Investing for retirement

20122013

Thank you for all the replies to my previous posts so far and had helped me to reach this stage. But I am still nervous about investing and it’s finally time to invest. (I had used an IFA for a long time.)

With 12 years till SP age which will give me a little more to spend. I have an old work pension worth about £100,000 and a separate pot of savings to last till 12/2030 and no debt.

As I have 10 years to invest and I am thinking how to invest all my savings to ensure my portfolio is diverse and include some guarantee income as I may need a large lump sum (for emergencies).

I would like to be 100% equities for at least the first 5 years and I will need £32,000 net per year return. If this is too risky than I will go with a lower risk and lower return (the ‘multi asset funds vs global mixed equities/bonds portfolio), as I was planning to to invest in bonds after I have got my SP but maybe for guarantee income I should start getting bond now? AI says ' To achieve a £32,000 annual net return (after inflation) in the UK, you would likely need an initial investment of roughly £800,000 to £1,070,000, assuming a sustainable real (post-inflation) return of 3% to 4%. '

I have 50% of my total investment will be S&S ISA. and currently have an all world index fund which i will sell half and invest it into a different fund due to Magnificent 7 / US tech stocks :

Split:

25% HSBC FTSE All World Index C Acc | all world index fund (high risk noted)

40% MSCI World Defensive Sectors Index | Defensive stock index tracker, need an alternative which is available on ii (not sure about ETFs)

25% Multi asset fund or mixed equities/bonds portfolio Vanguard life strategy

10% thinking of my options, a Global Fund with limited exposure to the "Magnificent 7" US tech stocks : Vanguard Global Equity

5 funds seem a lot to me and there maybe overlap, too. The weighting may need to change as they have different rate of return, Welcome your thoughts.

eskbanker

With 12 years till SP age which will give me a little more to spend. I have an old work pension worth about £100,000 and a separate pot of savings to last till 12/2030 and no debt.

This is the only mention I can see about your assets, but there's no obvious correlation with your expectation of £32K annual net income (let's say £40K gross) - you do refer to a S&S ISA but without any indication of its balance? It's difficult to understand whether you're trying to, say, double £500K to £1m or if it's an entirely different scale of uplift that you have in mind, and this will obviously affect the amount of risk you'd need to plan for.

20122013

I am looking at options on how to get a return of £32000 net per year, As I have kept back 5 years of spending money, and the initial investment will need to be £800,000 (including my current investment) with a 4% return.

eskbanker

https://forums.moneysavingexpert.com/discussion/comment/81922143#Comment_81922143

I thought you were looking at £32K net income, which would be closer to £40K gross and therefore a 5% return from £800K, which would be challenging?#

However, the point I was making was that you're saying that the end point of your investment journey is £800K (or £1m may be more appropriate), but don't seem to give any indication of where you're starting from, i.e. if you currently have £700K then that's going to be rather more straightforward than if you're starting from £200K, which would impact investment strategy and choices. Similarly, how much, if anything, will you be adding to the pot over those 12 years?

I appreciate that you may have covered this in other threads though, but still worth setting out the basic parameters here so that people don't need to go searching…

masonic

The AI has neglected to factor in tax as has been alluded to by eskbanker. However, with the SP kicking in part way, £800k might still be ok, albeit with some risk of a bad sequence of returns reducing the pot by too much.

Regarding the portfolio, the 40% defensive fund will already serve the purpose of the 10% reduced Mag7 fund, while the 25% FTSE All World tracker and 25% multi-asset could be combined into a single multi-asset fund a notch or two up the risk scale. So you could probably get to two funds.

Maybe something like https://www.justetf.com/uk/etf-profile.html?isin=IE00B8FHGS14 is similar enough to the index you are looking to track.

20122013

https://forums.moneysavingexpert.com/discussion/comment/81922166#Comment_81922166

I thought the total initial investment I will need would be about £800,000 (and I think I might have got this wrong).

I will need £32,000 net income a year x 40 years £1,280,000 minimum (not factored in inflation etc)

I have £400,000 invested in S&S ISA (All world fund) and I am working out whether £800,000 is the minimum I need so I can find the funds.

After I have made the investment, I will not have any fixed amount to add to the pot but if there are any remaining money left I will reinvest. My my goal is not to touch the capital and lived off the returns / dividends/ income.

20122013

https://forums.moneysavingexpert.com/discussion/comment/81922199#Comment_81922199

Yes, I did not include the tax - thanks for you and eskbanker pointing it out.

'However, with the SP kicking in part way, £800k might still be ok, albeit with some risk of a bad sequence of returns reducing the pot by too much.' - this is reassuring.

