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How can I build up enough to support early retirement?

When this investor retires she would like to draw £20,000-£30,000 per year from her assets
How can I build up enough to support early retirement?
  • This investor may have to retire early for health reasons
  • She wants to be able to draw £20,000-£30,000 per year from her assets to supplement her partner's salary
  • To help build up enough assets she should pay enough into her pension to get the maximum contribution possible from her employer
Reader Portfolio
Claire 42
Description

Pensions, Isa invested in funds and shares, cash, residential property.

Objectives

Build up assets to help finance early retirement and generate an income of £20,000 to £30,000 per year, get best return possible on money for house deposit, buy new home, build savings for nieces.

Portfolio type
Investing for goals

Claire is age 42 and earns £75,000 per year. Her partner earns £40,900 per year which will increase to £44,000 in January. Claire is selling their home, and this should result in proceeds of £170,000 which they plan to use as a deposit to buy a new home. They also have a rental property worth about £330,000 with a mortgage of £155,041.

“I hope to continue working for another 20 years but may have to retire early due to health reasons,” says Claire. “So I want to make sure that we have enough money to pay the mortgage and bills, and support me and my partner. We might otherwise only have her salary and she is considering a career change.

"I plan to draw from my individual savings account (Isa) to ensure that we achieve a good income when I retire. I hope to be able to get £20,000 to £30,000 a year from my assets if I can keep saving enough into my Isa. I aim to put at least £10,000 into it every year and, ideally, the full annual allowance if I can afford to.

"I have recently started paying 4 per cent a year into a workplace pension, and have three former workplace pensions worth £3,935, £8,556 and £31,079. I think they are defined contribution schemes.

"I have no cash savings other than about £18,000 in my investment Isa. I put all my cash into my Isa at the start of April but should have some in my current account again when my house sale goes through. I wondered how I should put this lump sum until we use it to buy a house, probably in two years. It will not get a good rate of interest in my current account.

"I have been investing for about 15 years and hold investment trusts with lower yields, and direct shareholdings with higher yields which I thought would do well or provide good dividends.

"I try to spread my assets across a variety of investments and tend not to have more than £5,000 in any one investment, unless I consider it to be a ‘solid’ fund. I am fairly cautious about investing sums of more than £1,000. I have put stop-losses (an order to buy or sell a specific stock when it reaches a certain price) of around 15 per cent below the highest value of investments that have not fallen below what I paid for them. I check the stop-losses once a month and move them up, if necessary, to have a trailing stop-loss.

"I top up investments that do well. If anything falls below the price I paid for it I tend to hold on and hope that it will recoup the losses. Or I sell after the security has at least paid dividends worth the difference between what I paid for it and the value it has fallen to. I am not trading much at the moment because it is uncertain what is going to happen. But I did invest in Murray Income Trust (MUT) in early May – my only trade in a year.

 

 

Claire's total portfolio
HoldingValue (£)% of the portfolio
Buy-to-let property minus mortgage17,495940.84
Former workplace pensions43,57010.17
Nedbank (SA:NED) 25,9476.06
Scottish Mortgage Investment Trust (SMT)23,2315.42
Cash18,3314.28
Personal Assets Trust (PNL)14,0403.28
Alliance Trust (ATST)12,7852.98
Merchants Trust (MRCH)11,2932.64
North American Income Trust (NAIT)85371.99
Sage (SGE)7,3841.72
Murray International Trust (MYI)6,8811.61
Henderson Far East Income (HFEL)6,2531.46
City of London Investment Trust (CTY)5,9901.4
Schroder Oriental Income Fund (SOI)5,0461.18
Royal Dutch Shell (RDSB)4,9611.16
Rio Tinto (RIO)4,7051.1
Templeton Emerging Markets Investment Trust (TEM)4,6361.08
P2P loans4,5441.06
AstraZeneca (AZN)4,1590.97
British American Tobacco (BATS)3,9110.91
Murray Income Trust (MUT)3,7710.88
GlaxoSmithKline (GSK)3,7180.87
Fidelity China Special Situations (FCSS)3,6670.86
Barclays (BARC)3,4700.81
HL Multi-Manager Income & Growth (GB0032033127)3,1190.73
HL Multi-Manager European (GB00BSD99K23)2,7190.63
Aberdeen Standard Equity Income Trust (ASEI)2,6630.62
Blackrock World Mining Trust (BRWM)2,4880.58
National Grid (NG.)1,5810.37
Vodafone (VOD)1,5430.36
Royal Mail (RMG)1,4870.35
Carr's (CARR)1,2700.3
SSE (SSE)1,1820.28
Tesco (TSCO)1,1780.27
Worldwide Healthcare Trust (WWH)1,1460.27
Old Mutual (OMU)8360.2
Quilter (QLT)6930.16
Marks & Spencer (MKS)4820.11
Micro Focus International (MCRO)1550.04
LF Equity Income (GB00BLRZQ737)670.02
Total428,399 

 

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

 

Chris Dillow, Investors' Chronicle's economist, says:

It is possible for you to get an income of £20,000 to £30,000 a year in retirement. If you can save around £15,000 a year for the next 20 years, rising in line with inflation, you could get even more than this if equities give an average real return of 4 per cent a year – a reasonable expectation.

