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How do you structure your money in retirement?

Including Financial Independence and Retiring Early (FIRE)
Aminatidi
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How do you structure your money in retirement?

#280028

Postby Aminatidi » January 26th, 2020, 10:36 am

I posted a thread here on how my mum and I were discussing whether or not she needed to stick with an IFA for her "small" £35K investment pot.

viewtopic.php?f=30&t=21474

I've found out a bit more info since and as this isn't something I've any direct experience of I would appreciate any thoughts.

Long story short my mum has around £50K in savings accounts and around £40K across a couple of stocks and shares ISAs.

She has a few pensions and each year she withdraws around £3000 in "cash" from those savings to cover living expenses and she lives a comfortable though not extravagant life and says she usually has some leftover each month.

I'm not about to ask my mum to account for her spending as it's non of my business so those numbers are just a high level with regards to understanding roughly how she runs her money and how it's split up between cash and investments.

My thoughts on the other thread were along the lines of set her up with a multi-asset for the current £40K chunk which is what the IFA has done.

Simply do not touch the investments and leave them to grow (hopefully) and don't treat them as a source of "income" as right now there's no need to do so.

This is pretty much what she does right now though when I was discussing it with her she mentioned she was thinking of buying something that was about £2K and the IFA suggested she withdraw it from the ISA which surprised me as the money is there in the bank so why touch the investment pot at all?

I'm still working so I've no direct experience of this as if I spend money it's typically from salary where there's going to be more coming in.

I'd be really grateful for any feedback on how those of you who are retired approach this kind of thing.

Just to be clear as I know this sort of thing can be delicate I'm not about to try and change the way my mum lives her life or spends her money, but if she no longer uses the IFA (who she speaks to once a year) it seems prudent to check that the way she structures things is normal.

Alaric
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Re: How do you structure your money in retirement?

#280031

Postby Alaric » January 26th, 2020, 10:45 am

Aminatidi wrote:This is pretty much what she does right now though when I was discussing it with her she mentioned she was thinking of buying something that was about £2K and the IFA suggested she withdraw it from the ISA which surprised me as the money is there in the bank so why touch the investment pot at all?



As a matter of general principle, maximising the amounts held under ISA rules has to be sensible. Tax rules can and do change. ISAs should be safer from interference in the absence of a government determined to tax wealth regardless of tax shelters.

staffordian
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Re: How do you structure your money in retirement?

#280036

Postby staffordian » January 26th, 2020, 11:07 am

By investing around £90k in a conservatively chosen selection of investment trusts it should be more than possible to ensure that this delivers £3k in dividends.

These can be paid away directly to a bank account, avoiding anyneed to "cash in" anything.

Aminatidi
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Re: How do you structure your money in retirement?

#280040

Postby Aminatidi » January 26th, 2020, 11:14 am

staffordian wrote:By investing around £90k in a conservatively chosen selection of investment trusts it should be more than possible to ensure that this delivers £3k in dividends.

These can be paid away directly to a bank account, avoiding anyneed to "cash in" anything.


I think as mentioned on the other thread that due to my mum being cautious it's not practical to go out and drop all of it into equities.

It's simply beyond her risk tolerance right now and whilst I'm trying to help her out I'm not about to do anything overnight that would knock her out of her comfort zone.

Perhaps in time once she sees for herself how things work and hopefully appreciates that it's not voodoo to do what is being done now she may be open to other options but I'm not going to push it as it's her money.

There is around £5K that's in the FTSE100 aligned product right now so that would almost certainly be going into something 100% equities with growth potential.

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Re: How do you structure your money in retirement?

#280061

Postby Chrysalis » January 26th, 2020, 12:37 pm

You haven’t said how old your mother is, if she is in good health, etc etc. These things impact on her spending needs and how long she needs her money to last. Also, is she a basic rate taxpayer, or perhaps a non taxpayer based on her pension income? Is she a home owner and mortgage free?
So, she has guaranteed pension income which covers some/most of her spending, and other assets (cash and investments) of about £90k. She is drawing £3000, or a little over 3% per year from that pot. That should be sustainable, but I worry if she has sufficient in savings to cover for example any unexpected expenses on the house, or the purchase of a new car, that kind of thing.

