HYP Income Retirement Planning

[Darka]

Not 100% certain this is the right board, but it's related to my HYP so I'll give it a go.....

As retirement gets nearer I'm attempting to create a very simple plan for the end of each year, including how to calculate the float and income that I can spend the following year but I can't decide between two different options on the income front.

Income for the upcoming year, is either:

1) Previous year's actual dividends + any pensions due in the upcoming year, etc.

2) Upcoming year's forecast dividends + any pensions due in the upcoming year, etc.

Obviously, neither will be 100% correct as forecasts can be wrong and dividends can be raised/cut etc.

So, I was wondering what those of you who are living off your HYP currently do, or for those not yet retired what do you plan on doing?

regards,
Darka

[Itsallaguess]

Income for the upcoming year, is either:

1) Previous year's actual dividends + any pensions due in the upcoming year, etc.

2) Upcoming year's forecast dividends + any pensions due in the upcoming year, etc.

Obviously, neither will be 100% correct as forecasts can be wrong and dividends can be raised/cut etc.

So, I was wondering what those of you who are living off your HYP currently do, or for those not yet retired what do you plan on doing?

I'm still working, but my plan is to use your Option 2, which is to utilise 'Forecast Dividend' figures to help provide an estimate of the next 12-month income from my HYP.

Even though I'm still working, I've used and tracked this planning technique for a number of years now, and whilst I can say that at an 'individual share' level, there is sometimes a degree of inaccuracy, I can also say that I have found the 'expected overall HYP income level' to be really quite accurate, and certainly accurate enough for me to warrant further use of this much simpler option.

Use of 'HYP-level forecast-income projections' using this option have been discussed many times in the past, both here and earlier back at the Motley Fool, and I believe some other HYP owners have found similar useful results at portfolio level, by the use of 'forecast yields'.

Some HYP investors prefer to use previous-year figures and already-announced figures, and sometimes see the use of 'forecasts' as a bit too 'finger-in-the-air', but I personally think that anyone assuming a particular company will pay out the previous-year dividend-payment is 'making a forecast', and I take the view that if we're then making a choice of listening to our own forecasts, or listening to the forecasts of the many brokers who have a much closer relationship with the companies they are forecasting against, then I personally prefer to listen to the people doing their 'brokering estimate' day-jobs, and I'm happy to simply remove and automate this particular calculation, especially when it's historically proven to be so accurate....

What I would say is that given it's the start of the year, you could get a HYP-level 'forecast income' figure now and compare it the actual figure obtained this time next year (taking into consideration any HYP portfolio movement, of course..), and if you were to do so then I'd certainly be interested in hearing your findings with regards to how close the result is in 12 months time...

Cheers,

Itsallaguess

[tjh290633]

I have a spreadsheet which lists all the dividends received in the previous 12 months, updated as dividends are declared and/or holdings are trimmed or topped up and holdings added or removed (such as in takeover or demerger actions). Special dividends are set to zero once paid.

Every so often I change the dates of those received to the next year and sort the list by date paid.

I do not use forecasts, except those issued by the company if reductions are planned. This gives me a reasonable forecast of my expected cash flow, if slightly pessimistic, and allows me to decide if I need to accumulate dividends for a known expense, like a cruise, or when I can use them to top up a holding.

The table lists announcement and ex-dividend dates, which change colour when the date is today.

I find it a very useful tool. Of course it has to be updated manually.

TJH

[Darka]

Even though I'm still working, I've used and tracked this planning technique for a number of years now, and whilst I can say that at an 'individual share' level, there is sometimes a degree of inaccuracy, I can also say that I have found the 'expected overall HYP income level' to be really quite accurate, and certainly accurate enough for me to warrant further use of this much simpler option.

Thanks itsallaguess, for the last 3 years or so, my preference was option 1, however in the last couple of months - with the intention to simplify as much as possible I think I've come to prefer the use of forecast dividends.

