19/06/18Balancing investment risk in the years leading up to retirement
After working hard for many years and diligently saving, it is not surprising that many people begin to reign in the control they have over their capital as retirement age approaches.
For instance, research from Retirement Advantage shows that, among those due to retire within 10-15 years:
- Around two fifths (39%) do not want their retirement savings to be exposed to any risk at all
- The amount of people who are willing to take reasonable risks, if they feel confident about the returns, has fallen from 28% to just 17% over 12 months
- Almost half (45%) would place certainty as their top priority regarding their retirement income
- Being able to access savings instantly is now a priority for 18% of over-50s, 6% more than a year ago
Reasons for restricting risk
Given the recent stock market wobbles and ongoing uncertainty, such as the ongoing effects of Brexit, it is hardly news that people are wary about irreparable damage being done to their savings and investments.
Often, investments are more ideally suited to achieving long-term objectives, while cash is king when reaching short-term goals. This is due to the nature of investments and the potential for the value to fall as well as rise. A longer timeline gives them more time to generate an overall return, while smoothing out fluctuations, which are a natural part of investing.
Previously, most people would choose to purchase an Annuity when they reached retirement age, which meant that they would need their retirement fund to be as healthy as possible. That meant that, as the time left until retirement grew shorter, risk needed to be reduced.
However, with the introduction of Pension Freedoms and the increase in Drawdown options, more and more pensions are remaining invested throughout retirement, extending the amount of time available for growth.
The risks associated with how you handle your retirement savings:
You might think that, if you remove the possibility of losing money to falling investments, your retirement income will be completely safe. However, that is not true, as all methods of handling your capital will bring potential disadvantages, such as:
As mentioned, savings held in Stocks and Shares accounts is always at risk of losing value due to market wobbles, or crashes. However, the way your investments are managed will go a long way toward just how likely you are to experience losses. While risk can never be fully removed, choosing lower-risk funds can be beneficial for those who are anxious about the safety of their money.
All banks and building societies are covered by the Financial Services Compensation Scheme (FSCS), which provides security on savings of up to £85,000. That means that, if your provider goes out of business, you will not lose the money in your account.
Unfortunately, due to inflation, and a lack of competitive interest rates, Cash savings will lose value in real terms and will likely have a decreased buying power when you come to use it than it did when you originally deposited it.
Storing cash at home
One of the savings methods which brings people the most comfort, is keeping their money at home. However, whether it’s in your mattress, sock drawer or under the floorboards, your savings are at risk of:
- Devaluation due to inflation
- Theft, which is not covered by the FSCS
- Damage; due to being eaten by moths and other pests!
Finding the middle ground
While it is not possible to remove the risk of losing money or seeing the buying power of your savings fall over time, there are ways of increasing your confidence and the control you have over your retirement savings.
The most important part of this is understanding the different levels of risk and how they relate to the potential returns you could see on your retirement savings.
Fortunately, a financial adviser or planner will be able to talk you through the ins and outs of retirement savings, investments and how to find the right level of risk necessary to meet your goals. By ensuring that the risk level works for you, your planner or adviser will ensure that your money is not in any more danger than it needs to be and that you are able to both understand and control your retirement savings effectively.
To talk about this in more detail, feel free to get in touch with us.