Guy is 51 and earns £200,000 a year, £100,000 of which is basic salary. The rest is paid as shares in his employer, and varies according the share price and his personal performance. Guy’s wife is 54 and a part-time lawyer. They have two children aged 11 and 14, and their home is worth around £1m and mortgage-free.
Isas, Sipp, workplace pensions and trading account invested in funds and shares, residential property, cash
Retire as soon as possible on £60,000 a year, grow investment portfolio to £1.6m and get 4 per cent yield on investments
“I would like to retire at the earliest opportunity on an income of £60,000 a year,” says Guy. “My current annual expenditure is under £55,000, but when I have more free time I think it will be higher – at least for the first 10 to 15 years of retirement. And my children seem to cost more and more!
"I don’t have a specific age or date target for retirement, rather I intend to grow my portfolio to around £1.6m, at which point I hope to be able to live off the natural yield, if it is about 4 per cent.
"I have a professionally managed self-invested personal pension (Sipp) worth £476,000 and a Sipp that I manage myself worth £71,000. I also have a former employer pension worth £59,000, a defined-contribution (DC) scheme invested in a with-profits fund, which I think of as a bond-proxy. The transfer value is increasing by around 3 per cent a year, and is guaranteed to grow at the lower of retail price index inflation (RPI) or 3 per cent until I am age 65. I got a quote for a transfer value two years ago and this was £2,000 higher than the asset value at that time. But a transfer seemed expensive and if I access it before age 65 it will be subject to a market value adjustment.
"My current employer pension is a DC scheme worth about £104,000. I make contributions to it at the level that gets the highest possible contribution from my employer – £1,050 a month on a salary-sacrifice basis. I choose the funds that it is invested in. I will be entitled to the full UK state pension at age 67. My wife and I keep our finances separate and redistributing assets between us is not an option. She has about £200,000 in bonds and individual savings accounts (Isas), and £200,000 in Sipps.
"I am not overly concerned about capital preservation to protect a legacy for my children as there is other money in the family that they are likely to benefit from. Not running out of money in retirement is my number one priority.
"Over half of my assets are managed by a wealth management company, and the assets I manage myself are held across various platforms to mitigate the risk of one of these failing. I keep a close eye on platform fees, and try to ensure that my highest yielding holdings are held in Isas and Sipps to minimise tax. I also try to avoid duplicating the investments my wealth manager has put my assets into.
"I prefer to invest in funds with an income bias and reasonable fees, alongside assets that should deliver capital growth and a growing income over time. Although I intend to live off the natural yield from my investments, I am aware of the risks of only investing for income and missing out on growth. I hope that the 4 per cent I will draw from my investments will be inflation-proof over the medium term, and come from a tax-efficient combination of income and realisation of capital gains. I will offset any capital gains tax (CGT) I incur against my annual allowance [which is currently £12,000]. As I can’t draw from my pensions until age 55 I expect to sell some holdings in other accounts before then.
"I have invested since 1986 when I was at university. I have seen many ups and downs from which markets have always recovered, so I'd be happy to hold tight during falls as long as the dividends keep rolling in. I will hold some cash to avoid being a forced seller, but not so much as to be a drag on growth and income.
"I think bonds are very expensive and will only go one way in the next 20 years. But over the long run Asia Pacific, and frontier and emerging markets equities will benefit from demographic trends, and the pound will decline against more dynamic countries’ currencies. So I want to increase the overseas income allocation of my portfolio.
"I have 38 holdings in the accounts I run myself, so I am not looking to add any new funds, especially as I already have wide geographical exposure. I will gradually consolidate my holdings, selling ones that have a value of less than £3,000. These are outside tax wrappers, so I may cash them in during the first months of retirement and continue to reinvest the income from the Isa investments.
"When it is worth the cost, I reinvest dividends from my Isa investments in Guinness Asian Equity Income (IE00BDHSRF15) and Jupiter Asian Income (GB00BZ2YMT70). I reinvest my Sipp dividends in Fidelity Global Dividend (GB00B7FQHK03) and my trading account dividends in BlackRock Continental European Income (GB00B3S9LG25).
"I have invested this year’s Isa allowance in JO Hambro Capital Management UK Equity Income (GB00B95FCK64) because I couldn’t resist the yield. And I added Finsbury Growth & Income Trust (FGT) because it has a good long-term record.
"I keep reading that active funds are better for emerging markets, but hold Vanguard FTSE Emerging Markets UCITS ETF (VFEM) and WisdomTree Emerging Markets Equity Income UCITS ETF (DEM). They have low costs and I can’t find active emerging markets funds that convincingly outperform over the long term. But although I’m not happy with BlackRock Frontiers Investment Trust's (BRFI) performance this is a small holding with a good yield so I’m not in a rush to sell it."
