‘I’m 39 with a £635k portfolio – could I pay off my mortgage and retire by 41?’

As you can see, I have only two index funds into which all the portfolio is divided. I also have about £4,000 in cash.

My mortgage will be left at about £90,000 when I turn 41 in 2025, when my low rate will expire.

I’m hoping the value of my portfolio will be about £700,000 by that time, as I will make some pension contributions.

When I turn 41, I’m also planning to retire. If I pay off the mortgage from my general investment account I’m hoping to be left with around £600,000 in the portfolio. I will then withdraw 3.5pc of £600,000 = £21,000 for 44 years.

Can I keep the same index fund as above, i.e. 100pc equity, and just withdraw 3.5pc of the end balance? In low years I can work easily to make it up, and hopefully the equity will keep up with inflation. Can this ensure there is zero chance of portfolio depletion?

Or should I change the strategy? I know my portfolio is against all the professional advice in terms of diversification, but fortunately it has served me well so far.

Kind regards,

Amit

Victoria says:

You’re still only in your 30s and already thinking about retiring soon – that’s very inspiring, and is clearly something you’ve worked very hard to achieve. With your clever use of tax breaks and index funds, no doubt you are a close follower of the FIRE (financial independence, retire early) movement. And with a £635,000 portfolio while also paying down the mortgage, aged 39, you’re on track to FIRE – but it won’t be as straightforward as you think.

I’d flag a couple of things initially before looking at your portfolio. First, given that you want to pay off your mortgage early with a lump sum when it’s up for renewal in 2025, you may be hit with some early repayment fees.

Inflation is the other big thing to watch out for. If all goes to plan and you have a £600,000 portfolio at retirement, with no mortgage, then taking £21,000 out as income at a sensible 3.5pc withdrawal rate makes sense at today’s prices. I am sure it fits with your cost-of-living forecasts. 

However, £21,000 in two years’ time, due to the effects of inflation, will buy you less than it buys you today. Over 44 years, that sum will have increasingly less buying power. And that’s assuming your spending habits remain the same.

What if you want to move house, or have to pay for emergency repairs, or decide to start a family if you don’t have one already? I don’t know your personal circumstances, but life is full of unexpected twists and turns that can cost a lot of money.

Withdrawing 3.5pc of your pot should, in theory, mean that your portfolio keeps growing, as US shares have returned 6.4pc above the US inflation rate on average since 1900, according to Credit Suisse.

But there’s never any guarantees, and we have no idea what the inflation rate will be in the UK, what the sterling-dollar exchange rate will be, and what market returns will be, as history is only a guide.

Also bear in mind that, based on April 2022 data, the Pensions and Lifetime Savings Association calculates that for a comfortable retirement, you need £530,000 at retirement age to lead a comfortable retirement – and that’s factoring in the state pension. We calculate that if you then build in inflation since last April, you currently need £600,000 at retirement age for a good standard of living. But you will only be 41.

So it’s definitely worth taking a fresh look at your retirement forecasts. You can always go back to work, but that may be a bitter pill to swallow if you thought you were never going to have to set foot in the workplace again – unless absence makes the heart grow fonder.  

Onto your portfolio. You’ve picked two fantastic, low-cost funds. Vanguard US Equity Index is on our Super 60 list of recommended funds. Costing just 0.1pc, it has comfortably beaten the typical active manager in the US since launch, returning 686pc since summer 2009 compared with 536pc for the average US fund.

Vanguard FTSE Global All Cap Index also has a great record, showing that keeping fees down and owning the market rather than trying to outperform it is a winning strategy.

Speaking of fees. While you are clearly cost conscious, given your choice of Vanguard funds, it is worth looking at your choice of investment platform.

I don’t know who you are with, but I can say with certainty that given the size of your pot, your platform fees would be considerably less with interactive investor versus Vanguard, due to ii’s flat fee. All too often, people focus on the ongoing charges without factoring in platform costs, but it can have a considerable impact on your investment pot over the long term, and you have years and years ahead of you – which means years and years of platform fees. So I make no apologies for the ii plug.

However, I’m most concerned that you are too exposed to expensive American shares. Not only is the Vanguard US Equity Index fund exclusively invested in US stocks, but the Vanguard FTSE Global All Cap Index invests around 60pc in the US.

Don’t get me wrong, the US has been a fantastic source of growth, thanks to its booming tech sector over the last decade. But let last year’s “tech wreck” be a reminder to you that past performance does not guarantee future results (please excuse the overused financial disclaimer).

Unfortunately, we can’t see into a crystal ball, but a black swan event in the US is by no means out of the question. That’s why diversification is sacrosanct when it comes to healthy investing, even if it means giving up some short-term gains.

As you’re a passive investment fan, why not add a UK or Japan tracker, such as HSBC Japan index or Fidelity Index UK?

These are some of the cheapest markets globally compared with corporate earnings, which would add some balance to your portfolio. Vanguard’s LifeStrategy range is also worth a look – its multi-asset portfolios take deliberate steps to not be too overweight with US shares, and they can also include bonds, an investment area that is interesting once again due to rising yields.

I’d also suggest you add some income funds to your portfolio now that you are nearing your planned retirement date, assuming you don’t have a rethink on timings. You could consider the Vanguard FTSE All-World High Dividend ETF, which is an inexpensive global tracker comprising around 1,880 large and mid-cap stocks, characterised by higher-than-average dividend yields. Another one to look at, also with low fees, is the Vanguard FTSE UK Equity Income Index, made up of around 100 UK stocks with strong dividends. The funds currently yield 3.4pc and 5pc respectively and distribute income four times a year and twice a year.

While you may sacrifice some capital gains by moving some money into income-focused shares, the benefit is that during poor years for the stock market, you will hopefully still collect a solid dividend income, which will smooth out the “total return” of your portfolio. Choosing distribution fund units means that the income will be paid out to you, which you can then use to help fund your retirement rather than solely relying on selling fund units to raise cash.

I should finish by stressing that I have no desire to pour cold water over your FIRE aspirations. Whether you retire at 41 with the full knowledge that a decadent retirement may be a good few years off yet, a slightly more modest way of life may be every bit as appealing. And as you say, nothing has to be set in stone and you may well decide to go back to work, at least part-time.

But you are a great example that the FIRE concept is absolutely achievable. With careful planning, there is another way. And I’m absolutely inspired.

Victoria is head of investment at interactive investor.  Her columns should not be taken as advice, or as a personal recommendation, but as a starting point for readers to undertake their own further research.