Think of yourself too

"I have a preserved final-salary pension that will pay around £30,000 a year from October 2019," says Paul. "But I do not intend to take the tax-free lump sum.

"I also have a freestanding additional voluntary contribution (AVC) fund worth £50,000, which I will withdraw tax-free in 2019 to pay down part of the outstanding mortgage on my Spanish property. When I retire I will clear the balance of this mortgage using £100,000 from the sale of my business, which is worth around £400,000 after corporation tax. The Spanish property will generate a small income of around £10,000 a year.  

"I will not start to receive my state pension until I'm 66 in 2025.

"My wife, who is 53, has several small final-salary pensions which will in aggregate start to pay out around £20,000 a year when she turns 60. She also has a self-invested personal pension (Sipp) that should pay out around £5,000 a year when she retires.

"Over the next three to four years I need to secure investments that can pay me the remaining £25,000 to £30,000, to make up my target annual income of £55,000 to £60,000.

"I make contributions into my Sipp of £30,000 a year, and will soon increase these to £40,000. The Sipp is worth £157,000, and with contributions totalling between £120,000 and £160,000 over the next three to four years that will get it to between about £280,000 and £320,000.

"I want to protect the capital in the Sipp as much as possible to pass on to my sons. I think that with a 5 per cent return I could draw down a 5 per cent income of £14,000 to £16,000 a year and largely leave it intact.   

"The additional income of around £10,000 a year needs to come from other investments, maybe funded through the sale of my business. My individual savings accounts (Isas) are not for funding my retirement but rather to build up deposits of £60,000 for each of my sons to buy homes. I hope to build up the £120,000 by October 2019. I will make further contributions from my dividend payments into the Isas and their Lifetime Isas (Lisas) over the next two years to achieve the £120,000 target.

"I am going to pay off my children's student loans, which amount to £100,000. I will make monthly payments to them rather than giving lump sums, which may need to be funded from pension income. But future inheritances from their grandparents or us may also be used to pay off their student debt.

"I have also been investing in Sipps for my sons and they each have one worth about £20,000. The monthly contributions are £240, plus £60 tax relief. However, my sons will be making their own contributions now as they have started to work. So instead, while I'm still working for the next three to four years, I would like to invest my monthly payments of £480 into an investment vehicle for any grandchildren that come along.

"As I am within three to four years of retirement my attitude to risk is becoming more cautious – I wouldn't want to lose much more than 10 per cent in a year. But I also do not want inflation to erode my investments. 

"I opened a Sipp in 2008, which I actively manage, and over the past two to three years I've moved more into funds than shares, and tried to ensure a balanced approach. 

"Earlier this year I reduced my allocation to UK equity funds  and switched into global technology funds. And I've recently increased my weighting to emerging markets, Europe, India, and UK small- and mid-caps. 

"I have no direct exposure to bonds as I don't really understand them, but am considering rebalancing my monthly contributions so that I put less in equities and more in cash, to take advantage of any future stock market falls.

Paul's 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's economist, says:

With average luck, you should meet your income objectives. I estimate that a real return of 4 per cent a year would get you a total income of around £60,000 a year, as long as you contribute £40,000 a year to your Sipp and get £400,000 from selling your business. As equity returns should average around 5 per cent a year with reasonable luck, this means you don't need to be fully invested in equities.

However, equities might do badly in the near term. Two lead indicators that have worked well in the recent past are troubling: foreign buying of US equities has risen recently and the ratio of the global money stock to global share prices is below its trend. These point to poor near-term returns.

The obvious solution to this threat is to hold cash, but this still offers abysmal returns despite the recent rise in the Bank rate, and this is especially the case in Sipps. You might want to consider a cash Isa as you can get a fixed rate of 2 per cent, which should at least mean a zero real return.

Even the best cash rates, however, still leave you with a problem – if you have a cautious portfolio, you'll not grow your wealth sufficiently to achieve your objectives.

One solution here is to have a safer portfolio and consider delaying your retirement, and/or getting by on less. Or you could stick with an equity-heavy portfolio and have fallback positions if the market does fall. For example, you could delay retiring, or eat into capital and leave a smaller bequest, in effect sharing risk with your sons.

Your problem arises from a deep structural fact about western economies: returns on safe assets are low because bond investors and central banks still lack confidence in the economy's prospects. Our only ways of coping with this may have high costs.

You also plan to repay your sons' student debt. But if they earn decent sums, the rate on this debt might well rise to more than the return on equities as it is set at retail prices index inflation plus 3 per cent. In which case there might be an argument for paying it off as a lump sum.

