Research has found there’s a mismatch between risk and reward when it comes to investing ahead of and during retirement.
The vast majority of over 50s want to maintain their current lifestyle in retirement but are unwilling to invest appropriately to achieve this goal.
A mismatch between low risk appetite and expectations of continuing reward when investing ahead of and during retirement is not a new predicament, and is something that financial advisers can certainly relate to. But number-crunching by The London Institute of Banking and Finance (LIBF) and Seven Investment Management (7IM) shows that the over-50s in particular struggle with investment risk.
A survey of over 2,000 UK adults aged over 50 with assets of more than £50,000 (including property and pensions) found nine in 10 (91 per cent) want to maintain their current lifestyle in retirement, but just over three quarters consider themselves to be either a ‘cautious’ or a ‘balanced’ investor and are therefore unwilling to put their capital into riskier areas in pursuit of higher returns.
Four in 10 (42 per cent) said they try to minimise investment losses, while 36 per cent see themselves as positioned between wealth preservation and wealth creation on the spectrum.
At the other end of the scale, 16 per cent described themselves as ‘fairly adventurous’ and just 6 per cent said they are willing to maximise potential returns.
Those who adopt a cautious stance ahead of retirement run the risk of leaving themselves short at retirement – a point acknowledged by Matthew Yeates, investment manager at 7IM.
Moreover, as Money Observer has previously pointed out, during retirement there’s also a tendency of being too fearful to spend it. In contrast, ahead of the pension freedoms being introduced just over three years ago, various experts feared retirees would splash the cash and run out of money.
‘We are often told that we all need to save more for retirement, which in an ideal world we would. But what is less talked about is the impact of saving smarter. Increasing or maintaining risk as retirement approaches absolutely won’t be for everyone – but nor will reducing risk,’ says Yeates.
Instead of taking risk off the table ahead of retirement, some advisers advocate that a pre- to post-retirement portfolio should broadly speaking have a greater emphasis on income-producing assets. The logic here is that the yield generated from the portfolio should be sufficiently high to cover the majority of the income required.
Another school of thought is to do the opposite: maintain the same level of risk that was in place prior to retirement and resist the urge to switch from growth to income-producing investments. After all, those retiring today could easily live for another 20 or 30 years.
Yeates adds: ‘When you are young, for the first few (possibly many) years of your career, the salary you receive is likely to be much larger than your pension pot and so saving hard can have a much bigger impact on growing the size of your pension. That’s not to say you shouldn’t think about risk early on, but it puts it in context.
'But crucially, as people get older things change. By the time a person is 50 years old, with the impact of compounded investment returns over time, the size of their retirement pot will have a good chance of exceeding their annual salary. In this case, much larger sums of money would need to be saved if you wanted to grow your pension pot by 1 per cent, and this is where even modestly increasing your potential investment returns can have a greater impact.
‘With greater returns also comes the potential for greater loss, but it is worth thinking about the potential implications of even small adjustments in risk.’