Model your cash flows to meet your goals 

“My wife wants to quit her stressful job but still be able to financially support our children in the next phase of their lives,” says Hamish. “So she plans to quit in three years at age 55. She may then work part-time, ideally taking on some non-executive directorships, but we will budget for zero earnings other than our pensions and investments.

"Our priorities are supporting our children, travel and leisure after years in hectic careers, and possibly self-building a home for retirement. The non-discretionary minimum income we want in retirement is £50,000 a year, but ideally we'd like £80,000.

"Our plan is to draw a tax-free yield of 6 per cent to 7 per cent from our  individual savings accounts (Isas) – at least until our state pensions are due – and have a sustainable or growing income of 2.5 per cent to 3 per cent from our taxable pensions. I hope for growth of 5 per cent a year through growth, dividends or both. But my projections are pessimistic and assume that my investments will only grow at the rate of inflation. 

"I have a defined benefit pension that will pay out about £15,500 a year from age 60. We will both be eligible for nearly the full amount of the State Pension at age 67.

"I'm not sure what to do with our pensions tax-free lump sums when we retire. If my wife continues to work and, depending on how much she earns, I may take the tax-free money out of my pension, put it into my wife's pension and claim tax relief on it. If we both take our full tax-free lump sums we could gradually reinvest them in our Isas or NS&I Premium Bonds, or use them to help our children financially.

"We have been able to invest the maximum amount possible into our Isas in most years, which has also helped ensure that we do not breach pension savings limits. The six-figure redundancy sum I received in 2016 was mostly paid by salary sacrifice into my pension and I have £1.25m Fixed Protection 2016. My wife maximised her carry-back pension contributions before the higher and additional rate relief was removed, and now contributes just £10,000 a year.

"Our home is valued at around £1.5m. The outstanding mortgage on it is £83,000 but we have £70,000 cash in an offset savings account that we keep as a source of emergency funding. This will pay off the remaining mortgage so that the £2,500 monthly payment we currently make can be saved elsewhere. We will put some of this into easy-access cash accounts and the rest into longer-term savings or NS&I Premium Bonds.

"When my wife stops working, and the children go to university or start jobs, we plan to sell our home and purchase something smaller. We might buy a kit home priced in euros, although exchange rates have not been kind.

I'm not sure if holding more eurozone investments would help in the event of further erosion? Brexit is obviously a concern, and property is not liquid, so it may take some time to sell our home or achieve the desired price.

"After purchasing a smaller and cheaper home we hope to have £500,000 left over to invest. Depending on what my wife's earnings are at this point we will invest this in the most tax efficient way. If her earnings drop below the additional tax rate then we may invest it in her pension and get relief. 

"My wife is not interested in managing our money so she leaves all investment decisions to me. I have been investing for 20 years. I started by using a broker advisory service but grew wary of charges, and was frustrated because they talked me out of investing in a company whose products I had some knowledge of and subsequently did very well – albeit during the tech boom. So, after that I managed my own investments, investing any money I thought I could afford to lose. And I enjoy the research and monitoring.

"The goal for our investment portfolio is to achieve as much growth as is possible for investors of our risk tolerance. We have a medium- to high-risk appetite, and could tolerate a fall in value of our investment portfolio of 25 per cent, if we could recover most of that within five years.

"I have always been overweight equities, particularly smaller companies and Europe. I am underweight the US because I worked for a US company so my salary, bonus and share options were heavily dependent on the dollar.

"I typically hold 15 to 25 direct share holdings. I am a buy-and-hold investor but this has led to the occasional larger loss when I have been convinced that sentiment will change. But I sometimes sell a direct shareholding after a short time if its price drops significantly.

"I invest sporadically, when a good idea whets my appetite or after reviewing an investment’s performance. I look for shares that are tipped by multiple analysts. 

