Seeking income to maintain a decent lifestyle

"I plan to work for several more years without drawing on my investments," says Anthony. "And my wife will retire when I do.

"I carried out a check of our expenditure for the last year and I think that I need around £42,000 income a year after tax to maintain our lifestyle - any savings made from not working will be offset by increased opportunities to spend.

"When I reach my 65th birthday in November I can draw the state pension, which I anticipate will pay £6,150 a year, though I could defer this if I'm still working. I have a final-salary pension which will probably pay £3,449 and a section 32 buyout with Friends Life which I expect to pay £1,200.

"My wife will draw a teachers pension of £2,106 from December 2017, and her full state pension of about £9,258 from December 2023.

"I have been moving our investments into income producing funds and, providing the dividend is maintained, am reasonably flexible about the fund price. I am anticipating that the income from the funds will balance our outgoings once my wife draws her state pension in 2023. But as I probably won't need all of the income from my self invested personal pension (Sipp), it still contains what I would term core and growth funds. And I expect to live for another 25 years - both my parents reached 90 - and that horizon allows room for growth stocks.

"I like to have around the equivalent of two years expenditure in cash and to have the majority of my investments in fairly boring things that pay a steady income.

"I read that a balanced portfolio should contain a lot of bonds plus property, but I prefer infrastructure and equity income. If I buy bonds now it's probably at the top of the market and I'm cautious about property, although some property funds have sufficient rental income to cover their dividend so are probably worth a look.

"I understand that the general recommendation is to hold 20 to 30 individual stocks, so that each one represents between 3 and 7 per cent of the portfolio. I don't hold too many investments although I do have a small 'play area' with small investments which account for less than 5 per cent of the portfolio.

"I am shifting my portfolio to investment trusts, partly because I resent paying a 0.45 per cent platform fee to Hargreaves Lansdown for holding funds. For example, at some point I will probably sell Trojan Income (GB00B05K0N75) and buy Troy Income & Growth Trust (TIGT).

"I am overweight global and emerging markets funds, and underweight Europe. I think that long term growth is most likely to come from Asia Pacific and emerging markets, and I like funds that focus on dividend paying stocks in these areas.

"I am cautious about trackers and exchange traded funds (ETFs) although I acknowledge that they are low cost. I think that markets are currently high and there may be a better entry point in the future. I also prefer funds where I am comfortable with the management team, investment philosophy and track record.

"I have on my watch list City of London Investment Trust* (CTY), Perpetual Income and Growth Investment Trust* (PLI) and Troy Income & Growth."

Anthony's portfolio

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

I like that you like cash. It's true that it will lose you money in real terms in the coming months thanks to rising inflation. But a loss of 1 or 2 per cent is better than a loss of 10 or 20 per cent, which can easily happen with equities. This is especially the case as your limited earning power means you cannot rely on your salary to make up for any losses on the stock market.

I would, however, caution you against having cash in a Sipp, where interest rates are usually awful. One solution here is to remember that what matters is your portfolio as a whole. You can be fully invested in your Sipp whilst holding your cash outside of it in higher interest-paying accounts such as the Santander 123 account - although the interest rate will fall to 1.5 per cent in November.

I also applaud your desire to minimise fees, as these compound horribly over time. As some active funds and most ETFs are lower-cost, you can get by without more expensive actively managed funds.

Better still is your liking for "fairly boring things." We know that dull defensive stocks outperform on average over the long-run. And you are well-invested in these. Some of your bigger holdings such as Murray International* (MYI) and Newton Global Income* (GB00B7S9KM94) have strong defensive biases. And both Trojan Income Fund and Troy Income & Growth are classic defensive funds, with big holdings in stocks such as Unilever (ULVR), GlaxoSmithKline (GSK) and Imperial Brands (IMB).

What I dislike, however, is your belief that a long investment horizon "allows room for growth stocks." It's a common misconception that growth stocks are long-term investments. They're not. Over the past 25 years growth stocks, as measured by the FTSE 350 Low Yield index, have given a total return of 7 per cent a year. That's two percentage points less than the FTSE 350 High Yield index. This is despite the fact that growth stocks should have benefited from the big fall in bond yields. This tells us that growth stocks have, on average, been overvalued.

This is probably the obverse of defensives' good performance. Investors have over-rated the chances of exciting growth stories actually materialising, and so have paid too much for them, just as they paid too little for dull stocks with the sort of monopoly power that comes from big brand names.

You should only invest in growth stocks if you think we are in one of those unusual periods when they are underpriced. Your time horizons are irrelevant.

