Please critique my proposed investment portfolio

if you can save £20k a year (maxing out ISAs) for 15 years, that's £300k; plus current value of £160k makes £460k. (and this ignores however much will be paid into the new employer pension.)

even with no real growth, that could be about enough. (i assume you'll want to spend the equivalent of £20k a year in today's money, not literally £20k when that will probably buy much less stuff than it does now.)

if you'll have a full new state pension, that's c. £8k a year from age 67. so you'll need a permanent income of £12k to supplement that, plus an extra £8k for the first 7 years (from age 60-67). so the extra for the first 7 years comes to £56k. and £400k could generate an income of £12k a year, using a pretty cautious assumption of a 3% draw rate. so total of £456k needed.

your portfolio doesn't really need to achieve 7% growth, then. it just needs to match inflation. but it isn't a very aggressive portfolio. even if i count infrastructure as similar to equities, and cash as similar to bonds, then you have: 55% equities, 40% bonds, 5% commodities; which is a medium sort of level of risk.

with average luck, you'd expect to get more than matching inflation, in which case you could retire earlier or spend more. and with less than average luck, you'd probably still be OK.

nothing obviously wrong with the actual portfolio, that i can see.

7% for a tracker will include inflation. it makes sense to look at real returns (after inflation), because that's what matters (to most of us, anyway).

equities generally might have given you inflation + 5% in the long run. with only 55% in equities, and bonds barely likely to beat inflation, you might hope for inflation + 3% from your portfolio. at least based on historic returns. but equities and bonds do look a bit pricey, so if anything less than that.

however, since i reckon inflation + 0% could get you about where you need to be in 15 years' time, you have some margin for error.

theGrinch wrote: »

I would like to retire by 60 and would need an income of £20k from my investments.

Until then I want to target average annual growth of 7%.

Currently have ISAs to the value of £160k in various trackers which I accumulated over 15 years in ad hoc fashion, which I want to max out every year.

The good news is that **if** you achieve your target annual growth, your maths roughly stacks up, ish, so it's not an outrageously impossibly ambitious plan to end up with £20k a year income from your investments on top of your state pension (which I'm assuming is what you meant when you said "would need an income of £20k from my investments"; grey gym sock above assumed you meant including the state pension money, and that's quite a difference.

My back-of-an-envelope calculation would be:
£160k + 15 year growth at 7% is £440k

Your £300k of new money maxing your annual ISAs going forward each year is only going to be invested on average half the time as the money you already got. So £300k + 7 yr growth at 7% is £480k

Giving £920k. But presumably your 7% was not 7% on top of inflation, so you need to strip out inflation from the £920k to see what it's worth today

3% inflation turns £100 now into £156 in 15 years time. So divide £920k by 1.56 and you have £628k in today's money.

Then when you retire, 4% withdrawal rate (keeping the funds invested) could be possible but isn't very cautious, so maybe 3.5% of the £628k is better: giving you £22k a year against a target of £20k. If you are willing to moderate that downwards in lean years you could be just fine for retirement. Though your state pension won't come in for a long time after your 60th so you'd need to consider whether the £20k is fine at age 60 or if you'll need to burn through a chunk of capital to supplement it.

But as Thrugelmir and others have said, expecting 7% for the next fifteen years straight when markets have already been nicely positive for the last nine, and debt is already incredibly cheap (36 year bull run in bonds)... is probably ambitious. If you rerun the numbers with 6% growth instead of 7, your £920k is only £834k, which after the 3% inflation is only £535k real terms, so a £22k withdrawal rate would be over 4% of the pot rather than merely 3.5%.

And if you're withdrawing 4% a year (or even more in early years while waiting for state pension age) you could run into trouble if the markets have a crash while you continue to withdraw.

To mitigate some of these risks there are a couple of obvious things to do

- plan to increase the £20k/yr of new investments so they stay the same in real terms even if the government doesn't choose to increase the ISA limits accordingly

- do much of your new investment into pensions rather than ISA for the tax relief ; you didn't mention any other existing employer or private pensions, so shouldn't be a problem with lifetime limits. You could move some of the existing ISAs into pension too, especially if there's high rate tax to be saved.

As for the asset allocation - you seem to have the main regions covered, but 30% in bonds, 10% cash and 5% gold will be a drag (as the latter two can't be expected to return any more than inflation long term and bonds don't have anything like the upside potential of equities). The infrastructure could maybe be considered somewhere between equity and bonds, so that's 50% that you haven't got in equities. I think that makes it ambitious to get 7% from here over a decade and a half.

Commercial property is the obvious piece missing from a typical portfolio (unusual to go into gold and infrastructure without stopping there along the way). I assume the equities will include small caps etc rather than just global largecaps and I generally agree with you that a part tracker, part active approach can work.

But with only a 15 year timeline starting from a market high point there is always going to be some (not insignificant) risk of not seeing the returns you've seen in other historic 15 year periods.