What I would say is that given it's the start of the year, you could get a HYP-level 'forecast income' figure now and compare it the actual figure obtained this time next year (taking into consideration any HYP portfolio movement, of course..), and if you were to do so then I'd certainly be interested in hearing your findings with regards to how close the result is in 12 months time...

I've already done this for a couple of years, so far they have proved pretty accurate which is why I think the forecasts are probably good enough:

Disclaimer, I am reinvesting all dividends and adding new cash to the portfolio - but not sure how to take that into account.

2017 - actual beat forecasts by 7%
2018 - actual beat forecasts by 0.7%
2019 - actual beat forecasts by 4.5%

regards,
Darka

[Darka]

I have a spreadsheet which lists all the dividends received in the previous 12 months, updated as dividends are declared and/or holdings are trimmed or topped up and holdings added or removed (such as in takeover or demerger actions). Special dividends are set to zero once paid.

Every so often I change the dates of those received to the next year and sort the list by date paid.

I do not use forecasts, except those issued by the company if reductions are planned. This gives me a reasonable forecast of my expected cash flow, if slightly pessimistic, and allows me to decide if I need to accumulate dividends for a known expense, like a cruise, or when I can use them to top up a holding.

The table lists announcement and ex-dividend dates, which change colour when the date is today.

I find it a very useful tool. Of course it has to be updated manually.

TJH

Thanks Terry,

I think your approach is probably more accurate.

The main reason for simplification is just in case something happens to me, I wanted something very simple for my wife to be able to do.

With a bereavement in our family last week it's very much focused my mind to get my spreadsheets/records significantly simplified so that I can teach/show my wife how everything works, just in case.

regards,
Darka

[monabri]

Realistically, would it not be better to plan based on the lower two figures of (1) v (2) and then build up a surplus (which can be re-invested, sit as cash...used for/towards a special treat)?

How much will next years dividends likely increase by..a few percent, perhaps? If a float of cash is sitting in your account, that is surely the easiest thing for someone to get their head around...a cash balance is easy to understand and could prove useful for instant-ish access in the event of an untoward event.

I would contend it is better to err on the side of caution.

[Darka]

Realistically, would it not be better to plan based on the lower two figures of (1) v (2) and then build up a surplus (which can be re-invested, sit as cash...used for/towards a special treat)?

How much will next years dividends likely increase by..a few percent, perhaps? If a float of cash is sitting in your account, that is surely the easiest thing for someone to get their head around...a cash balance is easy to understand and could prove useful for instant-ish access in the event of an untoward event.

I would contend it is better to err on the side of caution.

Thanks monabri,

As dividends come in, my idea is that they would indeed be paid into a float category in our collection account, being added to the starting float
for the year (which would set at 2 x monthly required income).

A monthly salary would then be calculated once each year (based on the forecast dividends at year end) and this would be paid monthly from the float into our bills and savings accounts by standing order.

I wouldn't retire unless this income was at least 25% more than required (once my SIPP kicks in - 5 years time, our safety margin would be about 50%), in addition we'd have a reserve of probably 2 years cash.

So, I have several safety mechanisms built in, hopefully they would be enough - I don't include state pensions, as I would use those as Dod does as purely travel money, hopefully.

regards,
Darka

[Itsallaguess]

The main reason for simplification is just in case something happens to me, I wanted something very simple for my wife to be able to do.

With a bereavement in our family last week it's very much focused my mind to get my spreadsheets/records significantly simplified so that I can teach/show my wife how everything works, just in case.

In that case, then I think the much more important aspect is the one that monabri has mentioned, which is the cash float...

Speaking personally, and in an ideal world, I'd have a future yearly income in mind that, once 'fixed from the outset', can hopefully be relied upon to continue into the future with an acceptable level of inflation-proofing raises.

So long as a suitable level of checking is carried out, using either of the two options you're considering to check future dividend income, then you could actually incorporate your cash-float into the process to perhaps help to deal with any 'down-years' that might occur, with top-ups being carried out from any yearly 'overflows', whilst maintaining a suitable level of inflation-proofing up-lift to the released income itself.

