This should be prudent, as in reality you would cut back when the markets are down, you may have some months where you do a little bit of work and get a little bit of side income, you might not spend the full withdrawal amount, etc
At the end of May the position of Mr Z’s portfolio before any drawdown, would be;
Any distributions will be taken directly and then any remaining withdrawal will be taken to re-balance towards the 75:25 allocation with any dealing costs picked up by poor Mr Z himself out of his £2,083. This should then skim off any parts of the portfolio that are doing well and hopefully give any flagging parts of the portfolio catch up while avoiding drawing on capital unnecessarily.
So, in the current environment, that would leave you with the choice of selling down capital or reducing the withdrawal rate and so increasing the amount of capital you would need to hold.
Some musings on income
My personal plan during accumulation is to utilise the easy diversification offered by global tracker funds, throw in some emerging market and small-cap trackers, combine with some cash/bonds and then largely leave it. Combined with some occasional rebalancing I’m hoping that this will offer me the best chance of generating a sufficient total return.
At some point I will need to make a decision on what investments I will be using once the ‘drawdown’ phase is reached.
It would sure be nice to cover expenses with income alone, with a bit of a buffer on top.
Options could include;
Considered bad value currently, but with gilts offering such low yields at the moment (the typical assets that would back these insurance products) that’s no surprise. Who know’s where these products will be in 10-15 years time, I do think it is an area that will be developed over the next few years following recent pension freedom. Variable annuity type products could take off and perhaps become the next with-profits whirl wind.
On a single life RPI linked annuity with a 5 year guarantee you are looking at c£2.2k a year on a £100k, so 2.2% +RPI. Seems expensive, but that is reflective of increasing longevity and shitty risk-free rates available.
It would be awesome (in a massively sad way) to be able to annuitise against a basic level of living expenses, say £10k a year. You run the risk of croaking it just after purchasing the annuity, to the massive profit of the insurer. But it would provide a base level of stress-free income and free up the other capital for more risky ventures, like stock picking or bear wrestling.
At todays rates, £10k of annual annuity income would need around £465k of capital to invest, which does seem expensive.
A high yield dividend approach
Active income funds
Rebalancing into income producing assets
Makes sense, we don’t want volatility that we can’t handle just as we start to rely on our capital for sustenance.
But perhaps we need to start moving, away from assets that provide the expected return that we need to meet out capital goals, towards assets that provide the income that we want. A slow shift towards HY holdings from a world equity tracker perhaps that could look something like;