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How to effectively manage your finances as you near retirement

30 August 2023

Thinking about time as well as asset classes can be a big help, according to one expert.

By Jonathan Jones,

Editor, Trustnet

Knowing where to invest is never easy but is perhaps even more challenging when saving for a life event. Whether it be putting money in a junior ISA or saving for retirement, knowing the end date for your savings can be both a blessing and a curse.

Advisers will commonly suggest investing in equities only if you have a long time horizon, but this can be confusing. If an investor has 10 years ahead of them, most would agree investing in equities is the right way to go. However, if they have five years, it is suggested not to invest in markets.

Yet there is a quandary here. If following this rule, investors may think they need to sell out with five years remaining – but this has only given them five years in the market.

James Batchelor, a chartered financial planner at Progeny, said investors saving towards a particular end date such as retirement should consider their savings in time as well as assets.

“It is not sufficient to simply sell all your equities with 10 years to go and stay in bonds or cash while you are on the retirement glidepath as this represents far too much of a loss of potential returns versus inflation, and particularly given the events of 2023, being a bond investor is no guarantee of capital security,” he said.

“Equally, retaining a high level of equities right up until retirement risks the possibility of an equity market crash punching a big hole in retirement plans. One way to mitigate this is not simply diversifying across asset classes, but across time as well.”

Instead, investors should consider their savings as three distinct buckets for the short term, medium term and long term.

“This is an approach that can be taken both at the point of retirement, prior to retirement and even well before retirement, if desired,” Batchelor noted.

The short-term bucket, he said, should hold roughly three years of disposable income and be invested in safe assets such as cash and government bonds. This is where any cash required in the interim years should come from.

Next is the medium-term portion, where Batchelor suggested a split of 40% equities and 60% bonds, which should grow more but is available as the next source of money should it be needed. Around 10 years of expenditure should be put between the these two.

The last is the long-term part of the portfolio, which should be the most volatile and aim for all-out growth.

“If this part of the portfolio makes money, cash can cascade down from the long-term bucket to the medium-term bucket, and from the medium-term bucket to the short-term bucket,” he said.

“If the long-term portfolio has lost money, the investor can simply sit on their hands, draw on their short-term funds and wait for it to recover.”

Overall, this approach gives a good overall level of growth, whilst ensuring that an investor has enough assets to cover perhaps up to 10 years of expenditure.

David Henry, investment manager at Quilter Cheviot, said he has considered his retirement portfolio already, despite being only 35 years old and with another 25 years to save.

Currently, his entire portfolio is invested in stocks, but he may introduce some further diversification to the portfolio with new contributions as he moves towards retirement.

“I will categorically not be selling all of my stocks as once I retire as I may still have a 30-year time horizon ahead of me and, as we all know, inflation can have a very corrosive effect on the value of one’s capital over that sort of time period,” he said.

“I disagree to an extent with the phrase ‘your time frame is always short’ – people with a 10- or 15-year time frame should be encouraged (risk profile permitting) to invest the majority of their funds into publicly listed stocks because over these sorts of periods stocks have historically had an excellent chance of outperforming cash.”

Even over five years, he argued, markets have a good chance of beating cash, although the results are not always as clear cut.

Overall, he said the strategy should be “inherently personal to your needs” noting that the textbook approach of aligning the percentage of a portfolio invested in equities with 100 minus the saver’s age will not be right for all investors.

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