about 3,000 years ago with some notable success.”
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Alex Peard
Posted: 10 February 2017 14:20:53(UTC)
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I agree with the comment above. You need to draw enough taxable income from your SIPP to utilise your personal allowance each year. Otherwise this allowance is lost and you will end up drawing the income in later years and paying tax on it. If you do not need the income you can put into an ISA or even non ISA investments now the new dividend allowance is in place.

I have been mostly retired for nearly ten years, since age 51, and was worried about living off investments at first but it has worked out okay and my capital has increased despite the capital taken out. Of course markets could tumble from here but I have about 25% of my SIPP and other investments in cash as a precaution. I took all my tax free cash from my SIPP's in 2014 as I was concerned a future Labour government might restrict the amount of tax free cash that could be taken. Happily that didn't happen but I don't regret taking the cash and enjoy managing the investments.

Good luck!
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Geoff N
Posted: 10 February 2017 14:24:42(UTC)
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I have a range of income funds/investment trusts to supplement my pensions - largely in global and equity income. These are paying around 3.5% on average. I prefer just to take the natural income only as otherwise I may be selling units in a down market and this will only help to deplete my original investments at a faster rate. Have always preferred not to invest in higher risk bond funds for the higher income as I have found that income is paid at the expense of lower fund values. A generalisation but over many years I have found this to be so.
I ensure I have at least 12 months emergency cash and enough for any larger ticket items I may in my mind be looking to buy over the next 3-4 years. Yes rates are poor and cash will be eroded in real terms by inflation but I find it an important aspect because there is always the possibility that when those unexpected larger ticket items arise it may mean selling out of the market after a crash or just plainly at the wrong time.
Whilst everything in the market looks euphoric at the moment I have learnt that things can turn very quickly.
Invest most definitely for growth and regular income. Reinvest the income/drip feed regular sums if you think cash balances are too high but always keep an amount there that you feel comfortable with.
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uhm on 10/02/2017(UTC)
uhm
Posted: 10 February 2017 15:00:10(UTC)
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Mr Helpful

Yes that was helpful - the two bucket approach is in line with what I already have in terms of cash allocation.

Thinking of cash - it may be wise to take the cash out of the cash ISAs and premium bonds and use up my SIPP allowances for this and last year. I would then get the tax rebate but could still just leave the cash in the SIPP as part of Bucket 1. Does that make sense?

I'll get hold of that book - thank you.
uhm
Posted: 10 February 2017 15:14:55(UTC)
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Alex Peard -

Thanks for the thought on maximising my annual tax allowance - very relevant. Drawing on cash ISAs, current accounts etc would not come into tax, so by not taking income from my SIPP, I would automatically lose my personal tax allowance for that year.

As you say, best to withdraw up to the personal tax allowance limit from the SIPP and reinvest it in an ISA if I don't need it for living expenses.

I have heard about reinvesting some of that money back into the SIPP - but it might not be worth the risk of falling foul of complicated regulations to do with that.
Alex Peard
Posted: 10 February 2017 17:47:38(UTC)
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uhm -

Recycling of pension tax free cash is a hot topic with the Treasury's decision to reduce from April the amount individuals can put into SIPP after they have crystallised a SIPP. In any event unless you have enough relevant earnings you are restricted to the £3,600 pa which any non working person (under age 80 I think) can put into a SIPP. I don't really see the point of putting money back into a SIPP as a basic rate taxpayer as although you get tax relief on entry you pay tax when it is taken out (if you are a taxpayer). I do put the £3,600pa (costs me £2,880) into a SIPP for my wife as she doesn't work and she will withdraw the fund between ages 60 & 65 whilst she is still a non-taxpayer (she will get pensions at age 65 and become a taxpayer).
uhm
Posted: 10 February 2017 21:41:25(UTC)
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Before going any further I would like to thank everyone who has taken the time to reply with suggestions and info on how they manage. This is going to be the biggest change in my life since starting work so all your comments are much appreciated.

Geoff N -

I intend to keep all my holdings the same - they are a mix of mostly passive funds / etfs and a few active funds / individual shares. I have been gradually moving towards all passive for ease of management vs performance. Most of my passive funds are accumulation type so the yield isn't there in cash to be seen, but I can find it by checking the latest fact sheets. I would have to sell of some units in that case to fund the withdrawals, but that shouldn't be too troublesome or costly if I do it just once or twice a year.

Alex Peard -

Yes I agree pension re-cycling sounds pointless when you put it like that and for a limit of £3,600 it hardly seems worth dipping into any hot topics with HMRC.

