This reader wants to retire at 65 and have a similar lifestyle to her current one
She hopes her pensions and investments will be able to fund this
Improving her asset allocation could help to achieve this
Workplace pension, Isa invested in shares and funds, cash, residential property.
Retire or reduce working hours at age 65, maintain current lifestyle in retirement, fund possible care costs in later life, 7%-10% a year average annual return.
Marjorie is age 50, works in communications and earns £50,000 a year. Her partner earns a similar amount. Their home is worth about £300,000 and has a mortgage of about £225,000.
“I plan to retire or reduce my working hours when we become mortgage free at age 65,” says Marjorie. “I hope that my investments and pension will cover or heavily supplement the costs of a similar lifestyle to what we have now. I’m also mindful of later-life care costs and hope that a suitable annuity-style or social care product will have been developed by the time I retire.
“I pay 6 per cent of my salary into a work place defined contribution pension which my employer matches. This is worth about £100,000. I also make a 1 per cent additional voluntary contribution. But my partner has a minuscule pension.
"I invest £300 a month into an individual savings account (Isa), which [at time of writing was] worth £57,000. I tend to invest every quarter or half year, when there’s enough to make a lump-sum investment into a particular fund. I would like the Isa to make an average annual return of 7 to 10 per cent a year until I am age 65.
"I would say that I have a medium risk tolerance, though fear that some of my choices so far have been high risk or inefficient. I’ve been investing for about 10 years, initially putting £1,000-£2,000 into direct shareholdings which I chose on the basis of tips. That didn’t work out well so over time I’ve shifted my self-managed investments mainly into passive funds.
"But I’m concerned that exchange traded funds (ETFs) will be the next trigger of a major financial crisis so am looking to buy unlisted open-ended tracker funds, in particular ones that focus on global equities. That said, if there were such a crisis I’m not sure I’d be any more protected in an unlisted open-ended index tracker fund than an ETF because presumably everything would head south.
"I aim to keep costs low, and to diversify as much as possible along geographical and thematic lines. So I’ve recently introduced robotics, health and renewable energy funds to the Isa, such as iShares Automation & Robotics UCITS ETF (RBTX). But I am worried that there’s a lot of geographical overlap between my investments.
"I’ve got a handful of underperforming investments that I’d like to ditch but cannot decide whether it is the right time. These include BlackRock Frontiers Investment Trust (BRFI), which has made losses since I bought it, and Just (JUST). But I am hoping that my holdings in Bango (BGO) and Vistry (VTY) will make gains over the coming months so that I will have at least broken even when I sell them.
"I have largely avoided bonds, partly because I thought I was too young to need them and as I don’t understand how bond funds generate returns."
|Marjorie's total portfolio|
|Holding||Value (£)||% of the portfolio|
|Vanguard FTSE Global All Cap Index (GB00BD3RZ582)||5313||3.27|
|Jupiter India (GB00B4TZHH95)||724||0.45|
|iShares Core MSCI EM IMI UCITS ETF (EMIM)||3808||2.34|
|Vanguard FTSE All-World UCITS ETF (VWRL)||3777||2.32|
|iShares MSCI AC Far East ex-Japan Small Cap UCITS ETF (ISFE)||3442||2.12|
|iShares MSCI Europe ex-UK UCITS ETF (IEUX)||2908||1.79|
|iShares Core FTSE 100 UCITS ETF (CUKX)||2694||1.66|
|iShares £ Corp Bond 0-5yr UCITS ETF (IS15)||1916||1.18|
|Invesco Physical Gold ETC (SGLD)||1432||0.88|
|HSBC FTSE 250 UCITS ETF (HMCX)||1219||0.75|
|iShares Automation & Robotics UCITS ETF (RBTX)||1096||0.67|
|iShares MSCI World Small Cap UCITS ETF (WLDS)||1051||0.65|
|iShares Core MSCI Japan IMI UCITS ETF (SJPA)||1002||0.62|
|Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL)||38||0.02|
|Scottish Mortgage Investment Trust (SMT)||14618||9|
|Worldwide Healthcare Trust (WWH)||2015||1.24|
|JLEN Environmental Assets Group (JLEN)||1955||1.2|
|BlackRock Frontiers Investment Trust (BRFI)||1341||0.83|
|JPMorgan Global Growth & Income (JGGI)||1022||0.63|
|Bluefield Solar Income Fund (BSIF)||788||0.49|
|Standard Life Private Equity Trust (SLPE)||664||0.41|
|Herald Investment Trust (HRI)||550||0.34|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS' CIRCUMSTANCES.
Dan Burrows, chartered financial planner at Saunderson House, says:
It's encouraging that you are making regular savings, but if you want to maintain your current lifestyle in retirement you will need to save more. I have assumed that you have a current expenditure, net of savings and mortgage payments, of around £50,000 per year.