Dennis Hall, chief executive officer of Yellowtail Financial Planning, says:

There is an argument for not taking an income from your Sipp until you have exhausted the investments in your Isas. From a tax perspective - particularly inheritance tax - it makes sense to spend both capital and income from Isas. In this respect, a total return bias rather than an income bias makes more sense.

I wouldn't allocate as much as a third to equity income funds, though I appreciate the comfort that a regular dividend stream brings. I prefer a portfolio to reflect the fact that long-term investment gains are derived across a number of factors, rather than skew it towards dividends at the expense of total returns.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

You might well be right to believe that long-term growth is most likely to come from Asia. But history tells us that long-term economic growth does not translate into good equity returns: optimism about economies does not justify optimism about stock markets.

Instead, the case for emerging markets is tactical, not long-term. Such markets are driven by sentiment, and sentiment tends to feed on itself. For this reason, a good buy/sell signal comes from 10-month (or 200-day) moving averages - a price above this average is a buy signal. MSCI Emerging Markets Index is above its ten month average which is a good sign. When this changes, however, you should consider reducing your weighting.

Dennis Hall says:

I'm not a fan of Neil Woodford and, in particular, the Woodford Patient Capital Trust (WPCT). I believe there are better ways to access unlisted securities and early stage investments, for example, Enterprise Investment Schemes (EIS) where tax relief compensates the level of risk taken.

I've also been a long-term fan of HgCapital Trust (HGT) and Electra Private Equity (ELTA) - both of these private equity investment trusts have an impressive track record.

I don't understand why people are attracted to resources and don't hold any investments focused on these. The amount of your portfolio invested in these is relatively small so is it worth the effort? Instead I would enlarge the amount in smaller company investment trusts. Over time smaller companies consistently outperform larger companies, yet there is relatively little exposure to smaller companies in your portfolio.

Fixed interest continues to concern me and I don't hold the same degree of optimism as this portfolio suggests. In particular, the pricing of the Burford 6.125% 26/10/24 bond suggests the market attaches a relatively high degree of risk to it, so I would sell it and reallocate the proceeds to the MI TwentyFour Dynamic Bond Fund (GB00B57TXN82) to diversify the risk.

Gavin Haynes, managing director at Whitechurch Securities, says:

Traditionally a portfolio at retirement age would have been invested primarily in traditional low-risk investments, with fixed interest a prominent feature. However, it is becoming increasingly common for investors at this age to accept more volatility and maintain a long-term approach, with life expectancy lengthening and traditional low risk assets paying negligible returns.

Your portfolio is structured for income and growth, and I would estimate that it should yield around 3 per cent excluding the cash, providing an income of over £30,000. This is despite there being a significant weighting towards capital growth investments.

And there is plenty of scope to boost the yield when income becomes more of a priority. The AXA Framlington Managed Balanced (GB00BGLC5L23) and Invesco UK Equity Pension funds are both solid core growth holdings, but could be switched to more income focused strategies such as the Jupiter Distribution (GB00B4WDT300) and Aviva Investors Multi-Strategy Target Income (GB00BQSBPF62) funds.

The non-yielders could also be used to increase the focus on equity income. This is certainly an approach I favour, and the importance of reinvesting dividends and compounding are powerful in contributing to long-term returns. The City of London, Perpetual Income & Growth and Troy Income & Growth investment trusts you are considering are all solid long-term core holdings.

Your infrastructure investments provide a good source of income. This area is flavour of the month and while I like the fundamentals, the valuations of some infrastructure investment trusts are looking stretched. HICL Infrastructure *(HICL) and John Laing Infrastructure Fund (JLIF) are both on premiums to net asset value (NAV) in excess of 20 per cent.

The thirst for yield may drive the price higher in the short term so I would not be comfortable buying at such heady valuations. Alternatives include open-ended funds that focus on listed equity investments, a proxy for unlisted infrastructure exposure. Examples include First State Global Listed Infrastructure *(GB00B8PLJ176) which you already hold, and Lazard Global Listed Infrastructure Equity (IE00B5NJXH66) and Legg Mason IF RARE Global Infrastructure Income (GB00BZ01WT03).

Ecofin Water & Power Opportunities (ECWO) investment trust is another income producing option.

From a contrarian perspective it could be a good time to add a small position in UK commercial property via an investment trust, which doesn't have the liquidity concerns of open-ended funds. The yields these trusts offer are enticing and they are unusually trading at discounts to NAV. UK Commercial Property Trust (UKCM) is trading at a discount of around 7 per cent and yielding 4.6 per cent.

*IC Top 100 Fund