I think some sort of cash-float would need to be incorporated into that process for it to remove some risk, similar to the sort of 'income-reserve' that Investment Trusts use to help them achieve multi-year records of 'no-cut' dividends. That could even be a separate 'pot' completely away from, perhaps, a 'two years income' emergency-fund that you might also consider too....

Regarding your other point of currently re-investing dividends and adding new cash to your HYP, then it's not clear what your intentions would be once you actually retire, and if those two processes were to continue in any form, even if they were at a much lower level than currently.

If they are, then you're then adding in another layer of 'explanation and process' that's going to have to be conveyed to your wife...

My own thoughts in this 'falling off the twig' area are off-topic for this board, but as a brief explanation it would involve the liquidation of single-share holdings and the re-investment into income Investment-Trusts, all of which already currently exist alongside my single-share holdings. This would then enable my wife to 'sub-contract' much of the management side of my income-portfolio out to various IT-managers, including taking advantage of their own IT-level income-reserves, but I'll leave that discussion there and would be happy to continue it over on the High-Yield Strategies Board if it's a technique that might have some legs in your own considerations..

Cheers,

Itsallaguess

[Dod101]

There is a huge amount of effort that seems to go in to planning. I never did any of that. I think you need a year or two of actually trying to live off last year's actual income, and try to set a budget of your likely expenditure. I do not pay myself per month; I gave that up when I stopped working. My expenses have long settled down to less than my income so I just draw down funds as I need them. Because I do not have any pension other than the State pension my cashflow can be quite irregular but then so is my expenditure. For instance I have just filled my oil tank for household heating. That costs the best part of £1,000, but happens only every 9/10 months. I do not budget for that but spend more in that month than in other months. If I took a regular monthly income I would need to do as I used to do when working and save in some months to meet this sort of expenditure irregularly. I would hate to have to be bothered with that.

Going back to the OP, I would not use forecasts; I would use actuals from the last full year and see how you get on.

Dod

[Darka]

I think some sort of cash-float would need to be incorporated into that process for it to remove some risk, similar to the sort of 'income-reserve' that Investment Trusts use to help them achieve multi-year records of 'no-cut' dividends. That could even be a separate 'pot' completely away from, perhaps, a 'two years income' emergency-fund that you might also consider too....

Thanks,

I already have plans for a float, safety margin and income reserve (see my post above yours, I think we posted at the same time) - I think they should be enough.

Regarding your other point of currently re-investing dividends and adding new cash to your HYP, then it's not clear what your intentions would be once you actually retire, and if those two processes were to continue in any form, even if they were at a much lower level than currently.

If they are, then you're then adding in another layer of 'explanation and process' that's going to have to be conveyed to your wife...

My own thoughts in this 'falling off the twig' area are off-topic for this board, but as a brief explanation it would involve the liquidation of single-share holdings and the re-investment into income Investment-Trusts, all of which already currently exist alongside my single-share holdings. This would then enable my wife to 'sub-contract' much of the management side of my income-portfolio out to various IT-managers, including taking advantage of their own IT-level income-reserves, but I'll leave that discussion there and would be happy to continue it over on the High-Yield Strategies Board if it's a technique that might have some legs in your own considerations..

Cheers,
Itsallaguess

Completely agree, and without going too much off topic, your IT suggestion is already the plan, I've been moving in that direction and it's where I would instruct my wife to reinvest any surplus income.

We do intend to continue to invest post retirement, as it will help the portfolio income increase above inflation along with any dividend increases too of course.

regards,

[Darka]

There is a huge amount of effort that seems to go in to planning. I never did any of that. I think you need a year or two of actually trying to live off last year's actual income, and try to set a budget of your likely expenditure. I do not pay myself per month; I gave that up when I stopped working. My expenses have long settled down to less than my income so I just draw down funds as I need them. Because I do not have any pension other than the State pension my cashflow can be quite irregular but then so is my expenditure. For instance I have just filled my oil tank for household heating. That costs the best part of £1,000, but happens only every 9/10 months. I do not budget for that but spend more in that month than in other months. If I took a regular monthly income I would need to do as I used to do when working and save in some months to meet this sort of expenditure irregularly. I would hate to have to be bothered with that.

