'I'm investing £3,000 a month – can I retire at 50?'

Setting ambitious goals for your future creates a strong incentive to save and invest as much as you can. But while retiring relatively young is appealing, amassing enough money to do so comfortably is daunting.

Peter, 29, is not lacking in ambition. He's self-employed in the construction industry and earns around £70,000 a year. He lives very modestly and invests £3,000 a month, almost three-quarters of his net income. His comparatively small £30,000 portfolio should grow quickly.

“I’m hoping to grow my savings to the point where I can use the capital gains to have a high-yield dividend portfolio, retire early and live off the income, ideally by the age of 50 and generate £40,000 per year,” Peter says. “If that doesn’t go to plan, I’d like to use the capital gains for property development instead. Although my goals may be a stretch, I use them as a motivational beacon to aim towards.”

Peter is quite new to investing. “I got into investing in early 2022 with little to no knowledge of the trade, but I’m learning each day as time goes by,” he says. He has since built up a portfolio of 49 single stocks, investment trusts and ETFs, evenly split between an individual savings account (Isa) and a general investment account. He does not use a pension, however, meaning half of his investments will be subject to dividend and capital gains taxes.

He says: "I’m self-employed so no employer contribution to tag along with and also I’d rather be able to have quick access to my money instead of having a company hold my money until I’m in my 50s in a personal pension."

Peter has monthly regular investing set up for 16 holdings, including well-known investment trusts such as UK equity income play Edinburgh Investment Trust (EDIN), Herald Investment Trust (HRI) for global smaller companies and BlackRock World Mining Trust (BRWM). He also invests in various UK large caps, such as Rio Tinto (RIO) and BAE Systems (BA.), and in a few racier plays such as the L&G Artificial Intelligence ETF (AIAG) and small-cap South African metal producer Sylvania Platinum (SLP).

Building a portfolio has been difficult as he is not entirely clear on his risk appetite. He says he is not “phased by big market dips” but does want to exercise some caution. He is happy to invest in stocks, trusts and ETFs, but for now is not keen on bonds. 

He wonders whether he is on the right track and whether investing so much of his income is too aggressive an approach. “I would like an opinion on my strategy and on whether I need to make tweaks to my approach and guidance on the next steps. How do I know when I’ve reached a point where I need to re-evaluate my portfolio?” he asks.

Peter owns his home, which is worth around £200,000, and is paying off his mortgage, with about £53,000 left of debt. He also has £28,000 in Premium Bonds and £16,000 in cash in savings accounts. He is in a civil partnership but manages his finances separately from his partner.

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

Dzmitry Lipski, head of funds research at Interactive Investor, says: 

You should think about your investment mix and how it relates to your situation and needs, such as your goals, age and risk tolerance. Since your key goal is to grow your portfolio, and you are young and have a time horizon of more than 20 years, a high allocation to stocks makes sense. These remain a strong source of expected returns and inflation protection over the longer term.

However, your exposure should be diversified. UK shares look attractive and yield more than 4 per cent, and some home bias is not the end of the world. But your 70 per cent is excessive. You should add more to global and US shares, and consider diversifying to emerging markets, with an allocation of around 10 per cent, which may entail higher risks and volatility but potentially higher returns.

For a core emerging market allocation, we like JPMorgan Emerging Markets (JMG), which provides exposure to quality growth companies in the area, with a bias towards sectors boosted by domestic demand and consumption, rather than commodity prices and currencies. The trust has a well-resourced team, is led by a talented portfolio manager in Austin Forey and deploys a consistent long-term, bottom-up approach. 

We also like Scottish Mortgage (SMT), which you already hold, and F&C Investment Trust (FCIT), which would make a good core holding. Scottish Mortgage is an adventurous and volatile option and has underperformed in the last two years, but your long-term horizon gives you time to tolerate short-term performance swings. You could also keep things simple with a global ETF such as the iShares Core MSCI World ETF (SWDA).

You should rethink your “no bonds” stance, although this will be more relevant once you get closer to your chosen retirement age and need the income and a less aggressive portfolio. Looking at the MSCI PIMFA Private Investor Balanced Index, the average allocation to UK shares should be around 20 per cent, and 20 per cent in government and corporate bonds.

Given the challenging recent years for bonds, valuations and yields look attractive, offering total return potential with less downside risk. Overall, bonds should offer investors diversification from shares, along with stable income and relatively low volatility, especially in periods of economic uncertainty. We like is M&G Global Macro Bond (GB00B78PGS53).

You have a lot of holdings for your portfolio size, including various single stocks. As your portfolio is growing, you can select funds from different asset classes, regions, company sizes and investment styles. Around 10 funds should be sufficient for a well-diversified portfolio and more than 20 funds might be too much.

It would be a good idea to review your holdings and ensure each one is pulling its weight in terms of performance, and that they are sufficiently different from one another. You have several holdings that are worth less than 2 per cent of your portfolio and that you do not intend to add to further via your monthly investing, so it is perhaps worth considering whether they add much value to the overall return.

Ian Futcher, financial planner at Quilter, says:

You have set yourself the ambitious goal of retiring by age 50 with an annual income of £40,000. Your ability to save £3,000 each month is a significant step given the impactful role of compounding. Assuming a 4 per cent annual growth rate and continuous monthly contributions of £3,000, you could accumulate around £1.2mn by the time you turn 50. To sustain your desired annual income of £40,000, you would need to withdraw approximately 3.2 per cent of your savings each year. 

However, this calculation does not account for inflation. If we assume an annual inflation rate of 2 per cent, the real value of your savings would be around £820,000. And if we adjust your income needs for inflation, your funds might depleted between the ages of 71 and 78, exposing you to financial risk. This basic calculation also does not account for significant expenditures or potential market downturns. Overall, to have a £40,000 annual income with today's purchasing power for around 40 years, you would need £1.9mn.

Your strategy also overlooks tax implications and missed benefits. Assuming you use your £20,000 Isa allowance every year and your investments grow by 4 per cent per year by age 50, your Isa would be worth £673,000 and some £546,000 would be in your GIA, subject to capital gains and dividend taxes.

A better approach would be to invest in a pension, which offers protection from CGT and dividend tax and offers an immediate 20 per cent tax relief from the government. Higher-rate taxpayers can claim an additional 20 per cent relief, and depending on how you take your income, you could qualify. Assuming you fully use your Isa and the rest goes into a pension, and both accounts have investment growth of 4 per cent a year, you could end up with pensions worth £683,000 with 20 per cent relief and £819,000 with 40 per cent relief. This would give you a total pot of £1.36mn or £1.49mn. This accounts for no change in your investments, just which account you use.

Yes, of course, a pension cannot be accessed until age 57 and this will likely rise by the time you get there, a drawback for you considering your desired retirement age. But you could always use the Isa first and then the pension when you can. Pensions attract income tax, much like GIAs attract capital gains and dividend tax, but you also can withdraw 25 per cent tax-free.

Another concern is the sustainability of your contributions, roughly 72 per cent of your annual income. This leaves minimal funds for your living expenses. The success of this strategy depends on your continued ability to make these contributions, which could be tricky to maintain, especially if any lifestyle changes knock your saving habits off course. Being self-employed, you should also consider income protection insurance to secure a baseline income in case of long-term illness or inability to work.

The good news is you have started early, which gives you ample time to refine your strategy to achieve realistic goals or adjust them as necessary.