Seeking solutions for early retirement

"We wish to be prepared to retire early if the business ceases and no other significant income is forthcoming," explains James. "The gross annual income to the business is £55,000, hence our target income from our investments would ideally match this.

"Between 2016 and 2024 this income will be derived from my existing investments of around £770,000 and my partner's personal pension worth £200,000. From 2024 I could draw from my self-invested personal pension (Sipp) worth £130,000, and from 2034 I will receive a final salary pension of £6,000 a year.

"I estimate that at present an income of £45,000 could be taken from the assets set out above, using the natural yield and capital withdrawal.

"I also jointly own a lock-up garage with my sister which provides £500 a year income, and my peer-to-peer loans to businesses provide £6,000, and commercial properties £9,000.

"Our estate will be left to each other and charities.

"I'm becoming less risk tolerant as I get older and after a few holdings went bust, and I'll probably need to reduce our risk further given the tough objective of retiring at a young age. I now also always look for a yield.

"I lack discipline when it comes to monitoring the portfolio and this isn't helped by complicating factors such as dividend reinvestment, drip feeding, regular investments, and loss of historical data when I've switched broker or provider.

"I'm trying to consolidate the portfolio by weeding out the small holdings. I'm unsure if the often referred to targets of a maximum 20 equity holdings, none of which should account for less than 2 per cent, should apply across all the portfolio, or to our Sipps, Isas and dealing accounts separately.

"I don't make direct investments into tobacco, defence or gambling for ethical reasons.

"I've almost ceased investing in open-ended funds. I plan to stick to individual shares, exchange traded funds (ETFs) and investment trusts. My Isa is primarily composed of open-ended funds, and in the context of our total portfolio the diversification they add may be excessive.

I have on my watchlist iShares Edge MSCI World Momentum Factor UCITS ETF (IWMO).

James and his partner's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

You hope to retire early on a decent income when returns on safe assets are negative, and you have more than 16 per cent of your wealth in cash. This will probably lose you 1 or 2 per cent after inflation in the next few years.

Your investments in commercial property and peer-to-peer lending will pay a higher income in normal times, but in a downturn they might lose money, and your commercial property holdings will also be hard to sell. Because peer-to-peer lending is quite new, we don't know how great a risk this is. But I would assume that default risk would be significant if we get a serious downturn, which is inevitable at some point in your life.

A high yield is often a sign of extra risk - the danger of doing especially badly in a recession.

I assume that you can't get a natural yield of more than £40,000 from your current investments and partner's pension until your Sipp kicks in, which leaves you a little short of your target. So, if you can, work longer as it allows you to save more, thus giving you a hedge against falling equity prices.

Secondly, try to cut your outgoings. You probably can save a bit on utility bills, mobile phone and broadband charges. And ask yourself whether you really enjoy fancier restaurants and holidays.

You can draw down your wealth, although only slightly as you might well be retired for 40 years. So in the event of a market downturn reduce your charity bequests.

Simon Bonnett, senior consultant at Beckett Financial Services, says:

Do not underestimate the level of State pension you have both accrued - it could be worth £8,093 a year each or more at your State pension ages, which I estimate to be 67. Check your entitlement using the free Department for Work & Pensions service by completing the BR19 form. This could mean less capital withdrawal out of your portfolios from these ages.

Guaranteed annual income from State and final salary pensions could therefore total £22,000 in today's money, but the income is staggered over a number of years. Your private pensions, Isas and investment portfolio will need to fund the income gap via a mixture of yield and capital.

As you are using your pensions and full Isa allowances, your limited company could make pension contributions which is more tax-efficient than contributing from your taxed earnings. It could save 13.8 per cent employer National Insurance, and pension contributions are normally treated as a business expense.

Also check that your private pensions have adopted the new flexibilities. For example, sometimes the intended treatment of pension funds on death is compromised by an old contract. As well as ensuring your pension Expression of Wish form is current, you should both update your wills and consider a Lasting Power of Attorney to ensure your financial matters are administered appropriately if you become unable to manage them yourselves.

