{"id":971,"date":"2019-09-21T11:47:32","date_gmt":"2019-09-21T10:47:32","guid":{"rendered":"https:\/\/evolvemyretirement.com\/blog\/?p=971"},"modified":"2019-09-21T11:47:32","modified_gmt":"2019-09-21T10:47:32","slug":"never-touch-the-principal","status":"publish","type":"post","link":"https:\/\/evolvemyretirement.com\/blog\/never-touch-the-principal\/","title":{"rendered":"Never Touch The Principal?"},"content":{"rendered":"\n<p>For most people retirement planning is about not running out of money. My mother believed that investments should be kept not spent. In other words she believed in the maxim \u201cNever touch the principal\u201d. The idea was that you should only ever spend the income. But this belief is still quite widespread.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Principal as your legacy<\/h2>\n\n\n\n<p>Many people are motivated to pass on a large inheritance. The very rich are usually able to comfortably live on their income, without touching any principal. Their concern is preserving wealth for the next generation.<\/p>\n\n\n\n<p>For the less wealthy the ideal of never touching any principal is likely to be unrealistic. Though there may be times when their investments generate enough income, this may not always be the case. The less wealthy you are, the less realistic it is to avoid touching your principal.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Natural income from your principal<\/h2>\n\n\n\n<p>There are many financial advisers who advocate never touching your principal. They say you should live exclusively off the income it generates. This is referred to as living off your natural income. So the idea is:<\/p>\n\n\n\n<ol class=\"wp-block-list\"><li>You eliminate all risk of running out of money.<\/li><li>You can pass on a nice inheritance.<\/li><\/ol>\n\n\n\n<p>And yet there\u2019s a big assumption behind idea 1: your investments need to be able to generate enough income for your lifestyle. So if they can\u2019t then never touching the principal is a non-starter.<\/p>\n\n\n\n<p>As for idea 2, not everyone has the same desire to leave a legacy. For some it\u2019s crucial. But others may not have any dependants, and not care at all. Most peoples&#8217; attitudes fall somewhere in the middle.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Income tax<\/h2>\n\n\n\n<p>Unless all your investments are in tax shelters in which income is tax-free, there&#8217;s income tax to think about. If you opt for high-income but lower-growth investments for your principal, you could find yourself having to pay a higher rate of income tax. On the other hand, a mix of income and capital disposals may make better use of capital gains tax allowances and bands.<\/p>\n\n\n\n<p>In other words an all-income portfolio may not be the most tax efficient.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">\u2018Safe\u2019 withdrawal rates from your principal<\/h2>\n\n\n\n<p>Those currently advocating never touching the principal often cite <a rel=\"noreferrer noopener\" aria-label=\"the 4% rule  (opens in a new tab)\" href=\"https:\/\/evolvemyretirement.com\/blog\/4-percent-rule\/\" target=\"_blank\">the 4% rule <\/a>as the alternative. The 4% rule is the best known example of a \u2018safe\u2019 withdrawal rate. It assumes you\u2019d be happy to run down your principal as long as you don\u2019t run out of money. Yet some advisers say the only safe withdrawal is one that doesn\u2019t touch the principal. But as we\u2019ve seen, for many that\u2019s like having your cake and eating it; it doesn\u2019t work for the average retiree.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Every situation is different<\/h2>\n\n\n\n<p>There are many articles that takes opposing positions on the idea of never touching your principal. I find <a href=\"https:\/\/uk.finance.yahoo.com\/news\/pros-cons-income-generating-strategies-050000297.html?guccounter=1&amp;guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvLnVrLw&amp;guce_referrer_sig=AQAAACS7GeX0CadR2aiShqoQ76sS4ECBVaK8a9KcEKFwKdDZncCsu8c9O7-7ky0yICCJSPcKF21jnzGZdMb608OxZozydfPmc_xe9bMs2gom8LRPACUVt86edCKKQjL76pEqXJvizWROikhJS6XrgJflafIzAsuu6sqzLl_J-Px60Y3e\" target=\"_blank\" rel=\"noreferrer noopener\" aria-label=\"this one (opens in a new tab)\">this one<\/a> nicely objective and unbiased.<\/p>\n\n\n\n<p>I\u2019m the first to agree that the 4% rule (or any fixed percentage rule) has its flaws; but so does the idea that no one need ever touch their principal. Everyone has their own unique set of circumstances. There are many variables to juggle in trying to achieve a comfortable retirement. When seeking a financial adviser, it\u2019s essential that they take into account the big picture. It\u2019s also important that they don\u2019t let their own biases cloud their objectivity.<\/p>\n\n\n\n<p>You can get a handle on the right strategy to follow by using the <a rel=\"noreferrer noopener\" aria-label=\"EvolveMyRetirement\u00ae financial planning app. (opens in a new tab)\" href=\"https:\/\/evolvemyretirement.com\/\" target=\"_blank\">EvolveMyRetirement\u00ae financial planning app.<\/a> It takes into account your individual circumstances. It\u2019s also unbiased and has no vested interest in any particular approach.<\/p>\n<!-- AddThis Advanced Settings generic via filter on the_content --><!-- AddThis Share Buttons generic via filter on the_content -->","protected":false},"excerpt":{"rendered":"<p>For most people retirement planning is about not running out of money. My mother believed that investments should be kept not spent. In other words she believed in the maxim \u201cNever touch the principal\u201d. The idea was that you should<!-- AddThis Advanced Settings generic via filter on get_the_excerpt --><!-- AddThis Share Buttons generic via filter on get_the_excerpt --><\/p>\n","protected":false},"author":1,"featured_media":976,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-971","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.1.1 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Never Touch The Principal? - EvolveMyRetirement<\/title>\n<meta name=\"description\" content=\"It would be great if you could live off income and never touch your principal. 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