Pre-empting some of your questions: Cash Buffer The key with retirement planning is to never be forced to sell stocks, or any asset when they are down. A healthy cash buffer means that if the markets do fall you can survive on this cash for a few years whilst you wait for the markets to come back. We'll be discussing this more in my next video. Natural income/dividends you receive Sometimes you won't have the option of Accumulation funds or you'll be invested directly in dividend-paying stocks, so it's likely you will receive natural income into your investment account throughout the year. So long as these are not larger than the yearly income you need you can just leave these in your account. When you come to top up your cash buffer each year you first take any cash that's already sitting in the account. Reasons you would want to invest for income If you're planning on gifting assets to family members one of the most efficient ways to do this is by making gifts directly from income you receive. This will normally not attract inheritance tax. If this was your goal then it may make sense to invest for a higher income.
@@neil8877 I think it’s because it’s literally just been taxed, so you’re free to give it as you please. Where as IHT is on wealth you’ve had for a while, kinda like CGT, and it’s also why you don’t pay both CGT and IHT.
Funds = Fund Manager Fees vs Stocks (no manager fees). Having a diversified portfolio is old schooland not for everyone. I have invested in 4 stocks only in the past year and this has proven to be the best strategy. Two years ago I had a Scottish Widows pension with about 8 funds. I consolidated them all into 1 fund and then sold the pension for cash. I transferred the cash to a SIPP and for the past year invested in 4 stocks only. One stock has 85% of my pension, there other 5% each. (I have these same 4 stocks in an ISA as well). In just one year I have doubled my pension proving to me that my pension strategy has worked.
Great video. I love the idea of providing an income from the cash buffer - this creates a bit of distance from market volatility. Less chance of panic selling!
These videos are first class - some very powerful messages underpinned by the power of compounding. What puzzles me is the emphasis on retiring ! Im in my late 50’s but could retire tomorrow on a high income but I like my work, people, mental stimulation. It’s very well paid. I need a post retirement goal which I don’t have at the moment to sustain me. Lots of people keep working beyond 60yrs - many have to, but not all.
Hey James have you created the safe withdrawal rate video yet? Great work to BTW love your content 👏 so glad to get my money to start working for me cheers
While trying to build passive income and prepare for retirement, It’s important to choose stocks that are expected to hold up in inflationary environments. To combat the negative effect of inflation, it’s a good idea to diversify your portfolio across different asset classes, such as stocks, bonds, and real estate, since this can help protect your portfolio against inflation. I have seen people making up to $800k in a month during high-inflation
One strategy is to invest in assets that perform well during inflation. Another strategy is to focus on companies that have the ability to pass on price increases to their customers. It's also important to maintain a diversified portfolio. It may be a good idea to speak with a broker who can help you develop a customized investment strategy based on your individual goals and risk tolerance
@@ScottBrown-b7o I used to manage my stock portfolio by myself, all that time I did not make any significant returns (but also did not suffer losses). Then out of nowhere 2008 happened, and I lost 50% of my savings in a very short period. That prompted me to hire an FA, Since then I have been learning a lot about the stock market and I have made up to $500k in returns
@@ScottBrown-b7o My financial advisor, KRISTIN GAIL CUNNINGHAM is a highly qualified and experienced professional in the financial market. She possesses a broad understanding of portfolio diversification and is recognized as an expert in this field.
Hi James, excellent video as always, indeed it would be great to get more practical tips on the cash buffer, i.e. how / where to build that up until retirement age?
Hi Cathy, you don’t need a cash buffer to this extent until you actually retire. Just an emergency fund which should be kept in cash or savings account.
James, would you be willing to do a video on how much one should be aiming to have at retirement? I appreciate that will depend on what different people will need but given that most people are living longer, I think this has changed over recent years.
Hi James, Can you speak to how to draw down in retirement? Does one take their dividends rather than reinvesting them & make up the balance required by drawing down from the investment? Can you elaborate on considerations in calculating the cash buffer you talk of. We are 5 years off FAT Fire FYI. Thanks for your informative content.
Why aren’t we taught this at school? Great video again, I’ve been using your videos about investing for the missus who’s scared of the risk, but now it’s time for me to go back to school with these retirement income videos 🧐
Yes. I've been investing for 2 yrs now Was terrified at first. Started small after clearing debts. Started with vanguard ls 60/40. Watched lots if videos and read a book or two.
