Not many weeks pass without a ‘financial expert’ telling us we will run out of money before we die. Is it really reasonable to imply that the rest of us have just mush between our ears?
I am certain that few people plan to run out of money before they die but, planning can go awry. I had experience of a case where a large part of the parents’ income was dependant on the success of one of their sons running the family business. Sadly, he couldn’t hack it, the business went bust and the parents’ income was halved.
In a recent blog post “I’m scared of living longer – our money has all gone” I highlighted the sad story of a couple much of whose income depended on the success of their business, which failed. That was not a low-risk plan for security of income.
Questions to ask yourself
Some people are lucky, some born with a silver spoon and some create a unicorn business. For most of us we should plan to make the most of the assets we have or can create.
Ask yourself these questions:
- What assets do I have?
- How much income will give me a comfortable life after full time work?
- How much income do I expect to come from my assets?
- Do I want to leave a specific inheritance to children or grandchildren?
I cannot answer questions 1, 2 and 4 for you but I can help you with question 3.
Income from investments
The 4% rule has long been a traditional measure of what was regarded as a safe withdrawal rate from capital, in particular from pensions. In the current market circumstances, I would normally expect to provide a yield of 4% from ‘natural income’ (dividends from equities, interest from bonds and rents from property) in a 50% Defensive and 50% Growth assets portfolio. I would also expect some underlying capital growth to keep pace with inflation.
The difference between drawing income from a pension fund and from an ISA or a personal portfolio is a matter of tax. After the tax-free cash, any money taken from a pension fund is taxed. Income from an ISA is free from tax and the personal investment allowance for dividend income from a personal portfolio is now quite generous.
The 4% rule is a good basis for reliable income in a long retirement when you are 65. Ten years later there will be little risk in taking 5% or 6%. If you want more, that’s OK but you will be spending your children’s inheritance. It’s your money, just don’t be too greedy.