Patrick Connolly, certified financial planner at Chase de Vere, says:

You and your wife have final-salary pensions, which will provide a guaranteed income that will cover a significant amount of your likely expenditure in retirement. Your Sipp also has an important role, though be careful you don't breach the pension lifetime allowance which would lead to an additional tax charge.

You are helping your sons by investing in Isas and Sipps for them, and plan to pay off their student loans. You should evaluate student loan payments considering your sons' likely earnings – sometimes there can be problems when parents help their children so much that they neglect their own finances. But you have a good balance, as long as your business sale proceeds will be as much as you expect. However, this isn't guaranteed, and if you don't get the amount from the sale of the business that you expect, it will have an impact on your plans.

You could potentially pass more money to your children when you die by transferring out of your final-salary scheme. However, you also understand that having a sustainable income in retirement is more important.  

While your overall plans seem broadly on track, these decisions are too important to get wrong, so if you are not entirely sure of what you are doing consider getting independent financial advice.

Jeremie Vuillard, head of advisory at Kleinwort Hambros, says:

Your final-salary pension, Sipp and the sale proceeds from your business should enable you to generate your targeted retirement income of between £55,000 and £60,000 a year.

But your business sale proceeds could fall short of your target. And if the outstanding mortgage on your Spanish property is denominated in euros, it could increase in sterling terms if there is a further significant fall in the value of sterling.

As you move closer to your target retirement date of 2021 you are becoming more cautious. This is sensible, given your ability to generate capital will be limited in retirement. A balanced lower-risk approach for your Sipp seems the right strategy. However, to achieve the returns you desire in the current low interest rate environment you may need to be able to tolerate losing more than 10 per cent.

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow, Investors Chronicle's economist, says:

I would consider shifting from some of the more expensive funds into a global index tracker. The problem with holding a basket of funds is that you dilute performance but not fees, ending up with an expensive tracker. This is especially true if you hold funds of funds. An additional management charge of a percentage point a year compounds a lot over time. And because you'll need big equity exposure, even in retirement, this might be expensive.

If you plan to spend a lot of time overseas you face currency risk: if sterling falls relative to the euro, your £50,000 to £60,000 won't go as far as you hope. The obvious way to protect yourself is to hold some cash in euros. This has the extra benefit of protecting you from equity risk: in the past, falls in global stock markets have been accompanied by rises in the euro against sterling. However, with sterling now cheap and the euro paying even worse rates than the pound, this insurance comes at a high price.

Patrick Connolly says:

You have too many funds in your Sipp, which is nearly entirely invested in equities. You need to take risk to beat inflation as you could be invested for decades, although you also need to give some thought to capital protection as you'll be relying on this money. So you should hold equities but also other asset classes.

You have three Hargreaves Lansdown multi-manager funds with ongoing charges of well over 1 per cent, which invest in a number of funds that you also hold directly. You could get rid of the multi-manager funds, and perhaps also your Lloyds (LLOY) shares, the technology funds and some of the UK equity income exposure. Then you could diversify by investing the proceeds in funds such as Henderson Strategic Bond (GB0007533820), M&G Property Portfolio (GB00B8FYD926) and Invesco Perpetual Global Targeted Returns (GB00BJ04HL49).

Your sons' Isa investments are high-risk, which is usually sensible for younger investors. However, you need to consider how soon this money will be needed for mortgage deposits. If it will be required within five years, you should reduce risk by moving into other asset classes or holding some of the money in cash. This would give some protection if stock markets fall shortly before the money is required.

Jeremie Vuillard says:

Your Sipp portfolio is very weighted to equity markets with a UK bias. The remainder is predominantly in bonds with a bit in alternatives via some multi-asset funds. The equity content of your Sipp is diverse and international, but we would increase the exposure to European equities as we are currently positive on the region.

In terms of changes to your portfolio, a typical asset allocation could be as follows:

The challenge with re-positioning your portfolio at this point in time is managing duration risk within the fixed-income component against a background of tightening monetary policy, as global economic growth becomes more robust and central banks normalise interest rate policies.

So consider repositioning the portfolio slowly over the coming 18 months, and focusing on short-duration bonds and active managers within the fixed-income allocation. Also consider incorporating funds with a bias to floating rate notes whose returns are directly linked to the level of interest rates. These will offer further protection to your capital.

You may also wish to add a small exposure, of no greater than 5 per cent, to high-yield and emerging market debt to supplement income returns.

And you could add some alternative asset funds which generate returns close to your targeted rate of 5 per cent with low relative levels of volatility. These strategies tend to be less correlated to bonds and equities, and would help to smooth the volatility of returns over the life of your Sipp.

You should check the ongoing charges of your funds of funds and the underlying funds they invest in, as over time high fees will impact performance.