Going back to the OP, I would not use forecasts; I would use actuals from the last full year and see how you get on.

Dod

Thanks Dod,

Before I actually retire from work I intend to live completely off dividend income for at least 12 months, my salary during that time will be 100% saved towards providing the income reserve.

We already budget, so I know what my expenses should be in retirement (hopefully) and have based my portfolio on providing at least 25% more than that at the point I dry-run living of the income.

Only at that point, would I then quit work - I think initially I would prefer a 'monthly salary' in retirement and just see how that goes.

regards,

[kempiejon]

I like the plan of holding a year of expected income as a float, braw an income fro that and replenish it with dividends earnt. In fact, my plan involves holding 3 years of reserve income with 1 year held in advance of that year's income topped up towards the end of each tax year from selling unsheltered funds and/or drawing ISAd dividends, I'll reinvest ISA/SIPP income until the unsheltered holdings are run down.

Quick back track though Darka, do you know what your expenditure will be annually? I kept an itemised spending diary back in 2011/12 I occasionally update it so I know how much I want each year, currently I am building my buffer and income excess above that expense. I'd like to be bringing in 10/20% more than my required budget and hold at least 3 years cash in reserve. I know my rolling 12 month of income and spending and I'll base my calculations on those numbers when I stop working.

[Darka]

I like the plan of holding a year of expected income as a float, braw an income fro that and replenish it with dividends earnt. In fact, my plan involves holding 3 years of reserve income with 1 year held in advance of that year's income topped up towards the end of each tax year from selling unsheltered funds and/or drawing ISAd dividends, I'll reinvest ISA/SIPP income until the unsheltered holdings are run down.

Quick back track though Darka, do you know what your expenditure will be annually? I kept an itemised spending diary back in 2011/12 I occasionally update it so I know how much I want each year, currently I am building my buffer and income excess above that expense. I'd like to be bringing in 10/20% more than my required budget and hold at least 3 years cash in reserve. I know my rolling 12 month of income and spending and I'll base my calculations on those numbers when I stop working.

We've used YNAB to budget for the last 3-4 years so have a good idea of expenses in retirement.

I do like your idea of holding a year's income for the float, I was intending 2 months income so may increase that - it would of course require working longer to build that.

My wife is older than me and will retire first, so I'm not sure I would want to miss those early years of her retirement as none of us knows how long we have.

[Dod101]

Before I actually retire from work I intend to live completely off dividend income for at least 12 months, my salary during that time will be 100% saved towards providing the income reserve.

We already budget, so I know what my expenses should be in retirement (hopefully) and have based my portfolio on providing at least 25% more than that at the point I dry-run living of the income.

Only at that point, would I then quit work - I think initially I would prefer a 'monthly salary' in retirement and just see how that goes.

I am not a very good example, but I think you and anyone who is taking the trouble to plan in detail as you are will be fine.

What I have done for some time is keep track of my expenses. I find that very helpful and it allows me to see where money is going and sometimes do something about it. For instance I was spending a ridiculous amount on my BT bill each quarter and have chopped a third off that. I buy a lot of books and am surprised at how relatively little I spend on them. They are value for money especially if buying from Amazon. And then booze............

It lets me see my annual expenditure and how much I can afford to give away for instance the grandchildren.

Dod

[kempiejon]

We've used YNAB to budget for the last 3-4 years so have a good idea of expenses in retirement.

I do like your idea of holding a year's income for the float, I was intending 2 months income so may increase that - it would of course require working longer to build that.

My wife is older than me and will retire first, so I'm not sure I would want to miss those early years of her retirement as none of us knows how long we have.

