‘Can my £1mn cash pile fund an early retirement?’

Early retirement is a dream for many, but sometimes it can result from the most challenging of circumstances. When that happens, getting the most out of your money is a must.

Rob is 57, and he and his wife Sarah each earn £30,000 a year. While relatively young, the couple are due a major life change as Sarah has multiple sclerosis, a chronic disease that tends to worsen over time. They plan to retire in June 2025, when Sarah turns 55.

“My wife has MS and her health is deteriorating, hence looking to leave her NHS employment at the age of 55 when she can access some of her pension,” Rob says. “If she leaves before 55, she will not have access to any of her NHS pension until she hits state retirement age.”

Rob describes the NHS pension as “modest”, adding: “I don’t know its value as she has been on at least four different NHS pension schemes. Also, she has worked part-time for the past 15 years.” However, the couple’s other assets are significant. They own a property valued at roughly £350,000 and have sizeable assets elsewhere. Rob has around £87,000 in a pension but £59,000 of this is in cash, with the rest invested across nine small-cap stocks, many of which are favoured by Investors’ Chronicle’s small-cap stockpicker, Simon Thompson.

The couple also use other tax wrappers: Rob and Sarah have £270,000 and £300,000 in cash individual savings accounts (Isas), respectively, with these each generating an average interest rate of 4.2 per cent.

Separately, they have £150,000 and £187,000 in savings accounts that pay an average interest rate of 4.1 per cent. It’s also worth noting that the two should receive the full state pension from the age of 67.

Rob and Sarah have been recycling cash from savings accounts into their Isas each year, but they are having some issues on this front. “Typically, as savings mature, we reinvest at least £20,000 per year into an Isa each,” Rob says. “By next year, however, we’ll need approximately £24,000 to £30,000 a year, so as some savings mature we may merely hold them in a current account and draw down any monies we require for living expenses. Ideally, we would like to be able to live off the interest we are gaining and not trouble any capital too much.”

Like many others, Rob wonders if his portfolio could be working harder. “Ideally, I’d like my pension to do some heavy lifting,” he says. “Online ‘experts’ glibly talk about 8 or 10 per cent returns but fail to mention how to do it. If my pension could generate a safe 5 to 6 per cent return per year for each of the next 10 years, before I hit state pension age, I’d be happy. As our numbers may suggest, my wife and I live comfortable, not extravagant lives.”

Rob started investing four years ago, and, as the substantial cash allocation illustrates, he is fairly risk-averse. He describes himself as “very cautious”, noting of recent losses in his pension: “I hate to see all that red.”

On the subject of any future portfolio activity, Rob would like a fixed-rate, low-risk strategy that gives him a return of at least 5 per cent a year. However, he could also be more opportunistic if the circumstances present themselves, noting that he is “currently waiting on a market crash before investing in an S&P 500 or Dow Jones index tracker”.

NONE OF THE COMMENTARY BELOW SHOULD BE REGARDED AS ADVICE. IT IS GENERAL INFORMATION BASED ON A SNAPSHOT OF THESE INVESTORS’ CIRCUMSTANCES

 

Darius McDermott, managing director, Chelsea Financial Services

The aim to retire young means you have a tricky period ahead before you start receiving state pensions. Sarah’s NHS pension may help with this, but it is not yet clear how much income this will provide. Therefore, rather than waiting on a market crash to start putting cash to work, you must devise a long-term strategy to generate income while preserving (and growing) your savings. The good news is that an impressive savings pot of nearly £1mn, excluding a mortgage-free home, provides a strong foundation.

My first suggestion would be to transfer your remaining savings outside Isas into an Isa to get maximum tax protection. Given Sarah’s health and your overall risk aversion, a cautious investment approach is prudent. Therefore, the high-risk Aim stocks currently held in your pension should be sold and reallocated to less volatile income-generating assets.

