The risk conundrum as you near retirement
investment strategy to a fixed date probably isn’t ideal.
Lifestyling was designed as a fail-safe for those approaching retirement. It may still be the right thing to do but there’s a good chance that it isn’t, so advice should be sought.
Research from Seven Investment Management (7IM), found the strategy of reducing investment risk as retirement approaches may result in millions of people running out of cash towards the end of their lives. 7IM pointed to five main risks that could stop savers from reaching their financial goals – losing capital when investing, not saving enough, outliving these savings, the risk of prices rising faster than the value of the savings, and the risk of a financial plan being spoiled by unex- pected events such as divorce and illness. The firm’s research modelled returns for two investors who each saved an average of around £7,500 a year from the age of 30 to 60 and retired with a pension that could provide an annual income of £22,000 a year. One saver invested in a moderately cautious portfolio targeting a return of four per cent a year; the other took a step up the risk ladder, investing in a balanced portfolio targeting a return of five per cent a year.
At retirement the first had a portfolio worth around £375,000 and the second had £425,000.
The first ran out of money at 86, having withdrawn £22,000 per year, while the balanced investor still had around £275,000 left.
Justin Urquhart Stewart, co-found- er and head of corporate development at 71M, said: “Taking your foot off the gas as retirement approaches is often precisely the wrong thing to do, but millions are in products doing this automatically and probably don’t even know it.
“It might be the right strategy for some people but it absolutely won’t be right for everyone.”
However, Stephen Lowe, group communication director at financial services group Just, cautioned: “As the pension fund grows and retirement nears, the money at stake gets larger and the time to recover from disaster gets smaller, so there remains a strong case for some to shift to a more defensive investment strategy to stop a sudden asset price shock derailing a plan to retire around a certain date.
“People should seek to guarantee the income they need – from state or company or private pensions – up to the point they know they can afford to pay their basic household bills for the rest of their lives.
“Once they have this certainty of income in place, they have complete peace of mind to spend, invest or give away the rest as they see fit. That is true pension freedom.”
Not a straight-forward decision then. Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,
based in Solihull. Email: tilaw@eastcotewealth.co.uk