The Daily Telegraph - Saturday - Money
‘Will £1.8m cover retirement, homes and uni?’
Skiing fan James Burton wants a peaceful retirement and to set up his children. Jonathan Jones explores the options
Giving your children a healthy house deposit and a good education, but making sure you leave enough for retirement, is a financial aim for many parents. James Burton is no different.
The 46-year- old marketeer lives in Austria with his partner and two 10-year- old children. He also has two adult stepchildren.
He hopes to give all four a £50,000 house deposit and also pay for the education of his two youngest.
“I want to give all the children a start in life, both with their education and deposit for their future homes,” he said. “But after that, they are on their own. I want to retire and be financially independent, spending more time travelling.
“The pension scheme I have is relatively poor and so I need to have my own savings. I want to keep my standard of living, so cannot really afford for my income to drop.”
These are lofty aims for Mr Burton, who formerly lived in Leicestershire. He moved to Austria 20 years ago for work and now earns £ 160,000 a year and manages to save more than £ 50,000. Over time, he has built up investments of £650,000 via a mixture of stocks and stock market funds, and he holds a further £600,000 in cash. He also has a £240,000 pension.
“I know I have too much saved in cash,” he said. “I am in the process of moving some of it to my investments, but have not found anything I want to buy yet.”
He owns his £950,000 home in Austria with no mortgage, but also owns a £280,000 flat back in the UK, which is rented out for £7,000 per year.
Mr Burton plans to fully retire at 65 but reduce his hours from age 60, to continue his hobbies of collecting old cars, skiing and mountain biking. He also plans to travel around Europe, and pay for holidays for the entire family.
Will his current savings stretch and cover all of his demands, and has he invested in the right way? Telegraph Money asks the experts.
Harry Mackie
Financial planner at Progeny Mr Burton works, lives and has investments across a number of countries. To provide consistency in the advice, the suggestions are all based on him being a resident of the UK. He has a number of financial goals.
The first step is to use cash flow modelling to help him plot out his future and allow him to explore a number of scenarios.
He wants to pay for university for two children, while also providing four with a house deposit, so we will assume that he gifts each child £50,000 at age 25, and gives the youngest £ 18,000 per year for three years each to cover fees and living expenses when studying, based on British universities and estimated living costs. He can comfortably make these gifts from his savings.
Mr Burton then has a number of options for his own financial future. Using a cash flow model, we projected that, after investment returns and additional savings are accounted for, Mr Burton can safely meet his current plan. There is even scope for him to retire early.
His current living expenses amount to £53,000 per year, and we assume this carries on in retirement. If his investments and pensions grow by 4pc per year, a long-term average, and his cash receives 1pc interest, he could retire at 60. This is because he has no mortgage left to pay and has already given his children what he promised. He could also supplement his income with the rent from his flat.
We stress tested this model by reducing the assumed investment return down to 3pc per year, and Mr Burton can still meet his goals.
Mr Burton could conceivably retire even earlier at age 55. However, the modelling suggests he would run out of money by the time he turns 95 – although he would still own two properties and one could be sold to cover any shortfall.
Paul Derrien Investment director at Canaccord Genuity Wealth Management
Mr Burton is in a very enviable position, with plenty of surplus cash each month. Cash is the problem in his portfolio though. He has £600,000 in cash and only £650,000 invested, mostly across global tracker funds with some exposure to commodities. There is nothing wrong with this and returns over the past year to 18 months should be good. However, the cash segment of his savings is holding him back. Given his age and current earnings, he can afford to take a lot more risk with his investments.
Mr Burton should invest most of his spare cash in stock markets over time and there are some key themes he might wish to consider adding.
First, there is much talk about a commodity “super cycle” ( an extended period in which commodities trade above their long-term price trend) predicated on investing for a greener future. I do agree with this in principle, but I am not so sure we will see a super cycle. I don’t own gold stocks, but I do like Rio Tinto, Anglo American, Blackrock World Mining and global commodity trackers.
Second, “growth stocks” (companies projected to expand and have a rising share price) are not worth buying compared with “value stocks” ( businesses whose share prices are depressed versus their intrinsic value). In the medium term, the latter will be the most lucrative area to invest in. There has been an obvious shift since the announcement of vaccines, and US bond yields are rising. The British market can be quite value- oriented, so funds such as Fidelity Special Values have seen exceptional recoveries.
Third, technology and healthcare stocks are worth owning and I would buy specific funds for each. Investors should own funds that are equally weighted to each company, rather than owning more of the larger stocks. Polar Capital’s Technology and Healthcare funds would be my starting point.
Ethical investing is also on the up. The amount of money flowing into funds and associated stocks is gathering pace, so Mr Burton should make sure he owns some of the beneficiaries. I am a little concerned there is too much money chasing too few ideas, so he should stick with active managers in this space. Ninety One Global Environment and Impax Environmental Markets are two funds that I would buy.
Finally, he should absolutely ensure that he owns funds that buy small companies from around the world. He has tracker funds that buy the largest stocks, so this would be a natural complement. Vanguard Global Small Cap Index is a simple way to do this.