If you both qualify for the full state pension, you will each receive net state pensions of about £10,000 per year. This means that you will require about £30,000 net from your portfolio – £37,500 gross of 20 per cent tax.
Research suggests that you could draw around 4 per cent a year from your portfolio if you retire at 65, require expenditure to increase with inflation, have a balanced attitude to risk and are willing to spend most of your assets in retirement. To generate what you need, a 4 per cent withdrawal rate would require a portfolio of around £940,000 at retirement. But as you can take 25 per cent of your pension and all of your Isas tax free, the blended rate of tax may be lower.
You are paying 6 per cent into your pension which your employer matches, so about £6,000 per year, plus £3,600 into your Isa. It is difficult to pinpoint exactly how much you need to save each year due to the variables involved, but I would suggest aiming for around £25,000-£30,000 split between pensions and Isas.
At this stage you may find a cash-flow forecast helpful, as this would illustrate the result of saving different amounts and how much you could sustainably draw in retirement. I would not plan on the basis of a new product or scheme to supplement retirement coming to market, but rather focus on the factors over which you have control.
You have an emergency fund of £5,000 but may wish to increase this as it is good practice to hold between three and six months’ worth of your expenditure in easily accessible cash.
Your investments have over 90 per cent equity exposure so little downside protection. A suitable equity allocation for someone with several years to retirement and medium attitude to risk is between 50 and 80 per cent, typically starting higher and steadily reducing as retirement approaches.
You could introduce some downside protection by reducing your equity exposure in favour of bond funds. Holding lower risk investments can also enable you to take advantage of future market falls, as investments that have held relative value can be used to buy equity assets at lower prices.
There is a lot of geographical overlap within your portfolio and it has too many holdings. This means that if an individual investment does well it is unlikely to materially impact the portfolio's overall return. As your direct shareholdings account for less than 5 per cent of your Isa I would reiterate this with regard to them.
Consider consolidating some of your equity holdings. You could use an actively managed global equity fund of which the manager will ensure appropriate diversification, addressing your concern on geographical overlap.
Ethical investments have become increasingly popular. Research we recently conducted found that two-thirds of investors feel that environmental, social and governance investments (ESG) should form at least part of their investment portfolios. While that’s partly driven by ethical considerations, 59 per cent of respondents believed that companies with strong ESG values are more likely to be successful, potentially boosting returns. If you agree, you could invest in an ethical equity fund which would provide further diversification.
Craig Melling, investment manager at Progeny, says:
You are worried about risk, an area where many investors would benefit from professional advice. You describe yourself as having a medium risk tolerance, but this portfolio does not have a medium risk profile due to its high equity content.
A medium risk portfolio typically has exposure to a range of assets. For example, it might have a 60 per cent equity and 40 per cent fixed interest split, while being diversified across sectors and geographies. But your portfolio has a distinct lack of fixed interest exposure. Although fixed interest is often seen as a low return option it has a place in a balanced portfolio.
I encourage investors to split their portfolios into two buckets, one defensive and the other for growth. In your growth bucket you include assets such as equities which drive returns in positive markets. And in the defensive bucket you have cash and/or bonds which, in times of stress, provide stability and a platform to build upon. It is up to each investor to work out what growth/defensive split they should have to match their attitude to risk.
Review holding sizes and monitor your desired splits. For example, 25 per cent of your Isa is in one holding – is that by choice or is due to growth? Also consider what that does to the Isa's overall geographic and sector exposure, and exposure to individual companies.
Many investors have adopted a low cost indexed approach in recent years as it helps them to understand what they are holding and can reduce costs. This approach encompasses two of our key investment strategies for controlling some of the known ‘knowns’ – diversification and cost. If you can spread risk and minimise cost, you will give your portfolio a helping hand.
Pound cost averaging can be a very sensible and powerful way to grow wealth. But don't always feel the need to buy something new as your savings build up. If you have the right diversification and asset allocation, and it meets your needs and risk tolerance, you should feel comfortable adding to what you already have. Taking an index approach strengthens this argument as you don’t have the manager risk that you take on with active funds.
Taking an index approach could also help you to avoid geographical overlap. But take great care when increasing your allocation to global tracker funds – it’s important to understand the type of exposure that these give and the geographical spread you are getting. The phenomenal growth of US tech means that it is likely US and global equity funds have a considerable holding in companies such as Apple (US:AAPL), Amazon (US:AMZN), Microsoft (US:MSFT), Alphabet (US:GOOGL) and Facebook (US:FB). These five stocks alone account for over 12 per cent of the global stock market, according to Forbes. And as of 28 August, the market cap of US tech stocks in aggregate eclipsed that of the entire European equity market, including the UK and Switzerland, according to Bank of America.
When buying new positions for your portfolio, look at how these would fit with your existing positions and consider weightings. Funds themselves are not necessarily a risk, but rather what overall portfolio returns they produce in aggregate.