Making a decision on how to invest close to retirement can be confusing. Especially if you never had an early retirement investing strategy. You may have always let you pension fund do all the work in the background. This means you may never have actively thought about how your money is invested.
Like many would-be investors out there, you might think that by investing in stocks and shares is gambling with your money. As a result, you might feel worries about how to invest close to retirement. You may have a lump sum from your pension that you are not sure what to do with. You’re unsure if you should take this or get a higher income.
This is are all concerns that came to light when I had this retirement conversation with my mum. I know from previous discussions with her that her opinion of stocks and shares is that they are like gambling. Any notion of risk, to her means that if she invests this money in retirement she may lose it all.
New investors will never find a good time to invest but there is a silver lining to this. The problem is you need to know how to invest in retirement to take advantage of this.
Early Retirement Investment Strategy
You may be some years away from retirement but the same principles of this article hold true for anyone in their investing journey. If you want an early retirement investing strategy, then managing a sustainable portfolio is crucial. You can use the same investing methods to grow your wealth and then maintain it in retirement. Understanding how to invest close to retirement comes down to knowing how to:
Invest in a stocks & shares ISA.
How to choose a fund.
How to gauge risk.
Invest for income in retirement.
This is all incredibly important considering we could be slipping into a bear market. Many people want to know if the market will continue to fall and if they should sell-off their stocks. Especially given the calls that an asset superbubble has formed.
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 Risk
All assets have a degree of risk associated with them. However, you need assets to sustain your retirement portfolio. Therefore you cannot truly avoid risk when investing in retirement. The reason you need assets, even in retirement is because you need to keep pace with the rising cost of living. You need to know how to invest in a high inflation, high interest rate environment.
In truth, the stock market may be your only chance of this. However, stocks and shares are also very volatile. You need to be clear what assets you hold, so that you can hold you nerve when it becomes a bumpy ride. As a general rule of thumb, the sooner you need your money, the less “risk” you should take.
This means reducing your exposure to volatility, as you won’t have as much time to ride out the of the market. The more stocks you have the greater your exposure to this volatility. This is not to say holding an allocation of stocks is bad for your retirement portfolio. In fact, an allocation of stocks improves portfolio survival rates.
According to the Trinity study; holding a portfolio of 100% defensive assets such as bonds can decrease your portfolio survival rate. Whilst you may hold some stocks, you can offset their volatile nature with other assets such as bonds or property (no I am not talking about buying a rental property – please stop buying all the houses).
How To Mitigate Risk
We’ve established that avoiding risk altogether is not an option. We also know that maintaining stocks into retirement can actually have a positive effect. This no means that you need to know how to build an allocation of stocks, bonds and other assets.
Depending on how close you are to retirement, this selection may influence your early retirement strategy. For example, I am in my 30s so my portfolio is 90%+ stocks. My mother is 65+ and particularly risk averse, so a portfolio containing 60% to 80% bonds and 20% to 40% stocks may be more appropriate for her.
Choosing a fund rather than individual stocks and shares means you can invest in dozens of companies and spread your risk, while targeting inflation-beating returns. It also makes it easier to asset a funds risk exposure. There will usually be a tab about the level of risk for the portfolio (a number between 1 -7). You can also check out the performance graphs to get an idea of volatility.
If you’re comfortable with a relatively high level of risk, you can choose a fund solely invested in shares. But if you want to reduce risk, a fund invested in a variety of assets, including corporate and government bonds and some cash, may be more suitable. Again, my mother has a retirement income from her pensions which covers her cost of living. This means that she can probably afford a little more exposure to volatility, in exchange for better long-term returns.
Where To Invest In A Stocks & Shares ISA
Many high-street banks such as Santander and HSBC are investment providers. They offer stocks and shares ISAs to their customers. Personally I find there investment platforms harder to navigate, especially through the lens of an external customer.
There are a number of institutions which have been at the fore-front of low cost online investing. They make choosing a retirement fund pretty straightforward. These are the likes of Vanguard and Fidelity (click here to get a £50 Amazon voucher from Fidelity). Both have ‘path finder’ style tools you can use. These return you a fund based on your preference for income vs growth or low vs high risk tolerance.
Find One Fund That Meets You Needs
Many investors have multiple funds for multiple assets and purposes. For example, one fund has a high allocation of stocks, the other is bonds. They then have to manually buy and sell to maintain this asset balance.
A multi-asset fund holds can hold all your different asset types. It an also hold companies from all around the world. These global funds invest in many different countries, so that if one countries economy drops you will suffer less. The more diversify, the more you are covered.
Mult-Asset funds can also help to diversify within a countries economy. For example, you can invest small or mid cap companies in addition to large cap stocks such as Unilever or Burberry.
You may also which to focus on building up a portfolio of only the most sustainable companies. For example, those invest in green technology or that have low Co2 emissions. Certain funds, called ESG funds screen or weigh out these negative impact companies. Whilst ESG funds create value there are a number of problems you need to know about.
It’s most likely that you multi-asset fund will track the indexes or particular markets. If it’s a global fund it may benchmark against the MSCI World Index. On the other hand if it’s a UK fund it may track the FTSE 100 or FTSE All Share Index. You can find the objectives and fund benchmarks on the fund fact sheet.
Check The Fund Costs
The fund factsheet will also tell you the charges of the fund. I prefer to keep my investments simple and low-cost. This means my ongoing fund charges are less than 0.25%. Many fund manager will complexify the fund and use jargon to convince investors to pay a premium for their services.
In reality, fund managers rarely outperform the benchmark they are trying to beat. If they do it’s not for very long. By contrast the index tracker funds I just mentioned as the cheapest options because you don’t need human resource to make investment decisions. It just mirrors an index.
Active funds usually around 1.5% (+/- 0.75%) but you can pay as little as 0.1% for a simple index tracker. This is on top of your standard around fee, Vanguards is the cheapest at 0.15% a year, whereas Fidelities is 0.35%. I still invest with Fidelity because I find their funds can add slightly more diversification in the way of real-estate-investment trusts. This accounts for 10% of my current portfolio. Vanguards base index tracker funds tend to be pretty much spit between stocks and Bonds.
Retirement Investing Strategies
The sooner your money is in the market the sooner your money is working for you. Which is the way it should be, especially in retirement. However, starting to invest close to retirement can obviously feel overwhelming. It’s important to remember that you don’t have to go all-in at once. Many of these funds only have a minimum £25 investment.
This means you can trickle money into a fund without feeling like you’re making a huge mistake. As the market trends up or down you can add money. This means that when the market drops you get better value for money. When it rises, everyone is happy.
There are hundreds if not thousands of funds to choose from. Like I said before, there are path-finder tools but if you want to skip all that. You can download the list of funds that I sent to my mum. Knowing how to invest close to retirement can be scary but it can be simplified.
These are low-cost tracker funds that have a balance in favour of less volatility. They contain a mixture of stocks, bonds and property. This should give her portfolio the best chance of survival, let her money grow a little and give her that extra income in retirement.
Click here to get these funds sent to your email. You can also download my financial freedom calculator, to plan your path to early retirement.
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