Worried about markets when you retire? Remember these 4 important lessons
We get asked a lot about market volatility – especially by clients who are getting close to retirement.
If markets are falling, or generally being quite unpredictable, you might worry that there’s not enough time to recover any losses. Well, there’s no need to panic! There are no guarantees in investing, but if you’re worried how market activity could affect your retirement, we hope these lessons give you some reassurance:
Lesson 1: You may have longer left than you think
Investing is for the long term.
But how long exactly? The idea of your life expectancy being ‘3 score and 10’ (‘score’ meaning twenty, so threescore (3x20) and ten would be seventy years) is long gone. These days, many of us can expect to live comfortably into our eighties or nineties. According to the Office for National Statistics, a woman turning 66 today has an average life expectancy of 87. There’s a one in 4 chance they’ll live to 94 (and 1 in 10, to 98). A man’s life expectancy is only slightly lower.
This means two things: Whatever money you’ve got needs to last another 20 years or more. However, much more positively, you’ve also got 20 years of potential growth left in your investment portfolio. As you no longer have to buy an annuity when you retire, you can remain invested and profit from that growth.
Even if you only had cash savings at the point you retired and this is your first foray into investment, there’s still a huge benefit to considering your options. It’s never too early to start investing.
Lesson 2: It’s time in the market that matters
Some people are concerned about buying at the top of the market and watching their investment drop in value. With a long-term mindset, that decision to buy a stock when it’s more expensive doesn’t matter as much. That’s because the long-term trend tends to be positive - on each occasion the new peak exceeds the last one.
Look back over the long history of financial markets (below) we can see there are numerous peaks and troughs. After each big drop, for example after Covid or the financial crisis, markets have rebounded.
The saying goes “it’s not timing the market, it’s time in the market.” Staying invested also allows you to benefit from compounding – magnifying your gains from reinvesting returns you receive on your investment.
But what about when the stock price is falling? Panic-selling to protect from further damage can end up ‘crystalising’ those losses – there’s no possibility of getting them back if the stock rises again. The key point to remember is, if you sell to avoid the worst days, you’re very likely to miss the best days as well.
Lesson 3: Diversify, diversify, diversify
Staying invested doesn’t just mean putting your money in and hoping for the best. Spreading your risk can help you build a portfolio to hopefully prosper through almost all economic climates.
Diversification means thinking about asset allocation – how much money you should put into equities, bonds, or other asset classes like real estate; getting a good blend of sectors, such as technology or healthcare stocks; and looking at different regions, including the US, Europe, and emerging markets.
The point is, by assembling a group of companies that don’t all behave the same way, you can try to balance out any big fluctuations and help grow your wealth.
Lesson 4: Get your risk levels right
It’s important that when thinking about the long term you select the right level of risk for you. Take too much risk, you could lose money you can’t afford to. Too little, and you might not achieve your long-term goals.
Even if you’re only just entering the investment market as you retire, that doesn’t mean you automatically have to be ultra cautious.
To show how this works, we’ve taken a hypothetical investor ‘Mr Test’, who’s retiring aged 65, drawing down £416 per month from a £100,000 defined contribution pension scheme.
We’ve applied different levels of risk to see how long his savings will last.
In the lowest-risk scenario, with all his money in cash, Mr Test’s savings run out when he reaches 81. However, with some money invested in bonds and equities his life savings can go further. In our highest-risk category, they could in theory last until he turns 97.
It’s important to remember that each set of circumstances is different and past performance does not guarantee future returns. If you want to discuss about your own cash flow, please speak to us.
Our personalised approach
With many of us living longer, healthier lives, our money needs to work harder to keep up.
At Bow FS, we’re constantly looking at where we can make tweaks, pull levers, and get your money to work as hard as possible, to get the result you need to take you long into retirement.
And it’s never too late for us to do this! So whether you’re just starting to think about investing, or you’re fast approaching retirement, please get in touch to find out how we can help.