‘I've saved £1m – how do I invest to get the highest retirement income?'

Telegraph

2 days ago

Would you like Kyle to rate your portfolio? Email [e-mail] with the subject line: 'Rate my portfolio'. Please include a breakdown of your portfolio, your age and what your investing goals are. Full names will not be published.
Dear Kyle,
I'm 52 and have been saving hard for some time.
I've used salary sacrifice to fund my pension, so my taxable pay is around £35,000 per year. The pension is with Scottish Widows, and I have £305,000 in 'Portfolio 2' and £236,000 in 'Portfolio 3' as of April 11.
I have several Isas. One is worth £18,000 (stocks held: BAE Systems, GSK, Rexl, Shell and Unilever), another is worth £10,000 in a Vanguard LifeStrategy 60pc portfolio, and I have £142,000 in an Isa with Fidelity.
Around £90,000 is in physical gold (coins and bars). I also have around £198,000 in cash across four high-interest accounts (paying between 4pc and 43pc). In total, I have around £990,000 in savings, investments and gold.
My home is mortgage-free and valued at £700,000. I have too much in cash and I'm tempted to move more into bonds – gilts and corporate – for a predictable return.
I think I'm close to being able to retire, but would appreciate your thoughts. I should be able to access the Scottish Widows pension at 55, before the April 2028 change to 57. I'm undecided about the tax-free withdrawal.
How do I adjust the portfolio to generate the best cash flow to support a (hopefully) prolonged retirement?
Thanks,
– Jim
Dear Jim,
Your diligence has clearly paid off and you've built up a substantial nest egg, which amounts to around £1m.
With that amount, especially with the mortgage paid off and assuming you qualify for the full state pension, you are comfortably ahead of Pension and Lifetime Savings Association calculations that say a single person retiring today needs a pot of at least £540,000 to £800,000 to live comfortably.
Bear in mind that this is only an illustration, makes a host of assumptions, and is based on the single person buying an annuity.
While keeping your money invested in retirement offers no guarantees in terms of how the investments will perform, a £1m pot earning 4pc a year would generate £40,000, which is higher than your current take-home pay of £35,000.
As a rule of thumb, withdrawing 4pc a year is potentially considered a 'safe' withdrawal rate.
The theory is that by taking this percentage as an income, adjusted annually to account for inflation, retirement pots will potentially last 30 years or more. However, this rule by no means offers cast-iron certainty.
Chief among the problems with this strategy is that, in the absence of a crystal ball, investment performance is impossible to predict. If your portfolio gets off to a bad start, continuing to draw 4pc could mean your pot drains quicker than planned.
That said, 4pc a year isn't an overly aggressive withdrawal rate. It can certainly be a good starting point, as long as you review where you are annually to make sure any withdrawals are sustainable.
Also keep in mind that choosing to remain invested at retirement or opting to take out an annuity is not a binary decision – you can do both. You could look to secure a guaranteed income through an annuity to cover a certain amount of expenditure, and then keep the rest invested to take flexibly.
The path, or paths you choose to go down, will help dictate whether you maintain the current risk levels with your two pension funds. If you are looking to buy an annuity in the next couple of years, it makes sense to be in a pension fund that reduces risk ahead of that happening.
Turning my attention to the investments you have in your biggest Isa account, you are clearly a fan of index funds that provide the return of a particular market. Legal & General's funds dominate, and they are one of the cheapest providers of index funds.
However, it's always worth seeing if you could pay less in fees by comparing fund charges for index funds or exchange-traded funds (ETFs) against other providers that are offering the same exposure to a particular region, part of a market, or investment type.
You have a nice spread of investments, proving plenty of diversification. You've conscientiously gained exposure to different areas, with Legal & General UK Index Trust and Legal & General US Index Trust having broader remits than other trackers held following the fortunes of America's S&P 500 index and our FTSE 100 index.
Your biggest position – Legal & General Global 100 Index Trust – is not for the faint-hearted, with the top four holdings, Apple, Microsoft, Nvidia and Amazon, accounting for 37.5pc of the fund.
However, a 15pc weighting is a sensible position size to keep a lid on risk. Another high-risk holding, Invesco EQQQ Nasdaq 100 ETF, also doesn't dominate your main Isa portfolio, accounting for around 9pc.
When examining performance over the past five years, there is one holding that stands out like a sore thumb, Legal & General All Stocks Gilt Index Trust, which is down -27.8pc. This is due to it investing in bonds with long lifespans, which were hammered as interest rates rose from rock-bottom levels at the end of 2021.
If you are looking for lower-risk options, turn your attention to researching 'money market' funds or consider owning gilts directly. Money market fund yields are normally just above the Bank of England interest rate, which can be really competitive compared with what a savings account might pay.
While you have a well put-together portfolio, my main observation as you enter your golden years is to consider whether to add some income-producing options to better balance your growth-heavy portfolio.
For the UK, one option is Vanguard FTSE UK Equity Income, which consists of UK companies 'that are expected to pay dividends that are generally higher than average'. Therefore, performance and income generation are heavily influenced by the largest companies in the FTSE 100 index that pay a high income.
While you seem to prefer index funds and ETFs, by considering active funds you may find smoother income returns, particularly when it comes to investment trusts, which have the ability to hold back up to 15pc of the income they receive each year in a revenue reserve, giving them an advantage in delivering income to investors.
Two UK options, with 58 years and 42 years of consistent dividends growth, are City of London and Merchants. Both target large UK companies.
For global exposure, Vanguard FTSE All World High Dividend Yield ETF follows the ups and downs of the FTSE All-World High Yield Index, which comprises more than 2,000 large and mid-cap stocks with higher-than-average dividend yields.
It has exposure to stocks listed in developed and emerging markets. Or you could look at Murray International, a global dividend investment trust, with a decent yield of 4.3pc and a 20-year track record of increasing income payouts.
Kyle Caldwell is funds and investment education editor at interactive investor. His columns should not be taken as advice or as a personal recommendation, but as a starting point for readers to undertake their own further research.