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Money Pit Stop: I'm an ex-policeman with 80k to invest in retirement, where should I put it - and do I pay off my 30k mortgage?

Looking to retirement: Kevin, 52, wants a medium-risk investment portfolio

Looking to retirement: Kevin, 52, wants a medium-risk investment portfolio

In our series Money Pit Stop, we ask an investing expert to give one of our readers a free portfolio makeover.

Kevin, a 52-year-old policeman who is due to retire later this year, wants to know how best to invest 80,000 at medium risk.

He also asks whether he should pay off 30,000 outstanding on an interest-only mortgage now, or invest that money too for seven years.

I am about to retire from the police and am expecting a lump sum of 200,000 at the end of October this year.

I intend to put 80,000 into an Isa shares account using my wife's and my allowances in October and when the next tax year starts in April 2018.

I would like to have a few good family holidays, buy a new car, have a drive laid and fire place put in, but should I pay off a 30,000 mortgage or invest the money instead for seven years.

I would appreciate your advice on where would be the best place to invest at medium risk.

Kevin, 52, Lancashire

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KEVIN'S SAVINGS AND INVESTMENTS

Risk appetite: Medium

Shares: 2,500 worth of shares in Asos, Good Energy, Johnson Service, Patisserie Holding and Thomas Cook

Savings: 4,000 in offset mortgage account

Mortgage: Interest only mortgage with 30,000 due to be paid off within seven years

Other outstanding bills: 10,000 for solar panel, 4,000 loan

Martin Bamford is a chartered financial planner and chartered wealth manager. He is also managing director of the independent financial planning firm Informed Choice based in Surrey. Martin says:

Kevin has some important financial decisions to make and needs to allocate this capital carefully.

One of the biggest challenges for people entering retirement is rebuilding capital reserves from a lower fixed income; once the cash is gone, it s gone.

Investor profile

Name: Kevin

Location: Lancashire

Occupation: Police officer, due to retire this October

Age: 52

Spending around 90,000 on holidays, a car and some minor home improvements seems excessive given his relatively young age. Kevin should work on the assumption he will live until his 100th birthday and think about spreading any capital expenditure over a longer period of time.

The first 20 years of Kevin s retirement are likely to be the most active and expensive, so it makes sense to spend money on life goals during this phase.

He will also need to bridge an income gap between now and when he starts to receive a state pension, from age 67 based on current rules.

We usually see expenditure reduce for a time after this, during the so-called golden years of retirement, when spending time with family is likely to appeal more than global travel.

Depending on his health in later life, there could be significant expenditure later for care at home or time spent in a residential care home. This is often funded from property wealth and can have implications for leaving an inheritance to children or grandchildren.

Martin Bamford: 'Kevin using his and his wife s Isa allowances this tax year and next is a great way to shelter 80,000 of the pension cash from taxes'

Martin Bamford: 'Kevin using his and his wife s Isa allowances this tax year and next is a great way to shelter 80,000 of the pension cash from taxes'

How should you plan spending?

Any spending decisions should be informed by Kevin s long-term financial plan. Creating a lifetime cash flow forecast, making sensible assumptions about future income, expenditure and price inflation, will allow Kevin to check he is on track to have enough money into the future.

This forecasting can also demonstrate the long-term financial impact of capital expenditure or gifts to family members during the early stage of retirement.

A lifetime cash flow forecast is a way to analyse your future cash position. It feeds income, expenditure, investments and any debts into a software system before applying assumptions about the future and presenting how your financial position might look in each year.

It s also possible to stress test the forecast, to understand the financial impact of a stock market crash or serious health problem.

A financial adviser can create a lifetime cash flow forecast for you. I ve had a look for free online cash flow tools and I m afraid I can t find any here in the UK. However, it s something an individual could do themselves with an Excel spreadsheet, if they felt comfortable with numbers.

Should you pay off your mortgage at retirement?

Kevin s dilemma about repaying the mortgage or investing the money is quite common. With a seven year term and only 30,000 left on the mortgage, there is relatively little benefit to investing this capital.

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Kevin would be best advised to repay the mortgage as soon as he can and enjoy the peace of mind that comes from being debt-free.

If he were to invest the 30,000 instead, he might generate a small surplus at the end of the seven year term, but there is also a chance it could fall in value and require him to dip into his other capital to make up the difference.

He also has 14,000 in debt for the loans on his solar panels and a personal loan. It should be Kevin s goal to enter retirement free of debt and then avoid at all costs taking on more debt in the future.

Debt is a drag on your ability to achieve financial goals and always expensive. With the prospect of rising interest rates in the next year or so, Kevin should repay his debts now and focus on living within his means, preserving his capital for the long-term.

How should you spread out investments?

Kevin using his and his wife s Isa allowances this tax year and next is a great way to shelter 80,000 of the pension cash from taxes.

Investment returns will be free of income tax and capital gains tax, and there is no need to report Isa investments to HM Revenue & Customs through self-assessment, which simplifies their administration.

We recommend that Isa investments are made as soon as the cash becomes available, and then again at the start of the new tax year.

The alternative is to phase the investment and spread it over time. But if you have a well-diversified portfolio, investing in lots of different things, there is less risk from market timing.

Spreading investments over a year or longer can help to reduce any timing risk, but it can also work against you if the markets continue to rise.

It is better to invest and then stay invested for the long-term, than try to place money into investments gradually in case there is a market correction during that time.

Where should a retiree invest at medium risk?

Kevin and his wife should invest in a diversified portfolio, covering the main asset classes of UK and international equities, fixed income – such as government and corporate bonds – and commercial property.

As a young retiree with a medium appetite for risk, Kevin can afford to invest with a relatively high exposure to equities, which tend to fluctuate in value more than other investments.

He already has some experience investing in company shares so understands the risks involved and will hopefully not panic when markets dip, as they often do.

Assuming they don t need to supplement their pension income with an investment income, a portfolio focused on growth could look like the one below.

Source: Informed Choice

Source: Informed Choice

This portfolio is allocated 35 per cent fixed income, 58 per cent equities and 7 per cent property, which suits a medium risk investor with a long time horizon, looking for capital growth.

WHAT IS LASTING POWER OF ATTORNEY?

Power of attorney gives people legal authority to take over decisions about the health and finances of family members or friends if they can't act on their own behalf any longer. Read a guide here.

Leaving aside the financial considerations, retirement is a good prompt for Kevin and his wife to update their wills to make sure these continue to reflect their current wishes.

They should also put in place a Lasting Power of Attorney, covering both property and financial affairs, and health and welfare.

The information provided by our expert is for the purposes of this article and is not personal advice, if you are at all unsure of the suitability of an investment for your circumstances please seek advice.

Nothing in this response constitutes regulated financial advice. Published questions are sometimes edited for brevity or other reasons.

chart created with amCharts | amCharts

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ABOUT THE AUTHOR celebrityrave

Journalist, writer and broadcaster, based in London and Paris, her latest book is Touché: A French Woman's Take on the English. Read more articles from Agnes.

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