Coming Up to Retirement - Portfolio Changes

davethebb

I am looking to retire in 12 months or so. I am 58 and have a large SIPP (£895k), an ISA (£356k) and a Section 32 policy (£3.2k at 65 years). My state pension forecast is £12,034 when I am 67. My partner is retired and is drawing a small income from a SIPP until next April, when it will be exhausted, and she will then receive her state pension.

My current portfolio is as follows:

SIPP

5% Royal London Short Term Money Market (Near Cash)

17% Twenty-Four Monument Bond Fund

10.5% Vanguard Global Equity Income Acc.

60.5% Vanguard Dev World Ex. UK Acc.

ISA

7 % Royal London Short Term Money Market (Near cash)

13.2% Twenty-Four Monument Bond Fund

20.5% Vanguard Global Equity Income Acc.

58.5% Vanguard Dev World Ex. UK Acc.

I currently earn around £140k per year, add £60k per year to my SIPP via pension contributions/Salary sacrifice (RL STMM/Monument bond fund), and save a little in the ISA.

In retirement (excluding my partner's income), I will need £48k after tax. In the first two years, I will make a couple of high-value capital outlays (a car and a holiday), approximately £50k to £65k.

We have no children/dependants, and inheritance planning at this stage is not a major concern.

When I retire in mid-next year, I should have an additional £60k added to my SIPP.

My current thoughts would be to use the basket approach and change the portfolio as follows:

Basket 1 (years 1 to 3) - 16% - Royal London M M as a Cash Substitute 

Basket 2 (years 4 to 9) - 24% - Twenty Four Monument Bond plus the addition of "ORBIS Cautious Managed" 

Basket 3 (years 10 to 19) - 30% - Vanguard Global Income 

Basket 4 (years 20 to 29) - 30% - Vanguard Dev World Ex UK.

In theory, using the 4% SWR as guidance, I can probably survive on a lower level of risk, but if I reduced my Vanguard holdings even further, what would I invest in/change the allocation to?

Your thoughts and comments on the allocations are very welcome.

El_Torro

Looks more or less fine to me, though I’m not clear why one of your funds excludes the UK. What do you have against UK equities?

Seeing as your ISA pot is quite large are you going to spend some of that to stay under the 40% tax bracket?

Linton

In principle OK

Some points...

1) Do you actually want income or is the Global Income just a proxy for something less volatile than a full global equity fund?

2) With a bucket approach I suggest you focus on what you want each tranche to uniquely provide rather than assign a time period.  For example if you want income, presumably you want it spread throughout your retirement.  Assigning it to 10-19 years doesn't make much sense to me.

3) What is your drawdown stragey? How will you manage these 4 buckets to implement it? Rebalance each year?  Another option is that you keep the 2 short term tranches to the size they need to be to ensure your desired short/medium term  income is met and then put everything else into the long term equity.

4) Think about which investments naturally fit within an ISA.  For example if you are short of basic rate tax band take all your generated income from an ISA

davethebb

El Torro & Linton,
The Vanguard Global Income has a UK element to it which is one reason I use this fund. The other is that is more geared for value than the Gbl Dev. world fund and may be in the near future when interest rate drop more people may look at Equity income?

Linton, Interesting point regarding the use of Buckets - I will give this some thought.

In general I was going to take out the maximum from the SIPP without paying tax (eg. £16k) every year and use the ISA to make up the difference as this seems to be the most tax efficient. The first two years I may take out more for the large expenses but I haven't decided yet.

The draw down plan was to slowly sell the Vanguard funds and top up the cash etc as they get low. When these run out then use the Monument bond fund/Orbis Cautious fund.

Fermion

One thing you might want to consider is switching the funds in both your SIPP and ISA from Acc to Income units. That will give you more flexibility in terms of selling units to fund your income requirements.

I did that with both my SIPP and ISA a couple of years before actual retirement. I'm with HL and I typically get a natural yield of about 3.4% from my portfolio. HL fees are about 0.3% although I get 0.21% back though their loyalty bonus (not paid as cash but reinvested). This limits the number of units I need to sell from my portfolio. I keep a cash buffer in my drawdown SIPP of about 2.3%. I have setup regular monthly drawdown from my SIPP totalling  about 4% per annum.

I switched my ISA on retirement to withdraw the natural yield only. Investments remain the same (and increase slightly each year due to HL Loyalty bonus reinvestment)

davethebb

Thank you, Fermion,

I do plan to do this, but I will swap over the funds slowly, hopefully minimising time out of the markets.

cloud_dog

I'm not sold on the switching of a fund to the income/distribution version, where you still need to regularly liquidate capital from the fund to support the drawdown requirements.

Obviously if your drawdown requirements are address by taking the natural yield then this seems reasonable / sensible, but where you still need to execute the same functions to liquidate investments, albeit a smaller amount, I don't see the benefit.  I would rather all my capital works as hard for me for as long as possible, rather than just sitting as cash.

Happy to be educated on this aspect.

ukdw

Impressed that you have kept the fund split nice and simple and have the same funds in both the ISA and the SIPP.

Not sure though about the bucket withdrawal strategy being so closely aligned to the 4 funds, as for example the up to 9 years horizon I don't think just needs to be restricted to bonds and money markets.

Personally I think I would set myself a target overall desired split percentage of each of the 4 funds and then just aim to do withdrawals in a way that tries to balance the overall splits back to the target levels.

So if for example equities drop then there would be more withdrawals out of the bond/money markets funds and if equities go up a lot then most of the withdrawals would come from there.

Also with the size of your SIPP I would probably make full use of each years 20% tax band which is presumably quite  lot lower than the over 60% tax relief you benefited from on some of your contributions - rather than keeping withdrawals to the tax free band.

OldScientist

Note that the 4% guideline is the worst case inflation adjusted withdrawals for a historical US retiree over a 30 year period. Retiring at 58, the planning horizon is more like 40 years (there is a 10% chance of living to 97 or 99 for a 58yo UK male or female, respectively), so the 'safe' withdrawal will be reduced for a longer period and reduced for the UK.

However, I also note that the SP and your Section 32 policy will reduce your portfolio withdrawals in the long term.

On allocation, you could consider an inflation linked gilt ladder to provide a guaranteed floor equivalent to the SP in the run up to receiving the SP (a 9 year ladder would cost just over £100k - see https://lategenxer.streamlit.app/Gilt_Ladder ). This then reduces income dependency on volatile assets.