Overall, I’d consider an appropriate asset allocation for the £90k, balancing the need for long term growth to keep up with inflation (depends on her age/life expectancy) and risk tolerance. Let’s say maybe 40-50% equities might be appropriate, or perhaps less. I’d probably have quite a bit of the non equity portion in cash (maybe for her reassurance something like she already has) and the remainder in something like lifestrategy 100 or 80, as appropriate to get the equity portion to around 40% (or as desired).

I’d get all of it into ISA shelters as soon as possible, if she hasn’t used any allowance this year then £20k before April and £20k after April. I suppose the cash doesn’t need to be in an ISA, as she will likely be below the £1000 savings interest allowance, and cash ISA rates can be worse than taxable savings.

That’s what I’d do if I had control of her finances under power of attorney -keep it simple and fairly cautious. If you’re just trying to gently help and advise, then I’d start from where she is and explain what changes might help simplify her life. But really, she hasn’t got a whole lot of money (and I’m guessing her pensions aren’t much if they aren’t covering her expenses) so I think some caution is warranted.

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Re: How do you structure your money in retirement?

#280062

Postby Chrysalis » January 26th, 2020, 12:39 pm

Personally I don’t think she has enough to warrant the expense of an IFA. Very easy to set up something simple with that level of funds.
If you want to simply replicate the asset allocation chosen by the IFA then something like half of it in cash and half in Lifestrategy 60 might be close. Very simple, one stocks and shares ISA probably with Vanguard. Cash can be ISAd if you want or if in danger of paying tax on interest.
Last edited by Chrysalis on January 26th, 2020, 12:44 pm, edited 1 time in total.

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Re: How do you structure your money in retirement?

#280063

Postby FoolishFilFive » January 26th, 2020, 12:40 pm

I think your first instinct is right - put it all into a multi asset fund and pretty much forget about it. I'd suggest vanguard. Given the markets seem high to me, I wouldn't change the proportion in cash. IFAs aren't cheap, so ending that relationship may free up a chunk of money each year - though your mum may find it difficult to offend someone she has known for a while, so best to approach carefully. With more work, you could probably manage the risk rewards a bit better, but I would not leap into that

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Re: How do you structure your money in retirement?

#280068

Postby Aminatidi » January 26th, 2020, 12:55 pm

Chrysalis wrote:You haven’t said how old your mother is, if she is in good health, etc etc. These things impact on her spending needs and how long she needs her money to last. Also, is she a basic rate taxpayer, or perhaps a non taxpayer based on her pension income? Is she a home owner and mortgage free?
So, she has guaranteed pension income which covers some/most of her spending, and other assets (cash and investments) of about £90k. She is drawing £3000, or a little over 3% per year from that pot. That should be sustainable, but I worry if she has sufficient in savings to cover for example any unexpected expenses on the house, or the purchase of a new car, that kind of thing.

Overall, I’d consider an appropriate asset allocation for the £90k, balancing the need for long term growth to keep up with inflation (depends on her age/life expectancy) and risk tolerance. Let’s say maybe 40-50% equities might be appropriate, or perhaps less. I’d probably have quite a bit of the non equity portion in cash (maybe for her reassurance something like she already has) and the remainder in something like lifestrategy 100 or 80, as appropriate to get the equity portion to around 40% (or as desired).

I’d get all of it into ISA shelters as soon as possible, if she hasn’t used any allowance this year then £20k before April and £20k after April. I suppose the cash doesn’t need to be in an ISA, as she will likely be below the £1000 savings interest allowance, and cash ISA rates can be worse than taxable savings.