As always another very interesting and informative video, thank you for posting. It was, however, surprising to learn that the cash buffer may equate to 'between two and five years worth of expenses'. That could be a sizeable fund, in fact the schematic displayed at 9:22 equates the 'cash buffer' at 20% of the total investments - although I understand the schematic was perhaps more focused on depicting the 'rebalancing' effect of the portfolio. I only raise the point in that the return on such a sizeable cash buffer is likely to be very low compared to having the funds fully invested. Of course, a larger cash buffer does provide an opportunity of buying into any dip in the market, but it would be my preference to always hold the least amount possible in cash thus maximising the long term cumulative return from an investment portfolio.
A larger cash buffer allows you to take more risk with your investments. You can model it: 50/50 stocks bonds with 1 years cash vs 100 stocks with 4 years cash. It may actually be able to see you get a higher return, but you’d need to be able to stomach the volatility.
I've seen a number of videos which talk about the accumulation phase of a pension, but I haven't seen any that give a strategy that can be used for managing the decumulation phase as clear and interesting as this one - thank you!
Hi James, great video... ive watched nearly all of them! haha. was there a follow on video to this one going through safe withdrawal rates? cant see it in your library... Im way off getting to that stage, but looking to educate myself now to ensure im doing the right things.
Hi James, very well done! Hahahaha when you posted the questios about this topic in YT I was hesitant at the beginning picking the right choice and finally I nailed according to this vid. One question, If you only want to have a vanguard account and try to invest on that what would be the best funds, ETFs, index funds to do it in order to have a diverse portfolio in this platform. Let's say for about 10+ years? Thanks for your response!
@@JamesShack right, and I can see in company B's case where profits are issued as dividends why a profit would increase the share price, but why would that happen for company A?
@@jhnpckr I think it's because the 10 profit is retained by the company and therefore either held as cash or reinvested in the business. Either way it represents an increase the company's balance sheet which should then be reflected in its share price?
I understand your reasoning and I agree with the mix between dividends and growth. However, if you consider a payout of 50% and your stock had 10£ revenue per share, you'll only receive 5£. So it's 105£ share value left. Secondly, although the dividends may be inconsistent and companies can simples shut them off, they are less affected by market value during Bear market and market crashes. At the moment I have 1/3 REITS, 2/3 Stocks (from which 80%+ are consistent dividends payers). I try to keep 10% for high risk high return stocks. Generally the money earned from this high risk investmentz are reinvested in dividends stocks.
It might be worth mentioning the difference between pension income and savings, ie. many people think drawing down their pension whilst not touching their savings makes sense, but I’d say the opposite is better (generally), ie. leave your pension alone and take income from savings first (I include investment savings in this, such as a shares ISA). Also in theory if the savings are in an ISA, CGT and income tax shouldn’t apply, making the above even more relevant (not sure on IHT)
Great video once again James! Thank you so much. I'm assuming one of the best ways to avoid all the CGT hassle would be to have the majority of your retirement investment in your S&S ISA from which you can sell and withdraw without any CGT impact. Of course, with that you need to have max'd out your ISA allowance for a number of decades at least to get a hefty boost?
ISA or a pension. But you also have a £12,570 CGT allowance each year so if your a couple with a 50% gain between you you could release £50,280 a year. So it’s very generous! CGT tax rates are also much lower than income tax (for now).
Taking income from investments could be compared to equity release from your property, which is a bad idea unless you are in retirement and preferably well into retirement
Nice video James. I’m as guilty as the next person of being seduced by a higher yield % on a fund 😂 This was a good reminder to focus on total return 👍🏻
I think I will be doing this in miniature. I'm a teacher so will get a defined benefit pension. However I also have a SIPP which I hope to operate like this when I retire to enhance the DB. Teacher's pension also gives a tax free lump sum which would start the cash buffer, and be drawn from and topped up from SIPP as necessary. At least that's my plan - I hope its a good one. What do you think?
If you have the DB then that’s epic, you may not need much of a cash buffer especially if you can just reduce your expenditure for a bit. You need to also consider that the DB is a guaranteed income which allows you to potentially take more risk in other areas of your portfolio.