Keith Hilton -

We're pretty close there on withdrawal rates of 2.75 / 3% I think 3% was Morningstar's advisory upper limit. Whilst I do have beneficiaries, I don't intend to leave the investments - just the (scaled down) property - assuming it doesn't have to be sold to fund a care home!. However, I am quite cautious, so I don't intend to spend my investments down to nothing, hence my initial choice of a lower withdrawal rate of 2.75%

For the first year or two I may restrict myself to withdrawing cash only so the equities / bonds can continue to grow (optimistically of course). I would still have a reasonable cash buffer after that, but could then start withdrawing some investments - say 50/50 investments / cash, increasing the investment proportion every year in order not to overly deplete the cash.

It sounds like I'm answering my own questions now, but discussion on a forum like this can have this effect!

Tug-Boat -

I agree with you not to draw too much cash - presumably you need that to cover years when investments go down. Sounds like the proportion of cash / investment withdrawal needs to be reviewed every 6 months.
mark antrobus
Posted: 10 February 2017 22:46:45(UTC)
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Really sorry to hear you are being forced out from your business. Age discrimination? I am the same age as you and have similarly built up worthwhile assets. Are you in reasonable health? If so have you considered working if only to keep active? After all many people today seem to live a lot longer than they might have expected,
My suggestion would be not to give in to retirement. Supposing you were able to work; then with your earnings would you be able to withdraw just the dividends from your investments and still maintain a reasonable lifestyle? That way you would not have to worry about depleting your capital and facing poverty in old age; in fact by managing your capital sensibly as you appear able to do, both your capital and the dividends should grow over time.
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King Lodos
Posted: 10 February 2017 23:02:15(UTC)
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Two problems:

1) 36 years of falling rates and now QE have pushed government bonds (and by extension most other asset classes) up to historically high levels .. So returns going forwards (at some point) are likely to be low .. On valuations alone, a traditional 60:40 portfolio could be expected to return 1% real annually.
https://www.researchaffiliates.com/en_us/asset-allocation/portfolio-analysis.html

2) The most inflated assets are yielding assets – bonds, bond proxies, dividend stocks, etc.

So what I'd do is take a leaf out of the endowment portfolio book .. Hold a very diversified portfolio across the risk spectrum, and withdraw from capital annually/quarterly.

So what the endowments might do is hold a portfolio like this – then rebalance back to those asset allocations periodically .. When you sell (to rebalance) withdraw an income from that, always getting back to your original portfolio asset allocations:

http://giving.princeton.edu/sites/default/files/styles/content-full/public/600-Policy-Portfolio-chart.jpg
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Alan Selwood
Posted: 10 February 2017 23:36:30(UTC)
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Some good answers on this thread.

I think it wise to hold adequate cash to cover both likely capital expenditure (car, domestic appliances, redecoration, etc) and a 'float' to take you through a couple of years of down markets.

I certainly favour the bucket approach, where the cash bucket is drawn on where needed to supplement the natural yield but topped up in good years from the other bucket to avoid running the cash bucket too low and risking having to draw on equity capital in down years.

In an ideal world you would draw only the natural yield if you wished to preserve the capital either for your later years or for the next generation. Any drawing above the natural yield increases the risk to future income streams.
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xxd09
Posted: 10 February 2017 23:42:32(UTC)
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Hi uhm
Just my tuppenceworth
Like you retired mid 50s-now 70
Wife has a Govt Pension
We also have a. SIPP and ISA each-invested in Bonds and Equities -using Index Funds-Accumulation format
Did initially take the 25% tax free cash from my SIPP-lived off that.-left Investments to run
Used a High Interest BS Account for cash storage and liquidity-good interest rates in those days!
Aimed to take 3.5% from the Portfolio-regarded SIPPs ,ISAs and BS Account as one Portfolio !
Currently keep 1years cash in a High Interest BS and sell shares or bonds from my ISA as required and top up the High BS Account
Will move onto wife's ISA in time
Have also taken 25% Tax free cash from wife's SIPP
Still using 3.5% withdrawal rate
"Portfolio" larger than when we started out!
Wife pays Tax -Govt Pension -I don't-yet!
I do take the a tax free sum from my SIPP (difference between Personal Allowance and State Pension) every year
Will start drawing from SIPPs eventually-maybe-I will have to pay tax then!
xxd09
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Jon Snow
Posted: 11 February 2017 01:16:06(UTC)
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The safe withdrawal rate argument (SWR) goes on and on, much is written in the US financial press about SWR because they don’t have the same “state” pension system as the UK or the same DB schemes that the UK does.

