Knowing how to live off investments in retirement can be anxiety-provoking. Investing in stocks and shares is often seen as gambling. This perception causes anxiety when people arrive at retirement. You might be worried about managing your money into retirement. Do you cash out or invest?
This is often because money as a concept is seen as binary. You are either saving money or spending it. This philosophy leads to perceiving investing through the same lens: you have cash or you are investing money for later in life.
When deciding how to live off investments in retirement many will opt-out of investing and prioritise cash. This is because investing has a degree of risk. You might be worried that if you keep money in assets they might lose money and derail your retirement. Especially when you consider some concerning economic factors, stock market sell-offs and asset super-bubbles.
Why Investing Into Retirement Is Crucial
It’s important to consider investing in retirement within the context of the broader economy. That is to say that inflation erodes the value of your money over time. The current inflation rate hit 6.2% in 2022 and is expected to increase. At this rate, the real value of £1,000 would be worth just £726 in 5 years’ time.
This means that maintaining money in cash is going to make you poorer over time. This is because the purchasing power of that cash will decline over time. You need a vehicle that can grow your money over time. You need a stable store for your retirement money.
Disclaimer: This is not investing advice and you are responsible for your own investing decisions. When Investing capital is at risk.
Andrew | Mr Money Side Up
How To Think About Money
Rather than think of money as a binary concept. Think of it as a fluid and continuous. Say I give you £10,000 you can invest and maintain the principle £10,000 and drawdown from the gains. You can have your cake and eat it. Obviously, we have to consider how much risk you want to expose yourself too. When investing you need to consider how much volatility you are willing to see. This means asking yourself two questions:
Do you have enough cash on hand (e.g. 2 years of retirement funds)?
Do you have enough income from your other pensions that the volatility won’t disrupt your retirement plan?
When it comes to knowing how to live off your investments in retirement, it’s not just about either growing or spending your money. It’s about continuously managing an asset allocation. This will allow you to comfortably maintain an income in retirement.
How To Invest In Retirement
To maintain a retirement income, you need to have assets. However, all assets have a degree of risk associated with them. This does not mean that you have to avoid investing close to retirement, or during retirement.
It does mean you need fund that can grow your money enough to make your retirement sustainable. This can be done whilst minimising volatility to an extent you are comfortable with.
Stocks are volatile but removing them completely can harm portfolio success. The minimum stock allocation in Vanguard’s target retirement funds is 45%. That’s likely for that exact reason. You may however decide that you want a fund that is 80/20 (bonds/stocks) because you are particularly risk averse.
Continuous Money Management
In continuing with our continuous money management philosophy. This is how an investment of £10,00 might play-out across various asset allocations. A 55% stock allocation, may fall significantly in value but deliver strong returns. By contrast, a 80/20 allocation may deliver limited growth but without the volatility. It may fall and return to the principle value, before delivering just over 20% growth.
Please note, this are just mock examples for educational purposes.
The 4% Rule: How To Live Of Your Investments In Retirement
The trinity study indicates that you can drawdown at a rate of 4% in retirement. This is suggested to be a safe withdrawal rate. The reason for this is that it gives your portfolio the best change of survival. The reason you may opt for a smoother investment journey is so that you can maintain a steady portfolio value.
Maintaining the principal value in retirement allows you to maintain a stable income. If you have alternative pension income that you can rely on, then you might be in a better position to opt for growth. As opposed to a strict defence or your portfolio through defensive assets.
What Retirement Style Funds Are Available?
I’ve been having this money talk with my 65 year old mum recently. I’ve been explaining the above concepts to her and I’ve also shortlisted 5 retirement style funds. As she is particularly risk averse she is keen on reducing risk and smoothing out volatility. You can download these funds by clicking here.
This list of funds contain a range of funds that range from highly defensive (e.g. 80% bonds) to funds more balanced for growth. You can also use these in combination with investing strategies for early retirement.
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