Most investors will not have enough money saved to fund their retirement as they are stuck in the “old fashioned” cycle of de-risking into bonds when they stop working, which will not provide enough income to fund ever-lengthening lifespans.
This is according to Securities Trust of Scotland’s Mark Whitehead (pictured) , who says this failure to adapt has led to the emergence of the ‘grey zone’ where people will have to continue working after their official retirement date. 
“We need income in retirement,” he explained. “The first stage of preparing for this is your savings lifecycle.
“We’re all saving for our pension funds and that’s the growth stage, where you need to make sure that you maximise the growth potential of your assets. Then, when you come to retirement age, you know that you have to have a large savings pot, and the larger the better because you can draw income from that and use that for your retirement.”
However, the manager said the next stage is where problems are beginning to arise.
Source: Office for National Statistics (ONS)
“What’s happening is that about 30 years ago the average person in the UK was spending around seven years in retirement,” he continued.
“But now because people are living a lot longer due to better medical care in the western world, the average time people spend in retirement is 19 years.
“So, what does that mean? It means that, now when they’re in their retirement they have these 12 years which they have not saved for. So there’s a hole in retirement which we need to fill.”
Whitehead said this trend has wider-reaching implications than the economic struggle of the individual. He argued this translates to greater and more continuous pressure on the government to support more people for longer in retirement, which could push current deficits even higher.
To solve this issue, the manager said that savers have to change their mindset to focus more on the long term, keeping their money in risk assets rather than moving it to bonds on retirement so they can continue reaping the growth benefits of equities.
“You don’t have to worry about your equities going up or down a lot if you have a very long investment cycle,” he added.
“For example, if you have someone in their 40s, it’s now very realistic that they’re going to be working for another 20 years. And then people may retire, but not fully and that’s what this ‘grey zone’ is.
“What we’re saying is basically that the old-fashioned way of looking at it was that once you retire you would have to de-risk and put everything into the very low-risk assets such as government bonds. But the problem now is that you’ve got a longer time in retirement and those assets will not be enough.”
Whitehead said it is vital that young investors just starting out should already begin thinking about how they can start offsetting the retirement deficit caused by lengthening lifespans.
However, while he acknowledged that there is a legitimate case for de-risking as they near retirement, he says it is important they maintain a significant exposure to equities so their portfolio continues to grow.
“Over a 20- to 30-year period, equities outperform bonds,” the manager continued.
“So, if you’re taking that 20-year retirement view, then you should be investing in equities. The old allocation theory was that immediately upon the year of your retirement you put your investments into bonds and live off the income – but spending 19 years in retirement, that won’t work. We still need our investments to be growing for us. We believe that people should be investing longer term into equities.”
Whitehead’s Securities Trust of Scotland uses a bottom-up investment approach to identify high-quality growth companies that can reinvest back into their business. However, he said this doesn’t mean he doesn’t pay attention to macro developments.
“We think about cycles of course and although we are bottom-up, we don’t ignore what’s going on.
“Growth is slowing, not in just one or two countries, but across the board, particularly in the US where a lot of the macro indicators and economic indicators are trending down.
“You have the Federal Reserve looking more dovish, cutting interest rates, and suddenly equity markets are doing really well, so we find it increasingly difficult to try and time our way into different markets on a macro level.
“We want to invest in structural growth stocks where possible. And yes, there will be some cyclicality to that. But we believe that if we find the right companies then that will stand us in good stead to outperform over the long term.”
Performance of trust vs benchmark over 10yrs
Source: FE Analytics
Securities Trust of Scotland has made 266.81 per cent over the past decade compared with 237.83 per cent from its IT Global sector.
It has ongoing charges of 0.9 per cent and is yielding 3.16 per cent. It is on a discount of 0.44 per cent.
Whitehead also co-manages the Legg Mason IF Martin Currie Global Equity Income and the Legg Mason Martin Currie Global Dividend Opportunities funds.