When I see articles advocating a max SWR of 2.75% or 3.0% being widely touted and 4.0% seen as adventurous and 5%+ seen as no go I just wonder who is making these suggestions and what are their motivations and more importantly where is the evidence for advocating these (low) SWR, not projections of future returns vs SWR % and when you’ll run out of cash, actual examples of real world experience.

I have a pretty decent sum invested in ISA’s, F&S, SIPP, BTL, commercial and agricultural property and cash interest. I take 6% pa. income from paper investments. I don’t sell when the price falls (that works against you), I just stick with my chosen investments and if you’ve chosen wisely they’ll come back (eg HFEL).

I take 60% of the natural yield from my SIPP and reinvest the other 40%, because I don’t need/want the extra income and I don’t want to pay tax on it and I can build up an IHT free pot to leave to my family when I pop off.

I keep 10% of my pf as a play, I think many investors are to some extent gamblers, they think they have the edge and they like to play it. I do, anyway and I manage the downside by capping my theoretical exposure to 10% (assuming zero correlation with the main pf, which is a flawed argument). I don’t expect income from this part of the pf and I follow a two strand strategy with the 10% -

1. I chase dividends, sometimes it doesn’t work (like early 2016) I was eating my capital for a while, sometimes (since Sept 2016) it works like a dream.

2. I invest in out of favour sectors/markets or (god forbid) tips from the Citywire forum.

SRG tipped LVD I bought a bit, should have held on….
MNL
JRS

Individual shares make me twitchy, prefer collectives, 50 holdings will mitigate individual share risk and leave you with market risk alone.

I haven’t considered bumping up your income with selling winners and the CGT allowance because I follow this core mantra –

A Southern gentleman never spends his capital

For a more rational analysis, you could try

http://monevator.com/no-safe-withdrawal-rate/

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King Lodos
Posted: 11 February 2017 06:05:56(UTC)
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I think the reason they're conservative is because, over the really long-term, things like non-US stocks have only returned about 5% real..

You get lulled into forgetting what bear markets feel like and do for your average returns .. In effect, when you get bull markets like we've had recently, markets aren't really generating higher average returns; they're just giving you future returns a bit early.

When the risk-free rate (10 year treasuries) is 2.3%, and people are still buying these bonds, you have to consider there is risk and uncertainty in targeting more than that .. I still expect to aim for 20-30% annual returns, but I don't think I'd have 50% of my portfolio in Shorts, and some decades nothing goes up.
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uhm
Posted: 11 February 2017 19:05:18(UTC)
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mark antrobus -

I haven't actually been forced out as yet, but getting out of the business is the 'nuclear' option for me should my wish to reduce my hours be met with continuing opposition from a younger acting partner. So yes, it is a type of age discrimination in some ways as my ideal choice would be to remain working with a slight reduction in hours. Fortunately I am in good health and this is one of the reasons for wanting to reduce my hours - to enjoy some life whilst I am in that fortunate state. I have seen many people work long hours to an old age in order to build up a fortune, only to then fall to ill health whereupon all the money in the world becomes irrelevant. If I do end up with no option other than to leave the business, I would then try to find some part time work. I have even started writing a CV for the first time in my life! Part time work would probably cover my spending anyway as other than food at home, we are quite happily frugal and have never been in any debt (other than a small mortgage which isn't worth paying off with such a low interest rate).

King Lodos -

The Research Affiliates graph makes grim viewing for me as a large chunk of my portfolio is in Vanguard Lifestrategy 60/40. I originally invested some lump sums into LS 60/40 between 2011 - 2012, with drip feeds since. I know I may have done better with well chosen individual shares and ITs, but I gradually discovered that I certainly don't have any edge over the market - other than following the occasional director's buy - nor do I have the time to devote to research whilst I'm working full time. I am therefore happy with the performance of LS 60 /40 up to now, but a 1% growth rate going forward (is that with dividends re-invested?) sounds very grim.

xxd09 -

It's interesting to read the different levels of cash held by various contributors. You're lucky to have found that elusive high interest BS account today as well! I think have kept too many years' worth of 'cash in the bank'. Should have stuck much more of it in the LS 60/40 as soon as I discovered Vanguard!

But I wonder if keeping cash is more prevalent among the self employed whose earnings are not guaranteed every month, than among fixed salaried employees? Looking back though, it is only for intermittent shortish periods that I could not draw a monthly income from the business, but it must have made me somewhat overcautious towards non-cash investments.
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Mickey on 13/02/2017(UTC)
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