James Norrington, specialist writer at Investors Chronicle, says:

Because you started investing at age 21 and have built up capital, it may be possible to maintain a decent standard of living should your business wind up sooner than you would like - especially if you have paid off your mortgage. But would it be impractical or unbearable for you to get another job if the business ceases trading?

Government bond yields are at record lows so the real return on safe assets is likely to move into negative territory. This means investors need to buy riskier corporate bonds and equities to pursue target returns. It increases the risk of capital losses, which are going to be more difficult to sustain if you are also drawing down capital to provide a portion of your income. Your ability to earn money is the best hedge you could have against this risk, and working for another 10 or even five years, would make all the difference. As well as delaying the need for capital drawdown, you would be able to reinvest dividends, make additional contributions from your salary and watch as the magic of compounding grows your retirement pot.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

In terms of portfolio readjustment, dump all higher-charging open-ended funds.

And have a decent weighting in overseas equity funds. These would rise if sterling falls further, something that usually happens in the event of a global or domestic recession - sterling is a risky asset and so cyclical. And they might also protect you from a UK slowdown.

Don't, however, go all-in on overseas stocks: there is a risk that a pleasant domestic surprise will strengthen the pound.

Craig Brown, portfolio manager at Beckett Asset Management, says:

Your income target of £55,000 gross a year is challenging, given the size of the portfolio and with certain yielding assets looking expensive.

You have a high level of cash which will offer little to no yield. While it is prudent to have instant access emergency funds, you could also use structured deposits. These offer capital protection and attractive yields subject to certain conditions being met by the underlying asset, typically an equity index. These are covered by the Financial Services Compensation Scheme like cash in the bank - unlike structured investments, peer-to-peer lending and retail bonds.

A sizeable percentage of your invested assets are in equities, which may be out of line with your increasing conservatism. This is particularly true of the Isas. Perhaps diversify some of this exposure across assets such as fixed income. There are a number of strategic bond funds available that offer experienced management and attractive yields. Fixed income is an area where you would benefit from the scale and diversification of a collective approach.

Absolute return funds, meanwhile, typically seek to provide steady returns and low levels of volatility relative to equities, some of which target an income. These could reduce the portfolio's volatility and contribute to the income target.

Reduce the cash weighting and deploy the proceeds into risk assets to enable more of your money to achieve a reasonable level of growth ahead of your need to draw on the portfolio. To manage volatility perhaps deploy some of the cash into absolute return funds.

Reduce your commodity sensitive weighting as this relies on rallies in commodity prices or commodity-related equities.

A material amount of your current yield comes from UK equities. So consider income sources such as Asian income funds, as well as European and US ones.

You are likely to have an income deficit from your investments, at least until you are able to draw from all of your pensions and receive state pension. This means you will need to draw on capital to reach your target. While this is not a problem with a portfolio of daily liquid assets, you will need to consider the liquidity of your peer-to-peer loans and commercial property. It may be more difficult to liquidate portions of these, meaning more would need to come from the other assets. If this continued over time you could find that the less liquid assets make up an ever-increasing percentage of your total wealth.

James Norrington says:

I would view your wealth holistically as it is very easy to become overexposed to certain themes, regions or sectors if you look at each investment in isolation.

Commercial property is highly cyclical, and more than a quarter of your portfolio (excluding the Sipp) is invested in cyclical UK investments, which is something to keep an eye on.

It would be worth considering investments in utilities, pharmaceuticals and manufacturers of consumer staples to balance your UK exposure better. These defensive sectors pay good dividends and have tended to outperform in recessions and bear markets.

Your fund holdings are definitely picking up the slack in terms of diversification, with overseas exposure accounting for nearly three-fifths of your equity investments. You could probably achieve the same and save on costs by using simple broad index-tracking exchange traded funds (ETFs). Holding several managed funds that provide different variations on the same themes - emerging markets, smaller companies and income - is less efficient, once charges are considered, than using ETFs to diversify across whole markets.

But managed funds are useful if you are targeting specific regions or themes where specialist knowledge would add value. That said, innovative new factor ETFs have emerged which target specific themes such as size, dividends, quality, minimum volatility, momentum and value.

But as you are keen to avoid investing in certain companies you need to know whether your investment manager has a policy that fits these moral concerns.