Don't bet on being able to spend less in retirement

His final-salary pensions, which are currently index linked at £12,500 a year, will start paying out when he is 60. He and his wife, who is 56, both qualify for around 90 per cent of the state pension. Their home is mortgage-free and worth around £725,000.

Haydn's wife has a self-invested personal pension (Sipp) worth about £90,000 from which she's taken her 25 per cent tax-free entitlement, and she plans to draw down the income produced in future.

Haydn fully uses his annual individual savings account (Isa) allowance, and his capital gains and dividend tax allowances for investments held outside tax-efficient wrappers.

"We plan to take income and profits to meet our base spend of around £35,000 per year, and maybe spend above this on holidays and giving our son, who is in his first year at university, a start in life," says Haydn. "I've estimated that we will have a return of about 5 per cent from the whole portfolio, even if the capital reduces over time. We will also release up to 25 per cent of the equity in our home as required.

"I estimate that we won't run out of money. Since 2010 my portfolio has on average made a return of 9.5 per cent a year. However, I'm aware that this period may have been a bull market, so my goal is to maintain future returns across the whole portfolio at the yield level from the income-producing shares and funds, which is currently 5 per cent. But I'm not sure if this is realistic in downturns.

"A loss of 10 per cent or more is well within the bounds of possibility - my portfolio took an 11 per cent hit in 2011, although has recovered well subsequently. I still hope to ride this out as much as possible with a cash buffer and use of stop-loss orders on the direct share holdings.

"In 2018 I plan to move employee pension schemes managed by Fidelity, UBS, and Legal & General, which are worth about £420,000, into a Sipp so that from June 2018 I can start taking benefits from them.

"I've tried to build out my portfolio from a solid lower-risk base - our home - adding some bond funds, income-producing funds, growth funds and direct shareholdings.

"I have built up the direct shareholdings in a similar fashion, with a core of equity income names, and a few holdings for growth and trading opportunities on which I keep a very close eye with stop-loss orders.

"'m increasingly focused on dividends and how well they are covered, but I like online gambling and payment processing companies for growth.

"I've had some successes and painful lessons, such as much bigger losses than necessary due to poor stop-loss discipline.

"I have recently sold some of the UBS (UBSG:VTX) shares I acquired via an employee share scheme The holding has made a loss of £33,000 - UBS was damaged badly by the financial crisis. I sell down some of this holding whenever the shares hit a reasonable price. And although UBS has started paying quite good dividends again I don't want the hassle of foreign dividends on my tax return.

"I favour globally diversified lower-cost tracker funds for growth, as well as funds focused on sectors such as healthcare and pharmaceuticals, and technology. I mostly invest in funds run by Legal & General Investment Management because its range covers the areas I've wanted to invest in to date, and sticking with one provider means I'm not overwhelmed by too much choice.

"But I've recently started to add funds run by other asset managers, including CF Woodford Income Focus (GB00BD9X6L36), and might increase this holding further. I have also recently added to Tritax Big Box REIT (BBOX) - I am very happy with the dividend income and growth it offers.

"I may move some of UBS UK Equity Tracker (GB0002680352) to a more globally focused equity fund - I think I have too much allocated to the UK. I may also put more money into Schroder Recovery (GB00BDD2F190) because it has a similar investment approach to the one I use when investing in direct shareholdings. I also think I should orientate more towards income funds so want to add a global equity income fund."

Haydn's portfolio

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE READERS' CIRCUMSTANCES.

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

I agree that you can afford to retire and live off your wealth. Your base spend of £35,000 a year represents around 4.3 per cent of this portfolio, and assuming a real return of almost 5 per cent a year on equities such spending is sustainable without drawing down your wealth. So I would not hurry into home equity release as many of these products aren't great value at the moment. Wait until you need the money and maybe by then the equity release deals available will be better value.

However, while you estimate a base spend of £35,000, how much more might you spend, and will you do this often? It's easy to be over-optimistic about prospective spending. I'd assume that my future spending will be roughly what I've spent in recent years, so don't bet on being able to spend less in retirement.

And although average returns might well be around 5 per cent a year, there's a significant risk that they will be below this level for a sustained period. This isn't just because of secular stagnation, but because equities can take a very long time to recover from bear markets.

There are two things you could do about this. One is to hold more cash and bonds. This reduces large downside risk to your wealth, but at the expense of ensuring moderate drawdowns.

Another is to be rigorous about stop-losses. I'd suggest Mebane Faber's 10-month rule that you sell when an asset has dropped below its 10-month (or 200-day) moving average. You don't need to monitor each individual holding: just keep an eye on global equity indices' and the FTSE All-Share index's moving averages, and cut your equity holdings when prices fall below these.

This will protect you from prolonged bear markets. You will miss out on bounces in the market, but I suspect that in your position it's more important to reduce the chances of worst-case scenarios than to chase every penny.