Most of the uk finance channels on RU-vid recommend Etfs but that just seems like a lot of work as you have to manually reinvest the dividends. Doesn't make any sense to me. Surely index funds are the way to go. Set it and forget it investing. Any idea why etfs are so popular when they often have similar charges to the index funds?
Would it be worth mentioning that accumulation funds do distribute and that this income has to be declared? For UK domiciled funds this will be reported on your account's annual tax certificate. For non UK domiciled funds (e.g. many iShares ETFs) this has to be researched, calculated and reported as Excess Reportable Income in the Foreign Income section of the UK tax return.
Love your videos but you say ... Your against dividend stocks because they might reduce the dividend in future but they'd only do that if profit reduced if that happened in none dividend paying the share price would decrease. So that's not a reason to reject dividend paying. I agree on tax but if I held them in an isa I wouldnt pay tax on either dividends or capital gains.
Great video and really good advice - really enjoying your channel. now I need to watch your videos on rebalancing as ive come across this term before - but it always strikes me that you are getting out of funds that are doing well and investing in ones that are doing poorly = reduces overall returns?? but you and others seem to say its a good thing??
Hi Neil, stock markets are mean reverting so if one area has outperformed of late it's likely that it will underperform in the future. Rebalancing forces you to see past this and to buy low and sell high. As such it can have significant positive impact on your portfolio performance. It also helps your portfolio to stay at the right level of risk. www.vanguard.co.uk/professional/insights/why-rebalancing-client-portfolios-is-good-practice
@@JamesShack are there any rules on when to rebalance or how. lets assume I have some cash or safe investments and ive taken your advice and have a life strategy one fund or similar but lets say im playing with some stocks - as you do. Do I let a stock grow 10% then sell 10% of it? and do I reinvest it in a poorly returning stock or in another stock that I think has potential.. does this work for funds as well as stocks..
Looking at a 10 year time frame would you be stating to invest now? I have a lump sum that needs a home but am concerned about the short term prospects of a market dip. Realise that 'corrections' will usually only take months to regain positions but if as many are predicting a more major downturn occurs worried that it could take years to recover. I know that timing the market is seen as futile by many and I wouldn't be asking if I had a 2-3-4 decade outlook. Instinct says to sit this year out but would be interested in others opinions.
my opinion and I'm am amateur watching these vids like you.. Is it depends on what is your risk profile and what is your capacity for loss. if the lump sum is extra and you can afford to loose it - all the evidence seems to be invest now don't try and time the market.. some might say invest slowly.. dollar cost averaging.. but some would say just go in.. if you cant under any circumstances afford to lose a penny of it then you should be thinking cash ISA.. watch inflation..of course what do you go right in on...so you might think bonds..not shares/stocks.. or think of a 20/80 stock bond.. one of James's videos shows that returns are less but variability is less and therefore risk is less. at least thats what I think im learning.. :-)
Hi Simon, first question: Why has this money got a 10 year time frame, is that set in stone? My video on Sunday will cover the probabilities of seeing positive /negatives returns over different time periods.
@@JamesShack Not a spring chicken James. Find myself looking down the barrel of retirement in around 10 years and would like to maximise the pot I've managed to accrue. Obviously aware that investments would still be working after that time frame. But want to try and focus on the next decade for best gains. Not really interested in a PPS because of withdrawal limitations. Have money in a few other relatively small positions (nothing in the North American market) but still have a lump sum that I would have ordinarily put into either something like VEVE or VUSA but as I say concerned that a major correction might be imminent.
But if I sell shares I have less shares and then if something positive happen to firm I will have less gains. If they pay me dividend I still have the same amount shares. Normally you want higher total return.
Um Some of the life strategy funds do have an income option!! I agree with what you say but my personal risk appetite makes it very difficult for me to sell especially if I am selling at a loss.🥴
🤦🏻♂️Thanks for pointing this out Jane. I’ve pinned a comment to note correction. The idea with this strategy is that you never have to sell at a loss, the Cash buffer is there to protect you from that.
