Throughout every stage of your life, finding the right balance of investments can be a challenge. When stock markets are volatile, investor sentiment is fragile and economic growth is weak, it can seem even more of a conundrum, particularly if you are near retirement. Achieving the right balance of investments is crucial if you want to enjoy a comfortable old age.
Britons are living longer, and it is now not unreasonable to expect 30 – or even 40 – years of retirement. State pensionable age is likely to continue its rise, forced higher by the massive budget deficit and increased lifespans in the UK. It is wise to start planning early – you shouldn’t wait until you are near retirement before considering your circumstances, so take stock of your situation well in advance.
In order to do this you need ask yourself some questions; When do you want to retire? How much do you need to ensure a comfortable lifestyle? What are your liabilities? What have you saved so far? Consider all your assets that might be able to generate future income for you, in order to determine the maximum income you might be able to achieve.
As you approach retirement, your attitude to risk is likely to change, and effective asset allocation becomes even more important. Higher-risk asset classes, such as equities, tend to perform well over the long term; however, as you near retirement, your portfolio will have less scope to recover from a stock-market decline. Therefore, as you grow older, it makes sense for your portfolio’s asset allocation to evolve with you and you might want to consolidate your gains and shift into assets with a lower risk profile.
A reduced risk profile is likely to lead to a portfolio that focuses less on volatile assets, such as equities, and more on lower-risk asset classes such as bonds and cash. One simple rule of thumb relates to an investor’s age: if you are 25, 25% of your portfolio should be in bonds and cash; if you are 40, 40% of your portfolio should be in bonds and cash. On this basis, by the time you reach the age of 65, your portfolio should have a maximum of 35% invested in higher-risk investments such as equities. At Concept Financial Planning we use risk and time adjusted portfolios which balance the risk reward trade off.
Of course, everyone’s circumstances are different, but proper planning will help you towards the retirement you want. Nevertheless, this is a complex area; expert advice is essential.