Investors relying on their portfolio to replace traditional sources of income can choose “natural income” or “decumulation”. Each has its merits.
Investors relying on their portfolio to replace traditional sources of income can choose “natural income” or “decumulation”. Each has its merits.
The goal of many investors is to build a portfolio that can generate sufficient income to replace traditional sources, but this isn’t as straightforward as it may seem.
It is essential to understand the different methods of extracting money from your investments. How money is withdrawn can dramatically affect the length of time until that pot of money is exhausted.
Broadly speaking there are two opposing camps on how to do this: the “natural income” method and “decumulation”. Here we explain the pros and cons of each.
What is natural income?
This involves taking the cash distributions an investment provides and leaving the capital untouched. For shares, this is dividends; for bank deposits and bonds, it is the interest payments; for property it is the rent received. For example, the benchmark for global stockmarkets (the “MSCI World Index”) was yielding 2.4% on 30 April 2018. Notionally, this would result in £100,000 paying £2,400 in natural income. (Past yield performance is not a guide to future yield performance).
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