Ask the Experts: What size portfolio do I need to generate £18,000 a year and keep my capital?

Published by Patrick Connolly on 22 November 2017.
Last updated on 22 November 2017

Q

I’m 50 and would like to retire early by generating an income from my investment portfolio. After tax is paid, I would like an income of £1,400 to £1,500 a month or around £17,000 to 18,000 a year. What value of portfolio would I need in order to generate such an income without the capital being depleted?

From:
OP/Edinburgh

A

It is incredibly difficult to say how big your portfolio would need to be to generate this level of income without depleting your capital. This will depend on the underlying performance of your portfolio, which you cannot know in advance.

The only way to achieve a guaranteed level of income, which will last for the rest of your life, is to buy an annuity. However, there is little flexibility with these products; usually there is no capital value left when you die; and the rates offered for somebody in their early 50s will be very low.

If you are looking to draw income from your investment portfolio, you will need to make some assumptions. In the current low-interest rate environment, it may be unrealistic to expect an annual income of 5% a year and for your capital to remain intact; a figure of, say, 3% a year may be more sensible.

If you’re looking to generate a net income of £17,000 to £18,000 a year, this may then require an initial lump sum of around £550,000. This also factors in any tax you may have to pay, although you can use your personal allowance and tax-free investments such as individual savings accounts (Isas) to minimise this.

However, you should also make some allowances for inflation. If you take a level income, its spending power will reduce over time. Assuming inflation of 2% a year, an income of £18,000 would be worth the equivalent of £14,765 after 10 years and £12,114 after 20 years. If inflation is 3% a year, the equivalent income value would be £9,967 after 20 years.

You’ll need to give some serious thought to the underlying investments that you want to hold. This will depend, to some degree, on your attitude to risk. Investing in shares should give the best long-term returns, but they are also risky. You can very quickly eat into your capital if you’re making withdrawals when stock markets are falling. For most people, a balanced and diversified portfolio will be the best approach.

You should also give some consideration to other sources of income you may have or will receive in the future. This should include your state pension. Request a state pension forecast (Gov.uk/check-state-pension) so that you have an idea of when you will receive your pension and how much it may be.

It is also imperative that you review your investment portfolio on a regular basis. This is particularly important if you are making income withdrawals and want your capital to remain intact. You need to ensure that your goals are realistic and that you review your progress on a regular basis.

If you aren’t sure what you’re doing, then you should take independent financial advice.

Patrick Connolly is a certified financial planner at Chase de Vere

This article was written in response to a reader’s question. If you have a financial or work/career question that has left you scratching your head ask our panel of experts who will aim to shine some light on the matter.

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