How to manage your investment portfolio when you’re close to retirement

As you’ve invested throughout your working life, you’ll have likely designed and refined your investment strategy so that it has achieved the right level of returns with the appropriate amount of risk for you.Even so, one point that many investors often forget is that their investment strategy, both their wider portfolio or within a pension, should adapt and change as they reach different life stages.The way you invest should reflect where you are in your life. That’s why you should always review your investments before any big life changes.This is particularly true when you’re close to finally finishing work. For most people, the major motivation behind investing is to create a pot that will support them in retirement.

Crucially, you need to do this in line with your wider financial plan, ensuring that your investments are pulling towards your goals.

So, with that in mind, here are some points you might want to consider to help you manage your investment portfolio as you approach retirement.

A pot for life

The main reason that you may need to reconsider your investments as you approach retirement is because you’re finally arriving at the stage when you’ll need to rely on these pots to support you for the rest of your life.

As a result, you may want to consider reducing your risk profile in your investment portfolio or perhaps even finding ways to achieve full income security for some or all of your retirement needs.

An extra consideration for your pension may be the Lifetime Allowance (LTA), the maximum amount you can hold in your pot without incurring a tax charge when you come to draw it.

The LTA is currently £1,073,100, as of the 2021/22 tax year, and can see your pension savings taxed by as much as 55% if you take money in excess of the threshold as a lump sum in retirement.

Therefore, you may want to consider strategies that can reduce the impact of an LTA charge on your retirement funds. This could include reducing the amount you invest in your pension or even targeting slightly lower growth.

Increasing your risk profile

Of course, on the other hand, there may also be an argument for increasing some of the risk in your portfolio as you get older.

For one thing, investing when your pot is at its largest means you may be able to make the most of greater gains in value brought on by a larger investment.

So, by increasing your pension contributions or your risk level even slightly, you might be able to give your pots one last push before you start drawing from them.

Indeed, for some savers, taking on more risk may be necessary. Targeting greater returns may be a way to ensure that your pot will sustain you for your entire lifetime.

As a result, increasing risk in retirement can be a useful or potentially even vital part of your retirement investing strategy.

If you do intend to try and boost your pots later in your working life, make sure you have sufficient cash savings. This is because of something called “sequence risk”.

Sequence risk refers to the dangers of withdrawing or liquidating investments in retirement when markets are less favourable.

For example, if the market takes a dip during your retirement, your investments would likely fall in value. As a result, you’d have to cash in more of your investments to provide yourself with the same level of income during retirement.

Meanwhile, by having a cash pot to live on instead, you’d be able to leave your investments as they are until the market recovers and the value goes back up, while using your cash savings to sustain your desired lifestyle.

That’s why, when approaching retirement, it can often be sensible to have two to three years’ worth of expenses held in an easy-access savings account just in case you ever need to rely on it.

Remember the importance of diversifying

As with any time in your life, your investment portfolio needs to be as diversified and varied when approaching retirement as it has been throughout your investing journey.

Double-check that you’re holding a variety of asset classes across different sectors, industries and geographical locations. This can help to spread out risk across different types of investments, rather than having it concentrated in one place.

For example, your entire portfolio may be made up exclusively of UK stocks. While there’s nothing wrong with this specifically, it may put you at risk if UK investments as a whole lose value due to wider political or economic circumstances.

Meanwhile, if you held some investments in other countries, they will likely be subject to different pressures. So, even if your UK stocks fall, your other investments may hold or even grow in value.

As a result, diversifying could help to reduce the impact of falls in value of certain types of investments. This could also help to reduce the impact of sequence risk if you needed to cash in some investments during a market downturn.

This could become even more important in retirement as short-term dips in value may have a direct impact on your income and your lifestyle as a result.

Working with a professional investment manager can be transformative here, as they can help you with a bespoke portfolio that has the right balance of diversified assets for you.

Bear in mind that no returns are guaranteed. Diversification can only help to reduce risk, not eliminate it entirely.

Working with a planner

If you’re approaching retirement and are unsure how to manage your investments, you might want to consider working with us at Bowmore Financial Planning.

We can help you by creating a financial plan that targets your needs, wants and desires in retirement.

We’ll then identify what your current investment and pension plans might deliver, including any guaranteed income or inflation-protected products, and work out how far these will go in allowing you to achieve your retirement goals.

By analysing what you’ve got and what isn’t quite fit for purpose at the moment, we can help you make informed decisions and provide alternative solutions so that you can reach your targets.

We’ll then use our mapped strategies and portfolios created by Bowmore Asset Management as appropriate to help you get there, including important considerations such as longevity, inflation, market risk and diversification.

By taking your wider financial health into account and assessing your investment needs around it, we can develop a financial plan that’s suited personally to you.

Need help?

If you’d like help working out how to invest as you get closer to retirement or you have any other financial planning needs, then please get in touch with us at Bowmore Financial Planning.

Email or call 01275 462 469 to speak to us.

Please note

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

The tax treatment of certain products depends on the individual circumstances of each client and may be subject to change in future. Bowmore Financial Planning Ltd and Bowmore Asset Management Ltd are authorised and regulated by the FCA.

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