"I am not too concerned about balancing our direct shareholdings because if some sectors are on the rise why not hold multiple companies within them? I like financial services companies because they are usually housed in shiny big buildings so must be making money. But I largely avoid retailers – I've just sold Bonmarché (BON) following a downward revision to its sales forecast, which reinforced my general aversion to this sector. I am also around the maximum number of direct equities I like to hold, so I'm looking to take profits on a number of these before investing in anything new.

"I keep a core of holdings that churn out dividends such as Chesnara (CSN), Phoenix (PHNX) and HSBC (HSBA), and hold them for a long time. Although I try to buy companies that will grow, I like most of them to have a dividend yield greater than 1 per cent and preferably greater than 2 per cent. I think this demonstrates commitment to their shareholders and drives good business disciplines.

"Our fund investments are more balanced but still heavily weighted to equities. I review them at least once a year but will tolerate two to three years of underperformance before switching. I like funds with a consistent track record of being in the top quartile of their sector for five years. 

"I'm not sure whether I should hold more fixed income funds. The bond market has been predicted to fall for so long it has put me off switching to this area - I'm worried we that we will move into bonds just as they are about to fall. I am also frustrated that many top-performing funds are not offered on the pension or Isa platforms we use, particularly bond funds.

"We have recently consolidated our Isa holdings to one platform to save costs, but should we be worried about having more than the savings protection limit in our accounts?"

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

THE BIG PICTURE

Chris Dillow, Investors Chronicle's economist, says:

The big question for those of us approaching or considering retirement is whether our income will be sufficient for a decent lifestyle. And there’s a danger here of an optimism bias – believing that you can happily cut your outgoings. Don’t fall into this trap. You are only truly in a position to retire if your outgoings this year and next could be financed by your savings.

I share your disquiet about bonds, which you should think of as a type of insurance. Bonds do well in some situations in which shares fall, for example, if we get a recession or if appetite for risk falls. But, right now, this insurance is expensive and you don’t need it. You could consider your wife’s salary as a type of bond – if you can save more from this in the event of a stock market fall you have a way of topping up your wealth. When your wife retires you’ll lose this insurance: the reason why older people are advised to own more bonds is to replace the bond-like asset they lose when they stop working. This, however, is a problem for later. 

There’s no point trying to second-guess the outcome of the Brexit talks as the noise-to-sign ratio here is enormous. But if you are thinking of buying a home that’s priced in euros, you should consider holding euro cash now. This is not because of Brexit but to do with asset-liability matching. If you want a euro-denominated home you have a euro liability so face exchange rate risk. The way to reduce this risk is to have a euro-denominated asset.

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

Your plan to draw from the Isas until you receive your State Pensions makes sense. From age 60, your defined benefit pension will provide a guaranteed inflation-proof income that your State Pensions will add to in the future. Even with growth only in line with inflation the Isas should last until you are 75 and your wife is 70, based on withdrawals to help to meet your £80,000 a year target retirement income.

Increasing the cash balance to two to three years minimum discretionary income would be advisable, so when market downturns take place you could draw on this rather than your investments. Making withdrawals from your investments during market downturns would compound portfolio losses.

As your pensions fall outside of your estate for inheritance tax (IHT) purposes there is an argument for leaving them untouched for as long as possible. However, if your children need financial support sooner it could make sense to use some of the tax-free cash to help them, for example, to pay for further education or get a foot on the property ladder. If your wife hasn’t got protection against the Lifetime Allowance this should also be looked at, given her sizeable pension of £852,831.

I would recommend a cash-flow modelling exercise to help visualise the different scenarios in terms of a possible house move or education funding, to ensure you can plan to meet your goals as tax efficiently as possible.

Rick Greiller, chartered financial planner at Saunderson House, says:

Your existing portfolio is already very tax efficient with your main future tax liabilities, after your wife stops working, likely to occur when you draw income from your pensions or die. The former can be managed via flexible drawdown according to your needs each year.  And you should have many years to address your potential IHT liabilities. A cash-flow projection might help to reassure you on your future spending and gifting strategies.

