We previously wrote about getting your investments ready for retirement. If you missed it you can read it here. Let’s move on now to actually shifting your portfolio from the ‘accumulation’ stage where you built up your investments, to the ‘decumulation’ stage where you start taking an income.
Although some things don’t change, like a focus on diversification, keeping investment costs low and making sure your investments have been thoroughly researched, there are of course different things to consider. So here are our top 6 tips to get your retirement portfolio off to the best possible start.
1. Switch In Stages
It’s a big change, moving your portfolio from one focused on building up to retirement to one providing you with an income. No-one knows, however, what markets will be doing when you make the switch. There’s no guarantee of favourable market conditions when you retire. That’s why we think it’s prudent to move your portfolio into ‘retirement mode’ in stages. That could be, for example, switching a fifth of your portfolio each year over the five years before you give up working. By spreading it out rather than doing all in at once, you reduce the risk of changing your portfolio right in the middle of market turbulence.
2. Stay Focused On The Long Term
With people living longer than ever before many retirements now last for several decades. So while some people feel retirement signals the winding down of their investments, in reality you may still need to look after them for another 20 to 30 years or more. Many people actually end up investing for longer in retirement than pre-retirement.
Although it’s natural to focus on the short-term to make sure you’re getting the income you need from your investments, keep in mind the long-term performance of your portfolio too. After all, your long-term returns determine how much income you’ll be able to sustainably withdraw in the years ahead.
3. Have Realistic Income Expectations
Although you may seek a certain level of income from your investments, make sure it’s achievable given the risk level you’re prepared to take. Sometimes we come across a request for a high-yield portfolio – normally associated with higher-risk investments – using a low-risk approach. Other times an income figure someone has in their mind might be way off current market yields.
A 5% annual income yield may not sound too much to ask, but global stock and bond market yields are currently not even half that. Withdrawing 4-5% of your portfolio each year could be sustainable, however, if you don’t only focus on the income generated by your investments (from stock dividends and bond coupons), which leads us onto to the next tip.
4. Stay Focused On Growth
Many people in retirement naturally reduce their focus on investment growth, and instead pay more attention to income. That doesn’t mean you should forget about growth though. Far from it. While they’re no longer at rock bottom levels, equity and bonds yields are still currently low by historical standards. That means you may need to withdraw partially from your investment capital to achieve your desired level of income. You’ll therefore need some growth if you want to maintain the value of your portfolio.
To safeguard your purchasing power, the amount you withdraw as income will also need to rise in line with inflation. Therefore you’ll also need some portfolio growth the make sure the increasing withdrawals remain sustainable.
5. Determine Your Spending Currency
A common question we receive from internationally-mobile clients is ‘what currency should I invest in?’ As a rule of thumb, we think it’s wise to invest in the currency you’ll be spending your investments in during retirement. If that involves changing your portfolio’s currency, doing it in stages is again the best way to go in our view.
Knowing which way currencies will swing from one period to the next is almost impossible, and therefore so too is knowing when the best time is to switch. Currencies also have no obligation to reach a certain level just because you want them to. Delaying until a certain rate is hit means you could be waiting a long time.
6. Maximise Your Tax-Efficiency
Even though you may have paid your fair share of taxes while you were working, for most people taxes don’t end in retirement. Many countries, however, provide tax-free allowances when taking pension income. Tax rules vary from country to country and can be complicated, so they’re often not well understood. That’s why some people miss out on reducing their tax bill or potentially even avoiding taxes altogether. Even if you are aware of tax-free allowances, making the most of them isn’t always straightforward, and can require careful planning. Getting it right means you could pay less tax and therefore give your retirement income a boost.
It's really important your investments get off to the best possible start at retirement. If something goes wrong or you miss opportunities at the beginning because you haven’t planned properly, it could impact your income for the rest of your retirement. Taking professional financial advice can help you avoid potential pitfalls and get the most out of your pensions and savings. Contact your Skybound Wealth adviser or nearest Skybound Wealth office so we can support you and your wealth as you begin your golden years.