The big problem is that you might not be able to work for another 20 years. The only thing you can do is what you are already doing – saving enough to give yourself some kind of income should you have to retire early. And remember that money is not the only thing we can save. Spending on experiences such as holidays, weekends away and “me time” is also a form of saving – such experiences build up a stock of happy memories for later life. Nobody remembers that blissful time they put £20,000 into an Isa!

I suggest putting some of the proceeds of your home sale into a balanced portfolio. You can create this with a few exchange traded funds (ETFs) which track global equities, gold and government bonds. Such a portfolio should protect this money from the risk that the economy performs less well than expected, in which case bonds would do okay but equities wouldn't. It should also protect this money from the economy performing better than expected, in which case losses on bonds would be offset by gains on shares.

But also retain some cash holdings as protection against a fall in share prices and rise in interest rates. The latter risk also means that you should think carefully about how big a mortgage you can afford – budget for rates going up in the next two to three years.

I like many things about your portfolio, including the defensive bias of your direct share holdings. History and a bit of economic theory tell us that defensives, on average, do better than they should. I also like that you are using investment trusts to get global exposure.

Stop-losses, meanwhile, are important is because there are fashions in investment – strategies wax and wane. For example, investors might come to believe that US big tech has become overvalued in which case Scottish Mortgage Investment Trust might get caught out.

A second reason why stop-losses matter is that there is often momentum in equities – fallers carry on falling. So you must be rigidly disciplined about cutting losses. It’s tempting to hold onto losers in the hope that you’ll break even. But this can be an expensive error. You will regret cutting a loss in some instances because the stock bounces back. But nothing in investing works 100 per cent. On average, disciplined stop losses save you money.

Don't be worried about being unsure where to invest. We should always be unsure because the future is, to a large extent, unknowable. Being sure is a good sign that you are wrong. And you don’t need certainty. Diversification across equities and other asset classes, including cash, is usually good enough.

 

James Norrington, specialist writer at Investors' Chronicle, says:

The world is full of uncertainty but you are being proactive in areas that you can control. By investing regularly and reinvesting the dividends, you are taking advantage of the power of compound returns which is every long-term investor’s greatest ally in achieving their goals.

You should continue to take advantage of easy wins that are available to you. One of these is to pay enough into your new workplace pension to ensure that you get the maximum contribution possible from your employer. Paying more into your pension would also have the benefit of widening your lower rate income tax band so that more of your salary is taxed at 20 rather than 40 per cent.

An Isa is a good wrapper for you as you might stop working early and need money before age 55, the earliest at which you can currently access pensions. That said, it is possible to get some dispensation and draw money from a pension early on grounds of ill health.

Chris makes a good point in saying that you should enjoy life as well as just saving. But making pension contributions and using your full annual Isa allowance each year will give you the best chance of meeting your objectives.

When buying a new home, you and your partner should think about budgeting for interest rates rising. And because of the uncertainty over your health you don’t want to be overly leveraged with a huge loan-to-value ratio on your property. Also consider taking out an insurance product to pay off the mortgage if you are forced to retire early due to ill health.

There are some good aspects of your portfolio construction. The first is keeping a healthy slug of cash. You’re not a professional investor who has to worry about beating a benchmark, so having that bit of padding and liquidity is always worthwhile.

I also like the approach you have taken with the peer-to-peer (P2P) loans. You have put enough money into them to make your holding worthwhile, but it still only accounts for a small fraction of your overall wealth so it wouldn’t matter too much if it goes wrong. Anybody speculating on volatile assets like silver or cryptocurrencies would do well to take a leaf out of your book on this.

You have a reasonably well diversified selection of UK-listed shares in a number of major sectors, which is good. These are nice holdings at the moment because the UK was relatively cheap compared to other major stock markets at the turn of the year. Some are cyclical stocks which will suffer later in the economic cycle, but you balance them out with some good defensive holdings.

The investment trusts diversify your equity holdings across different geographies. With these, I would focus on total returns rather than dividend yields. You aren’t taking income from them yet, so you want them to reinvest capital and prioritise compound total returns. When you do draw from your investments, you could sell some of the investment trust shares and, in effect, make your own dividends.

Investment trusts, like ETFs, are also a great way to buy into some of the mega-trends that will help your portfolio deliver growth. And you’ve already bought into some of these via your holdings in mining and healthcare.

Your position management is good, with not too much risked on any one holding. But watch some of the smaller holdings - especially those with a value below £1,000. If you build up too many they can make a portfolio unwieldy and difficult to manage.