Table Of Contents
Draw Down Approach
In my article Securing a 6% to 8% Income Stream (February 3, 2021), I explained how, as a result of the bond market collapse of 1994, I developed the Draw Down Approach to solve the dilemma facing retirees in a falling interest rate environment. The key point that I made is that there is a difference between receiving an income return (yield) from an investment and receiving a regular monthly income stream from structuring investments into their appropriate timeline.
Understanding this principle takes all the pressure off trying to fund your living needs in today’s low interest rate environment.
Falling Interest Rates
In last week’s article Don’t Chase Yield I recounted advising in 1990 a 60-year-old gentleman with $3m to invest.
I prepared strategic advice to:
- receive $30,000 per month;
- pay no income tax; and
- grow his wealth by at least the inflation rate.
Against my advice he place the funds into a term deposit that was paying 14% at that time. Although he would pay tax of $195,000 each year which would reduce his income to $19,000 per month. Unfortunately when the term deposit matured 3 years later, interest rates had fallen to 4.25% and his after tax income dropped to just $6,200 per month.
My Draw Down Approach solves the dilemma of investing in a low interest rate environment. In fact it doesn’t matter what interest rates are, you too can safely draw an income stream of 6% to 8% pa without running down capital.
Failed Income Investments
In Don’t Chase Yield I also wrote about a company called Estate Mortgage that in the early 1990s was offering retirees high interest returns of 17.5% pa They claimed to be “better than a bank”, with promises of being safe as they were backed by “rock-solid real estate”. But they were a Ponzi Scheme and collapsed in the early 1990s, with thousands of investors losing their life savings.
According to one professional association*, between January 2006 and April 2013, 164 high yield investments in Australia have either frozen or gone into liquidation, with investors losing a total of $37.3 billion.
Some of these investments were:
- AMP Capital Enhanced Yield A
- Australian Unity High Yield Mortgage
- Blackrock Combined Property Income Fund
- CFS Bricks and Mortar Fund
- Goldman Sachs JB Were Property Securities Fund
- Howard Mortgage Trust
- MLC Property Securities Fund
- Perpetual Monthly Income Fund
- UBS Australian Equity Income Fund
I haven’t named these companies to shame them, but to demonstrate that even Australia’s largest institutions can have product failure. Nearly all of the 164 failed funds were selling their product based on a high yield. We have seen this failure of high yielding investments every market cycle, and we are likely to see it again and again.
An Invitation
If you are taking the risk of using high yielding investments to fund your retirement, please come in and meet with me to discuss how the Draw Down Approach can provide you with the income stream that you need, without the risks of chasing high yield. Your initial discussion with me will be provided without cost or obligation.
Disclaimer: This information is general advice only, & has been prepared without taking into account the objectives, financial situation, or needs of any individual. It is not a specific recommendation to buy, sell or hold any product or security. Readers should seek financial advice before making a decision & should consider the appropriateness of this advice in light of their own objectives, financial situation, &needs.
Peter Lanham
