My plan for 2020? To retire on £45k a year
Harry Brennan meets an IT consultant who wants to stop working at 58 and continue his travel-loving lifestyle
There are more people aged 65 and over still working full-time than at any point in history, and we are all predicted to live longer than ever before. Men are now expected to live 79.3 years on average, while life expectancy for women has reached 83.2 years, according to the Office for National Statistics. It means everyone has to save more and think harder about funding their retirement before delving into their life savings.
Peter Jordan, 58, who works as a freelance IT consultant in the insurance industry, plans to retire in March. He is leaving the workforce early as he thinks tax rules coming into force in April will make it hard for him to sustain his lifestyle.
A travel lover, he wants an annual income of £45,000 to support himself and his wife, as well as their ventures abroad. The couple – who have lived in India, Nepal and Australia and holidayed in south-east Asia, South America and Africa – have recently bought a house in France, where they plan to spend half of the year.
To supercharge their self-invested pension pot, they plan to move out of the family home and downsize to a smaller property. This, combined with the cash left over from winding down Mr Jordan’s limited company, will leave the soon-to-be pensioners with around £750,000 to invest.
This is on top of additional cash savings and employer pensions worth more than £700,000.
The couple also plan to gift £100,000 apiece to their two adult children, which they want to fund by selling one of their two buy-to-let properties: a student house in
Brighton and a cottage in West
Sussex.
But with an estimated 20 years of retirement to enjoy, and more for his wife, will Mr Jordan’s savings stretch so far? We put it to the experts to find out.
rachel Winter, of Wealth adviser Killick, said:
Mr Jordan already receives an annual income of around £24,000 from his larger rental property, meaning he will require £21,000 income from his investments in order to make up his £45,000 income requirement. If we consider all pensions, the Isas and the house sale proceeds, his holdings will need to yield 1.45pc annually to make up the shortfall, which is easily achievable. This would still be achievable without the rental income, requiring an annual yield of around 3pc.
Big pension providers tend to move clients to lower-risk investments as they grow older, which made sense at the time when buying an annuity was the only option at retirement. Today, however, they should be taking on a little more risk to continue to grow their money over longer lives. This is especially important when a 10-year UK government bond offers a yield of just 0.78pc per year, which is well below the current rate of inflation.
Alternative investments in property or infrastructure offer a third way between higher-return but higher-risk stock market holdings and lower-risk, lower-return fixed interest options. Londonmetric Property, for example, a listed fund that invests in logistics warehouses, offers a decent yield of more than 3pc. Mr Jordan could also look at renewable infrastructure funds such as Greencoat UK Wind.
Dan Mckissock, of planner connor Broadley, said:
Mr Jordan’s attitude to investment risk is low or medium, and he would prefer to sleep easy in retirement. He should buy an annuity, which, although they have fallen out of favour, provide a guaranteed income for life.
His pension funds should provide him with a lifetime annuity of around £13,900 before tax. This is based on the assumption that he first takes the full 25pc tax-free cash entitlement of roughly £185,000 from his available retirement pots. This should put him in a better position to invest some of his available cash to supplement his income and to offset the effects of inflation over the long term.
To allow Mr Jordan to focus on enjoying his retirement, we would suggest a single collective investment fund to provide the remainder of the desired income and continue to grow his savings. He should have greater exposure to defensive assets, such as property, cash and bonds, than to risky equity markets. The fund should have a proven track record of consistent, competitive returns and should not be overly expensive so excessive charges do not hinder performance.
Legal & General’s Multi-index 3 and Vanguard’s Life Strategy 40 funds both offer well-diversified exposure to a range of assets via low-cost tracker funds.