Help me clarify my thoughts!

7_week_wonder

I’m just returning to a situation where I can begin to save seriously again. I’m thinking about what to do and I’d welcome any help/suggestions to clarify my thoughts. Please be gentle as I’m fairly new to these parts of the forum!

Background: 46, married, no children, no mortgage, no debts

Current savings, investments and pensions:

National Savings (Index-linked): ~£70k
Easy Access Cash (current accounts etc. paying around 2.5%): ~£10k
Cash ISAs (notice accounts, fixed till 2014, 2015, around 3% ): ~£20k
Trackers (80%UK, 10% USA, 10% Europe, mainly in ISA wrappers): ~£70k
Ecological Funds (ISA): ~£15k
Shares from previous employer: ~£12k

Current pension provision:

Deferred pension from previous employment: estimating £18k per annum at 65
Pension from current employment (assuming employed til 65): £15k per annum at 65 plus £44k lump sum;
State pension: £5.6k

OH has similar provision levels of savings and pension.

Current situation:
Had 6 year mid-life career swerve where I changed fields and re-trained, so no additional savings during that period. But I now have a (minimum) 5 year contract and am able to at least £1k per month for 5 years (minimum) and am happy to lock away for 10-15 years (minimum).


My thoughts are to put £1k per month away into Vanguard Lifestyle 100%. Why? Because I like passive investing, I feel that my division between cash and stocks and shares has swung too far towards cash and I think I would like more exposure outwith the UK. My thoughts are to put it within an ISA wrapper rather than a pension wrapper, just to give me a bit more flexibility and also I think I will probably be above basic tax-rate when a pensioner.

I did look at buying additional pension years from my current provider, but using the modeller on their website if I paid the maximum allowable (15%) I would need to live to be at least 98 before I broke even (i.e. amount of extra pension equalled/exceeded amount paid in). I need to check that calculation with our pensions department.

I’m working my way through various threads on here and have been to some of the websites recommended when I asked about books, and will be ordering the Tim Hale’s book when the new edition comes out in October. But in the mean time I wondered whether anyone had any thoughts or suggestions about my plan or any further questions I should be asking myself?

Many thanks for your help

Linton

Your overall strategy looks sensible to me as does your intention to now move further into shares via funds.

I would be a little concerned about diversification on the shares side. All your investments are in and will continue to be in trackers in developed countries. The Vanguard 100% fund does have a broader range, but 70% of it is invested in the UK/US which you already have covered. So it doesnt help much.

A problem I see is that these trackers overwhelmingly invest in large companies which mostly operate in a global market. So having a geographical spread in the western developed world doesnt provide as much diversification as you might think - a UK, US, or European oil company is going to be more influenced by global factors such as the oil price than by the economic situation in the country where their HQ happens to be located.

Also as your pension/(non) mortgage/cash savings ensure that the basics of your future seem secure, in your position I would consider taking a bit more risk with a part of the investment.

atush

I agree I would look to diversify. Into Small Caps and more Globally (or at least some trackers outside of Us/UK).

As you have no mtg, do you have a home? Or if you sold before, will you be rebuying?

If you own your home mtg free, you seem to have good pension provision so i'd be whacking your extra (both of you) into S&S ISas.

typistretired

Looking at your portfolio you need to come on here more often and give us advice as you seem to be doing very nicely all on your own.

7_week_wonder

Thanks for the replies so far.

To answer atush we are fortunate in that we own our home outright (value about £350k).

I agree that some more diversification might be good, and I would be happy to put about £10k in something "high risk". Looks like it is back to more reading and research during my daily commute! I'm currently looking at the emerging markets funds mentioned in the Monevator website, and will investigate small caps but other suggestions are welcome.

jamesd

When would you like to retire? Ignore whether you can afford it for now, just say for example whether you'd like to retire at 50 or 55 say. What sort of income would you want at the start of retirement?

Is your current pension defined benefit or defined contribution? Which?

I'm asking because it appears possible that you could retire quite early with an income that many would consider to be sufficient and it's worth considering that and possibly planning to do it.

Ark_Welder

What might be pertinent is a list of the trackers currently held: there may be an overlap with some of the suggestions for looking at smaller companies. For instance, Vanguard's global smaller companies tracker holds companies that represent the bottom 15% of each market that is included. in the UK, that represents quite a substantial chunk of the FTSE 250 index in addition to the FTSE Smaller companies index (which is around 2% of the UK market, with the FTSE 100 covering around 82% of the market). And a combination of trackers of MSCI and FTSE indicies might also result in a greater degree of overlapping representation than is expected.


Don't underestimate your cash holdings, especially the index-linked certificates. Cash does help to balance out the volatility of equities so that the overall volatility of your whole portfolio is reduced. In the (aparent) absence of any bond holdings, having a higher level of cash can act as a substitute. And those ILSCs are definately not to be sneezed at! The do give protection against future inflation, and that is something that even a holding in equities does not guarantee over all timescales.

I would also suggest that you have a look at what a holding of bonds can do - not necessarily with a view to investing right now, just to understand how they can be combined with a holding of equities and what this can do for you. Bonds are generally seen as a one-way bet on the downside at the moment. The problem here, is that with this high level of expectation, the unexpected would be to the upside... Then, have a think of how your current level of cash could be considered to be a proxy for top quality government bonds, such as Gilts and US Treasuries. (Note: I have fallen into the trap of referring to 'bonds' as a collective asset class, whereas there are different types of bonds, and these will - usually - act differently according to prevailing economic circumstances. Perhaps a complication for a separate post sometime!)

bigadaj

Wouldn't you say the ilscs are a good proxy for bonds currently, particularly when combined with cash. I'm light on bonds myself but see little opportunity to benefit currently, so am heavy in cash and have some commercial property which I might look to increase.

7_week_wonder

Good morning and thanks for the further replies. I'll need to double check a few things tonight but a few answers so far:

My current pension is defined benefits, but I need to check about my previous pension (a mixture of normal contributions and AVCs) .

My UK trackers are FTSE 250, need to check exactly the US and European ones are.

I love ILSCs and will quite happily top up if they *ever* do another issues. I wish I'd got more whilst I could!

Retirement: well depending on my job (which will come in fixed term chunks), I would be quite happy to go on to 65 or beyond. OH, however, is an entirely different kettle of fish. He will be 55 next year and is seriously contemplating leaving his current job.

What income would I/we need to live on. Currently I manage very well on between £900 and £1000 a month and OH spends similarly (I know it sounds odd giving the figures separately, but we have a joint account which pays for all domestic stuff, then our own accounts for hobbies, clothes etc). I wouldn't see that changing in the early years of retirement, as reduced transport costs might be offset by increased utility bills etc. Later on, maybe we'd need a bit more.

Didn't get a chance to do any more research last night, but thanks again for all the food for thought.