Six considerations if you’re nearing retirement
Important information: The value of investments can go down as well as up, so you may not get back the amount you originally invest.
No-one is enjoying the Coronavirus or the impact it is having on financial markets. Many will be wondering if they need to rethink their plans.
So, here are six key considerations for those approaching retirement:
- Be flexible. For many, the prospect of having to work a bit longer may be disappointing. Others may consider it a nice problem to have because the economic fall-out from the current crisis will most likely lead to a reversal of the long period of falling unemployment we have enjoyed in recent years.
Perhaps this is a good time to think about phasing retirement, moving down to three or four days a week, rather than hanging your boots up all in one go. Not everyone will have the luxury of being able to choose how they withdraw from the workplace but, for those who can, a stepped retirement is probably a healthier approach anyway.
- Put in place a cash buffer. Falling stock markets are only really a problem if you need to access money NOW. Everyone else can afford to wait for things to improve and markets to recover their poise. The best way to avoid becoming a forced seller of shares at the wrong price is to make sure that you always have enough ready cash to tide you over a difficult period in the market.
There is no correct answer to the question ‘how much?’ That will depend on how long the market takes to recover. After a really savage bear market this might even be a few years. But having enough money set aside to cover a year’s essential outgoings will ensure that you don’t need to cash in your investments at the worst of all times.
- Don’t fixate on your account balance. At times of market stress, many of us develop a self-preservation instinct when it comes to monitoring our investments. We simply refuse to look at our accounts. This might sound like a head-in-the-sand approach but there is actually some merit in it. If you have no intention of selling, then you don’t really need to know how much money you have lost on paper. It’s irrelevant.
This is not to say that you should abandon sensible portfolio management. You should still look periodically at your investments to ensure you have the right balance of bonds and shares, for example, (see below). But switching off the day to day noise is good for your mental health and makes for better investment decisions too.
- Learn from the past. In the heat of the moment, it is tempting to think that markets will never bounce back. But in reality, we are rarely ‘all doomed!’ Look back at the periodic stock market crashes over the years and you will see that markets have always come back in due course. Sometimes a lot more quickly than people expected at the time.
The stock market crash of 1987 is the really memorable example of this. At the time it was the scariest moment investors had experienced since the fabled crash of 1929. But the stock market actually ended the year higher than it had started it. Look at a long-term share price chart today and it can be quite hard to imagine the trauma of 1987 - it looks rather insignificant against the great upward sweep of the market, although if you were there it wasn’t!
- Don’t lock in losses. Selling after a fall in the stock market is very tempting. It makes the pain go away in the short-term. But in the long-run you are very likely to regret doing so because you effectively crystallise what remains a paper loss until you act on your desire to make the hurt disappear.
Remember that, unless you never intend to invest in the stock market again, you will have to buy back in. If you sell close to the bottom and then don’t buy back until prices have risen by 10-20% you will never be able to retrieve the value in between those two points. It will have gone forever.
- Think about the balance of your portfolio. No experience is wasted unless you refuse to learn anything from it. If you entered the recent market correction over-exposed to riskier investments like equities, then use what has happened to teach you a lesson about asset allocation.
If you are no longer the 30-year old you still feel like inside then think about the right split between shares, bonds, cash, property and alternatives like gold in your portfolio. Don’t become too conservative. With luck you will still have another 30 years to enjoy the money you have accumulated during your long, hard-working career. But accept that you need to build in some protection. This probably won’t be the last downturn in your lifetime.
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. This information is 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. You cannot normally access your pension savings until age 55.
Get support with your plans.
If you are looking for support with your retirement plans, we can help you navigate your income options and allowances, and help you access your money. We offer free guidance as well as paid for advice services if you want recommendations based on your personal circumstances.
Call us on 0800 860 0048. We’re available 9am to 5pm.
The Government offers a free and impartial guidance service to help you understand your options at retirement. This is available via the web, telephone or face-to-face through government approved organisations, such as The Pensions Advisory Service and the Citizens Advice Bureau. You can find out more by going to pensionwise.gov.uk or by calling Pension Wise on 0800 138 3944.
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