That’s what I’d do if I had control of her finances under power of attorney -keep it simple and fairly cautious. If you’re just trying to gently help and advise, then I’d start from where she is and explain what changes might help simplify her life. But really, she hasn’t got a whole lot of money (and I’m guessing her pensions aren’t much if they aren’t covering her expenses) so I think some caution is warranted.


Thank you :)

She's late 60's good health home owner mortgage free.

You're quite right that she isn't rich but she lives quite comfortably.

As per the other thread of mine she has come to the view that the IFA isn't required for her "small" pot so I'm looking at what simple options there are.

I'm still drawn to using Vanguard directly and keeping it simple with a LifeStrategy fund and once she (hopefully) gets used to seeing how that works out we can go from there.

My mum is a cautious investor so I have no intention of attempting to get her to take any undue risks with her money so a HYP or £90k in equities is not going to happen.

If I were going with a first instinct it would be to use something like a LifeStrategy 40 and try and encourage her not to have so much sitting around as cash in the bank but the second part may take a little time.

My reason for starting this thread was more around how much people keep in direct cash savings v investments when retired especially if a nervous/cautious investor.

Aminatidi
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Re: How do you structure your money in retirement?

#280070

Postby Aminatidi » January 26th, 2020, 1:00 pm

Chrysalis wrote:Personally I don’t think she has enough to warrant the expense of an IFA. Very easy to set up something simple with that level of funds.
If you want to simply replicate the asset allocation chosen by the IFA then something like half of it in cash and half in Lifestrategy 60 might be close. Very simple, one stocks and shares ISA probably with Vanguard. Cash can be ISAd if you want or if in danger of paying tax on interest.


Thanks and also to FoolishFilFive.

The total fees on the chargeable money that's managed by the IFA are > 2% so she's paying £700/year on a £35K pot.

So by my maths she's already got around 20% of her annual withdrawal covered simply by losing the IFA fees.

I am looking at LifeStrategy and from her views on risk/reward and as per the IFA's own paperwork she's cautious so I'd lean towards LifeStrategy 40 if I was looking at using one single fund for the lot.

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Re: How do you structure your money in retirement?

#280073

Postby TUK020 » January 26th, 2020, 1:12 pm

There are two distinct and different questions here:
- how to structure things from a tax wrapper perspective
- what to invest in (i.e. how risk averse).

Tax wrapper
- keep a cash buffer (2 years worth of spending) in a savings account, which protects against any volatility of income from investments
- investigate the option of SIPP (depending on age etc). You will need to investigate this, but I believe that anyone can get a government tax contribution 25% rebate io SIPP contributions of up to £2800 per year (i.e. get £750 a year from the taxman)
- put the rest into an ISA, pay income from the ISA into the cash buffer. (it will take a couple of years to cycle this into the ISA).

Investment
From an investment perspective, Something like City of London Investment Trust is an example of a low risk equity solution, which has an unbroken record of over 50 years in rising dividends, and pays over 4% yield.
However, if this is too racy, then simply go with the existing multiasset fund.

From the figures mentioned, it should be possible to have a low risk solution that results in no run down of cash savings, and keeping the bulk of the principle invested in an ISA, and accessible in an emergency.

Aminatidi
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Re: How do you structure your money in retirement?

#280084

Postby Aminatidi » January 26th, 2020, 2:05 pm

Thanks that 2 years of spending presumably excludes an "emergency fund" and excludes "income" which isn't at risk of going away i.e. state pension and her DB pensions?

The existing investments are both wrapped so the simple thing seems to be to open an ISA and if she wants to put some money into it do so from this years allowance even if it's just a small amount.

Then transfer the existing investments to her new ISA as part of the de-coupling from the IFA.

That leaves her the rest of this years allowance should she choose to add more cash before April.

She isn't liable to tax but it seems madness not to use ISA wrappers for something so simple.

There isn't enough leftover income to think about stuff like SIPPs unless I've overlooked something.

