'Is my £160,000 portfolio ready for me to retire?'

Working until later in life gives you more time to amass savings. But once the time to step back does come, making sure you have the right investment strategy is vital to ensure you can enjoy your golden years with few worries.

At the age of 75, William still works part-time but is thinking about retiring, but to do so he will need to draw from his investments. He and his wife, Valerie, who is 70 and fully retired, have £80,000 in their individual savings accounts (Isas), £55,000 in their self-invested personal pensions (Sipps) and £25,000 in a one-year savings account with NS&I, so a total of roughly £160,000.

They both receive the full state pension. “I still work part-time as a university lecturer, earning around £34,000 a year, and intend to continue to do so for at least the next five years,” William says. “We currently have no need to spend our savings. I invest approximately £500 per month into our Isas, as well as the maximum (non-taxpayer) amount of £2,880 into my wife’s Sipp every year.”

Once he retires, William expects to start drawing about £15,000 a year (at current prices) from their portfolios. He is hoping for a 5 per cent return and describes his tolerance for risk as medium-to-high, being prepared to lose roughly 15 per of the portfolio in a given year.

The chart below shows what the trajectory of William’s portfolio could look like over the next few years. It assumes that the whole portfolio, including the amount held in the savings account, returns 5 per cent a year; withdrawals starting in 2029 have been adjusted for 2 per cent inflation. The portfolio should be able to support William and Valerie into their 90s, but there isn’t a huge amount of leeway – for example for additional care fees or to leave an inheritance.

Once he retires, William will also consider taking out equity release of around £100,000 from their mortgage-free property, which is worth around £250,000, and reinvesting the sum for income purposes.

William is wondering how he should invest his portfolio over the next few years, in preparation for retirement. “I am not very pleased with returns and have in fact already disposed of some poor performers,” he says. “I appreciate that I have no investment in bonds, and I am thinking that perhaps I should.”

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

Darius McDermott, managing director of Chelsea Financial Services and FundCalibre, says:

If you continue working and saving into the Isa for five more years, you will add another £30,000, plus almost £15,000 into Valerie’s Sipp. Assuming the investments grow at 5 per cent a year, you will end up with just shy of £256,000 by 2028.

But from here, things become a little complicated, especially if you want to protect the value of your portfolio. A 5 per cent withdrawal would only give you £12,786 but you need £16,561 (having increased the £15,000 by 2 per cent inflation for five years). So you have a choice to make: you can start winding down your savings, or you could use equity release and invest to boost the income as you suggest, but this would require careful sums.

The overall portfolio is very stock-heavy, so some of the cash elements should be moved into either bond funds or alternative investment trusts. These would give more diversification to the overall portfolio and would also start to provide an income – which could be reinvested as it is not needed for five years.

Bond funds we like include Jupiter Strategic Bond Fund (GB00B4T6SD53), Man GLG Sterling Corporate Bond (GB00BNLYQX62) and Premier Miton Strategic Monthly Income Bond (GB00BMWVS110). When it comes to alternative investment trusts, some favourites of ours include Greencoat UK Wind (UKW) and Bluefield Solar Income (BSIF), which both have decent yields and are currently trading at a discount to net asset value. 

Another option would be to consider making a multi-asset fund a core part of the portfolio and let a professional investor decide on asset allocation. BNY Mellon Multi-Asset Income (GB00BP851Q49), Orbis Global Balanced Standard (GB00BJ02KY25) and VT Momentum Diversified Income (GB00BKV4HY34) are all good options worth considering.

I’d also suggest that if a significant amount of the portfolio is still held in cash, then you check the interest rate you are getting from your new Isa provider – they are not always the best and it may pay to shop around for a better cash Isa rate.

You should also take a look at the ‘tail’ of the portfolio. There are quite a few investments that represent less than 1 per cent, which really are not adding much. If the single stocks are held for a reason then by all means keep them, but these small positions could be tidied up and the money pooled. The portfolio has a reasonable split of growth and value stock styles but might benefit from more equity income rather than out-and-out growth. Again, as the income produced is not required at the moment, it should be reinvested.

Rachel Winter, partner and investment manager at Killik & Co, says:

Withdrawing £15,000 a year would equate to over 7 per cent of the portfolio value, which exceeds the natural yield and annual return of the portfolio, which means it would be depleted over time. If the £15,000 annual withdrawal was raised each year in line with inflation, it is possible that the portfolio would be depleted too quickly.

Equity release is a big decision that would require formal advice. If you are thinking of using it to generate a lump sum that could be invested for income, a key consideration would be the interest rate payable versus the return received from the portfolio. At the moment, the average interest rate for equity release is more than 6 per cent, which is already above the target return for the portfolio, so this isn't looking like a feasible option until rates start to fall. Equity release rates are priced off the yield on gilts, so it might be some time before they fall below the natural yield or total return from your portfolio, unless you substantially increase how much risk you're willing to take.

The vast majority of the investments in the existing portfolio are equities or equity funds. This constitutes a high-risk portfolio and does not fit with your stated risk tolerance level. You are prepared to lose 15 per cent in any given year, but the equity market dropped by more than this in 2022.

Adding in some bonds is a great option. Bond prices have fallen as interest rates have risen, and this means that bond yields are now much higher and more attractive. It is now possible to generate a yield of more than 6 per cent from a portfolio of investment-grade corporate bonds. UK government bonds (gilts) would be worth considering too. These are low-risk investments, and the two-year gilt yield is currently in excess of 4.5 per cent.

Bonds are typically less volatile than stocks, and ideally you should be looking to reduce the volatility of your portfolio if you intend to start drawing capital. You currently have a large amount of cash, and the bond market would be a good home for it.

Ideally, a portfolio of individual shares should have at least 30 different holdings to ensure an adequate level of diversification so that the portfolio will not be overly negatively impacted if one or two companies struggle. The alternative is a fund-based strategy, as each fund will be innately diversified. Some investors opt for a ‘core and satellite’ approach, whereby the bulk of the portfolio is invested in a ‘core’ of diversified funds, with a few smaller ‘satellite’ investments in individual shares based on areas of particular interest or conviction.

In your case, to take one example, only 0.19 per cent of the Isa is invested in Slater Growth (GB00B7T0G907). Researching and monitoring an investment takes time, and I would argue that it is not worth spending this time on one that accounts for such a small proportion of the portfolio. The impact on the performance of the overall portfolio would be relatively small if this investment either doubled or fell to zero.

Several of the existing funds in the portfolio do not pay an income. You could consider replacing some of them with equity income funds such as the Fidelity Global Dividend Fund (GB00B7GJPN73) or the SPDR S&P Global Dividend Aristocrats ETF (GBDV).