Living on income is a fairly common desire among mortals. It usually has a first part in which you get a jackpot in a lottery, it is inherited generously, you hit a resounding stock market hit or you are able to have a brilliant idea that translates into millions of euros. From there, the large assets obtained are intelligently invested in real estate, companies, stocks … and a splendid recurring income is achieved that allows you to maintain a good life without working and without worries. A beautiful dream that few lucky ones manage to make a reality and that, however, experts say, it is possible to achieve, even without the free rain of money dreamed of, with the discipline of saving, time, diversification and a certain assumption of risk.
In order to live on income it is necessary, and all the experts consulted agree on this, to save previously to form a patrimony that, they point out, should have the qualification of “not necessary” in the near future for current expenses, housing, children’s education , health … How much to save depends on the financial needs of each person. 200,000 euros may suffice or two million euros may be necessary, they say, emphasizing that the sooner you start and the more regularly you do it, the better.
Having overcome this first and important stumbling block, Jorge Coca, founder and CEO of Wealth Solutions, defends a change in attitude and an evolution in thinking to make a living from income. Traditionally in Spain this objective has been associated with the real estate market through obtaining periodic rentals, with dividends or even in the past with interest on deposits or public debt securities. However, today housing is quite expensive and requires dedication of time in exchange for an average gross return (not counting taxes) of 3% or 4%, companies do not always distribute dividends, fixed income has little margin of return and profitable deposits or accounts simply no longer exist, he says.
Hence, the most diversified alternative possible is, in his opinion, to take positions in three indexed investment (accumulation) funds (because they are cheaper in terms of commissions), whose weights (more or less than 15%, 20%, 40%) are determined by the liquidity need of each person. The first of these three funds, he explains, would be one linked to the money market that would provide equity stability; the second should focus on global fixed income, from which a sufficient return could be obtained at least to cover inflation. “The third of the funds must necessarily be global equities since, on average, a return between 8% and 10% could be obtained in the medium or long term, with which the trilogy of funds would generate a return between 4% or 5%, something already significant and that, depending on the capital obtained, could allow a living from the income ”, he concludes.
Jorge Coca specifies that the investment funds chosen to diversify assets must be for “accumulation”, and Almudena Mendaza, head of sales at Generali Investments Iberia, shares this. As he explains, accumulation funds (75% of those marketed in Spain compared to 25% distribution, he assures) “play with compound interest: the profits achieved are reinvested and higher returns are achieved in the medium and long term, being the participant who decides when to get their money back ”. In the distribution or distribution, dividend or income funds, the subscriber receives quarterly, semi-annual or annual income from dividends, interest earned or even from the sale of part of the shares.
The yield range that this type of fund offers is very wide: from 0.5% guaranteed through 1%, 1.5% to more than 6% or 7% in uninsured cases. “They have the advantage of periodic income and the disadvantage of taxation. Every year, taxes will have to be paid on the income obtained, whether they are required or not, while in accumulation funds, the tax burden only appears if these funds are made effective ”. Once this qualification is made, Mendaza maintains that without assuming risk, without placing at least 15% of the equity saved in variable income assets, “it will not be possible to obtain a return of 5% in the medium and long term, a level necessary to be able to live off the income ”. The appropriate thing for this minimum investment, which could be longer if the period to wait to have recurring income can be lengthened, would be, in his opinion, to distribute them among funds with a global focus on equities (that look for dividend companies and also companies thematic) and fixed income (private securities of solvent companies, with good ratings and always denominated in euros).
Hernán Cortés, director of Olea Gestión, is clear that anyone who wants to live off income in the future must first save and then follow an investment strategy that involves not only preserving capital, but also obtaining, on average for periods of 3 , 5, 10 or more years, an annual return of 5%. From his point of view, it is mandatory to diversify and break the “radical” profile of the Spanish investor who “in many cases tends to place 100% of their assets on the Stock Market or 100% in fixed income or 100% in the real estate market” . This diversification has to pass the risk filters (how much is capable of assuming, but under the traditional British motto of No risk, no money) and term (minimum of three years) before addressing the different alternatives: European, American, global equities, mutual funds high yield, emerging debt …
The difficulty involved in the correct selection of funds of this type leads Cortés to bet on accumulation investment funds (again, not pay-as-you-go funds due to their tax implications), mixed and dynamic multi-asset funds for investors with a moderate risk profile. They are, as he explains, funds “that have everything”: from private and public fixed income, debt from emerging countries, individual shares of countries or sectors, real estate, gold, raw materials … “If whoever already has money in deposits at 0 % spends at least half of its capital to this type of assets and has a solution to obtain the necessary profitability to live on the income ”, he concludes.