Looking for a more comfortable retirement

“I want to be able to draw down about 5 per cent a year on the assumption that I can achieve around 3.5 per cent annual growth. This should leave me with £120,000 by the time I am 85. But I wonder whether my assumptions are correct.

“Our house is worth £750,000 and is mortgage-free, and I also let out another property worth £175,000 to provide a little extra income. I’m also aware that overall the need for portfolio income isn’t massive given the pensions, so I am also minded towards a capital preservation strategy with a little bit of growth, instead of income. I am nervous about losing a large amount of the portfolio, but I also accept that with the pensions, risk is something I can afford to take. I am unsure what to do.

“I started investing nearly 30 years ago, and I’ve built up a lot of capital via the housing market – but have reinvested most of this back into property.

“With my portfolio, I am wary of direct shareholdings having been burnt in the past, so prefer spreading the risk using funds – having a balanced approach across geographies, sector and asset classes.

“I have some direct holdings in Marathon Oil Corporation (NYQ:MRO) and Marathon Petroleum Corporation (NYQ:MPC), but have been gradually (to manage capital gains tax) selling out as I’m not convinced about the future for big oil. They were also legacy investments via an employer share save scheme. I’ve also sold down some of my holding in Scottish Mortgage Investment Trust (SMT) because of its exposure to technology stocks, which I think are due a correction. All my sales are currently held in cash.

“I’m thinking of reinvesting these proceeds into biotechnology stocks or infrastructure.”

Phil’s investment portfolio

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

THE BIG PICTURE
Chris Dillow, Investors Chronicle economist, says:

I think your aim of drawing down 5 per cent and having £120,000 left at 85 is possible. If the future resembles the past, a reasonable (and even slightly cautious) return expectation for your portfolio is 4 per cent a year. Drawing down 5 per cent would leave you with just over £140,000 in 20 years’ time.

There is risk around this, one, the future may not resemble the past, and two, historic volatility suggests there’s a one-in-six chance that a 5 per cent drawdown would leave you with less than £110,000.

How much of a problem this is depends in part on how much you’ll need when you are 85. The big uncertainty here is, of course, whether you’ll need social care and if so how much. This is genuinely unforeseeable. If we had a proper government and/or financial system, however, social care insurance would be introduced sometime in the next 20 years, so this risk would become more manageable.

Another problem is your second aim of wealth preservation, which will be quite difficult to achieve with the current portfolio. Even the most diversified equity portfolio cannot achieve this simply because there is the unquantifiable danger of a long bear market. Cash and bonds cannot do so now because real interest rates are negative.

Luckily, though, your other assets mean you are well placed to hold equities. Your pensions are in effect big holdings of a bond-like asset uncorrelated with shares. And your second home also helps diversify equity risk, although houses are no protection against equity bear markets caused by recessions; they are protection against those caused by overvaluations.

Julie Wilson, director of PenLife Associates, says:

There are a lot of mixed messages looking at your comments and portfolio. You say you are nervous about losing large amounts of capital, but 88 per cent of the portfolio is invested in equities – excluding cash and your properties. I don’t think 88 per cent is a balanced portfolio, this would be closer to 50 per cent. Neither does the portfolio lean towards wealth preservation – and also given your income, portfolio and other assets, I’m not sure why you need to worry about this.

Given you have quite a modest growth target of 3.5 per cent, but have this portfolio and have been investing for 30 years, I worry that you have made some bad decisions over the years. So I agree with your mantra of buying investment funds.

Freddie Cleworth, chartered wealth manager at EQ Investors, says:

Your household income from various pensions is stable, but just because you could afford to take more risk with the portfolio does not mean that you should, given your desire for on wealth preservation. 

Your goal of achieving annualised growth of 3.5 per cent is realistic, especially considering your fairly adventurous portfolio. It may be possible to take some risk off the table and still be comfortable meeting your income needs. It is important to note the difference for your share portfolio between withdrawing £10,000 a year and 5 per cent. A fixed £10,000 will remain static in monetary terms although the purchasing power would be eroded over time by inflation. A 5 per cent withdrawal will mean the monetary figure fluctuates, but could extend the life of the portfolio, leaving more to pass on to help out your family. By age 85 you will likely need to rely on a mixture of the share and fund portfolio and your cash to have £120,000 available.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

Your equity and fund holdings are sensible and well-diversified, but with three caveats. First, your big holding of Marathon makes sense only as a legacy. Ask yourself: do I really want one-fifth of my equity holdings in two similar stocks? If not, carry on cutting.

Secondly, beware of fund fees. Even if you hold only a few unit trusts, you can end up diversifying away any outperformance one or two offer and so end up with something like a tracker fund but with higher fees. Your portfolio is a long way from being the worst offender in this regard. But be very careful about adding more actively managed funds. Look out for investment trusts or exchange-traded funds (ETFs).

Thirdly, I fear you are exposed to a particular type of risk – that investors have wised up. Your trimming of Scottish Mortgage shows you are awake to the possibility that big tech stocks have become overpriced. But other funds carry a similar danger. Investors might have wised up to the historic tendency for big defensives to be underpriced because people have traditionally underappreciated the importance for earnings growth of what Warren Buffett calls economic moats – sources of monopoly power.

If so then funds that hold such stocks such as Finsbury Income & Growth Trust (FGT) and Fundsmith Equity (GB00B41YBW71) might suffer. It’s difficult, however, to see what you should switch into, as it’s not obvious that any segments of the market are clearly underpriced.

Julie Wilson says:

To me it seems as though your objectives aren’t very clear, and this is something to work on. Your vague idea of withdrawing 5 per cent a year from your portfolio is a backward way of looking at things.

So you need to identify, achieve and maintain your desired lifestyle and build a financial plan to deliver it, making sure your money lasts as long as you do, and making sure anything you have left over goes to where you want and not to the tax man.

Your assets (due to property) already exceed the nil-rate bands for inheritance tax, so 40 per cent of what is left will end up paid in inheritance tax (IHT). In this regard, your plan to help your family and grandchildren along the way is sensible – anything that reduces your estate immediately gains a 40 per cent return in terms of IHT savings.

Freddie Cleworth says:

It makes sense to invest using diversified funds or investment trusts, gaining exposure to different asset classes and underlying themes. It is also sensible to reduce your overweight to the Marathon stocks, which are heavily dependent on oil prices.

In an inflationary environment these should do well, but the oil market is cyclical and you are sensitive about seeing large falls in your portfolio.

It is always prudent to hold a degree of cash for liquidity and opportunities. Your current balance represents 21 per cent of the portfolio (excluding property), which is fairly high. Given your time horizon for investment you could reduce this cash balance slightly and make small allocations to potential growth areas such as biotech and healthcare. You should consider specialist trusts such as Biotech Growth Trust (BIOG) or Worldwide Healthcare Trust (WWH). For an interesting renewable infrastructure energy play with a good yield you could look at Greencoat Renewables (GRP).