- These investors estimate that they will need a retirement pot of £800,000
- They should not hold back cash to try to time the market
- They could probably meet their objectives with cheaper funds than they currently hold
Sipp and Isa invested in funds and shares, cash, residential property.
Retire when Nick is age 67 on an income of £48,000 a year, supplement pensions income with £32,000 a year from investments, build up investments to large enough size to generate this amount sustainably.
Nick is age 48 and his wife is 43. He is self employed and earns roughly £80,000 a year after tax, and his wife has a share in his limited company. They have children aged 16 and 19.
The family home is worth about £400,000, and has a mortgage of £250,000 which the couple is due to pay off within 20 years.
"I plan to retire at age 67, and to be comfortable we will need an annual income of around £48,000,” says Nick. “Although my wife doesn't work she makes voluntary National Insurance contributions, and we are forecasted to receive state pensions of £15,757 a year in aggregate. So we want our investments to be able to generate roughly another £32,000 a year.
If, as I understand, you can comfortably withdraw 4 per cent a year from your investments without the risk that your money will run out before the end of your life, I estimate that we will need assets worth about £800,000, excluding our home. So I have built up investments in an individual savings account (Isa) and self-invested personal pension (Sipp) with this in mind. I contribute £12,000 a year to my Sipp via my business account and try to put the full allowance of £20,000 a year into my Isa. I do this as one payment per year into each account to minimise trading costs, and put an equal amount of money into each holding.
"I try not to have exposure to the same securities in the Sipp as in the Isa by mainly investing in exchange traded funds (ETFs) with different themes. I think that the Sipp is more adventurous than the Isa.
"I try to think ahead on what investment trends will be over the next 20 years, and hold thematic as well as index tracking funds. Although I prefer not to invest in direct share holdings, I have invested £500 in Bitcoin miner Argo Blockchain (ARB) to get exposure to this cryptocurrency. My initial investment went up to a value of £28,000 and, although it has now fallen back to below £7,000, I do not intend to sell it as I see a lot of potential in Bitcoin over the next decade or so. And as I am not going to add to Argo Blockchain I consider that I am taking a small risk by having made an investment of £500 that could have a value of several thousand pounds in 10 to 20 years’ time.
"I am holding cash in the Isa worth about a quarter of its overall value – more than the amount I usually hold in the Sipp – about 5 to 10 per cent of its overall value. This is because I think that there will be more investment opportunities in the near future due to the generally pessimistic investment environment."
|Nick and his wife's total portfolio|
|Holding||Value (£)||% of the portfolio|
|iShares Global Clean Energy UCITS ETF (INRG)||11,600||6.70|
|L&G All Commodities UCITS ETF (BCOG)||11,560||6.68|
|iShares Core S&P 500 UCITS ETF (CSP1)||9,754||5.63|
|L&G Ecommerce Logistics UCITS ETF (ECOG)||9,324||5.38|
|SPDR Morningstar Multi-Asset Global Infrastructure UCITS ETF (GIN)||9,082||5.24|
|L&G Cyber Security UCITS ETF (ISPY)||9,000||5.2|
|iShares Automation & Robotics UCITS ETF (RBTX)||8,717||5.03|
|Worldwide Healthcare Trust (WWH)||8,375||4.84|
|First Trust Cloud Computing UCITS ETF (FSKY)||8,300||4.79|
|Invesco CoinShares Global Blockchain UCITS ETF (BCHS)||8,130||4.69|
|Argo Blockchain (ARB)||6,540||3.78|
|iShares Agribusiness UCITS ETF (SPAG)||5,300||3.06|
|L&G Clean Water UCITS ETF (GLGG)||4,695||2.71|
|Bailie Gifford Pacific (GB0006063233)||3,513||2.03|
|VanEck Vectors Video Gaming and eSports UCITS ETF (ESGB)||3,343||1.93|
|WisdomTree Battery Solutions UCITS ETF (CHRG)||3,280||1.89|
|iShares Electric Vehicles and Driving Technology UCITS ETF (ECAR)||3,073||1.77|
|L&G Hydrogen Economy UCITS ETF (HTWG)||3,055||1.76|
|L&G Digital Payments UCITS ETF (DPAG)||3,028||1.75|
|International Biotechnology Trust (IBT)||2,976||1.72|
|Montanaro European Small Companies Trust (MTE)||2,908||1.68|
|Bailie Gifford Shin Nippon (BGS)||2,657||1.53|
|Fidelity Emerging Europe Middle East and Africa (GB00B87Z7808)||2,212||1.28|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.
James Norrington, associate editor at Investors Chronicle, says:
You’ve done well to make a long-term plan and set a realistic timeframe over which to achieve it. Because you are making sizeable regular contributions over a long-term period of time, the power of compound returns means that your objective should be easily attainable.