We would only suggest taking tax-free withdrawals from your IHT efficient pension to fund further pension contributions for your wife while her pension is below the Lifetime Allowance. And we would not suggest drawing on your pension to fund Isa contributions. The Lifetime Allowance issues could be managed by moving out of equities into short-dated bond funds.

Once your children’s private school fees cease, your desired expenditure of around £80,000 a year could be met by a return of around 5 per cent a year from the existing portfolio, allowing for basic-rate income tax. And when your defined benefit and state pensions start paying out, the portfolio return required would fall to around 3.5 per cent a year. 

As you release equity from property your income requirements from the resulting enlarged portfolio will become less demanding, so gifting the surplus proceeds from the sale of your current home is likely to be sensible. Any residual funds that you retain could be put into an investment account, using both of your dividend and personal savings allowances, and your annual capital gains tax exemptions, to offset any tax that is incurred.  

With the eventual outcome of Brexit unclear it is not sensible to try and second guess it. Holding overseas equities should mitigate potential falls in the portfolio in the event of a no-deal Brexit as sterling would be likely to fall in this scenario. 

When your assets are held by an investment platform they are ring-fenced from the creditors of that company in the event that it goes bust, although this protection may not extend to special administration costs. It is worth noting that following the collapse of discretionary fund manager Beaufort Securities, fewer than 10 out of its roughly 15,000 clients will be left out of pocket. Investment platforms are also heavily regulated and it is rare that they fail, so this is not to be something to be too concerned about. 

HOW TO IMPROVE THE PORTFOLIO

Chris Dillow says:

I like your preference for dividend-payers, as it should prevent you from chasing more speculative growth stocks that are often overpriced. Be aware, though, that an unusually high dividend is a way of compensating shareholders for something such as a lack of growth prospects. This isn’t necessarily a problem as markets have been poor judges of what long-term growth companies offer.

An unusually high dividend can also be compensation for particularly high risk. This might be market risk – the danger of underperforming in a bear market, cyclical risk or tail risk – the small chance of a disaster. Always look to see what a high yield is compensating shareholders for.

For this reason I’m not as keen as you are on financial services stocks. Many of these have high betas – they outperform rising markets and underperform falling ones. Historically, however, high-beta stocks have done badly, on average, in part because bullish investors have treated them as a way of getting geared exposure to the market and have been overweight in them. A notable exception is HSBC.

I’m also not as enthusiastic as you are about funds. I’d think less about whether fund managers have stockpicking skills – we need years of outperformance to be confident that they do – and more about whether they’re holding the right type of share. History tells us that some segments of the market have outperformed, for example, momentum, defensives and quality companies with barriers to entry. Ensure that your funds are backing these proven factors – these matter more than skill.

Freddie Cleworth says:

Looking across the Isas and pensions, your overall equity allocation of 78 per cent is fairly adventurous. As you plan to draw on your Isas first it could be worth adding some more collective funds to mitigate the volatility of the direct equity holdings.

Your highest geographic allocation is the UK, which accounts for 54 per cent of your investment portfolio, followed by the US at 21 per cent. As you are UK investors and have liabilities to meet in sterling, it is natural that you have a home bias. But you could add some extra exposure to specialist funds that invest in Japan, emerging markets or Asia Pacific to help hedge against sterling currency risk.

We like Hermes Global Emerging Markets Fund (IE00B3DJ5K90), which provides large-cap exposure and strong risk management via a thorough environmental, social and governance screening process – something that is particularly important in emerging markets.

Rick Greiller says:

You say your capacity for loss is up to 25 per cent but you have over 90 per cent of your investment portfolio in equities. Equity markets fell by more than 40 per cent between December 1999 and February 2003, for example, and also experienced sharp falls between July 2007 and March 2009. So the biggest risk you face is a bear market for equities and the sequence of returns. Consider introducing some ballast to your portfolio by investing in short duration bond funds, which are less interest rate sensitive than standard bond funds or medium-dated gilts.