Building up a sufficient retirement pot

"I have always used my late father's words - 'save half of what you never had and you will never go short' - as a guiding principal," he says. "My dividends have always been reinvested and any annual salary increases and bonuses have always been split 50:50 between savings and family requirements, such as holidays or a larger house. I started saving significantly in 2008 into funds of a riskier nature than I had been doing prior to then.

"I would like to retire in late 2015 when I will be 64, so my two main questions are:

1. By gradually transferring from riskier funds to income funds, will I be able to generate £5,000 a year of income? My state pension and personal pension is forecast to generate £14,000 a year.

2. My wife, Joyce, is six years younger than me, so will have to wait until 2017 for her workplace final salary pension, and until 2024 for her state pension. Will it put a strain on our finances if she retires at the same time as myself?"

David Meckin, author of How To Grow Your Own Money and managing director of Insight Financial Consulting, says:

Planning is key to a financially secure retirement and, with a year still to go, this is an excellent time to review your investment strategy. For individuals who have the time, I am a strong advocate of self-investing.

This has three distinct advantages:

■ Total visibility of your investments on a day-to-day basis;

■ Avoiding fund management fees; and

■ The ability to sell most securities at a moment's notice should you unexpectedly need access to cash.

It would appear you already have some experience of self-investing in equities, with over £50,000 of your overall portfolio currently held in this form.

If you are prepared to pursue the self-investing route, I would advocate rolling your existing Isa investments into a self-select Nisa (new Isa), which allows you to buy and sell individual securities directly. Doing this makes decision-making far more straight-forward. Bonds can provide a guaranteed fixed rate of income, but the downside is that this income will inevitably be eroded by inflation. By contrast, shares provide potential for long-term capital growth, but dividend income cannot be guaranteed.

In addition to bonds and shares, you would be well advised to maintain some cash balances to meet any short-term needs. You currently have over £13,000 divided between cash and premium bonds. This represents about 8 per cent of your overall portfolio and for most people this should be quite sufficient. You also have £31,000 in a two-year cash Isa, but this is only earning 2.05 per cent a year. Given the current rate of Retail Price Index (RPI) inflation is 2.6 per cent, this investment is actually losing value, so you ought to consider moving it at the earliest available opportunity into higher-yielding investments. Assuming you continue to keep 8 per cent of your portfolio in cash, this leaves you with nearly £160,000 to apportion between fixed income bonds and shares.

Corporate bonds offer significantly higher rates of return than savings accounts. Ten-year bonds, for example, currently provide an average annual yield of 4.3 per cent. If you invested £60,000 in this type of security, that would generate an annual income of £2,580 which is over half your income target. Providing issuers don't default, this income is guaranteed. That would still leave you with £100,000 to be invested in shares.

To keep risk low you will want a well-diversified share portfolio, but you do not want to over-diversify as this can damage returns. A holding of between 20 and 30 companies, with the value of these investments being spread evenly over a variety of sectors, provides a reasonable balance for most investors. This will require a significant rebalancing of your current portfolio where SSE (SSE) accounts for about a third of the value of your current share holdings.

As a guideline, the current average dividend yield for companies quoted on the London Stock Exchange is 2.6 per cent, which could provide a further £2,600 annual income. If you combined this with income from your corporate bonds, you would exceed your income target of £5,000.

Although dividend yields are not guaranteed, you can improve your income opportunities by opting for higher-yield sectors. For example, life insurance companies are currently producing average yields close to 4 per cent, while utility companies are producing ones in excess of 4.5 per cent. Furthermore, by maintaining a significant capital investment in shares in the long term, you should also enjoy sufficient capital gains to help maintain your future income in real terms. Ultimately, the split between fixed income bonds and shares is determined by your appetite for risk.

As far as your wife taking early retirement is concerned, you don't provide any details of your financial commitments, so it is impossible to say whether or not you could both live comfortably on an annual household income of £19,000. My advice would be to defer this decision until at least a year after you retire and review your financial situation at that stage.

