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Re: When to draw down the capital

Posted: August 13th, 2019, 5:38 pm
by TahiPanasDua
I should have added above that we do a similar thing with our ISAs. We don't touch the income preferring to reinvest it for obvious reasons. But we have a long time to wait until we run down the taxable account as we couldn't buy ISAs, or their predecessors, for decades due to being expats. At 40k a year the ISAs should mount up but we only have 3 years of contributions at present. Everybody's gotta start somewhere.


Re: When to draw down the capital

Posted: August 13th, 2019, 5:56 pm
by Alaric
bluedonkey wrote:Where there is ISA + Taxable pot + SIPP, there is a further tax complication in that preserving the SIPP can have IHT advantages.

It should be usually worth taking enough out of the SIPP to get the tax free 25% and the personal allowance. But you might also want to raise £ 2880 by an asset sale every year to put into a SIPP.

Re: When to draw down the capital

Posted: August 13th, 2019, 7:26 pm
by TUK020
bluedonkey wrote:Thank you Alaric for the exec summary!

The scenario appears to be ISA + Taxable pot. Sell off the taxable pot to equate to the income that could be drawn from - but is instead accumulated in - the ISA.

Where there is ISA + Taxable pot + SIPP, there is a further tax complication in that preserving the SIPP can have IHT advantages.

Also a consideration: managing your income withdrawal from the SIPP to stay on the right side of a tax break. So even if you have money in a taxable account to drawdown, you should always take your tax free allowance from the SIPP as the starting point.

Re: When to draw down the capital

Posted: August 14th, 2019, 4:54 pm
by Julian
Alaric wrote:
TahiPanasDua wrote:Julian obviously put in a big effort to explain his new monitoring approach. A splendid effort.

The basic premise is :-

You have assets in both ISA (tax exempt) and taxable accounts and both pay dividends.
You need most of the dividends for living expenses.
You structure your affairs so as to leave ISA arising dividends in the ISA and to also add the maximum possible to the ISA every year. You do this by periodic sales in the taxable accounts.
Depending on how investments perform and how much you spend, there will reach a point where the taxable account has been run down to zero and you have to start withdrawing from the ISA.

Yes, but there were intended to be a few other points in my post covering psychological/character issues which were actually the main thrust of the post. Some might consider those totally irrelevant - "why on earth wouldn't you just do the financially most appropriate thing?" (assuming you are confident that you know what it is) - but I happen to know that at least a few people here have in the past expressed sympathy with my view that for some people psychological tricks to help break past conditioning/deeply-routed-preferences can be necessary before feeling comfortable with certain changes of direction. So to your summary I would add the following ...

1 - Breaking the link between income-drawn and dividends-received, in my case by pre-loading my collection/savings account pairing with an entire year's worth of living expenses on 1-Jan each year. What that does is actually decouple dividend income earned in any given year from the spending that year. Dividends earned in the current year are simply collected over the year and then contribute towards reducing the level of capital sell-off required to prime the account with the income required for the following year. There is no longer any need for a monotonically increasing (or at least not decreasing) flow of dividends year-on-year or for the absolute level of dividends receieved to anywhere near cover the money being drawn in the following year. If in some years dividends disappoint then a higher capital sell-off will be required at the start of the following year, or in other years the other way round. Essentially I view it as having put an abstraction layer on top of the harvesting of my investment returns so that I don't really care how much comes from dividends vs from capital sell-off in any given year or how the dividend stream behaves year-to-year. I find this useful and immensely liberating.

2 - Maintaining the salary illusion. (1) above also enables me to maintain the illusion that my investment income is a regular salary, paid to me by myself via the month-end standing order made from my collection account into my main bank account just like a monthly pay check. This was something that was critical to me when I was an HYP investor living off dividends so it was important to me to maintain that property now that I simply live off "investments" rather than dividends. Some people might not care about that at all but others might. I'm simply not of the "if I want something I'll sell something to buy it" mentality, I prefer to live within a fixed and sustainable annual income so concerns such as this that might seem irrelevant to some are critical to me and maybe to others with the same psychological constraints. It is also important to me that my back-end systems are automated, i.e. it isn't the case that if I forget to go and log in to move some money around each month a standing order might fail and hence my credit card bill might bounce (for instance) so my replacement system needed to ensure that (errors by my banks not withstanding).

