Michael was already in receipt of various pensions and Margaret was drawing her State Pension. They were regularly spending around £300 per month more than their investment and savings portfolio - which included Isas, insurance bonds, premium bonds, savings accounts and unit trusts - was generating in interest and yield return each month.
The couple had a portfolio of £240,000 which was invested in 15 different investment contracts all with different providers, including £42,000 in shares, so it is no surprise that they didn’t really understand their portfolio. Furthermore it didn’t match their attitude to risk. They were seriously concerned about their situation and unsure what to do.
Michael and Margaret were committed church- goers and had a passion for nature. They spent many an hour at their beach hut or bird watching. They had one daughter who lived in Australia with her husband and children. Michael and Margaret had retained an adviser in London where they lived during their working lives, but when they retired to the coast their adviser no longer wanted to work with them due to the distance. He recommended the couple contact me, their local chartered and certified Financial Planner professional, for advice.
The first – and most important - step was to understand how Michael and Margaret wished to live in retirement. What were their goals and dreams? What was of most importance to them? What would they regret not having done if the worst were to happen? It transpired that the couple had planned to save enough money to visit their daughter and grandchildren in Australia in three years time – but this goal was in jeopardy because of their concerns that they were struggling to pay their monthly bills. They needed £20,000 to fund the Australia trip.
Aside from the holiday of a lifetime to Australia, the couple had no aspirations to dramatically change their relatively simple lifestyle. They were active members of their local community and church, enjoying outings with their local walking club. They wanted to continue to partake in these activities, so fundamentally they wished to maintain their current standard of living.
Once I had established the lifestyle that Michael and Margaret wished to live, I created a lifetime cashflow forecast which illustrated that the couple would continue to need an extra £300 income per month to meet their on-going needs. I demonstrated to them that they could withdraw the additional money they required from their portfolio and that, even in the case of a severe market downturn, they would not run out of money.When I discussed estate planning with Michael and Margaret they were not particularly concerned about leaving their investment portfolio to their daughter, but would like her to inherit their house. However when I raised the potential issue of funding long term care and suggested it could cost up to £50,000 per annum with a local care home for each of them, the couple concluded they could fund care home fees from the sale of their house if needs be, which wasvaluedat£400,000.
They had savings and investments of £240,000, so I illustrated that based on our agreed assumptions even if they lived beyond 100 they could cover their monthly shortfall from capital. In fact they could afford to spend substantially more per annum, not the £3,600 they needed currently, assuming low interest rates or capital gains. Michael and Margaret were visibly relieved that this was the case. I then created two further cashflow scenario forecasts to illustrate that should either of them die, the other would still be able to afford to live their desired lifestyle, and have sufficient income to meet their expenditure needs. Margaret would receive a widow’s pension in the event of Michael’s death.
Despite being able to fund their expenditure fully from capital without requiring any real growth, the couple still wanted to ensure inflation didn’t erode the capital value of their savings, which I highlighted as a real risk. They wished to continue to try and maintain their buying power. While being quite cautious Michael and Margaret had always invested in the stock market so were familiar with investing and were keen to continue to do so.
I evaluated the couple’s current portfolio and discovered it consisted of 75 per cent equities and 25 per cent fixed income investments. I illustrated the historical long-term returns and the level of volatility historically experienced with a portfolio with a similar asset allocation to theirs. I explained that historically this asset mix had experienced a level of volatility that they may not be comfortable with and illustrated that they did not need that level of risk to meet their income needs – now or in the future. I explained my investment philosophy of utilising a global diversified mix of index funds which keeps charges to a minimum. They agreed upon a portfolio with an asset allocation that had historically delivered a lower level of volatility – and a lower level of return – than their current investment portfolio; 55 per cent equities, 40 per cent fixed income and 5 per cent global property.Michael and Margaret did not fully appreciate how their various investments were being managed or what they were being charged. They had 15 investment contracts with a number of different providers, which meant it had been incredibly difficult to keep track of their performance and asset mix. The past performance had been varied, with most funds underperforming their benchmarks, illustrating the difficulty of selecting fund managers that were going to outperform the market.
They understood and were comfortable with the level of risk this portfolio carried. All investments could be re-registered in specie on to my preferred low cost wrap platform. In addition to the lower cost structure the wrap delivered, my clients could easily view their portfolio performance at their convenience.
Michael and Margaret hadn’t utilised their cash Isa allowances for that particular year so I moved cash savings from taxable accounts into cash Isas. I also recommended encashing £30,000 worth of Premium Bonds to fund their trip to Australia, which was estimated to cost £20,000, and invested the balance into Isas for a guaranteed tax free return. Finally I transferred all of the cash savings that weren’t held in Isas in to Margaret’s name to benefit from tax free interest, as her only income was the State Pension.
Despite the couple buying in to the investment strategy I recommended one of the biggest challenges was the personal, emotional attachment that Margaret held for a unit trust her late husband (this was her second marriage) had bought for her a number of years previously. I explained that the level of risk being taken was neither necessary nor suitable for her current circumstances or for her future, and once the facts illustrating the historic volatility of the fund were presented to her, she agreed it was not a suitable investment to hold.
In summary I collated all of this information into a financial plan for Michael and Margaret that demonstrated they didn’t have to wait three years to visit their beloved family on the other side of the world - they could afford to withdraw money from their investments to fund the trip now. I gently pointed out that none of us knows whether we will be here in three years to make such a trip so to benefit from their good health and fulfil their dream.
Six months after our first meeting Michael and Margaret made the trip of a lifetime to Australia and spent a month with their daughter and grandchildren. They returned home overflowing with incredible memories of the time spent with their family, and extremely pleased they had been given the confidence that they could in fact afford the trip.
Their investment portfolio is tracking +6% after fees and withdrawals 18 months later. At our annual review Michael and Margaret expressed their happiness at the performance of their investments. They now have total visibility of their portfolio’s performance – they log on regularly to see the portfolio valuation as they now understand how it’s invested, all on one easily accessible platform.
The couple gained a significant amount of confidence in their financial future as a result of the work we did together. They needed someone to give them the OK to spend their hard earned savings, safe in the knowledge that they would not run out of money in years to come. They now have a number of other trips planned, including a visit to a friend in Italy, and feel free from financial constraints.