Navigating your retirement journey

Selecting the right investments at the right time can help you make the most of your accumulated wealth.  

We are all living longer. Medical progress, better living conditions and improvements in lifestyle have all contributed to the advanced age that most of us can expect to reach. In the UK, the average now stands at 81 years¹.

After working hard for many years, the prospect of having more time to spend with family and friends, enjoy hobbies or travel the world is attractive. But it can also be a source of worry when thinking about the reality of how these years will be financially supported.

Accumulated wealth is increasingly relied on to provide this long-term income stream, such as withdrawals from a portfolio of investments fund living costs and other expenses. There will always be some uncertainty. We cannot confidently predict how much money we will spend in the future or how long we will need funding for. However, we know we will need money as long as we live.  

This growth is usually achieved by investing in financial markets, which means the level of growth might fluctuate over time. These uncertainties can be summarised as two risks: longevity risk and sequencing risk.

Longevity risk

Longevity risk is the risk of living longer than your portfolio of financial assets and is a key factor in determining what income level should be withdrawn.

Sequencing risk

Sequencing risk refers to the timing of investment returns and is highest at, or shortly after when you stop saving and start withdrawing.

Suppose periods of poor investment performance are experienced around the early years of withdrawal. In that case, this can magnify the negative impact on the overall portfolio value. These withdrawals can make it difficult for the portfolio to recover and fund future income requirements.

How to keep your plan on track

There are four key areas to consider, which your adviser may discuss when selecting an approach that is right for you.

1. Reliable cashflow planning

A key consideration is that you might spend more in the future than you thought you would.

This could be because of an unrealistic initial estimation, an unforeseen change in circumstances, or because of inflation. Inflation erodes the purchasing power of currency over time and affects all investors. Those investors who are relying on their portfolio to provide an income over a longer time frame are particularly impacted by inflation, so it’s important to be mindful of this.

Working with an adviser can help ensure your planned income withdrawals are realistic and achievable. Regular meetings will help ensure that cashflow planning stays on track and that any changes in circumstances can be incorporated into your overall investment plan.

2. Invest. And remain invested.

It can be tempting to consider investing a portfolio in cash to reduce risk, but this is unlikely to keep pace with inflation over the long term or generate enough growth to combat longevity risk.

So, it is important to invest the portfolio in a suitable mix of investments to deliver an appropriate level of return.

Equally important, however, is that the portfolio remains invested for the long term – trying to ‘time the market’ is a strategy that carries with it the risk of missing out on better periods of market performance, which can then have a serious impact on your long-term returns. Most investors are far better at having ‘time in the market’ and working with a wealth manager to help them make sense of the short-term fluctuations, linking matters back to their plan, number and future.

3. Tailor the portfolio allocation

The dual objective of a retirement income portfolio is to generate enough long-term growth to combat longevity risk while also protecting the early years of income withdrawals from sequencing risk.

It can be beneficial to tailor the investment strategy according to these time horizons and use a different mix of investments for the shorter and longer time frames and the level of risk being taken.

Multi-asset investing involves blending different types of investments to improve performance and manage risk. This approach gives you the choice of a diverse range of return-generating investments. Not all investment types behave in the same way at the same time, so it’s important to be able to actively adjust the mix of investments in your portfolio to remain appropriate as the environment changes.

4. Ongoing review and adjustment

It is important to ensure that your income withdrawal targets are realistic based on your portfolio size, return expectations, and risk profile. Your needs will likely change over time, which means that a flexible approach to management is required. Both your objectives and investment strategy should be regularly reviewed with your adviser and adjustments should be made as needed to navigate your specific retirement journey.

Considering how to support your retirement financially can seem daunting, but it doesn’t have to be.

Careful financial planning with your adviser, combined with an appropriate investment management strategy, can help ensure that your requirements are met for the required length of time into the future and reduce the risk of an unexpected outcome.

Sources

1. The World Bank, 2019 - https://data.worldbank.org/indicator/SP.DYN.LE00.IN