When you retire, the investment dynamics change

Investing after retirement is quite distinct from accumulating wealth during your working years

After a lifetime of hard work, you’ve successfully built a substantial and comfortable retirement account. Congratulations are in order. You’ve officially entered the golden years of retirement! Now, it’s time to enjoy the fruits of your labour, provided you’ve laid the groundwork for a well-prepared retirement. But investing after retirement is quite distinct from accumulating wealth during your working years.

The approach of steadily building your investment portfolio, benefiting from pound cost averaging and return compounding, worked well during your earning years. A low-maintenance ‘set and forget’ strategy, with occasional rebalancing, might have been all you needed. But when you retire, the investment dynamics change.

Don’t underestimate your lifespan
Entering retirement might bring a sense of accomplishment but can also usher in doubts. You might question whether you’ve amassed enough resources, how to optimise them and what to do if unforeseen circumstances arise.

If you’re transitioning out of work entirely, you may experience a significant shift in perspective. It can be psychologically challenging to watch your net worth decrease after a lifetime of seeing it grow. Planning ahead can alleviate this stress. Begin by defining your financial goals and estimating their costs. Additionally, don’t underestimate your lifespan. The average life expectancy in the UK during 2023 was 81.77 years, but if you’re in good health in your sixties, you are likely to live longer[1].

‘Necessary expenditures’ and ‘desired expenditures’
This will likely involve distinguishing between ‘necessary expenditures’ and ‘desired expenditures’. Compare these projected expenses against your known income sources – state and defined benefits pensions, any annuities due – to determine how much your personal pensions, capital and investments need to generate to cover any deficit.

In your retirement income strategy, you’ll encounter three major risks: inflation, longevity and market volatility. Each requires a unique solution. Inflation silently erodes your spending power annually as prices rise. This has become particularly noticeable recently with the sharp increase in the cost of living after a period of relatively low inflation. However, even minor annual increases can compound into substantial hikes over the two decades or so that the average person spends in retirement.

Two principal courses of action to consider
Market fluctuations are an ever-present uncertainty. While risk-taking can yield rewards over the long term, significant swings in a retirement portfolio’s value can be unsettling and potentially catastrophic if withdrawals coincide with market downswings in the early retirement years.
Regarding retirement, your pension options are not solely about investing. You can take two principal courses of action as you approach this phase of your life. You can either continue investing and withdraw money from your pot as needed, a strategy known as ‘pension drawdown’, or purchase an annuity, an insurance policy ensuring a steady income for life.

Challenging endeavour filled with numerous pitfalls
Pension drawdown provides additional flexibility and the potential for higher returns and increased income from your pension pot. Since your pension fund remains invested, market performance can fluctuate. Purchasing an annuity guarantees you a regular income that will last throughout your lifetime. Moreover, annuity rates have increased over the past year due to the rise in interest rates.

Securing a steady income for 30 or so years can be a challenging endeavour filled with numerous pitfalls when drawing from an investment portfolio; the long-term average return and the sequence of returns matter. Poor performance in the initial years can also be costly, even if followed by good returns.

Pension investment strategy aligned with your needs
While it’s crucial not to take too little investment risk, de-risking a portfolio might not be the best move if you only need to draw modestly on your money and keep most of it invested for long-term returns. However, withdrawing from your pot means you can benefit less from compounding returns.

Ensuring your pension investment strategy aligns with your needs is essential as you approach retirement. Depending on whether you opt for an annuity or a drawdown, you might need to adjust the asset mix in
your portfolio to meet your retirement objectives.

Ready to secure your financial future during retirement?
It’s time to adopt a strategic approach to investing that generates a steady income and ensures the longevity of your retirement fund. Whether drawing down your capital or opting for income-producing assets, the choice is yours. We’ll create a personalised investment plan tailored to your retirement goals. Act now and secure your tomorrow.