Justin Modray

Overall you are sitting quite comfortably and generating £5,000 of annual income from your shares and funds is not unrealistic. However, I would suggest de-risking your fund portfolio quite significantly, including exposure to a wider selection of assets that are unlikely to all move in the same direction at the same time.

Your shares portfolio comprises a selection of blue chips paying healthy dividends and should remain a good long term source of income. Given you will continue reinvesting dividends until retirement I would just double check your stock broker is not charging an excessive dealing fee to do so, as some brokers impose minimum charges that become prohibitive on smaller holdings.

If you want exposure to more companies and/or a simpler life you might consider shifting the shares into a low cost tracker fund such as Vanguard FTSE UK Equity Income (fund ongoing cost 0.25 per cent a year), which will provide similar exposure, otherwise I see little reason to change your current approach.

Your fund portfolio is dominated by exposure to emerging markets, which I think is too risky given your plans to retire late next year. I’m a big fan of emerging markets over a 10-20 year timescale, but you really don’t to endure sleepless nights in retirement due to high short term volatility, which is common in such markets. Also, your combined shares/fund portfolio is over 90% invested in stock markets, which again I feel is too risky given your retirement plans.

If you are comfortable with middle of the road risk I would suggest exposing around 50-60 per cent of your portfolio to the stock market, around 15-25 per cent to fixed interest (such as corporate bonds) with the balance split between commercial property, absolute return funds and gold. This should retain good potential for growth and income while reducing the impact a stock market downturn would have on your retirement.

Perhaps consider supplementing your shares with equity income funds like Threadneedle UK Equity Alpha Income (GB00B12WJY78) and Fidelity Enhanced Income (GB00B3KB7682), the latter interesting in that it sells away some future potential upside to boost income now, a good way to de-risk. Your Newton Global Higher Income is fine, albeit the manager’s style has fared less well of late. M&G Global Dividend (GB00B39R2M86) is another to consider.

As for fixed interest, in the current climate I would favour managers who have the flexibility to invest widely across bond markets rather than those who are shackled to a narrow remit. Inflation and interest rates are both likely to rise medium term which is probably bad news for safer bonds, so investing with a good, nimble manager is key. Perhaps consider blending a more conservatively managed fund like Fidelity Strategic Bond (GB00B05NC857) with a more opportunistic like Jupiter Strategic Bond (GB00B2RBCS16).

Funds investing in physical commercial property are well worth holding as income tends to be steady and correlation to stock markets is usually low. L&G UK Property (GB00BLM78D49) is a good example. You could diversify further by investing in overseas property, albeit such funds buy shares in property companies rather than physical property itself, which will be more correlated to stock markets. An interesting option is Schroder Global Property Income Maximiser (GB00B4XCGK27) which, like the aforementioned Fidelity fund, sells away some future potential upside to boost income now.

Gold doesn’t produce an income, but is an excellent safe haven when markets throw a wobble. It can therefore make sense to have some exposure and the ETFS Physical Gold tracker fund (PHAU) is a relatively cheap way to do so at 0.39 per cent a year.

Absolute return funds, which try to deliver positive returns across varying markets, offer another way to diversify, albeit the majority tend to fail at delivering what’s on the tin. Newton Real Return (GB0001642635) is one of the more cautious and has generally delivered to date.

To deliver an income of around £5,000 a year from shares and fund portfolios requires an annual yield of around 4 per cent. You are achieving this with your shares and this should also be feasible if you spread your fund portfolio across the asset types mentioned.

A few final points:

You mention you have a personal pension. Is this a pension that you invest yourself as opposed to a ‘final salary’ pension provided by your employer? If so, you have an important choice on whether to swap the pension fund for an income for life by buying an annuity, or leave it invested and instead draw an income.

And pay some attention to the cost of holding the fund investments. You may be using a provider at the more expensive end of the market. You might use www.comparefundplatforms.com to gauge how these costs stack up.

Whether your wife retiring at the same time as you will put a strain on your finances depends on the extent of any shortfall between her income now and how much you’ll jointly need to live on in retirement. You might squeeze an extra £1,000 or so of annual income from the portfolios but more than this would be a stretch.

David Cresswell portfolio

Source: David Creswell & Investors Chronicle, as at 6 June 2014