Should Your Investment Strategy Change As You Get Older?

Whether you’re a graduate just starting out on your career or a veteran worker with the finishing line in sight, investing to secure your financial future in retirement is essential. As state coffers dwindle and pensions become ever-less generous, none of us should be relying on state benefits to sustain us through our twilight years. Wherever in the world you plan to retire, the onus is very much on you to ensure that you have sufficient savings to live off when you stop working.

There are certain investment rules of thumb which apply to everyone, whatever their age. These include keeping a diversified portfolio and investing within your own parameters of risk. However, your asset allocation (how you choose to divide your investment pot between shares, bonds, property, cash etc) will change over the course of your lifetime so yes, your investment strategy needs to be reviewed and tweaked as you age.

Here are some pointers of what you should be thinking about at different stages of your working life with regard to your financial planning:

Investing in your 20s and early 30s

Start saving early

Make sure that you get into a savings habit while you are still young. Retirement may seem very distant but it will come round quicker than you think and you don’t want to squander the potential that compound interest offers when it has three or more decades over which to work its magic.

You can afford to take risks

With youth in your favour you can afford to take greater risks with your asset portfolio. In fact now is exactly the right time to take higher risks and potentially gain higher rewards but only if you are comfortable with the potentially extreme fluctuations in the value of your portfolio. When you are young, you have time on your side so any falls in the value of your investments can be recuperated over the decades that follow. You also have plenty of time to fix shortfall issues by changing lifestyle or increasing savings.

Build an emergency fund

Before you start investing into your retirement nest egg build a buffer of cash savings which you keep easily accessible. This emergency fund should be maintained throughout your working life, and increased as circumstances demand, to be used to cover any emergencies such as periods when you are unemployed, if you have to take time off for illness or if you have sudden unexpected expenditure such as needing to buy a new car.

Invest in the most tax effective way

Certain pensions and savings vehicles could maximise the returns on your savings so it is worth finding out about those which are relevant to you depending on where you live and hold assets. Making the most of tax breaks from the start can make a big difference to your final pension pot.

Investing in your late 30s and 40s

Get a firm handle on your pension requirements

Mid-life is often the time when the reality of retirement starts to loom into view. People tend to become increasingly aware of their mortality, accompanied by a realisation that, if you are lucky, retiring in your sixties could mean you need to support yourself for three decades or more on your savings. It’s a sobering thought for many. You may well be hitting your stride with regards to your career about now with peak earnings potential and can maybe afford to up your savings. You’ll also start to have a reasonable picture of how your working life and future earnings will pan out. Now is the time to drill down and look at how much you want to save, the time you have left and whether the two are in alignment.

Take less risk

Now is the time to reduce the amount of money you have invested in higher risk shares and look towards less volatile assets such as bonds. Of course, some of your investment fund can stay in equities – you still have a reasonable time in which to recuperate potential losses – but it’s a question of balance.

Keep an eye on tax changes

It’s worth reviewing your investment vehicles to ensure that they are still in line with your situation and investment goals. Legislation changes all the time and what may have been best for you when you set up your investment strategy may not be the optimal choice now. The value of your investments will be increasing so tax considerations may have greater implications.

Investing in your 50s and beyond

Go low risk

After 50 your tolerance to risk plummets and with fewer years left to recoup any major stock market losses you simply can’t afford to take any gambles with your investments. Reduce the percentage of your portfolio invested into equities and shift towards bonds and perhaps shares which pay guaranteed dividends to provide an income.

Ensure you have estate planning sorted

Estate planning is something we’d advise anyone of working age to get sorted but it’s absolutely imperative at this stage of your life. Make sure you have a will in place to guarantee that your assets go to the people you want them to should you pass away and if you have children, make sure you nominate guardians. Your portfolio may need restructuring to take into account how you will pass your assets to your children and/or grandchildren.

Review expected retirement income and expenditure

Now retirement is in sight you will have a better idea of any pension and state benefits you will receive once you stop working and what your expenditure might be. For example, if you have paid off a mortgage, or will do so in the coming years, then you won’t have housing costs to worry about after your retire. Any shortfall between income and expenditure will need to be covered by investment income, purchase of an annuity or liquidation of assets e.g. equity release from a home.

However old you are, a financial planner is an essential ally in helping you clarify your financial goals in order to plan for a comfortable retirement and maximise the return from your investments. If you don’t already have one, give us a call and see how we can help you review your investment strategy to verify whether it is appropriate for your age or if it needs tweaking in order to meet your retirement needs.