Nearly 50... asset allocation and other puzzles

Thomsk

I'm reviewing my savings and investment strategy, now that I'm potentially only 6 years away from being able to access my pensions. This is mostly me thinking aloud, but of course if anyone has any observations or suggestions then it would be great to hear them.

I'm 49, my wife is about the same, we jointly own our house outright and have no other debt. I've been employed by the same company for over 25 years, and I'm a a higher rate taxpayer, while my wife hasn't been in paid employment for the last 17 years. She will have around 24 years of qualifying NI contributions (or equivalent from Child Benefit) and I'll have 30 years by the time I retire.

Between us we have:

> My employer's group pension plan with Friends Life, with monthly contributions made from my gross salary and currently invested in an FL managed fund which is 39% in overseas equities, 35% UK equities and the rest in cash, gilts, bonds, etc. New investment options have just been announced, so I'll be moving some or all of that around. There's around 20% of salary (gross) going into this

> My SIPP, mostly invested in tracker funds. I've got around 60% in equities, with over half of that split evenly between the UK and the US, while 10% is stuck in Templeton Emerging Markets investment trust, having lost quite a bit, so I'm reluctant to sell it yet. Then there's 40% in a gilts tracker, parked there while I decide what to do. Another 20% of salary (gross) goes here

> My wife's SIPP. My gross contribution is only £100 a month, so I'll probably increase that to the maximum permitted, but the fund is small, under £20k, and invested 50:50 in a FTSE index tracker and Shroders Managed Balanced

> S&S ISA - mostly in funds, including UK, US, Japan and Pacific trackers, corporate bonds, and a couple of actively managed equity funds. I'm not adding to this at the moment, but want to. The allocation needs to be changed

Obviously there's a cash buffer as well, 3 months salary, but that's enough to live on for 9 months or a year if we had to.

So, I'm looking at my options for the next 6 years, when I turn 55. The objective is to have enough invested by then to at least switch to part time local employment with much less stress, with a view to retiring completely by 60. Between 55 and 60 I may either start drawing down from one or both pensions to supplement part time earnings, or partly live off the S&S ISA and start drawdown later - it really depends on investment performance between now and then and how employable I am at 55+, so asset allocation feels a bit trickier than it has been in the past.

If I stay employed, with returns of maybe 3% and all other things being equal we should have a very decent amount invested when I turn 55. On the other hand, when you look at drawing down less than 4% to preserve capital over a 30+ year retirement it isn't as much as I might like, especially when we have to wait until 67 for our state pensions. The more personal finance blogs I read, where everyone and their dog seems to have £1 million in their pension, the more I wonder if I've been a massive under-achiever.

Right now I'm struggling with a range of issues, just a few of which look like this:

- In drawdown I'll be looking for dividend income and ideally we will be living mostly on that income rather than depleting the capital too much before we get our state pensions (and can afford to be a little more relaxed about it), so I need to decide how to split my investments between equities and fixed interest now and over the coming 6 years and beyond

- I may not stay employed until I'm 55 (there aren't a lot of people of that age in my company and I wouldn't bet against redundancy before I reach it), and I'm sick of corporate life anyway so will bail out at 53 or 54 if I can. That means it would be good to have a few more years living costs in the ISA (currently we could live pretty well for 2 years on what's in there), but as a higher rate tax payer I'm keen to maximise the amount going into my pensions

- The last few years have been pretty good in terms of growth and therefore recovery from 2008, because until recently I was almost entirely invested in equities. Monthly contributions over the last 20+ years have smoothed out a few ups and downs, but here I am with potentially 4 to 6 years left of my current earning capacity, perhaps less, and it feels very different to when I had decades of pound cost averaging ahead of me. I'd like some certainty, but I don't think I can afford to have more than 40% in fixed interest investments, and possibly less. How to decide the optimal split is the hard question

- Dividend income from investment trusts is appealing. While I'm making monthly contributions I prefer (cheap tracker) funds because I can deal free of charge, but maybe a few times a year I should start moving money into IT s - there are still some good NAV discount figures around it seems

In summary, I'll never earn more than I do now, but I don't know how long that will continue, no one knows when there will be a market correction, how long that might take to recover from, what returns I will get in the meantime…


As I said, I don't have any really specific questions, I just wanted to start a conversation. If anyone has any thoughts, please chip in!

atush

If you can live on less, put enough into pensions to take you out of HRT completely.