Any advance on 2 years? :)

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Re: How do you structure your money in retirement?

#280089

Postby JohnB » January 26th, 2020, 2:22 pm

Ask to see her tax return calculation, and check that her dividend income is below £2k, and interest below £1k. If so she won't gain anything from an ISA anyway.

She would gain a little from the SIPP, as the £2880 the government tops up to £3600 applies whatever her income is, so its not a question of "a little left over". But if she's using her full personal allowance now, she will only gain on the 25% tax free, as the rest will be taxed again on withdrawl, so 25% of £720, so not much. The SIPP would not be included for IHT, but unless she's got a very nice house, this doesn't sound an issue anyway.

Go for something simple, as it sounds like she doesn't want to be hands on, and get a Lasting Power of Attourney, its a bit fiddly, but better to do now than nearer when you need it.

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Re: How do you structure your money in retirement?

#280094

Postby Aminatidi » January 26th, 2020, 2:36 pm

As of the IFA visit a few days ago she was and is under any thresholds for any form of tax.

That said it seems sensible to use an ISA allowance as there's absolutely zero downside in doing so.

Agreed she wants simple and so do I.

LPA is already in place which seemed a bit pointless to me but that was her suggestion - don't start me on that one as I cannot believe what solicitors charge :o

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Re: How do you structure your money in retirement?

#280107

Postby Chrysalis » January 26th, 2020, 3:57 pm

You don’t need a solicitor to do a power of attorney. Have you registered it yet? This is best done sooner rather than later.

I personally would keep more than £6k in cash. She has £90k savings, in total, to last for maybe 25 years. (It’s hard to gauge how much or little that is without knowing her essential spending needs and her guaranteed income. Do her pensions at least cover the essentials? Does she need the £3k drawdown for bills or is it for holidays and spoiling grandkids?). It seems to me she has fairly limited capacity to take risk, ie for loss. The main rationale for taking some equity risk is to try to keep growth at least in line with inflation. Bear in mind that we haven’t had a serious pullback on equities for over 10 years, and there will surely be one at some point. If the IFA has been worth anything, have a read of his initial report which should outline a rationale for a particular asset allocation.

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Re: How do you structure your money in retirement?

#280112

Postby Aminatidi » January 26th, 2020, 4:14 pm

Chrysalis wrote:You don’t need a solicitor to do a power of attorney. Have you registered it yet? This is best done sooner rather than later.

I personally would keep more than £6k in cash. She has £90k savings, in total, to last for maybe 25 years. (It’s hard to gauge how much or little that is without knowing her essential spending needs and her guaranteed income. Do her pensions at least cover the essentials? Does she need the £3k drawdown for bills or is it for holidays and spoiling grandkids?). It seems to me she has fairly limited capacity to take risk, ie for loss. The main rationale for taking some equity risk is to try to keep growth at least in line with inflation. Bear in mind that we haven’t had a serious pullback on equities for over 10 years, and there will surely be one at some point. If the IFA has been worth anything, have a read of his initial report which should outline a rationale for a particular asset allocation.


It was done about six month ago so it's in place.

Agreed £6K sounds low but for example if she were to commit an additional £5K or £10K of cash on top of the existing investments that might be sensible.

Or just slowly add a little each month as she hopefully realises it isn't voodoo.

Her income covers essentials I think but the £3k drawdown is her business and I'm not about to pry too much.

She thought she needed an IFA but otherwise she's quite capable of managing her affairs so I'm not about to ask her to account for spending her own money - suffice to say she isn't off sunning herself or buying lots of extravagant gifts but equally she doesn't live hand to mouth and is debt free :)

I did read the report and the thing that shines through is she is cautious which I knew anyway and which I probably inherited going from some of my own threads.

That's why dropping the IFA seems a bit of a no-brainer as it seems blatantly obvious that a balance of cash and a cautious multi-asset for the rest is simple and sensible.

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Re: How do you structure your money in retirement?