But surely with option A if you are selling off your shares to take the $10 income out (or thereabouts) you need say twice a year, then eventually you are going to end up holding no stock in that company within 5 years. Where as if I was receiving a dividend twice a year of $10 I would receive that same $100 income over that time, but I would still own that stock at $100 at the end of the 5 years and in to the future.
If we're saying that the shares of company A grow in price at the same level as the dividend, for the other company, so $10 a year then you would always have $100 worth of shares, but just less of them in nunber.
Am I right in saying that an Accumulation fund can and will incur a dividend tax liability for its investors, even if it's not visibly paying them a dividend? The companies inside the fund are paying dividends that get reinvested inside the fund, right? Vanguard for instance tells me each year how much dividend I have "received", and I have to report this to HMRC on my tax return...
Surely if you sell shares to provide an income as and when you need it, then you will incur selling fees, which come off what you sell? This should be taken into account.
Hi James. Great video. In relation to the cash buffer is it ok to hold that as uninvested cash within the SIPP where my funds are invested. Also, does selling funds to keep that buffer (within the SIPP wrapper) at a certain percentage level trigger any tax implications? Thanks.
Hi William, keeping it in the pension would keep an interest tax free. But then again you have a savings allowance of £2k a year so unless you have over £200k in cash having it outside the pension won't cause much harm. I think the main consideration is the timing of when you take the money out of the pension and the tax you pay on it. No you should be able to keep the cash in the pension unless the provider has some special thing against that (unlikely tho).
Just set up an account with a years worth of money in as a buffer and get your dividend income payed into here over the year. Then you do not care when these dividends are payed. Do you not have a £2000 personel dividend tax allowance each year, might as well use it.
Hi James. How do you work out that only investing in growth results in a lower total return over the long term? I would have thought it results in a higher return in the long term but with higher volatility.
in this video i talk about risk adjusted return, how much return you get for each unit of risk you take. A more diversified portfolio gets you better risk adjusted returns.
Love your channel … looking to see if you can help me with financial planning but seems like you only do UK? The videoask question was in British pounds :( I’m in the US.
There’s not much out there to be honest. I know it’s frustrating, but an emergency fund is not supposed to generate a return. It’s nice if it can hold its value but it’s main job is to allow you to take risk and get returns with other monies.
We use premium bonds. The rate of return is currently a measly 1% but that's better than any other instant access savings produce we could find. And there's the thrill of winning something.
Just watch your video , very interesting and plenty to think about At the end you mentioned that you had a separate video about topping up cash buffer , however I can not seem to find it
Hi James great channel. Do u have any clients that pay into a nhs pension as I do? As from March 2022 the new pension scheme will commence. Which doesn't have as good benefits as previous with bigger penalties for withdrawing early. I have a s&s isa and a rental property and 20 years paid in2 the old scheme. I'm wondering whether to opt out of new scheme and invest in2 my s&s isa instead. Just wondered if this has been put 2u at all? Many thanks for all the great content. Really does help... jj
James could you do a video for self employed and investing for retirement. Is it worth making State pension fund payments or other investments. Or direct me to one you have already done.
Good advice all round - mix is best of div and non div - div evangelists (living off divs and never selling) are just lazy/least path of resistance peeps whom are ignorant of concept of 'opportunity cost' of actions !
Yes you could, not for all of it, but for some. You’d need to make sure it’s a treasuries etf. There will still be some risk but you just need to think about the overall picture.
Does compound interest/growth still happens with stocks/funds that don’t pay dividend? I know this sounds silly but all the dividend-focused videos make it seem like compounding only happens when there’s dividend?
Yes very much so. When a company makes a profit it either reinvests that profit or it pays it’s out as a dividend. If a company reinvests profits they should compound over time - Amazon didn’t pay a dividend for 20 years but just kept reinvesting. A dividend however only compounds if you manually reinvest it buying more shares.
It's risk management - you originally split across the funds to make sure if any one performs badly it doesn't have too much of an effect on your portfolio. If a stock that used to represent 25% of your total portfolio is now more like 50%, you have more to lose if it now performs badly.
Hi James. I've just discovered your channel. Very informative, and very well presented. You've gone straight into my top 3 alongside Damian and Nathan. Re drawing dividends Vs selling stock, isn't it more tax advantageous to draw dividends, as Div tax is lower than CGT?
