'I'd rather lose out than lose money – how do I invest for a £60,000 income?'

Going into retirement is a good opportunity to do all the things you never had time for before – be it seeing the world or fully embracing a hobby. But such laudable ambitions can be expensive.

That's one concern for Steve, who is 61 and currently in the process of easing back on work ahead of retirement. He moved to a four-day week in 2021, with plans to drop down to three days next year and then to retire a year or two after doing so. As he puts it: “We want to travel while we still can”.

Steve currently makes £88,000 a year and is now thinking about the financial requirements of working less before retiring altogether. He estimates that he and his wife, Sandra, will need approximately £60,000 a year after tax, with that level likely to fall over time as the couple travels less due to age. However, as he rightly notes, this income would have to have some inflation linkage.

In terms of timings, moving to a three-day week next year will mean the couple needs to generate some income from their investments. Between full retirement (in 2025/26) and the state pension kicking in from mid-2029 the entire £60,000 will need to come from the couple’s assets.

Steve and Sandra own their £750,000 home outright and have a mix of other assets that amount to roughly £1.2mn. Steve has around £744,000 in a pension that he started managing in 2018 after poor returns using a financial adviser. Some of this is invested in funds such as Fundsmith Equity (GB00B41YBW71) but a big proportion of the portfolio is in cash or cash funds. More generally cash makes up around 70 per cent of the couple's assets once property is excluded. This includes nearly £300,000 in savings accounts and Premium Bonds, and some limited individual savings account (Isa) holdings. Steve also holds a few venture capital trusts (VCTs) and Sandra has £61,000 in a self-invested personal pension (Sipp), £47,000 of which is in cash.

If the couple’s cash allocation seems high, this most likely stems from Steve’s cautious approach. When asked to describe his attitude to investment risk he describes it as “very low”, noting: “We’re too close to retirement to take significant risks. I’d rather not make £100,000 than lose £20,000."

Steve has perhaps acted more cautiously than normal in the context of big market movements, with him adding: “I’ve tended to move assets into cash when things look troublesome on the markets. While the portfolio has held up well, this approach has also probably meant that I’ve missed some good growth opportunities.”

His ideal investment would now be something low-risk, with a return of between 5 and 10 per cent a year.

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

Laith Khalaf, head of investment analysis at AJ Bell, says:

You have got yourself into a strong financial position to approach retirement, so congratulations. In many cases, a DIY investor like yourself, who is willing to roll up their sleeves and do some research, can do better than a professional when it comes to picking investments. However, professionals come into their own when it comes to cash flow planning and tax efficiency, two things your situation calls for.

In terms of investments, you have expressed your cautious leanings by adopting what is called a barbell approach, using cash and equities to balance off against each other, with a smidgen of bonds in the middle. Two years ago, I would have said that isn’t going to generate sufficient returns, but now interest rates have risen, this should grow at a reasonable rate.

If you’re going to start drawing that income at some point you may still have an issue with matching inflation. By drawing all the interest produced by cash you can expect a decent income nowadays, but the income stream won’t grow, and neither will the capital, so rising prices present a problem over the longer term. You can offset this by starting to draw down your capital to supplement your income, but clearly this damages the income-producing potential of your assets.

I also note you hold a large sum of money in cash in your Sipps. Interest rates paid on Sipp cash tend to reflect the fact that it is effectively instant access, as that money needs to be available immediately if you wish to trade. So you might find you can get better rates on this portion using money market funds, some of which you hold already, provided you are willing to wait a day or so for encashment, should you wish to invest this money.

Your equity portfolio needs some attention too if you are going to transform it into an income generator. The main income-producing equities you hold are individual shares, and the sectors you currently have high exposure to – airlines, banks and mining companies – are economically sensitive and vulnerable to many factors outside their control, which puts dividends at risk. The two big fund holdings you have, Fundsmith Equity and Jupiter Ecology (GB00B4KLC262), are growth funds that aren’t going to throw off much income.

I’m a bit concerned that almost a sixth of your equity portfolio is invested in one cyclical company, Shell (SHEL), which is a cross in the box on both risk and diversification. Consider how much conviction you have in these individual stocks and either broaden the share portfolio out a bit or think about including some equity income funds. Some interesting options include City of London (CTY), JPM Global Equity Income (GB00B1YX7336) and BlackRock UK Income (GB00B67DWR44).

Your overall wealth is currently about 70 per cent in cash, 25 per cent in equities and 5 per cent in bonds. I think this broadly reflects your risk-averse attitude to sustaining losses. However, I think this is partly in conflict with your desire to see returns of 5 to 10 per cent a year.

At the moment you can probably expect something at the bottom end of that spectrum, but if cash rates were to fall back again you might have a problem hitting that lower bound. The less risk you take, the lower your returns, and seeing as your retirement could easily last 25 years or more, it makes sense to address this issue here and now.

Matthew Bird, chartered financial planner at Falco Financial Planning, says:

Your income goals appear to be achievable with careful planning, although you do not have a large amount of headroom. You cite that you have a very low risk attitude and try to avoid small losses even if it means missing out on large gains. And you have tended to move assets into cash when things look troublesome.

Many studies have shown that we are not great at timing markets as they are highly unpredictable. I would not consider market timing at all, but if you are going to attempt it, it is important to systematise the strategy. I recall now-retired Investors’ Chronicle writer Chris Dillow talking of a timing strategy based on moving averages that had positive data to back it up. Importantly, you need a signal to get you back into the market at some point.  

Currently, your personal pension is roughly split 30 per cent in equities, 60 per cent in cash/money market funds and 10 per cent in bonds. Holistically, cash is 68.4 per cent of your total savings. Given your cautious attitude to risk, this asset mix is not unreasonable, although over long time periods your high cash allocation may hinder your ability to grow your income with inflation.

Historically, bonds outperform cash/money market instruments over time, and bond markets look a lot more attractive now, so it may be worth increasing your bond exposure to around 50 per cent and lowering cash to 20 per cent (keeping equities at 30 per cent), which should increase returns.

A mix of passive bond index funds (government & investment-grade corporate) could be a way of gaining exposure. Options could include Vanguard UK Investment Grade Bond Index (IE00B1S74Q32), iShares UK Gilts All Stocks Index (GB00B83HGR24), Vanguard Global Corporate Bond Index (IE00BDFB5M56).

If your equity holdings aren’t keeping up with the general market, consider switching this allocation to index tracker funds and try to stick with a fixed asset allocation. During market turbulence, rather than sell into cash consider doing the opposite by selling bonds and cash and topping up equity holdings back to around 30 per cent of the portfolio as you will effectively be buying them on the cheap.

Regarding stocks: try to stick to funds/businesses that you have long-term conviction in, research how they performed during past recessions, and remember that future recessions are both inevitable and unpredictable.

There could be a strong argument for buying some bonds directly, using your cash. Many UK government bonds are trading at a large discount to par so will give a tidy guaranteed (subject to UK government solvency) tax-free capital gain on redemption. Given that you are a higher-rate taxpayer, this strategy should deliver a much higher net return than fixed-rate bank accounts.

Given your cautious attitude to risk it may be worth considering lifetime annuities or fixed-term annuities to purchase guaranteed income to meet your retirement income goals, if only to cover essential outgoings so that you are able to stomach more volatility in the rest of your portfolio.

You appear to have an inheritance tax liability which could grow over time. If you are concerned about this, it may be wise to start taking income from non-pension assets first. Despite this, further planning may be needed.