Aid and Rachel Rogers-Wright, 37 and 32, have managed to accumulate savings and investments, but if they want to retire early they need to rethink their strategy.
The couple rent a property in Woolwich, south London. Mr. Rogers Wright is a train driver and his wife is his executive assistant. Their combined pre-tax salary is £110,000.
They hope to have a combined pension savings of around £1 million by the time they plan to retire at age 55, around 20 years from now.
Mr Rogers-Wright receives a final salary pension of around £30,000 a year at the age of 65. His wife receives a private pension worth £11,000 from investment company Vanguard and £15,000 from another pension company, as well as a workplace pension. At Legal & General she has investments worth £6,000 and she and her employer contribute her £500 a month.
She also has £20,000 in shares given to her by her previous employer.
The couple have invested £4,000 in premium bonds and some cryptocurrencies, and £15,000 in two equities and shares Isas invested in a Vanguard ETF fund and a global SME fund.
Combined with salary, pension and investments, this is a positive start to their retirement journey. Complicating their ambitions is the possibility of buying a home in a few years. The couple want to buy her £350,000 property around Gravesend in Kent.
James Marston, Financial Planner at Quilter, said:
Mr. Rogers-Wright has 18 years until his planned retirement at age 55, and his wife has 23 years left. This makes it impossible to increase investment over the long term. Their strategy is to spend less and save as much as possible in a workplace pension or retirement fund.
Their total investable assets are now £80,000. If they contributed £2,200 a month and the funds grew at 6% a year for his 18 years, he would end up with a pot of £1.1m.
Mr Rogers-Wright has an after-tax income of £46,430 and his wife £34,996. Their pension contributions cost £26,400 a year, giving them a living allowance of £55,026 a year, which is achievable.
They have a combined income of £110,000 but have few assets and do not own a house. If they buy a home in five years, Mr. Rogers-Wright will be 42 years old.
Assuming he takes out a 25-year mortgage and retires at age 55, he will continue to pay the mortgage for another 12 years, relying 100% on his retirement savings to pay off the mortgage. This will cover your monthly living expenses.
But his pension won’t start paying until he’s 65, leaving him 10 years to fund his retirement. What’s more, if he retires at 55 and stops paying his pension, he could be worth £30,000 a year.
He can increase his contributions to £14,460 a year, which means his income is below the £50,000 high-rate threshold and he doesn’t have to pay 40% income tax.
Couples can use Lifetime Isas to save for a home deposit. As long as they use the funds to buy their first home, the government will give them a 25% bonus of up to £1,000 a year. If both parties save up £4,000 for Lisa, the government will match this up to a maximum of £5,000.
They have invested in stock market funds all over the world. This should give it the greatest opportunity for growth over the next 18 years. The US market has grown an average of 11% over the past 72 years.
They need to find tax-efficient housing for their £20,000 equity. This could be stocks and shares or a pension. Premium bonds are a good emergency savings vehicle, but there are also fixed-rate savings accounts that pay more than 6% a year.
Emma Deuchars, Investment Manager at Bestinvest, said:
The couple’s goals are focused on retirement, but their emergency fund of £4,000 in premium bonds appears to be small. We recommend a cash fund to cover six to 12 months of unexpected expenses.
The sooner a couple adds money to their retirement fund within a tax-free Isa allowance, the longer they have to benefit from compounding interest on their investments.
Maximizing the benefits of long-term compounding is especially important because the gap between a couple’s retirement goals and their existing funds is large.
I suggest they increase the diversification within the fund. Although the largest holding in the existing portfolio is the stock market, I would consider lowering that weight as they are both heavily skewed towards large-cap US stocks and therefore behave very similarly.
Alternatively, you can add geographically specific funds, such as European, UK, Japanese, or Asia Pacific stock market funds, to diversify your investments more widely.
Holding “actively managed” funds alongside existing “passive” holdings within a portfolio offers the potential for long-term gains ahead of the market and provides some protection against stock market declines. You can get it.
Although their time to retirement may be around 20 years, the funds invested to provide a down payment on a home in 5-6 years should be created for the medium term.
Holding bonds is necessary to provide a low risk element and I use tracker funds that hold government bonds. Government bonds are not exposed to the risks that corporate bonds face in uncertain economic conditions.