Your current cash Isa totalling £570,000 generates an annual income of £23,940 at the current rate of 4.2 per cent. However, the danger of being entirely in cash is that if rates come down, that income will drop considerably. At the same time, bonds and equities could rally, making it costlier to invest later.

A portion of this cash Isa should be allocated to government and investment-grade corporate bond funds. Bonds offer a steady, pre-determined stream of income and, with yields for investment-grade corporate bonds reaching record highs, there is an opportunity to lock in good income for years to come. This, combined with Sarah’s NHS pension, should provide the £24,000 to £30,000 you need to live off.

In the corporate bond space, we like Invesco Corporate Bond (GB00B1W7HZ91) and BlackRock Corporate Bond (GB00B4T5JV79). 

Strategic bond funds, such as Jupiter Strategic Bond (GB00B544HM32) and TwentyFour Dynamic Bond (GB00B57TXN82), are another good starting point for accessing fixed income. These ‘go-anywhere’ bond funds can adapt to the market by being flexible on currency, credit risk and inflation protection.

For stocks, you should avoid investing in specific companies, sticking to funds for their diversification and simplicity. I would suggest a small long-term allocation to broad and core global stock market funds to allow for some capital growth over the longer term. For tapping into global growth, established options such as T Rowe Price Global Focused Growth Equity (GB00BF0S8Y85) and CT Responsible Global Equity (GB0033145045) can help future-proof your portfolio.

Given your risk tolerance, a total stocks allocation of no more than 20 per cent is advisable. Should markets fall, you could take advantage by increasing this allocation slightly. However, a very high allocation to equities is not advisable given your circumstances. 

Investing in an S&P 500 tracker is sensible given the market’s historically strong performance. However, the index is currently more concentrated than it has ever been, and its good performance relies heavily on the success of a select few technology giants.

A complementing actively managed US fund, such as Premier Miton US Opportunities (GB00B6Z0P562), can mitigate this concentration risk – despite having no exposure to any of the S&P 500’s dominating Magnificent Seven, the fund has delivered a total return of 305 per cent over the past decade.

 

Dennis Hall, chartered financial planner for Yellowtail Financial Planning

One of my major frustrations is that risk discussions often focus excessively on ‘volatility’ rather than more comprehensive measures. When assessed over a realistic timeframe, concerns about volatility diminish and the importance of inflation becomes apparent.

Consider a couple in their mid-50s who could live another 30 years. Analysing any rolling 30-year period over the past century shows that although equities are volatile, they compensate with real returns that exceed inflation, a claim that cash cannot make.

Another frustration is the widespread belief that investors can consistently ‘time the market’, despite evidence to the contrary. Peter Lynch, the renowned stock investor, observed: “Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves.”

This brings me to your strategy. I’m not questioning your ability to save money and budget, as you have done a terrific job in that respect. However, holding nearly £1mn in cash rather than a substantial amount in global stocks is a recipe for long-term wealth erosion. Similarly, your approach to stockpicking, index-picking and market timing could be detrimental.

To mitigate the impact of volatility, investors need access to liquid capital, typically held in savings accounts. For a cautious investor, this might mean keeping 10 years’ worth of cash on account, equating to about £300,000 in your case. This allows the remainder to be invested simply in a ‘buy and hold’ global index tracker fund, which can deliver the ‘super easy’ returns often touted by online ‘experts’.

What kind of returns are we talking about? Since 31 December 1987, the MSCI All World index has delivered an annualised 9.55 per cent. Even accounting for fund and platform charges, returns would be in the 8 to 10 per cent range you mention. However, it comes with volatility; over the past decade, annual returns from this index ranged from a low of a 7.4 per cent loss in 2022 to a high of a 25 per cent gain in 2013. The key is ensuring you don’t have to sell in the bad years.

Instead of trying to manage money, your focus should be on managing your thoughts and behaviours. It’s not easy when the usual sources of information we access have a short-term bias, but there is a wealth of evidence to support the long-term case for simple stocks-based investing. You’ve simply got to look in the right places, and that’s not the weekend papers.