I like that you look to take full advantage of tax allowances and minimise management fees by holding trackers. But you need to distinguish between the two categories of income stock.

One category, into which companies such as housebuilders fall, have high yields because of their cyclical risk. These pay off well in good times, but do very badly in downturns.

The other category is stocks where the growth prospects are consistently underestimated by investors who overrate "exciting" new technologies and under-rate attributes that renowned US investor Warren Buffett calls "economic moats" - things such as brand power and high capital requirements. Having these attributes helps companies to fend off potential competition.

Many income funds, including CF Woodford Income Focus, hold both these types of income shares. This is fine while the economy is growing, but when it stops some higher-yielders will suffer.

Peter Savage, chartered financial planner at Fairstone Financial Management, says:

We are at a different period of the investment cycle to seven years ago, so are much more likely to see lower investment returns with a potential downward correction of values. But your income goals are still achievable, especially in view of your final-salary and state pensions.

When people retire they assume a steady rate of return, but the market doesn't provide steady consistent returns. If a fund or the market falls and you are taking a fixed withdrawal, you need to encash more units or shares to cover the amount needed. This can lead to capital erosion of your retirement pot because it has far fewer units, making it harder for it to recover previous gains.

You are correct to focus on yield, especially as you are looking to draw down from your portfolio. Try whenever possible to withdraw the natural yield for income as this does not involve encashing units and shares, meaning that if there is a fall in the portfolio value it can recover much more easily.

Paul Taylor, chief executive of McCarthy Taylor, says:

You should speak to an independent financial adviser about the implications of drawing income from your pensions before you start receiving your occupational and state pensions. We estimate your portfolio needs to generate just under 5 per cent a year to sustain your basic spending.

We would suggest holding cash worth at least a year's income in the Sipps, as well as taking your 25 per cent tax-free entitlement. There are also cheaper options than Sipps.

HOW TO IMPROVE THE PORTFOLIO

Peter Savage says:

Bonds have traditionally been a safe asset class, but at present there is a considerable downside risk with long-dated bonds, which will react more to possible interest rate and inflation rate rises over the short to medium term. If interest rates rise this will push long-dated bonds' yields up and their capital will fall. So consider some alternative funds for the lower-risk element of your portfolio over the next few years.

You invest in tracker funds for growth, and because markets have performed well over the past seven years these trackers should have made good returns. However, as the potential for market growth is now less, consider more active stockpicking funds for growth and potentially lower volatility.

I like your focus on dividend yields when picking shares. Consider investing in sectors that traditionally pay good dividends, such as utilities and pharmaceuticals, even in market downturns.

Income funds to consider include Premier Multi Asset Monthly Income(GB00B7GGPC79), which has a historical yield of 4.68 per cent, Eden Tree Higher Income (GB0009449710) with a historical yield of 4.56 per cent and Threadneedle Global Equity Income (GB00B7S8N055) with a historical yield of 3.4 per cent. These funds also provide good diversification across asset classes and geographic regions.

Paul Taylor says:

There is merit in using low-cost tracker funds to get exposure to developed stock markets such as the US and UK. However, when investing in bonds, particularly UK government bonds (gilts), purchasing direct holdings is a better option. Direct bond holdings don't have an annual management fee so you get a higher income from them, and they have a pre-determined maturity date, which avoids the risk of a loss if you hold to maturity. Gilt funds don't have such a maturity date, but do have higher costs.

You could increase the diversity of your portfolio by introducing asset classes such as infrastructure and commodities. Funds in these areas we like include HICL Infrastructure Company (HICL), an investment trust with a market capitalisation of about £2.9bn. The trust aims to pay a dividend of 7.85p for its current financial year, which equates to a yield of about 4.7 per cent.

HICL mainly invests in assets used by the public sector, such as schools, hospitals and public buildings, and transportation such as roads and railways. It also has selective exposure to economic infrastructure such as toll roads and transmission lines. The trust has an ongoing charge of 1.26 per cent.

Among commodities, we prefer industrial metals such as copper and aluminium. Although industrial metals have had a torrid time, they have performed strongly over the past 12 months due to expectations of a recovery in the global economy. We get exposure to these via ETFS GBP Daily Hedged Industrial Metals DJ-UBS PDSM ETC (PIMT), which tracks Bloomberg Industrial Metals Subindex and aims to mitigate currency risk. It has a charge of 0.49 per cent.

For global equity income we would suggest Vanguard FTSE All World High Dividend Yield UCITS ETF (VHYL). This ETF is very well diversified as it tracks more than 1,000 stocks providing exposure to developed and emerging markets. It has a yield of 3.7 per cent and an ongoing charge of 0.29 per cent. This ETF has tracked FTSE All-World High Dividend Yield index very closely.