Guy's investment portfolio
|Holding||Value (£)||% of the portfolio|
|Aberdeen European Property Share (GB00BWK26899)||10,744||0.75|
|Artemis Income (GB0032567926)||3,865||0.27|
|Artemis UK Smaller Companies (GB0002583598)||17,678||1.23|
|Baring Emerging Europe (BEE)||7,612||0.53|
|BlackRock Continental European Income (GB00B3S9LG25)||15,829||1.1|
|iShares Emerging Markets Index (IE00B3D07P14)||10,156||0.71|
|Blackrock Frontiers Investment Trust (BRFI)||7,687||0.53|
|BMO Global Smaller Companies (BGSC)||7,639||0.53|
|BMO Property Growth & Income (GB00BQWJ8687)||6,441||0.45|
|Caledonia Investments (CLDN)||10,703||0.74|
|Fidelity Asian Smaller Companies (LU0702160192)||2,478||0.17|
|Fidelity Emerging Europe Middle East and Africa (GB00B818K645)||2,561||0.18|
|Fidelity Global Dividend (GB00B7FQHK03)||5,326||0.37|
|Finsbury Growth & Income Trust (FGT)||3,673||0.26|
|Guinness Asian Equity Income (IE00BDHSRF15)||15,135||1.05|
|HarbourVest Global Private Equity (HVPE)||20,988||1.46|
|Henderson Far East Income (HFEL)||33,006||2.29|
|Henderson Smaller Companies Investment Trust (HSL)||6,505||0.45|
|Invesco Pacific (GB00B8N44Y60)||2,344||0.16|
|Invesco Hong Kong & China (GB00B8N44V30)||2,339||0.16|
|Janus Henderson European Smaller Companies (GB0007476426)||2,438||0.17|
|JOHCM UK Equity Income (GB00B95FCK64)||58,893||4.09|
|Jupiter Asian Income (GB00BZ2YMT70)||11,195||0.78|
|LF Morant Wright Nippon Yield (GB00B2R83B20)||2,667||0.19|
|Lindsell Train Global Equity (IE00B3NS4D25)||11,583||0.81|
|Lloyds Banking (LLOY)||13,775||0.96|
|Man GLG Japan CoreAlpha (GB00B0119B50)||15,076||1.05|
|Merian UK Mid Cap (GB00B8FC6L92)||16,251||1.13|
|MI Chelverton UK Equity Income (GB00B1FD6467)||18,241||1.27|
|BNY Mellon Global Income (GB00B84QJT19)||43,147||3|
|Schroder Asian Income Maximiser (GB00B3SF6658)||27,254||1.89|
|Schroder Oriental Income Fund (SOI)||18,666||1.3|
|Schroder Small Cap Discovery (GB00B5ZS9V71)||9,274||0.64|
|Smith & Williamson Artificial Intelligence (IE00BYPF3314)||4,673||0.32|
|Stewart Investors Asia Pacific Leaders (GB0033874768)||9,958||0.69|
|Threadneedle UK Equity Income (GB0001448900)||3,743||0.26|
|Vanguard FTSE Developed Asia Pacific ex Japan UCITS ETF (VAPX)||25,278||1.76|
|Vanguard FTSE Emerging Markets UCITS ETF (VFEM)||21,038||1.46|
|WisdomTree Emerging Markets Equity Income UCITS ETF (DEM)||12,869||0.89|
|Shares in employer||34,984||2.43|
|Former employer pension||59,392||4.13|
|Professionally managed Sipp||476,786||33.14|
|Professionally managed Isa||197,738||13.74|
|Professionally managed fund portfolio||86,439||6.01|
NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THIS INVESTOR'S CIRCUMSTANCES.
THE BIG PICTURE
Chris Dillow, Investors Chronicle's economist, says:
Your target of a portfolio worth £1.6m seems reasonable. With average luck you should get there within three years. And you might get there even quicker. Lead indicators such as foreign selling of US stocks and the FTSE All-Share index’s dividend yield are giving positive signals, and the US market’s high valuations are justified by the health of its economy,
Living off a natural yield of 4 per cent is also reasonable. If we (cautiously) assume that UK equities are fairly valued meaning their dividend yield won’t change from just over 4 per cent, their prices should rise at the same rate as dividends. If dividends grow at the same rate as profits, and the share of profits in national income doesn’t change, it follows that share prices will rise in line with gross domestic product (GDP), which we can assume will grow at 1.5 per cent a year after inflation. This implies a real total return of just over 5.5 per cent a year. So if overseas markets make the same returns as UK markets, you could withdraw over 5 per cent of your investment portfolio each year and maintain your capital.
But there are lots of assumptions here and it’s almost certain that there’ll be bear markets, which will reduce your wealth. Nevertheless, overall your target is reasonable and not caring about leaving a bequest gives you a big safety margin.
