The disruption socially, economically and in markets this year may come at a particularly worrying time for those who are nearing or about to retire. So what should investors do to make the most of their retirement fund now and to ensure its resilience for the years ahead?
It’s likely that the value of many retirement pots will have been hit by recent stock market sell-offs. What is important, therefore, is for you to evaluate your own circumstances and ask yourself some important questions.
- Do you need to draw your pension now and can you defer some until later?
- Should you stay invested?
- How much do you need to live comfortably?
- What pitfalls should you avoid when retiring?
- Is it a good idea to change your risk level preferences?
Utilising cash could be an option
If your pension and other investments have suffered losses recently it might be appropriate to consider using your cash savings and, more generally, exploring how to effectively use cash as part of your finances.
The amount of cash you hold typically varies over time and nearing retirement you may have more in reserve than at other stages in your life – so drawing from this pot might be sensible if you can afford to, as it may help you avoid realising losses from investing.
Where possible, and when your circumstances haven’t changed, we recommend that you stay invested for as long as you initially planned to. Although it may be tempting to try and time markets when they are volatile, investors typically lose out when they pursue this path, as we show here.
Many people who approach retirement won’t need to draw all of their pension fund straight away, so the impact of following your original plan and drawing immediately might not be as big as you might think. If you plan to draw a relatively modest amount each year, for example 5% or less, then as long as you remain invested a well-diversified portfolio should be able to cope with this.
If you need to draw a larger amount, say to pay down your mortgage, then waiting for markets to recover could be the best option. Going forwards it may make sense to segment your pot according to when you need it. You could invest the money you need soonest at a lower level of risk, then higher levels of risk could be chosen for funds that might end up being passed on to your beneficiaries. This helps to match up the time horizon for your retirement fund with the level of risk within your investments.
As we demonstrate below, the long-term average return, after fees, is what matters and small changes in the average net return make a big difference to how long your money could last.
Please note that forward looking models are not a reliable indicator of future performance.
Source: Netwealth, £500,000 invested in a Netwealth risk level 5 pension for 10 years then withdrawals of £2,000 gross per month inflated by 2% per annum for 30 years.
Above we look at the returns of a Netwealth Risk Level 5 pension in a strong (yellow), average (green), and weak (orange) investment environment. In the ‘strong’ scenario where the portfolio achieves 4.4% per annum, the portfolio is worth just under £600,000 after 40 years. The above also shows that in the same ‘strong’ market environment a portfolio that incurred fees of an additional 1% per annum, relative to Netwealth, would have provided a similar outcome to the green line and been extinguished before the end of the 40 year period, assuming gross investment returns were similar.
Securing a comfortable retirement
It’s likely that if you are approaching retirement you will have made suitable provisions but it is nevertheless worthwhile to ensure you are taking the right steps to secure a comfortable retirement.
For example, you should assess your assets and your liabilities and your income versus your expenditure. You should also try and model for the factors you can’t control, such as living for longer than you might expect and the startling impact of inflation if it is overlooked.
To ensure you live comfortably for longer it is also worth noting the common retirement mistakes we see again and again. While some of these errors can have lifelong consequences, with a little forethought they can be preventable – and with a little initiative they can be fixed.
Changing your risk level
If you haven’t done so already, you may need to consider changing your risk level – not because markets have sold off, or because they have rebounded, but because when you are approaching retirement your circumstances are soon to change.
This article shows you the implications of changing your risk level and the effect it could have on your investments, with examples showing how different risk levels may perform over the long term.
Gaining a clearer picture
Recent market falls have highlighted more than ever the importance of having a globally diversified portfolio. Yet even these market movements should be put into perspective with how portfolios have typically recovered in previous downturns.
While many retirees don’t have the luxury of waiting for their portfolios to recover fully before accessing them, this may not be as big an issue as it first appears and there are options to consider. At Netwealth, we offer clients tools that show how short-term performance can be viewed in context with previous events as well as many other visual tools to enable effective planning ahead.
Of course, the options at retirement are complicated and what you may need most is some friendly and impartial advice. Our business was set up to help clients in all circumstances – giving you flexibility, transparency and control – both during lockdown and when conditions are more favourable.
If you want to see how you can potentially improve your circumstances at retirement, please get in touch in the way that suits you best with one of our financial advisers.
Please remember that when investing your capital is at risk.