Last stages of retirement accumulation and adjusting portfolio mix ready for retirement - thoughts?

GazzaBloom

We are 100% stock index funds in our pensions and ISA have been for years. I have a high tolerance for volatility and ability to stay calmly invested but wish to reposition our portfolio ahead of retirement (or semi retirement) in 2-3 years and have a bit of a dilemma.

I want to build up some cash beyond our current emergency fund but have left building a sizeable cash element on the theory that using my salary sacrifice towards the end of accumulation will counter inflation by building cash at the end as pay rises will keep up with inflation or thereabouts and the cash doesn't sit on the shelf for longer than necessary suffering erosion in spending power.

So, in 2023 and 2024 I will be able to pay in £40K each year salary sacrifice plus around another £10-15K per year after tax into ISA. So £105K or so over the 2 years. I am targeting £50-60K cash and then maybe a bonds fund (not sure on that yet) to get to either 90%/10% stocks/cash or 80%/10%/10% stocks/bonds/cash or maybe 70%/20%/10% stocks/bonds/cash.

Would you keep buying stocks through the next 2 years then sell some to to meet the cash/bonds requirement immediately prior to retirement, or direct the 2023 contributions to cash until I reach the £50-£60K then bonds fund in 2024?

My thinking is that it may depend on the stock and bonds market in 2023, if stocks are still dropping it seems like a wasted opportunity to buy at reduced prices but I run the risk of the rebound taking longer and being forced to sell in a down market to get the portfolio balance I want.

My instincts tell me that I should send the contributions to cash/bonds in the remaining 2 years so I don't have to sell stocks during this time but welcome some views.

I may take a lower paid job more local to home in 2025 or go part time, or stop completely - that is yet to be decided but the ability to pay in significant further contributions is not likely beyond end of 2024 or Q1 2025 but I may be in a position to run a reduced drawdown with some part time work for a long as I can hack it.

NedS

It's impossible to know so you should probably do whichever will allow you to sleep at night. You could buy gilts and lock in 4.5% return now, or go into something like UK small caps which have sold off heavily and see 30% returns in 2 years, or not. If I absolutely needed the cash in two years time, I would be buying gilts with appropriate maturity dates right now. A 3 year bond ladder may help you sleep better - depends what other sources of income you have and how flexible you are able to be in drawing income.

GazzaBloom

NedS said:

It's impossible to know so you should probably do whichever will allow you to sleep at night. You could buy gilts and lock in 4.5% return now, or go into something like UK small caps which have sold off heavily and see 30% returns in 2 years, or not. If I absolutely needed the cash in two years time, I would be buying gilts with appropriate maturity dates right now. A 3 year bond ladder may help you sleep better - depends what other sources of income you have and how flexible you are able to be in drawing income.

Thanks, I'm not sure I can buy anything other than gilt or bond funds via my workplace pension, the shortest duration I can see is a 5 year index link gilt fund, so nothing as targeted as a 2 year date. Also, I prefer funds with low fees and that rules out a lot of them. I'm with Aviva and really don't know a lot about bonds except what I've learned on here, and seen the bonds funds crash this year due to the rising interest rates.

I'm much more comfortable with stocks index funds! And understand cash. 😀

This is the 5 year index linked gilt fund:

https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx/?type=packet_lp_fund_unit_doc_factsheet&docid=0614d749-b5b6-4b83-bf7e-5a5f07bed739&user=zkbRVNMQ%2bKzJCvZNYa3lErylrHKKt6OckYuuS50qoCk%3d&language=en-GB&track1=g7pNzlHkDsaO4tq53ivyDL24pnreBbSc9iSChsdGxj8vjAMz164t%2fo0z2OXBOh2%2fkuZHQ3s54exIqB%2fqf7o1dA%3d%3d&track2=&r=1

And this is a screening tool that shows all the funds available in my workplace pension:

https://www.fundslibrary.co.uk/FundsLibrary.BrandedTools/AvivaForAdvisersUnsecure#Price%3AMyMoneyPension%3A

MK62

That's not really a 5 year fund, but an "over" 5 year fund......80% of the fund's assets are in IL gilts of >10 years to maturity and over 60% are >15 years from maturity..........it's not what I'd use to build a cash pile inside a pension in 2-3yrs, though I suppose it all depends if this is a change of strategy to reduce equities exposure in the next 2-3yrs, or an attempt to build a cash pile ready to fund your PCLS in 2-3 yrs.......

GazzaBloom

MK62 said:

That's not really a 5 year fund, but an "over" 5 year fund......80% of the fund's assets are in IL gilts of >10 years to maturity and over 60% are >15 years from maturity..........it's not what I'd use to build a cash pile inside a pension in 2-3yrs, though I suppose it all depends if this is a change of strategy to reduce equities exposure in the next 2-3yrs, or an attempt to build a cash pile ready to fund your PCLS in 2-3 yrs.......

Yes, I'm learning about the difference between bond funds and holding a bond directly. I don't think I have access to anything other than funds unfortunately. I'm still not sold on holding a bonds fund and may just hold equities index fund and perhaps an increased percentage of cash.

Also, although not completely defined yet, I may not be taking a PCLS but will take regular monthly drawdown instead starting at a maximum of 5% per year reducing significantly when state pensions kick in. I want to keep a chunk in cash to cover a minimum of 2 years expenditure which I would draw from and top up from sale of stocks fund as I go.

