Investment income returns.

[HanoiRocks]

Hello everyone,
I'm curious what everyone would estimate the returns they would expect to generate given a certain level of investment to be.
Basically, say you had,
￥10 milion -
￥50 million -
￥100 million -
now, and needed them to generate an income, say if you were retired, how much would you estimate each figure to produce annually, assuming no, or little, capital depreciation in the long-term?
Any ideas welcome, including say buying buy-to-lets for ￥10,000,000 and renting them for ￥80,000p.m which was one thing I had thought of.
How would you best generate an income and what do you think you could make?

[RetireJapan]

Great topic. I'm working off 3% based on a stock index-heavy portfolio. This is a bit conservative, but I'd rather err on the side of too low an estimate than too high

I'm too lazy to deal with real estate...

[HanoiRocks]

Right, I would agree with you from what I know myself. I'm curious, because as I touched on in another thread last year, following the general rule (which is explained well here although by no means the only place you could read about it http://www.interest.com/savings/news/se ... nt-4-rule/) the funds run out after a certain amount of time. I don't want the funds to be depleted! I'm interested in how much a certain level of capital could provide in income permanently, all things considered, possibly with some re-investment, trust in long-term etc.

I'm also quite interested in the real estate market. It seems like something a lot of people don't go in for here, certainly compared to England, but once you get on the ladder and get a tenant in paying rent you can obviously leverage your position and snap up more and more. If you had say ￥50million to start with, you could diversify property type even when starting out and have a good spread.
The only thing I'm not sure about is property values. We all hear about property losing value but you still see "second-hand" houses going for ￥20million, or as a friend of mine did, sell his ￥15million apartment for little less than what he had paid for it (2009 - 2014), so I'm not sure exactly how much property does lose in value.

[TokyoWart]

My experience with a portfolio of Japanese stocks is that you can get around 1.5% dividend yield (1.3% after the 20% tax) which goes up gradually over time. The capital gains are harder to describe. My total Japanese portfolio is worth about twice what I paid for it but I have been investing since 1996 (starting from zero so most of that investment is in the last 10 years) and before Abenomics my capital gains were minimal. I've never seen a study on sustainable withdrawal rates for a Japan-based portfolio but it would probably not give the 4-4.5% rate found by Bengen or confirmed by the Trinity study because this country has very prolonged periods of stock underperformance and bond interest rates are lower than ever appear on any historical time series.
For a US stock-heavy portfolio --which is what the 4% rule assumes-- that 4% rate is actually quite conservative. Most of the time series end with a larger total than started. The 4% means starting with 4% of the total portfolio value and increasing the amount withdrawn by inflation each year and "inflation" here would mean the US inflation not the much lower Japanese rate.
In practice, I think RetireJapan's suggestion to starting with a 3% withdrawal rate is conservative but not unreasonable and I think anyone living in the real world is going to adjust that rate depending on whether they see the underlying portfolio value increasing, decreasing or staying steady.

[RetireJapan]

An easy solution would also be to have a withdrawal rate that doesn't change with inflation: for example if you took out up to 4-5% of the portfolio value every year you would never run out of funds (by definition!) and as long as you had a margin of safety this could work.

[TokyoWart]

In many periods that kind of fixed withdrawal rate is more conservative but if we had strong deflation like the 1930’s it means you are removing more from your portfolio in real terms right when markets are crashing. Some withdrawal optimization strategies are discussed in this paper which also mentions in passing that the safe withdrawal rate for a UK or Japanese portfolio is only around 2% using the same time series that gave a 4% withdrawal rate for US portfolios. https://www.york.ac.uk/media/economics/ ... 7/1706.pdf

[HanoiRocks]

Thanks for the replies, TokyoWort and retirejapan.

TokyoWort, you think 3% is a conservative return rate even above inflation, is that right? And maybe especially easy to achieve in Japan?

retirejapan, could you explain a bit more why a 4-5% withdrawal rate would by definition mean you wouldn't run out of funds. Are you assuming natural fund inflation would be around that much, and inflation in Japan being negligible?

[RetireJapan]

Thanks for the replies, TokyoWort and retirejapan.

TokyoWort, you think 3% is a conservative return rate even above inflation, is that right? And maybe especially easy to achieve in Japan?

retirejapan, could you explain a bit more why a 4-5% withdrawal rate would by definition mean you wouldn't run out of funds. Are you assuming natural fund inflation would be around that much, and inflation in Japan being negligible?

The 4-5% in this case would just be 4-5% of the portfolio. Unlike the 4% rule, which refers to increasing the amount you take each year along with inflation, just taking out 5% of the current balance would never deplete your investments (although there is a danger that 5% of a shrinking portfolio would not be enough to meet your needs).

[TokyoWart]

Thanks for the replies, TokyoWort and retirejapan.

TokyoWort, you think 3% is a conservative return rate even above inflation, is that right? And maybe especially easy to achieve in Japan?

retirejapan, could you explain a bit more why a 4-5% withdrawal rate would by definition mean you wouldn't run out of funds. Are you assuming natural fund inflation would be around that much, and inflation in Japan being negligible?

Just to clarify, I think 3% is a conservative withdrawal rate for a US-dominated portoflio that has at least 50% stocks. In Japan it is less conservative because the long-term market returns here have not been as good as for the US and because the bond portion would return so poorly at today's interest rates. However, "less conservative" is relative. Sustainable portfolio withdrawal calculations are usually done for 30 years. Put your money in a shoebox and you can take 3% of the original out for over 30 years.

[HanoiRocks]

Thanks for the replies, TokyoWort and retirejapan.

TokyoWort, you think 3% is a conservative return rate even above inflation, is that right? And maybe especially easy to achieve in Japan?

retirejapan, could you explain a bit more why a 4-5% withdrawal rate would by definition mean you wouldn't run out of funds. Are you assuming natural fund inflation would be around that much, and inflation in Japan being negligible?

The 4-5% in this case would just be 4-5% of the portfolio. Unlike the 4% rule, which refers to increasing the amount you take each year along with inflation, just taking out 5% of the current balance would never deplete your investments (although there is a danger that 5% of a shrinking portfolio would not be enough to meet your needs).

Thanks for the reply. Sorry, I'm still confused as to why continually taking 5% out of your portfolio would not deplete the investment, continually shrinking as it would be?