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Dear Victoria,
I’m 60, single, debt free and still working full time, but would ideally like to retire.
However, I’m unsure whether my pensions and investments are enough for a decent standard of living.
I have two defined contribution pension pots of about £200,000 each (I’m still contributing to the current one, which is with Scottish Widows) and also have investment Isas totalling £105,000 as below.
Thanks, Jenny
Victoria says:
Congratulations on saving an impressive, sharply above-average nest egg which means you can now look forward to financial freedom in retirement. With a good-sized pension pot on top of your Isa, you’re on track for a decent standard of living once you finish working.
Having sizeable private pension wealth gives you more options when it comes to retiring early, but you’ll still need to keep a watchful eye on the numbers.
The Pension & Lifetime Savings Association estimates that you need a private pension pot of £300,000-£500,000 (which you have) and total pension income of around £36,000, including the state pension, for a moderately comfortable retirement. This assumes you retire at 66, receive a full state pension and therefore need to withdraw only £24,500 a year.
Also, the state pension age is rising between 2026 and 2028, so your actual state pension age will unfortunately go up to 67 and you’ll have to plug that gap before you start to receive the state pension. That means you would need to withdraw the full £36,000 a year from your private pension if you retired before 67 to achieve the same standard of living.
And don’t forget that retiring early means you’ll probably need your pension pot to last longer than someone who retires later.
I’m still very positive about your financial situation though – you’ve done fantastically well.
Digging into your Isa, I’d suggest that 25 funds are way too many to keep track of so you might want to let some go. I can spot an easy way to do this – you’ve got lots of overlaps where you own various funds that invest in the same regions, such as Japan or emerging markets.
Each fund provides built-in diversification, so you don’t need more than one or two per region unless they have specific differences that suit your investment goals (such as one going for growth and another for income).
You also have all your money in stocks, which is fine in the capital accumulation stage. But since you’re looking to retire and live off your investments, you might want to add some bonds for income. Your pensions are likely to be in stocks and bonds, probably with a 60:40 split.
While your Isa could be used to generate a bit more growth than your pensions, I still think bonds make sense as retirement nears – investment-grade sterling corporate bonds yield more than 5pc and gilts around 4pc, so this income element could play a significant role in future returns and portfolio stability.
The Vanguard LifeStrategy 60pc Equity or BlackRock MyMap 5 (which has 60pc to 80pc in shares) funds offer low-cost ways to gain exposure to stocks and bonds.
A good approach is to have around two-thirds of your portfolio in a core building block such as one of these funds. Then you can add some smaller “satellite” positions around the edges, perhaps to supplement your income or to invest in regions or sectors that excite you.
For extra income, I like your holding in the Vanguard FTSE UK Equity Income Index fund: it offers an attractive yield of 5.3pc and is on Interactive Investor’s “Super 60” list of funds. Also on our rated list and perhaps one to consider is Jupiter Strategic Bond, a good one-stop shop that invests in sterling bonds and offers an inflation-topping yield of 4.9pc.
It’s hard to know how much income you’re after without knowing what’s in your pension pots. But depending on your personal requirements and risk appetite, since you’ve still got a long life ahead of you at age 60, you might want to add some more growth to your portfolio too.
If that chimes with you, I continue to rate Terry Smith’s Fundsmith Equity fund. Smith buys high-quality large firms that have proven they can withstand tough economic times. It is a top-performing global fund since launch more than a decade ago.
You could also look at adding a technology fund to profit from advances in artificial intelligence (AI). While valuations are rich and you’ve missed last year’s AI bull run, taking a longer view at what breakthroughs could appear over the next decade, the best could still be to come for software and computer chip firms.
L&G Global Technology Index Trust is a simple and cheap way to gain exposure, but it could be volatile and should be only a small percentage of your portfolio.
Your hard work means I’m confident that you can retire relatively soon. Have a think about whether you’d rather wait until you get the state pension or if you’re happy fully funding your retirement yourself for a few years before that.
And in terms of your Isa investments, I’d start by simplifying things and sticking to the core/satellite approach. What exactly those core and satellite positions are will depend on your appetite for income as well as risk.
Best of luck with your investment journey.
