Investing your money in retirement has many challenges. How can you recession proof your portfolio in times of high inflation. How can you create a retirement plan when the market drops? How do you plan your investment strategy and make sure your retirement income does not drop. Whilst it’s important to avoid knee-jerk reactions or try to time the market, how can you integrate market crises into your investment strategy?
Investing is crucial during a high inflation environment. We also need to balance our investing strategies against the risk of asset bubbles and market crashes. For example, knowing what to do in a market sell-off is crucial.
How do you build a portfolio that aligns with your life goals and the lifestyle you want to build? Whilst it’s often key to have a little more cash on hand during a time of surging prices. How do we stick to the plan that we have? In short, you may look to a three pillar approach to investing. This means maintaining three buckets of money.
Short Term. Focused on cash and liquidity.
Mid Term. Low risk investments with the goal of maintaining against inflation.
Long Term: Growing your assets.
Disclaimer: This is not financial advice and your are responsible for your own financial decisions. When investing capital is at risk.
Andrew | Mr Money Side Up
Why Everyone Needs An Investment Strategy
This is not only an article for those entering retirement. The same strategy can apply to young investors too. Youthful exuberance can push you to become overleveraged. This often happens when investors don’t carry enough cash and are overly focused on high-risk/high growth financial products.
When the market or the price of a niche product crashes, this can leave investors with a gap in their finances. This is because they had planned to pay debt or lifestyle costs with the growth from these assets. I recently watched Netflix’s Hunt For The Crypto King. One individual purchased 80k in cryptocurrency and took out personal loans to do so. When the price of Bitcoin crashed they struggled to find the money to pay back these high-interest loans.
Second to this. I often find that whilst we don’t want to hold high amounts of cash in a high inflationary environment. It can be difficult to bridge the gap between our cash and investments. This is because in the past decade interest rates have been at an all-time-low. There have been basically no cash based ISAs where people can earn an inflation beating interest rates.
#1 Short-Term Bucket Of Cash
The goal of this bucket is to make sure that you have enough income to fund your immediate lifestyle. You can easily cover your rent, mortgage and bills. You can also afford to go on holiday, meals out and all the other things that make life fun. When investing your money in retirement, you will want to ensure you always have the income to maintain your lifestyle.
The important question to ask here is: what is your cash need for the next 2 years. The first 2 years of retirement can be tricky waters to navigate. You may be waiting for a state pension or other retirement pots to kick in. Secondly you might be basing your retirement on something like the 4% rule. This is a rule of thumb where you drawdown from your retirement portfolio at a rate of 4%.
Dynamic Spending In Retirement
There have been regular debates scrutinizing how religiously investors and retirees should stick to 4%. Vanguard for example, recently published an update guiding investors to a dynamic withdrawal rate (dSWF).
Following this guidance, if the market crashed, investors would soften their withdrawal rate by 1% for example. This would then improve the changes of portfolio survival. This is because the portfolio would be sold-off at a slower rate during a time of it’s value declining.
If you were strictly abiding by the 4% rule then as your portfolio drunk you would have a smaller income. This is because your income is proportionate to your portfolio size. For example, if your portfolio value is £500,000 you can maintain a safe withdrawal rate of £25,0000. If this portfolio crashes by 25% down to £375,000 your SWR would be £18,750. Less if you decide to approach if from a dSWR.
#2 Income Producing Assets
Fixed income, inflation-linked Bonds, dividend paying stocks are all useful tools when it comes to investing your money in retirement. When prices fall it usually presents a buying opportunity. Simultaneously, it’s a time when we want to avoid selling assets as much as possible. This is where your cash and low-risk income producing assets are critical. This is because these defensive assets have two functions.
These defensive assets soften volatility. They can also be sold to subsidize the buying of growth assets that now represent a strong buy opportunity.
Alternatively, these assets can fund your retirement until the market recovers.
You can buy into an ETF which holds an allocation of inflation-linked bonds such as TIPS (US) or Gilts (UK). This is Government issue debt and deemed low risk as Governments rarely default. You can also invest into an EFT which collates other types of bonds (e.g. corporate bonds). When you buy into an ETF that has an allocation of both stocks and bonds, it will be continuously re-balanced to maintain this allocation.
Alternatively, you can hold your stocks and bonds in different buckets. This allows you to flexibility withdrawal from each as you see fit. Whilst avoiding selling your assets in a fire-sale of market decline is crucial. You will also want to avoid the erosive effects of inflation on your retirement portfolio. These types of defensive assets can help you do just that.
#3 Growth Assets: ETFs and Stocks
You might be questioning if you should sell, or even buy stocks if you are nearing retirement. Many retirees are facing a shortfall in assets now they are nearing retirement. This means that they risk running out of money in retirement. Investing your money in retirement is not just about being defensive, it’s about being balanced. You will also want to tailor your investments to your financial situation and goals.
Investing is highly emotive and investors always want to avoid losing money. This is especially the case in retirement. There is a serious risk that if a retiree holds no stocks at all, this only increases the risk of this happening anyway.
According to the Trinity study, holding an allocation of stocks can promote portfolio survival long term. This is because it can be necessary to fund retirement with growth assets. Retirement can obviously last a long time, which means there is a need to focus on longevity (e.g. 30 years).
Factoring Growth Into Retirement
If your portfolio is sufficient in size, you can focus on low growth, low risk assets. Then you can consider decreasing your risk and exposure to market volatility. By contrast, you may need to factor growth into your retirement planning. This doesn’t have to be scary or complicated.
This is because you can still build a resilience into your stock portfolio. You can for example, invest in an ETF that has a high level of diversity. You can invest into one fund that buys stocks across multiple geographies, sectors, cap sizes. It is often argued that the more diverse a portfolio, the less risky it is. This is a great strategy generally for investors, not just for those investing your money in retirement.
How To Balance A Portfolio With An ETF
As I alluded to earlier you can buy into a fund which contains a mixture of assets. This is a highly simplified method of investing. Mixing a cocktail or cash, defensive and offensive assets is a powerful way to strategically simple and fund retirement.
This method can promote both stability and growth in your retirement portfolio. It also means that you have one fund to invest or withdraw from. This simplicity can make retirement and investing your money in retirement a little less scary.
Whilst you can manually maintain the three buckets that we have talked about. You can also use a wealth manager to do this for you. This means that each allocation will be rebalanced and allocated out according to an agreed strategy.
5 ETFs For Automated Investing Your Money In Retirement
When investing your money in retirement you probably don’t want to actively manage your assets. You might want all these assets to be automatically re-balanced for you, so you don’t have to worry. I have synthesized a little of 5 funds that can do just that.
On one end of the spectrum there is a fund that is highly defensive. It’s 80% bonds, so the focus is on the fixed income aspect of retirement. At the other is a 55% bonds and 45% stocks ETF. This is a bold balance between maintaining and growing your retirement portfolio.
Click here to get the list of 5 funds.
When investing capital is at risk.
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