In the final part of our series about investing in retirement, we’re going to discuss how to manage your investments throughout your golden years. In case you missed them, you can also read our top investing tips for the years leading up to retirement and actually switching your portfolio into retirement.
With people living longer, many retirement pots will need to last several decades. In fact, some will end up investing longer in retirement than in their ‘accumulation’ years, where you build up your wealth. So it’s crucial your portfolio is well run. Here are our top five tips for managing your investments in retirement.
1. Take a total return approach to income
For many people, investments provide a significant portion of their retirement income. Therefore it’s natural to focus more on income than growth. Some may only take income from their portfolio’s ‘natural yield’ (equity dividends and bond interest). Although bond yields have been on the rise recently, both equity and bonds yields are low by historical standards, and so could be insufficient for your needs. There are high-yielding investments, but they tend to be riskier, which is the opposite of what most retiree investors want.
We think a ‘total return’ approach to taking income from your investments is best. This is where income is taken from both investments’ yield and growth. Yields fluctuate over time. Supplementing them with some investment growth means your income doesn’t have to go down if yields do, and avoids being forced into riskier higher-yielding investments.
2. Stick to the fundamentals
While your circumstances are different in retirement compared with your working years, the fundamentals of investing don’t change. Areas of the markets will fall in and out of favour, but the time-tested principles are ever-relevant. Investment time horizons in retirement should remain long. Even though you’re likely to be taking regular income, your investments may need to last several decades and long-term performance has a big impact on your income levels in future years.
Your portfolio should stay well-diversified, including a mix of assets such as equities (likely the main growth driver) and bonds (to provide stability), and a blend of funds that work well in different market conditions. Investment costs should also remain an important consideration. All things being equal, lower costs mean more income for you. It can be worth paying more in some cases if the return exceeds the extra costs. That’s why thorough research to identify investments with a premium return potential is also key.
3. Stay disciplined
Staying disciplined is one of the simplest things you can do when investing, but it can also be one of the most difficult. No matter how experienced you are as an investor, it can be tempting to make knee-jerk decisions during turbulent markets. Volatility is part and parcel of investing though. It’s why investors receive higher income and growth than cash-in-the-bank savers over the long term.
Reacting to short-term market movements is usually already too late and you can be taken by surprise by rapid, unexpected recoveries. This can have a detrimental impact to your investment returns, and in turn could harm your retirement income. Often the best thing to do is nothing at all. That doesn’t mean you should always do nothing, but more often than not staying disciplined leads to better outcomes than panicking, chopping and changing.
4. Use your cash buffer
There will almost certainly be times when your investments don’t go to plan during market downturns. Your income needs of course don’t rise and fall with markets though. To sustain your income without having to sell investments that have fallen (known as ‘crystallising’ losses), you can instead use a cash buffer, which we recommend all retiree investors have.
Using your cash buffer gives your investments time to recover from falls while maintaining your income levels. As a rule of thumb, we think it’s sensible to have enough cash to cover your income for three years – more for higher-risk portfolios as they’ll generally fall further and take longer to recover. That should give your investments enough time to recover from most large, sustained market falls. Once they’ve recovered, you can use them to top your buffer back up.
5. Seek professional advice
There are many things to consider when managing your investments during retirement. Making sure they generate enough income for your needs. Ensuring the amount of income you take is sustainable over the long term. Keeping your income ahead of inflation. Having a plan and sticking to it when markets take a turn for the worse. Who wants the stress of all that though? Your retirement should be a time of relaxation and enjoyment. That’s where we come in.
Managing your investment portfolio is arguably even more important during retirement than it is in the lead up to it. For most people, it’s something that’ll need to last for the rest of their life. If you don’t have the knowledge, experience, time or will to manage it all yourself the best thing you can do is seek professional advice. Our qualified and regulated financials advisers are on hand to help you navigate your way through the often complex world of investing for retirement income.