Fast approaching retirement? You may be wondering how best to manage and drawdown from your pension during the current economic market.
As you approach your retirement, you’re probably looking forward to having more time to enjoy your international lifestyle, whether that’s pursuing hobbies, travelling or simply spending time with family. Maybe you’ve already started planning for the retirement you always dreamed of – after all, you’ve worked hard to achieve it.
For many people approaching retirement, investments are one of their major sources of income once employment or business income ends. So, it makes sense to prepare your investments so they’re in the best possible position to help you achieve your desired retirement.
Here are seven golden rules to help get your investment portfolio ready for retirement:
Everyone knows the sooner you start to save and invest, the better. The same also goes for getting your investments in order for retirement. Your investments goals, time horizon and levels of risk are all likely to change. Income is probably going to become more of a focus than growth. This means alterations to your portfolio may be needed. Rather than think about something that could have an enormous impact on your lifestyle at the last minute, we think you should start planning and adjusting your portfolio at least 5 years before your retirement date. That way you’re not pinning all your hopes on favourable market conditions at that time.
Although many people focus mainly on investment returns, the level of risk you take is just as important. In fact it’s arguably more important as we can actually control it, whereas returns are subject to the whims of the markets. Many people find themselves less comfortable taking risk as they approach retirement. Taking risk is still important though, as that’s what generates higher levels of income and growth compared to cash in the bank. So it’s important to get the right trade-off between how much income and growth you want from your portfolio and the level of risk you’re willing to take.
Investing in the markets is one of the best ways to grow your wealth and provide income for your retirement. From time to time though markets will deliver a nasty surprise and fall. It’s almost impossible though to know when that’ll happen, how far they’ll fall and how long the recovery will take. That’s why your portfolio should be prepared in advance by including some investments that offer a measure of protection. That way your income and returns will be less volatile, and your portfolio should fall less and recover more quickly.
Although being invested is a great way to keep growing your retirement pot and generate income, there’s still value from having some cash on hand. When markets fall, if you’ve got no cash buffer and you need to sell investments to generate income, you’ll lock in those losses, rather than giving them time to recover. The amount of cash you need depends on your circumstances and the risk profile of your portfolio. As a rule of thumb though, we think it’s prudent for most investors to have around 3 years-worth of expenses in cash.
Traditionally, investors in retirement reduce their stock market exposure and invest more in bonds instead, in some cases their entire portfolio. In years gone you could get a healthy 4% yield from lower-risk investment-grade bonds with some growth on the side. Although they are on the rise, bond yields are still a long way off those halcyon days and aren’t enough for many income-focused investors. Bond’s growth potential is also diminished as bonds rise when interest rates fall, and rates haven’t got much room to go down. We still think bonds play an important role in keeping volatility at bay. As things stand, however, the stock market has both higher dividend yields on offer and more long-term growth potential. That’s why we think equities should still play a key role in retirement portfolios.
Often investors are tempted to go off-piste from their investment plan. Perhaps they’ve heard about the ‘next big thing’ and want a slice of the action, or maybe their returns haven’t gone as expected and so they ramp up the risk scale to try and make up the shortfall. Although of course everyone’s situation is unique and circumstances can change, if your initial plan was robust enough in the first place we think the best thing you can do is to stick to it. In investing there will be times when things don’t work out as planned – markets don’t go up in a straight line. If your portfolio is well diversified, appropriate for your level of risk and you’ve got a sufficient cash buffer, we think this should be enough to keep most investors in good stead.
For most people investing is a journey that will last a lifetime and could be the difference between living the retirement you want and having to cut back. What you do in the lead up to retirement lays the foundation for your investments in the years ahead so could have the biggest impact of all. That’s why it’s so important to get it right. If you’re unsure how to plan your portfolio for retirement, what’s the right level of risk to take, or which are the best investment options to achieve your goals, you should speak to an expert. Even if you’re a confident investor, getting a second opinion or exploring options you may not have considered could give your retirement portfolio a boost.
Skybound Wealth financial advisers can help get your investments retirement ready by carefully considering your personal circumstances and goals. Our dedicated investment team gives you confidence that your portfolio is being looked after by professionals. So you can worry less about your investments and more about what how you’re going to spend the most enjoyable years of your life.
Past performance is not a guide to future returns. Investment in securities involves the risk of loss and the advice herein cannot be construed as a guarantee that future performance will be reflective of past returns.
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