Janine Menasakanian explains what you need to consider when it comes to investing when retired.
Investing in retirement: tips for securing your financial future
The 100-year life is upon us. It’s no longer the stuff of myth or legend. But while there’s much talk about us having multiple careers, working longer and retiring later, we still need to make a meaningful difference to how we fund these longer lives and think harder about our saving strategy. The traditional financial rhetoric tends to describe moving from growing our cash to investing for income, but this might not work for our century-long lives – or at least the transition should happen later. So here are my five tips on investing for retirement and making our cash work as hard as possible, for as long as possible.
Know how much you need
Understanding the income you need for your ideal retirement is essential to your investment strategy. Regardless of whether you put your savings into shares (equities) or bonds, or even spread your investments to include other different asset types, you’ll need to determine roughly how much you need to access each year from your portfolio – that is the total amount you are looking to build.
It’s important that you’ve got enough to provide for that big holiday, to help your grandchildren with university or onto the housing ladder, but you also need to be able to create headroom in case you change your mind, you encounter unplanned expenses or you don’t want to touch your pension pot. If you don’t take the time to understand your needs and goals you may run the risk of running out money, while being too conservative could mean the plans you have won’t materialise.
Goals, goals, goals
If you’ve invested money over the years, you’ll likely have focused on funds and assets that generate the best returns. Growing your fund is what matters when you’re building your nest egg and you might have even measured your investments against an index or market. Retirement, on the other hand, may well warrant a change in approach.
I’m sure many of us would say that quality, not frugality, of life is an important part of retirement. Considering a goals-based approach, rather than focusing too much on having the best returns, might better help you to understand whether your investments are delivering enough for the life you plan to lead or not. After all, if your income in retirement is for living life to the full, returns may no longer be your priority.
But it’s here that the notion of our 100-year lives creeps in again – retirement is just not what it used to be. While we may be ready to retire and stop working, our retirement could well be as long, or almost as long, as the time we spent earning. That’s a lengthy period, so we may want to extend the time we spend investing for growth to account for the fact that our earning power won’t be extended and we’re living for longer. What’s more, we can’t predict what markets will do, and we may well miss out on returns that could help our pot stretch a little further.
Don’t make retirement too taxing
What sources of income you choose to draw on in later life can have an impact on the tax bill you’ll face in retirement, which may in turn affect whether or not your savings last the duration.
If you’re accessing money from a pension you’ve saved over the years, it’s important that you understand the tax implications of drawing on those savings. You can normally take up to 25 per cent of a pension pot tax free, but the remaining 75 per cent is taxable, even if you’ve moved your pension into income drawdown.
If you do need to take your investments as an income, consider spreading the withdrawals you make over several years and maximising the benefits of your personal income tax allowance. If you’ve invested a larger amount that is generating sufficient growth, you might even be able to simply access the income from dividends and interest.
In addition to any personal or workplace pension scheme savings you have, it’s also worth considering investing in a stocks and shares ISA before retirement and combing a pension and ISA to make the most of the tax breaks available to you. ISAs are tax-efficient way of building your nest egg, because you’re not charged income or capital gains tax (although this depends on your personal tax situation). You can also access the cash without having to draw on your pension and take your money out of the market at any time.
Ultimately, the amount of tax you’ll have to pay in retirement depends greatly on your personal circumstances. Taking advantage of good guidance can make a difference. There is plenty of support available through the Money Advice Service or you could speak to a financial adviser. At Legal & General, we have a substantial hub of guidance and tips-based content, dubbed the Legal & General Academy, which may well have what you’re looking for.
Equities still have a role
The 100-year life, by virtue of its length, means you’re more likely to be hit by changes in living costs. For example, you might have set up your investments to pay a regular income month to month, but over time as living costs rise and inflation hits, your purchasing power could fall.
One way some investors are seeking to balance the impact of inflation on their retirement income is by increasingly involving equities in their long-term retirement investment strategy. By including more shares in your investment mix, you’ll be able to take advantage of the potentially higher returns that equity investing can offer. However, shifting your retirement income plan to involve these assets will also increase your exposure to market movements, so ask yourself whether you’re happy to take on risk and consider your capacity for loss – that’s the amount of potential loss to your savings that you’re able to bear.
The worst action is no action
Retirement is different for everyone, but there are also big differences between your lifestyle in your 60s and your needs in your 80s.
Make sure your retirement income continues to meet your needs by keeping tabs on the progress of your investments and make any adjustments to your portfolio where necessary. This could include rebalancing your investments and reducing or increasing your exposure to different asset types. For example, if you’re after more certainty, you might want to think about spreading your investments across different asset types and including fixed income (bonds) investments in your portfolio. Alternatively, if you want to put yourself in a position to benefit from potential market growth, you might consider increasing your exposure to shares and increase the risk you’re willing to take.
Above all, the worst mistake you can make is to do nothing. Whether you’re keeping up with inflation and have enough to lead the life you want, or if you need to revisit your investments and adjust accordingly, it’s much better to know where you stand with your finances rather than hoping for the best and missing out on the potential returns that investing can bring.
Please remember that the value of your investment and any income from it is not guaranteed, and can fall as well as rise. You may get back less than you invest.