You also seem to be well ahead with your financial planning, thinking about your business, home and state pensions, alongside the Isa and Sipp. But as you have a mortgage and your wife doesn’t work, you should consider some form of life insurance, if you do not already have this. It is also important that you and your wife have wills, and you should inform your Sipp provider that your wife/children are your nominated beneficiaries.
And you should have a Lasting Power of Attorney in place in case you become ill and cannot make decisions about your family finances.
You mostly seem to think about your finances holistically whereas many people mistakenly treat each of their assets as separate pots instead of looking at the whole picture. However, you think about the Sipp and Isa investments separately. This might make sense if you were saving for two different things over different time horizons. But as you have one main goal of saving for retirement, you should think of the investments as a single entity.
Your goal of an £800,000 retirement pot in 19 years is very achievable. If you start with £173,175 and add £32,000 a year to it, you will almost certainly hit that target early. But you must also factor in inflation because £800,000 will buy a lot less in 19 years than it could now.
The Bank of England (BoE) forecasts that inflation will rise to 11 per cent this year but fall back to its long-term target of 2 per cent by 2024. Although I wouldn’t expect double-digit inflation to persist, one of the scenarios sensible investors should factor in is higher sustained inflation than the BoE forecasts. That said, looking at a similar timeframe to yours, even over the high inflation decades of the 1970s and 1980s the average annualised real rate of return – after inflation return – for important asset classes was positive. The Credit Suisse Yearbook shows that the annualised real returns of UK bonds averaged at 2.2 per cent and those of UK equities at 7.5 per cent.
Past returns don’t predict the future, but it is very unlikely that inflation will be sustainably high at the same time as returns are sustainably low over a timeframe such as yours. This means that you don’t have to take huge risks with your asset allocation to have the income and spending power you want in retirement.
You like niche investment themes but could almost certainly meet your objectives with a mix of cheaper funds than you currently hold. Thematic funds have the scope to outperform, but are not guaranteed to and charge much more than plain vanilla tracker funds. You are investing for the long term and most lasting themes will be captured by funds which track country indices. So why pay many funds 1.5 or 2 per cent when you could buy ETFs which track major indices such as the FTSE 100 and S&P 500 for charges of between 0.09 and 0.15 per cent?
For you, a sensible mix of US and UK-listed shares, and government and high-quality corporate bonds should do the trick over the long haul so just try to keep costs down. That said, right now you might want to hold more in cash and gradually drip money into investments because we are in a tricky global downturn. Market timing is hard so don’t panic and try to time dips.
One area you should exercise caution on is anything crypto-related. This is a speculative area and should be treated like a lottery ticket. You are right to limit the size of your exposure to an amount you can afford to lose.
Luke Worthy, chartered financial planner at Kingswood (KWG) says:
Your level of annual contributions and time horizon of 19 years mean that you are likely to be able to build a sufficient pot to meet your retirement goals. But we advise scrutinising your aims and objectives on a regular basis to ensure that you are aiming for the right targets. We also suggest undertaking a cash flow modelling exercise with a financial planner to ensure that your portfolio remains on track and could withstand any bad surprises in the future.
Saving into both an Isa and Sipp will give you excellent income flexibility and control over tax in retirement. I would continue with this method of saving and emphasise investing in the pension. Accumulating funds in your Isa at the same time as the value of your home is likely to rise could mean that the value of your estate outgrows the inheritance tax (IHT) allowances. But assets held within pensions do not incur IHT so putting a larger proportion of your savings into your Sipp makes sense.
The safe withdrawal rule of 4 per cent is a contentious topic in financial planning, particularly following recent research on sequential risk – the risk of withdrawing money in any given time period. Again, cash flow modelling would help to determine a sustainable rate of withdrawal. However, the reality of retirement is often not so linear, for example, you might want a larger annual income in the early years.
Your investments mostly target thematic exposure and neglect more traditional markets. And you are almost entirely invested in equities, meaning that your portfolio is likely to experience a great deal of volatility. This might be palatable in the earlier stages of accumulation, but as you approach retirement you should think about the level of risk you are taking. Although traditional hedges such as a mixture of bonds and equities haven't performed predictably recently, you would benefit from considering your asset allocation carefully over the next 20 years. What is right for you depends on many factors you have not set out, so I suggest getting specific holistic financial advice on this.
You have taken a sensible approach with your investment in Argo Blockchain by only investing an amount of money you can absolutely afford to lose.
It is almost certainly not worth holding cash in your Isa to attempt to take advantage of falling markets. It’s almost impossible to time the market and, for the vast majority of investors, "it’s not about timing the market but time in the market". So I suggest that you do not treat this cash differently to the rest of your portfolio and rebalance accordingly.