And your list of investments that you mentioned seemed fairly conservative (but probably within your comfort zone).

As far as emerging markets, if the find has gone down, THAT is the time to invest more in it, not sell it when it regains?

So you say you'll never earn more, then go ahead and make hay while the sun shines.

As for SP, I'd buy more years (you need 35) and for your OH, she could register self employed and make cheaper contribs? It will be an index linked income after all.

jamesd

UK and US markets are at high levels, with the US breaking records. Europe, UK commercial property and emerging markets are at low or mid levels. Why are you heavy in the markets with greater downside potential instead of shifting money to the lower priced ones?

Thomsk

atush wrote: »

If you can live on less, put enough into pensions to take you out of HRT completely.

And your list of investments that you mentioned seemed fairly conservative (but probably within your comfort zone).

As far as emerging markets, if the find has gone down, THAT is the time to invest more in it, not sell it when it regains?

Good point. It's just sat there at the moment. My plan was to reduce volatility in the period leading to my potential retirement, and to focus on the UK and the US for dividends rather than strong growth. Dripping a bit of money into Templeton now wouldn't undermine that.

atush wrote: »

So you say you'll never earn more, then go ahead and make hay while the sun shines.

Exactly. A few years of maximising my contributions, that's what I aim to do. We aren't extravagant anyway, but cancelling Sky, shopping at Lidl more often than Waitrose and being more aware of general spending can increase the amount available to invest by a surprising amount.

atush wrote: »

As for SP, I'd buy more years (you need 35) and for your OH, she could register self employed and make cheaper contribs? It will be an index linked income after all.

Ah, I had got it into my head that it was 30 years. Damn. I'll look into the cost of buying additional years (although who knows, in my case I could have 35 years in the end).

Very helpful comments atush, many thanks.

jamesd

It's 30 years for the full basic state pension under current rules. Increasing to 35 under the flat rate rules.

Thomsk

spakkaman wrote: »

I am in a similar scenario to you but 7 years on - I have a final salary pension that kicked in when I left big corporate at 55 - this pays more than I get from my more local and less pressured job.

Hmm, that sounds good. I've only ever had defined contribution pensions available to me, which obviously come with a level of uncertainty that makes me more uncomfortable now I'm in what should be the last decade of working.

spakkaman wrote: »

I am busy maxing out on pension contributions to my SIPP as everything I earn in my current job is at 40% tax. The plan is to be pretty much retired by 60 and live off SIPP in drawdown + final salary pension. My wife and I have quite a bit in ISAs of both descriptions and no mortgage or any other debt. So all pretty good.

Having worked for the same company for so long, doing something fairly technical which seems quite specific to that employer (I'm sure in fact the skills and experience are readily transferable elsewhere), I'm trying to plan for a worst case scenario where I go from earning quite a lot to earning very little. I think this is an area I need to look at in more detail while I have the time to do so, rather than waiting until I'm forced to find a new job.

spakkaman wrote: »

I am taking an active interest in my S&S investments which are now almost all under the Fidelity roof for simplicity. I have a decent mix of funds - a fair bit of income funds as I see dividends as a safer bet - I am not particularly conservative in the run up to retirement as I am going to maintain investments for many years - the only difference is I will be in drawdown and no longer contributing. I am therefore a bit puzzled why you have retreated a bit from equities....... That said, one of the reasons I still work is to get some money together to give the kids a useful helping hand in terms of housing ladder.
With regard to mix of investments I wouldnt worry too much about going more conservative due to impending retirement - just spread the investments around a bit with a profile of risk you feel comfortable with.