I've been planning my early retirement for 15 years and I'm nearly there I just need to get a bit more cash and bold enough to make the cut. Your 3 or 4 years of budgeting data is excellent as is the rolling income records so it looks like you're well planned. I agreed that putting it off and missing out on early years is missed opportunity but being poor is a risk too. 2 months would probably smooth out monthly dividend income variations but my year of income float is part of my 3 years of liquid assets to get me through hard times in the market.

[MDW1954]

So, I was wondering what those of you who are living off your HYP currently do, or for those not yet retired what do you plan on doing?

regards,
Darka

I'm not living off my HYP, but for the past 18 months I have been drawing an income from it, in order to maintain a standard of living as I wind down into retirement or semi-retirement. (Because of what I do for a living, I may never fully retire -- earning into my mid-70s or beyond is entirely possible.)

My approach is to take a fixed sum every month, that equates to about two-thirds of the HYP's income. The remainder is either used for reinvestment, or to build up a cash reserve.

I have found it to be a good confidence-builder.

MDW1954

[funduffer]

I have found HYP income forecasts based on forecast yields pretty accurate at portfolio level.

However, there are sometimes 'funnies' in the data. An example:

South32 has for many months shown a forecast yield of over 10%, which I never believed. Now it magically shows 4.5%, which seems much more likely.

So if you use HYPTUSS, then you need to eyeball the forecast yields and check for 'funnies'. Problems seem to arise with shares who give out dividends in foreign currencies, and who switch specials on and off.

Not sure if your wife will want to be checking for 'funnies' though! Perhaps just check if historical yield and forecast yield are wildly different - which they can be of course if specials are involved.

FD

[tjh290633]

That South32 comment reinforces my view that you are better gathering your own data rather than relying on sites to do it for you. The dividend announcement was on 22nd August, so there is no excuse for publishing duff gen.

TJH

[Darka]

That South32 comment reinforces my view that you are better gathering your own data rather than relying on sites to do it for you. The dividend announcement was on 22nd August, so there is no excuse for publishing duff gen.

TJH

That's a very good point.

[Itsallaguess]

That South32 comment reinforces my view that you are better gathering your own data rather than relying on sites to do it for you.

It's a fair point, but we should remember that Darka started this thread looking for a very low maintenance process to hopefully pass on to his wife, and constantly 'gathering your own data' at single-share level during the lifetime ownership of a HYP might not quite align with that initial proviso...

We should also remember that previous-year dividend-payments are only useful if they continue to be paid at that level or higher, and to discuss a potential data-anomaly in a South32 forecast without also acknowledging that a potential future dividend-cut that might come from left-field without warning (and taking into account the requested 'hands-off' approach to portfolio-management in this thread, which makes such a left-field issue much more likely..), then I personally would see the potential risks of either of those situations as being more or less balanced in the context of the OP's initial requirements....

Which brings us neatly back to the real issue, in my view, which is to simply 'accept' that there's going to be variations in either using 'forecast-data', which might not always be 100% accurate (and certainly at single-share level...), or using 'past-payments-as-a-guide-to-the-future', which again might not always be 100% accurate (given the potential risk of dividend cuts arriving at any time...), and then once we've 'accepted' that both data-sets have their limitations, the actual important issue is to then ensure that the 'float', and 'income-reserve', and other necessary buffer-like systems are in place to simply 'cope' with those variations, no matter which one is actually used...

So then, if we've got the float and income-reserve systems set up to cope with expected 'future-dividend' variations, and I would take the view that those systems are likely to be very similar no matter which data-set we might use, then we're right back at the start of the conversation, where Darka is asking which might be simplest to use as a guide, and I remain of the view that an automated process using readily-available forecast-yields, which are attested to be really quite accurate over many years at HYP portfolio-level, is likely to be much simpler to use in Darka's requested situation than one which required the constant 'manual gathering' of the required dividend information at single-share level for the life of the HYP portfolio ownership...

Just my view - but it's one based on many years of testing HYP portfolio-level forecast-income, and the results of those tests have shown such a process to be quick, simple, and effective at HYP portfolio level....

Cheers,

Itsallaguess