'Regarding the portfolio, the 40% defensive fund will already serve the purpose of the 10% reduced Mag7 fund, while the 25% FTSE All World tracker and 25% multi-asset could be combined into a single multi-asset fund a notch or two up the risk scale. So you could probably get to two funds.

40% Defensive fund to get something like this: https://www.justetf.com/uk/etf-profile.html?isin=IE00B8FHGS14 is similar enough to the index you are looking to track.'

May I check the two core funds:

1. Fund 1 (50% or 40%): iShares Edge MSCI World Minimum Volatility UCITS ETF USD (Acc) the annual return (-2% to 22%) in the past 10 years - is an ETF also USD, currency risk and pay tax to US?
2. Fund 2 (50% or 60%): Multi asset fund - annualized returns of 5%–10% over the long term

I will look into this a bit more, also double check it will provide the income I need.

InvesterJones

I think I get the question - it's not 'how do I get to X pension pot?', it's more like what size pension pot do I need, and in what investments, to deliver an income of Y?'

There is a pensions board where this kind of thing gets asked more frequently, this board is more likely to help with the first question. But we can take a stab at the second.

In today's money, as mentioned, a 32k income (before tax) is 4% of 800K. To account for inflation and not touch the capital, that needs to be a real return of 4%. That is well above what could be expected for bonds, but more in line (and below) the long term real returns for equities which since 1900 has averaged 6+% annualised for US, and 5+% for UK equities.

Whether you have 100+ years to wait for mean reversion is another matter of course, so I think people in a similar situation might add some diversifying investments which dampen volatility at the expense of some return. Or you could assume the returns will be in line with the mean (rashly) in which case you might need less than 800K.

What counts as diversification is a whole large topic in itself. Within equities the obvious one is just buy everything, which is cheap to do these days. But equities markets are linked, so you might also consider bonds, cash-like, commodities etc. each of which has either correlation (bad) or lack of correlation (good for dampening volatility) in different scenarios. The proportion of equities to non-correlated assets is given by how much return you need to drive. For a 4% real return, taking UK long term figures, it could be theorised with 2/3rds equities, 1/3rd bonds mix. However I'd certainly be looking at other assets than bonds.

What I would not be doing is trying to pick the next winners within equities or to say tilt away from the US or a particular sector - that's the route to underperformance for most.

masonic

https://forums.moneysavingexpert.com/discussion/comment/81922247#Comment_81922247

"Fund 1 (50% or 40%): iShares Edge MSCI World Minimum Volatility UCITS ETF USD (Acc) the annual return (-2% to 22%) in the past 10 years - is an ETF also USD, currency risk and pay tax to US?"

This ETF has two listings on the London Stock Exchange, you can choose MINV which trades in sterling, so you can avoid forex fees, but currency risk exists on any unhedged global investment (hedging equities is not generally recommended). It is domiciled in Ireland, so dividends from the US stocks it contains have withholding tax at the lower 15% rate.

"Fund 2 (50% or 60%): Multi asset fund - annualized returns of 5%–10% over the long term"

The returns on this will vary depending on the risk level you choose. There will also be withholding tax on US dividends and currency risk on the equities part of the fund, like the ETF. Some multi-asset funds currency hedge their international bonds (which is often seen as a good thing).

Linton

The only way an investor has of achieving a specified return with an extremely high chance of success is to invest in safe bonds. The higher the targetted return above bond level the greater the chance of not making it or even losing money, especially if it's for a short duration. 5-10 years is a short duration for equity investment. If you do invest highly in equities what is your fall-back plan should you not achieve your target?

You do say that you are ignoring inflation. With long term retirement planning you cannot safely ignore inflation - £32K in 2015 would be equivalent to around £45K now, so about 1/3 of the value has been lost in just 10 years.

If your absolute requirement really is a return of 4% gross for 10 years you could get that now with a very high degree of security by investing in a UK government bond which would currently return 4.5%. I am not suggesting you do that.

If you have not done so I suggest you make a detailed plan as to how you are going to finance your retirement for the next 30-40 years based on an acceptable level of expenditure. As has been suggested it may be useful to post on the Pensions board.

20122013

https://forums.moneysavingexpert.com/discussion/comment/81922253#Comment_81922253

Yes, those are the kinds of questions I wanted to ask eg:

1.
What size 'pension' pot do I need, and in what investments, to deliver an income of Y (factoring in inflation and tax)?

2.
What lump sum do I need, and in what investments, to deliver an income of Y (factoring in inflation and tax)?

I will also post on the Pensions board and comeback to this one later.