Useful ideas. It may well be that I have conflicting objectives - I want a degree of certainty and low volatility, but on the other hand I recognise that over what will hopefully be a long retirement I'm going to need dividend income and some capital growth. The gilts tracker is a very recent purchase, part of a small switch around to get out of some managed funds that were starting to look expensive, but not really knowing where to put the money I stuck it in there for the time being.

Thanks for your reply. Lots of food for thought and further research!

Thomsk

jamesd wrote: »

UK and US markets are at high levels, with the US breaking records. Europe, UK commercial property and emerging markets are at low or mid levels. Why are you heavy in the markets with greater downside potential instead of shifting money to the lower priced ones?

Good question. I've always been primarily in the UK and US markets, including when I started out with nothing but a FTSE 100 tracker, but that was a big part of how I managed to pay off my mortgage 13 years early, so I suppose I've been lucky and that skews my perspective. I've already had my 20+ years of pound cost averaging, when I didn't care too much about volatility and in fact could benefit from it.

The other thing is that I'm conservative by nature, and an early piece of advice that I took to heart is that it isn't a question of timing the market, it's the time you remain invested in the market that leads to good outcomes. And especially in this final decade of work I think that I'll benefit most from packing as much cash into my pensions as I possibly can, while I can, because it's too late now for compound interest to be a big factor.

Then again, as I said in an earlier reply, dividends and capital growth are needed to get through retirement in reasonable comfort, but the tricky part is to know how to achieve just the right balance.

jamesd wrote: »

It's 30 years for the full basic state pension under current rules. Increasing to 35 under the flat rate rules.

Ah, OK. I'll go and Google to see what the transitional arrangements are, but as we don't reach state retirement age for another 18 years I expect we will need 35 years for the full entitlement.

Thanks for your replies - very useful.

atush

Cancelling Sky? Might be a step too far as you have the readies lol. We have sky multiroom so I can watch what I want while the boys/men watch sport elsewhere this leads to domestic bliss.

jamesd

Time being invested counts. So does picking where you're invested. It's clearly established that the price of a market at the time you buy affects your future returns. Same for selling. Even the FCA uses that in their decisions about what returns pension companies have to use in their projections. It's the basis for the improvement in performance that comes from rebalancing, which shifts money from the expensive investment types to the relatively cheap ones. You've probably heard about buy low, sell high and it applies in market choices.

What I wrote was in effect that now is the time to be rebalancing out of the main US and UK markets and into the ones or parts that are cheaper. The expected results of that are reduced drops in the next fall because they start at a lower P/E and higher future returns. It's just another way to benefit from the volatility timing differences between various markets and investment types.

There's still quite a bit of time for compound interest to do a lot of work for you. Average long term return of the UK market has been about 5.1% plus inflation. That's a 64% increase. However this doesn't allow for the effect of buying at today's cyclically adjusted price/earnings ratio and that would reduce the expected return.

The transitional rules say that your entitlement at that date is to be calculated under old and new rules at the time the new rules come into force. You get the higher of the two calculations as your foundation amount. A State Pension Statement will tell you what you have accrued so far. The Additional State Pension plus the thirty years you'll have under old rules to get a full old rules Basic State Pension will probably take you over the flat rate level, but maybe not.

Thomsk

jamesd wrote: »

What I wrote was in effect that now is the time to be rebalancing out of the main US and UK markets and into the ones or parts that are cheaper. The expected results of that are reduced drops in the next fall because they start at a lower P/E and higher future returns. It's just another way to benefit from the volatility timing differences between various markets and investment types.

There's still quite a bit of time for compound interest to do a lot of work for you. Average long term return of the UK market has been about 5.1% plus inflation. That's a 64% increase. However this doesn't allow for the effect of buying at today's cyclically adjusted price/earnings ratio and that would reduce the expected return.

Yes, that makes sense, thank you. I have modest amounts each month going into European and Japanese trackers. I've not thought about going back into emerging markets, but it sounds like I should do some research. Can you recommend any sources of information or good commentators on that sector?

jamesd

If you don't mind an expensive newspaper the Saturday FT is a good source for investing commentary.