3 - Now that I am blindly harvesting investment returns to live off from both capital and dividend income and have deliberately created a situation where I have moved away from monitoring (and stressing over) my dividend stream I still feel the need for some sort of alternative readout so that I can be reassured that my financial extraction rate is sustainable. During my HYP phase I did that by monitoring the average monthly dividend income over the year (I preferred to look at the monthly figure because it related more immediately to my monthly paycheck "salary illusion" mentioned above whereas for others multiplying that by 12 to look at the total annual divi income from their HYP might be more natural). I felt it important to come up with a metric to replace my old HYP one and be able to quantify the predicted very-long-term health of my financial system and set thresholds for alarm bells to ring. I cited the one I have currently chosen but I might well revise that in future and in any event it is probably quite specific to someone who is lucky enough to have sufficient assets such that the bulk of them are outside of tax wrappers. It was just an example, the point was more the importance to me of defining such a metric that I could monitor. Also, because the new metric is looking at a much longer timescale and hiding year-on-year comparisons I expect it to be less volatile than my previous HYP metric in case anyone was thinking that I have simply substituted one stress-point for another. Then again, time will tell on that one and I'll have to wait and see how my new metric behaves, what alarm thresholds I set on it, whether I get anywhere close to them, etc. this point (3) is still a work in progress but points (1) and (2) are done and dusted.

- Julian

Re: When to draw down the capital

Posted: August 14th, 2019, 5:37 pm
by Itsallaguess
Julian wrote:
My new magic number is a ratio derived from the zero-point model.

It is the estimated average monthly dividend income that the zero-point model predicts that my ISA plus my SIPP will be generating when I reach zero point divided by the monthly income that I currently draw but excluding from my currently drawn income any ISA contributions (since once I reach zero-point there will be no funds left for ISA contributions) and assuming no HMRC tax liabilities (my SIPP is small and not getting new contributions so I am assuming anything drawn from my SIPP after zero-point will fit within the nil-rate band; that's perhaps overly optimistic since it would be sharing that nil-rate band with my state pension so I might refine that calculation in a future iteration of my spreadsheet).

It's this ratio that currently sits at 2.63 and that is extremely healthy. If it was exactly 1.0 my magic number would be indicating that, if things go as per my model, I would seamlessly sail through zero point such that, in the year when my non-tax-sheltered funds are depleted, the annual divi income being generated within my ISA and SIPP would be exactly enough to continue to pay the same monthly amount into my account each year minus any provision for ISA contributions or tax liabilities (those two exclusions as previously explained).

Any figure above 1.0 indicates that my zero-point income could afford me a bigger monthly draw than I was taking prior to zero-point (happiness) and a figure below 1.0 indicates that I would have to reduce my monthly draw once I reach zero-point (misery).

Interesting methodology Julian - thanks for detailing that out, as I'm always very interested in this side things when it comes to income-investing.

I'm still in the 'growing' stage of my HYP, as I'm still working, and whilst I collate quite a lot of interesting data for my HYP (which is all automatic, and not at all onerous, I should add...), the only two numbers I've really been interested for a number of years now are -

1. The 'Forecast Income' figure from my spreadsheet, which is collated by using the ShareCast (ex Digital Look) 'Forecast Yield' figures for each of my holdings, and then aggregated up to give an overall 'Forecast Income' figure for my whole HYP portfolio.

2. A rolling '12-month real income' figure that's been generated from real-life income from my HYP in the past 12-months, re-calculated at the end of each month.

Whilst I'm happy that generally over the years, the 'Forecast Income' figures obtained via the ShareCast 'Forecast Yield' data has been close enough to the actually-delivered income each following year to probably be good enough to get away with only using that first single metric whilst I'm still working, I do also like to collate the second figure so that I can hopefully see in hard 'real-cash evidence' that on an ongoing monthly basis, all things being equal, my rolling '12-month real income' figure will always be gravitating slowly towards the 'Forecast Income' figure each time I calculate it at month end, and also I will hopefully see a steady creep upwards of both figures over time too, as my investment-dividends increase going forwards in real time as well, over the months and years...

Tracking the above really doesn't take much time at all, and I find it to be very rewarding personally when I hopefully see two things happening over time -

1. There is the sort 'steadiness' to my '12-month rolling income' figures that will enable me to build up what will hopefully continue to be a real sense of confidence that when the actual time comes to make use of this income, I've got the long-term data available to help make any transition decisions much easier to make...

2. There is a regular 'upgrade' to both my 'Forecast Income' and also my '12-month rolling income' too, that helps me see and confirm that my long-term plans and hoped-for income-levels can be achieved in the sorts of time-frames that I'm aiming for.

Some people might see this as a level of 'work' that's not required, but I liken it to watching a long marathon on TV, as I well remember watching many of them during my younger years, and the commentators would often refer to the 'lap-time clock' to check if the current race was being run in a way that was likely to get anywhere near any previous record-times. Without those lap-times, no-one would really have known until really close to the end of the race if there was any chance of seeing a really good finish time, and I see the above income-tracking processes as doing much the same job....

I don't want to get to the 'end' and only then work out where I am - I want to see where I am 'now', and I also, importantly, want a good idea if keeping at the same 'pace' might get me the sort of 'income lap-times' that I'm hoping for, so as to achieve the final-lap 'income-goal' that I desire, and the above calculations really do help deliver that sense of ongoing achievement, round out many investment laps, and on towards that final finishing line...