If you’re taking a regular income from your portfolio that isn’t being spent and is simply accumulating in your bank account (earning little or no interest), now might be the time to reconsider if that income is actually needed.
People tend to focus on the income they receive rather than the expenditure they make. We explore expenditure as part of our cashflow planning as it helps make informed financial decisions. With a reduced ability for discretionary spending you could consider:
- If your expenditure has gone down
- Whether you can use this as an opportunity to save more
- If you are making withdrawals from pensions or investments, whether you could reduce or stop these payments to preserve the funds you have.
For most investors (where a regular income is needed), the level of income they are drawing will be sustainable even after the recent falls we have seen.
We appreciate that in times of falling values this means that a greater percentage of the investment is being drawn; raising the prospect of accelerating the rate of any capital erosion.
To cover income withdrawals, portfolios generally hold a proportion of the fund in cash which avoids the necessity of having to sell equity investments in the short term. If the downturn goes on for some time it’s likely that the cash held in portfolios will need to be topped up. Rather than being forced into selling equities when markets are low, we can disinvest from the defensive assets within the portfolio which have broadly maintained their value.