#280123

Postby Chrysalis » January 26th, 2020, 5:16 pm

All sounds good, I’m sure you will work out something sensible. It’s wise not to push people to take more risk than they feel ok with, especially when they have limited funds.
And totally understand that you don’t want to know more than is necessary. That’s wise too.

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Re: How do you structure your money in retirement?

#280351

Postby Degsy67 » January 27th, 2020, 5:33 pm

I agree with all the comments around putting the investments inside an ISA over time to protect it from taxation changes. I also agree that DIY is perfectly sensible in the circumstances outlined.

£3k per year from £90k is an annual withdrawal of 3.3% so this is a safe and sustainable rate over a long timescale in my opinion and based around a lot of SWR research for a 60/40 portfolio.

I agree with keeping things simple and all the suggestions around Vanguard LS make sense.

My reason for posting is to add in one alternate approach - a basket of income focused Investment Trusts. A basket of 4 or 5 ITs will generate over 3.3% in dividends per year with payouts roughly quarterly and rising with inflation. This would mean 100% equity exposure but with a long term track record of rising dividends.

I had this exact same situation with my own parents who are very risk averse with their long term savings in cash constantly chasing the best interest rate which was below inflation. It took a number of years to educate my father that he was spending time and effort but his long term savings were being eroded by inflation. He didn’t rely on these savings for income and all that was happening was accruing the interest he was receiving. At the point when he realised that he didn’t actually need to worry about the capital value, just the return he was receiving over the long term beating inflation, we setup iWeb ISAs for Mum and Dad then setup the income IT basket. Over the past 5 years they have achieved returns of about 6.5% of which they’ve withdrawn the equivalent of around 3.5% per year as cash for holidays etc. Dad only focuses on the income received an enjoying spending it. He has learned to ignore the capital value and takes comfort it he fact that he owns the same number of shares at the end of the year as he held at the start.

Just offering an alternate suggestion.

Degsy

Aminatidi
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Re: How do you structure your money in retirement?

#280386

Postby Aminatidi » January 27th, 2020, 6:45 pm

Degsy it's just not her thing :) Rightly or wrongly she would absolutely crap herself if she saw things drop 2.5% in a day like today.

It's noise you know it I know it but you can't change psychology so a HYP or investing in 100% equities just can't and won't happen.

Ditching the IFA fees are one thing but that sort of shift of mentality just can't and won't happen and no way would I try to persuade her to do something that I know would distress her if she thought she was "losing" lots of money.

Christ I'm 2 grand down today and I have a monthly salary coming in but it still smarts :mrgreen:

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Re: How do you structure your money in retirement?

#280431

Postby TheRIT » January 27th, 2020, 9:10 pm

Aminatidi wrote:...
Christ I'm 2 grand down today and I have a monthly salary coming in but it still smarts :mrgreen:


Could be worse, I'm down more than 6 months of expenses.

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Re: How do you structure your money in retirement?

#280450

Postby Aminatidi » January 27th, 2020, 10:40 pm

Apologies, didn't mean to rub it in.

I did ask my mum to make a rough list of outgoings so not to account for every penny but just to get an idea of the costs that don't really change and that aren't optional i.e. heat/power etc.

There seems to be around £500 leftover each month which won't be the actual number as there are incidental costs but it's enough that the general picture is that she's got plenty of income.

I'm reasonably sure that if we could get to a point where there is a new ISA in place we could:

* Start it off with (example) a grand from savings
* Transfer the existing IFA managed investments from their respective ISA's (wrapped of course)
* Aim to build the ISA slowly from both existing savings and some of that leftover monthly income

With the idea being that she isn't having to make any drastic changes but she can hopefully see that the overall trajectory is upwards whilst right now it's money moving between half a dozen savings accounts as my mums way of doing things but the cash is a drag as it's doing nothing.

Fund would be LifeStrategy 40 as 60 doesn't feel appropriate for her level of risk aversion.

Sound reasonable?


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