Peter Savage, chartered financial planner at Fairstone NI, says:
To ensure that you don't run out of money in retirement consider cash flow forecasting with a financial planner. This will help you to consider the required income and capital you are likely to need during your retirement. By using different assumptions, a cash flow forecast can project the possible effects of withdrawals on your capital. These forecasts can also be stress tested by simulating different market conditions, which should demonstrate whether your retirement plan is achievable – even in the worst environments.
You are not overly concerned about capital preservation to protect a legacy for your children. However, consider using a bypass trust for your pensions because if you die before age 75 your beneficiaries can access your pension funds tax-free. A bypass trust ensures that the tax-free proceeds remain outside of your estate so will not be subject to inheritance tax. But if you live beyond age 75, you may want to nominate a beneficiary rather than the trust. However, seek financial advice on the potential advantages and disadvantages of bypass trusts.
Also consider which tax wrappers you will withdraw your income and capital from. Try to be as tax efficient as possible by using up your personal allowance with taxable income withdrawals, and then withdrawing the rest of the required £60,000 a year from tax wrappers as efficiently as possible.
HOW TO IMPROVE THE PORTFOLIO
Chris Dillow says:
It’s reasonable to avoid bond funds. These insure us against bear markets that are caused by heightened risk aversion or fears of recession. But this insurance is expensive – it comes at the price of negative real returns in normal times and losses when interest rates go higher than the market expects. I have a high cash weighting as protection against bear markets rather than bonds.
I sympathise with your preference for passive emerging markets funds. The case for active investment in emerging markets is that these might be less well researched than the US market, meaning there are more stockpicking opportunities. But market inefficiencies are not a guarantee that active investors will be able to profit from them. So passive exposure is all right.
I also like your exposure to private equity and venture capital because it’s possible that a lot of future growth will come from unquoted companies. But do you have enough exposure to these?
However, your preference for yield may be exposing you to excessive risk. You couldn’t resist the yield offered by JOHCM UK Equity Income, which invests heavily in big dividend payers such as the oil majors. Other UK equity income funds, such as Artemis Income (GB0032567926), also have exposure to these. And other investors might have wised up to the merits of stocks that have what renowned US investor Warren Buffett calls economic moats. By that, he means barriers to entry to the areas these companies operate in, such as high capital requirements. If so, such stocks might now be overpriced.
You have diversified this risk more than many investors, but at a cost. By holding so many active funds you are diversifying away the chance that one or two good fund managers will beat the market, but are still paying active fund fees. So consolidate your holdings. Consider cutting funds with higher fees, and hold passive funds alongside a handful of active managers you especially like.
Simon Bonnett, senior consultant at Beckett Financial Services, says:
A non-crystallised loss can be both beneficial and detrimental. Often, behavioural biases can hinder investment performance, so it can be important to differentiate between a transitory loss and a more sustained capital erosion. Writing an investment case for each of your positions could help you to recognise losers, for which the original reasons for investing in them no longer hold.
But your portfolio is generally well diversified across asset classes, sectors and fund houses, reducing the risk of any one of these. And targeting a total return for income is a prudent measure in a low interest rate environment. But you could improve your overall portfolio composition by consolidating the holdings that account for less than 1 per cent of it into higher-conviction positions.
As you are not keen on bonds you could invest in other assets to offset equity risk, such as absolute-return funds. Although this sector has received a lot a negative media coverage, there are absolute-return funds that deliver returns with low or negative correlation to equity markets, so would diversify your exposure.
Inflation proofing your income over the medium term is an important consideration, even in a lower inflation environment. You could do this by investing in infrastructure, to which you can get exposure globally or just in the UK via some very good funds. Infrastructure assets' predictable and recurring cash flows often have an element of inflation linkage, which can result in dividend increases and a healthy income yield, in some cases above your 4 per cent requirement.
Many investors get exposure to emerging markets via passive funds. But our quantitative screens show that some active funds have outperformed the benchmark in this area consistently over various periods. For example, although Vanguard is typically associated with passive funds, its active Vanguard Global Emerging Markets Fund (GB00BZ82ZY13) could be worth looking at.
Peter Savage says:
You have a well-defined strategy and some good investments in your portfolio. I agree that bonds are expensive and the long-term outlook for that asset isn’t favourable. So I would suggest alternatives that could provide the higher yields and diversification you're looking for. Options include Sequoia Economic Infrastructure Income Fund (SEQI), GCP Infrastructure Investments (GCP) and HICL Infrastructure (HICL). These investment trusts focus on infrastructure and have a yield higher than 4 per cent, while providing a degree of diversification.
For increased property exposure, British Land (BLND) is a real estate investment trust that also has a yield of more than 4 per cent. For growth, consider Veritas Asian (IE00B02T6J57), which offers emerging market exposure and has returned 111.6 per cent over five years.