I want to invest for our retirement

12 July 2018

Question by Fiona

I am in the very lucky position of just having received a gift of £800k which I want to invest for our retirement. My husband and I are in our late 40s and aim to retire in around five years. Our other assets (shared with my husband) are: property - c. £1.5m stock and share ISAs - 250k shares - 40k pension - 200k trust - 170k Kids' investments. We plan to give these to them when they are 25 or sooner if they are ready to buy their first property. They are currently 7 and 9. trusts -250k bonds - 250k After tax, our current annual income (from work, not including investment income) is around 70k, but last year we spent around 115 (27 of which went on school fees). I'm trying to reduce our frittering, but we still need to keep some cash accessible to fund some overspend. We have 11 more years of school fees to fund, then hopefully university fees for two after that. So my questions are: - how does this sound as a breakdown between term of investment: cash - 100 short term (2-5 years) - £100 medium term (5-10 years) 250 long term (10-20 years) 350? - would it be crazy to put all the medium and long term sums into the stock market at this time, given it is so high? - I'm thinking of choosing a tracker fund for all or part of the medium/long term investments - do you have recommendations? - what sort of thing should I be considering for the short-term? - is there a good argument for buying gilts or other government bonds to hedge against the stock market? - I've been toying with the idea of buying a small investment property to let in the long term and give a small short-term income. Would it make sense to invest the £350 long term income in this way to protect myself against a stock market crash? What else should I be considering?

Answered by Holly Mackay

Gosh. There’s a lot here!

Firstly I would suggest you see a financial adviser. There’s a lot to unpack and digest and I suspect peace of mind is valuable to you. There’s investment, retirement, trusts, cash and property all rolled up into your questions.

I can share some thoughts.

Rather than jump into the shares or cash question, I think we need to start by thinking about what sort of a life we want. What income we need to support this. And then what time frames and ‘life chapters’ these broadly fall into.

Many advisers offer cashflow modelling services and I think this would help. You have about 5 more years on employment income ahead and an overspend of about £45,000 a year in this period. The Working and School Fees chapter. You’ll then lose employment income and be living off investment income whilst funding school fees. The Retired and School Fees Chapter. So let’s say 6 further years where you’ll need £115,00 a year to support your family (at current burn rates and not including inflation!) And then they’re off to uni (maybe) which will impact your cost base again as you enter the Empty Nester chapter.

So your income needs are quite lumpy and variable. You may also want to add renovations. Holidays. Hobbies.

Once you have mapped out your income needs then you can think about the various ‘buckets’ of cash and savings and investments which will fund these. I think you’re right to split these into timeframes. Cash and cash-based products make sense for the short-term – no point in looking at the stock market for this.

Once you’re looking at more than 5 years then I think it makes sense to consider the stock market yes.

There is no single right time to invest and yes markets are high. But you and your husband could have 50 years ahead of you! So why sit on the sidelines agonising? Markets could fall this year – yes. But they might also climb this year as you sit on the sides and watch. We don’t know. The main thing is that they tend to come back over the long-term so frankly you may as well get on with it with the long-term pot of money.

If you want a tracker fund then I’d suggest you have a look at Vanguard where you can invest directly online at a very low cost and pick a very simple ‘multi asset’ Life Strategy fund. These will blend in a dollop of the bonds or gilts you mention – and so someone is making these decisions and doing all the blending for you. The longer-term the pot of money, the larger the chunk of equities you need. So the LifeStrategy 100 fund could be a good choice for the long-term pot.

Two things you don’t mention which it’s worth thinking about are pensions and ‘equity income’ funds. Pensions should absolutely be a part of your planning and you get tax relief from the Government which boost the coffers. And you guys can afford to set money aside until your mid 50s so it’s a no brainer. You’re still a long way off the maximum ‘Lifetime Allowance’ * so you should be OK.

Secondly equity income funds are collections of shares managed for you which pay quite nice chunky dividends. So you invest in these because you hope they’re going to go up BUT also because they can pay you an income of about 3% a year (rough rates on some good ones today but not guaranteed. Have a fossick about on Hargreaves Lansdown for some info).

For the short-term cash assets it’s a trade off between security of your assets and the interest rate. NS&I for example is as safe as they come (Government backed) but the rates aren’t the highest. But be careful about rate chasing in an age where cyber crime is on the rise. It’s a balance. Savings Champion is a good website with some useful Best Buy tables.

When it comes to the kids, there’s an awfully long time between now and their 25th birthdays so again, just be sure that this money is working hard enough for them now and avoid the common temptation to stick to cash-like stuff because “I don’t want to take any risk with the kids’ money”.

As for an investment property, speaking from experience, these can be a real pain to manage. There’s stamp duty. You’ve lost a lot of the tax perks. And boilers pack up and roofs leak and there’s Council Tax and blah blah. You’re also quite overweight on property already? These can be a good option for some people but almost everybody underestimates the pain the bum factor of buy-to-lets.

A collection of thoughts from me. But I really would suggest seeing a Certified Financial Planner for a spot of cashflow modelling and some advice – you can ask for this as a one-off piece of work rather than signing up to an ongoing fee. For this much money I think the peace of mind that brings is well worth it?

* From April 5th 2020, the Lifetime Allowance rises marginally to £1,073,100.

Answered by

Holly Mackay

Founder and CEO of Boring Money

I’ve worked in investment markets for over 20 years. I started out at Merrill Lynch Investment Management and worked at a few big names before setting up my first business in 2008.