Glidepath to retirement
Important information - The value of investments and the income from them can go down as well as up, so you may get back less than you invest.
How to land smoothly
There comes a time in every investor’s life when retirement is no longer a distant point on the horizon but a destination that’s clearly visible on the road ahead.
There’s no fixed age for this realisation. You will know you are approaching it when you suddenly feel less relaxed about the ups and downs of the stock market. Capital preservation starts to seem at least as important as growth and income.
Welcome to the glidepath to retirement.
This is a complicated moment in an investment journey. For the first time in your investing lifetime you may suddenly feel like you need some advice. It’s certainly a good time to start reading up on your options.
A very good starting point is a newish book from two of my former colleagues at the Telegraph, Richard Dyson and Richard Evans. Your Retirement Salary is an excellent, practical guide to generating an income for the rest of your life from the money you have saved to date. Find your copy here.
And that, ultimately, is the challenge facing all of us as we head towards the end of work and the beginning of everything else we want to cram into what we hope will be the many years left to us.
What follows is a sketch of some of the things you need to be thinking about if you are a few years away from retirement. I’ve presented it in the form of four questions you should be asking yourself today:
1. What do I want my retirement to look like?
This is a more complicated question than it used to be. In the old days of widespread final salary pensions, retirement usually meant just that. You stopped work and your employer continued paying you a kind of replacement salary - smaller than the one you got when you were working but guaranteed to last as long as you do. Hello golf, gardening and writing your memoirs - all with the glorious freedom of not having to ever worry about money again. If you missed the final salary boat, that’s not how it will be for you. Sorry.
Increasingly few of us will benefit from this kind of pension now. And for those of us forced to pay ourselves an income out of our savings and investments, a key decision is whether we want, or can afford, to stop abruptly like this. For many of us we will be considering the option of carrying on working a little bit, or quite a lot, to supplement the investment income we can safely earn from our pension pot.
Every pound we earn from part-time work is, after all, a pound that we don’t need to withdraw from our savings, and which can then continue to grow in the background. So, there’s a clear financial advantage to a phased retirement. But there might also be a mental health benefit, too. I’ve seen too many recently-retired men (usually men) looking a bit lost and lacking in purpose.
2. Can I afford to retire?
This is related to the answer you gave to the first question, of course. There are four sub-questions to which you need to have at least a tentative answer: how much do I need to live the way I want to; how much have I already got; what other sources of income will I have on top of my savings; and how much income can I safely take from my pot?
There’s no fixed answer to how much you need, of course. It depends on lots of different factors that are unique to you. Do you like eating out? Do you want several holidays a year? Are you happy driving that battered but reliable old Volvo estate around? To make a start on answering these questions, you should take a look at our retirement calculator.
How much you have already got is pretty simple to monitor, but it may be complicated by having your money spread around several different pots. You don’t have to bring it all together in one place to manage your retirement income, but my guess is that you will find it easier to do so. Your other sources of income should be pretty simple to work out too. You can get a forecast of your state pension here. Inheritance may be a factor here too.
The final question is much more complicated and accounts for the lion’s share of Your Retirement Salary. A good rule of thumb is to not take out more than around 4-5%1 of the total value of your savings in any one year. That’s because this can reasonably be taken as natural income - that is to say you can remove this from your pot each year without depleting the capital. This conventional wisdom will change alongside prevailing rates of dividend pay-out, but it is a reasonable starting point.
3. DIY, do it with me or do it for me?
Another consequence of the recent shift in responsibility from employers and the state to the individual is the need to be honest with yourself about just how clued-up about or even just how interested you are in the whole subject of managing your retirement income.
For some, investment is a fascinating subject and something they are happy to carve out time for from their busy retirement schedule. For others, it’s scary or boring or a bit of both. This is a good time to be really candid with yourself. Also, be clear about how you will feel if and when things don’t go as well as you hope in the markets - can you live with that uncertainty on your own, or do you want someone to turn to (or even to blame!).
If you really pine for the certainty of a final salary pension, you still have the option of re-creating that guaranteed income by purchasing an annuity. Bear in mind, though, that the income these offer is pretty low in today’s environment of rock-bottom interest rates. Even more so if you want to make sure a surviving spouse has an income to live on after you go, or you want to offset the effects of inflation.
The good news is that Fidelity can help you whether it’s DIY, do it with me or do it for me. Our investment finder is the front door to thousands of different investment options - funds, investment trusts, ETFs and shares. The Select 50 list of our preferred funds can provide a helping hand to more confident investors. Our PathFinder tool will help you find a managed income or growth solution at a risk level that suits your appetite. If you want guidance or advice on your retirement income, and are aged 55 or over, both are available from our experts at Fidelity Retirement Service. Why not have a preliminary conversation to discuss your options? You can also get free, impartial guidance to help you understand your options at retirement online from the Government’s Pension Wise service. You can access the guidance online at www.pensionwise.gov.uk or over the telephone on 0800 138 3944.
If you have accumulated a larger portfolio, you might also be interested in the Fidelity Wealth service.
4. How can I prepare my portfolio for retirement?
On the grounds that you probably won’t be thinking about retirement if you haven’t already built up a retirement pot, a key question that you will be asking yourself at this point is whether your current investments are doing the job they should be. Again, this is a more complicated question than it used to be.
In the old days, when you were pretty much obliged to use your pension savings to buy an annuity, retirement was a cut-off. The years leading up to retirement were largely focused on protecting your capital to make sure you had the maximum amount available to buy your fixed income for life. Avoiding market losses in the final few months of your working life was key.
Pension freedoms in 2015 changed all of that and now retirement is no longer a watershed moment but a milestone on a journey that might last for another 20 or 30 years with any luck. This completely changes how you should think about your investments on the glidepath to stopping work.
As I said at the top of this article, you know you are on the glidepath because you are increasingly attuned to the ups and downs of the market. That’s only natural because you will soon no longer be in a position to make good any shortfalls by investing more money out of your salary. What’s different now, however, is the fact that you are also investing with an eye on generating growth and beating inflation over a multi-year period, just like someone investing in their 20s or 30s.
This calls for a much more diversified portfolio than might have been the recommendation a decade ago. A mixture of growth, income and capital preservation assets will see you through a hopefully long, but definitely uncertain, retirement.
So, a few key questions to ask yourself as retirement appears on your radar. It might sound a little daunting. There’s a longish list of things to put in place in the next few years. But isn’t it exciting?
1 Fidelity International June 2020 Withdrawal Rate tool
Important information - Withdrawals from a pension product are not normally possible until age 55. Tax treatment depends on individual circumstances and all tax rules may change in the future. This information and our guidance tools are not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser. Investors should note that the views expressed may no longer be current and may have already been acted upon.
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