Considering bonds was to be a bridge between the 2 and act as a hedge against the volatility of the stocks fund, but that strategy appears to have been turned on it's head this year, although from what I've learned I would expect bond funds to stabilise once inflation/interest rates settle down and what has been seen this year should not be a regular occurrence.

Bir of a bummer for those holding a chunk in a bonds fund that is 30% down though...not sure what I would do in that situation as I guess it's a long road back to recovery for those funds most affected?

tacpot12

Your retirement strategy is very similar to my own. I transferred all of my DC pensions to AJ Bell, 1 year ahead of my 55th birthday, and bought income-producing funds, and collected the dividends for 12 months as cash to give me a 12 month cash float. I also have other cash savings, equating to a further 12 months of expenses. 

I'm 58 and half now and have been pleased with my strategy. I've had £65,000 of dividends over the last 4.5 years, on a portfolio of £360,000 and this is enough to cover all my living expenses. The portfolio has been worth well over £400,000 in the last 18 months but has dropped to £313,000 in the last couple of months, but I have expectations that it will rise above the price I paid for it over the length of my retirement. I have two DB pensions that pay about £4,500 pa starting at age 62, and I have a full state pension starting at age 67.

GazzaBloom

tacpot12 said:

Your retirement strategy is very similar to my own. I transferred all of my DC pensions to AJ Bell, 1 year ahead of my 55th birthday, and bought income-producing funds, and collected the dividends for 12 months as cash to give me a 12 month cash float. I also have other cash savings, equating to a further 12 months of expenses. 

I'm 58 and half now and have been pleased with my strategy. I've had £65,000 of dividends over the last 4.5 years, on a portfolio of £360,000 and this is enough to cover all my living expenses. The portfolio has been worth well over £400,000 in the last 18 months but has dropped to £313,000 in the last couple of months, but I have expectations that it will rise above the price I paid for it over the length of my retirement. I have two DB pensions that pay about £4,500 pa starting at age 62, and I have a full state pension starting at age 67.

Sounds great - I hope you are enjoying your retirement.

What funds are in your portfolio if you don't mind me asking? I'm always interested in hearing from people who have crossed the line into retirement and living off a DC pot.

Most info and "guidance" from Financial Planners on YouTube seems to be from people in accumulation wanting an extra income from YouTube, so their thoughts on post retirement drawdown strategies and portfolios don't ring with the gravitas of experience for me.

tacpot12

Yes, I'm certainly enjoying my retirement!

The full list of my holdings in my SIPP are: 

Scottish Mortgage (3.4%)

Finsbury Income & Growth (3.8%) 

Edinburgh Investment Trust  (3.0%)

Invesco Perpetual UK Smaller Companies plc (3.86%) 

The City of London Investment Trust (6.4%)

The Mercantile Investment Trust (2.97%)

JP Morgan Claverhouse (3.2%)

The Bankers Investment Trust (3.7%)

JP Morgan Global Growth & Income (9.2%)

European Asset Trust (4.0%)

Schroder Oriental Income Trust (3.32%)

The North American Income Trust (4.6%)

Henderson High Income Trust (6.25%)

Invesco Bond Income Plus Ltd (5.3%)

iShares UK Dividend UCITS ETF (10.4%) 

iShares UK Property UCITS ETF (3.0%)

Balanced Commercial Property Trust (2.6%)

AXA Framlington Managed Income (3.0%)

Artemis High Income (2.8%)

Schroder Long Dated Corporate Bond I (ACC - so no dividends) (2.5%)

The percentages are the allocation within the portfolio.

My costs are:

0.62% paid to the Fund Managers.  
£250 pa paid to AJ Bell for platform feeds including monthly withdrawals via UFPLS. 

GazzaBloom

Blimey - that's a lot of funds! We currently hold 3, one each per pension and one in the ISA. 

fees on the bulk of our money (my pension) is 0.16%

NannaH

Why not just build up a cash Sipp alongside? 

I’ll switch to cash in 4/5 years as I’m still building my investments pot, ( I’m limited to £3600 contributions)
my husband is going to open a new Sipp before the new tax year and just feed cash into it for the next few years,  he already has a decent amount in 2 other pensions and gets his DB pension in 3 years, which will go straight into his cash sipp for around 5 years too. 

Planning on £60-£100k can that we can allocate to income cash/ bond ladder/ fixed term savings ( rates dependant).  We already have a couple of inc funds and may move a couple more as time goes on. 

GazzaBloom

NannaH said:

Why not just build up a cash Sipp alongside? 

I’ll switch to cash in 4/5 years as I’m still building my investments pot, ( I’m limited to £3600 contributions)
my husband is going to open a new Sipp before the new tax year and just feed cash into it for the next few years,  he already has a decent amount in 2 other pensions and gets his DB pension in 3 years, which will go straight into his cash sipp for around 5 years too. 

Planning on £60-£100k can that we can allocate to income cash/ bond ladder/ fixed term savings ( rates dependant).  We already have a couple of inc funds and may move a couple more as time goes on. 

I will be using employers pension salary sacrifice to build the cash, opening a separate SIPP would lose that tax advantageous benefit.