If you’re a 0% income tax payer, perhaps. In reality most people are either basic 7.5% or higher 32.5% tax payers in retirement. But most people never come close to using their tax free CGT allowance. So most realised gains are free of tax. Especially if you’re married. Having a balance of both is best but the natural 2% dividends you get from a normal portfolio is already enough dividends to use up the dividend allowance.
Can you do a video on Annuities so time. Because they look like a rubbish investment to me at 2 or 3 percent return a year. You may as well keep your money in stocks. As when you die you can pass stocks on to your family and Annuities die with you. When you have a pension do you have to put it into a Annuities.
Why should I max my income??? Do I look fucking greedy???? See that's the problem of capitalism...every cocksmoker especially the oligarchs feel entitled to out-max profit
@@erniez7443 I think that most people would want to maximise the amount they get out of their savings to ensure they don’t run out of money in retirement.
Although you cash buffer does not earn anything itself it allows you to take more risk in other areas of your portfolio. You need to think about the whole portfolio.
If the long term objective is to maximise returns, why do we rebalance i.e.when £ cost averaging and setting the allocation at the input stage via monthly direct debit payments, why do "the experts" advocate rebalancing; selling funds that are performing well, to purchase funds that are under performing? It doesn't appear to be logical or Darwinian
1) To ensure that your portfolio stays at the same level of risk. 2) Stock markets are not darwinian, but they are mean reverting. So if one sector does better than the average, it's likely that it will underperform in the future. Rebalancing solves this by forcing you to buy low and sell high. As such, rebalancing, when compared with drifting, can have significant positive impacts on the return of your portfolio : www.vanguard.co.uk/professional/insights/why-rebalancing-client-portfolios-is-good-practice Does that make sense?
@@JamesShack Thank you James for this explanation, I totally understand this function when having an asset allocation determined by stocks and bonds, however I have a number of vanguard funds that are 100% stocks ie 1. Global All Cap (50%), 2. Global Small Cap (10%), 3. US Equity Index (10%), 4. FTSE Developed World Ex UK (10%), 5. Emerging Markets (20%). So it is a well diversified Portfolio, from the information provided rebalancing may reduce my risk, but with a Portfolio of 100% stocks and shares, I am still unsure that it will maximise returns. I so wanted to set and forget :)
@@chrisc486 So what you will find is that there will be periods where your small-cap fund outperforms the All Cap, typically at the beginning of new market cycles. However, we would also expect the All Cap to come back later in the cycle. So rebalancing forces you to sell the sector that is doing well, and buy the sector that has been underperforming in anticipation of a mean reversion. The same thing will happen with emerging markets, they come in and out of favor, the clever thing to do would be to buy when they've been underperforming, and benefit as they revert back to their mean. And then sell down once it's been outperforming. Buy low sell high. Another way of looking at it is by asking yourself why have you set that specific allocation in the first place if you don't intend to keep it? Instead, you're letting your allocation be set by past winners. Thank you for this question tho, I think many others will be thinking the same and I will do a video on it.
@@JamesShack You raise a good point, through £ cost averaging I am maintaining my desired allocation at the input stage from my direct debits to vanguard, not after it has been subject to the effects of the market ie outcomes - so in terms of the trickle of money that I continuously invest, it is locked to my original allocation at the input stage.
@@chrisc486 as James will know this is exactly the question ive been asking in my comments - not trying to troll just trying to learn by asking questions. the vanguard link about this seems to suggest the strategy ISNT to maximise returns - its to maintain the same risk profile throughout your portfolio and its lifespan. I like you wonder if you can do this by keeping your input percentage the same.. I can kind of see that indexes or sectors/markets might wax and wane but some companies seem to persist and constantly do well why loose them ?isnt that anti-buffet? the question is are todays bad shares tomorrows good ones? so maybe its not about flogging a growth share to investing in a bad one its about knowing when a share has peaked in its growth potential and detecting tomorrows growth shares?
I've just recorded a video about dividends, too, James (partially inspired by your own channel!), would love to hear what you think if you ever have a chance to check it out 😀 cheers!
Maybe i'm just terrible at editing! It's quite a common thing to zoom in or zoom out to draw attention to the middle of the picture but is it the fact that ut jumps back to normal zoom straight afterwards?
