Investing in retirement; what do you need to know?

In addition to saving into our pensions before we retire, we also need to consider where we will invest during retirement. Making the right investment decisions can help boost your income and protect it from inflation.

That said, investing in retirement often requires a different approach than it did when you were earning. Most significantly, you’re more likely to be focused on income creation rather than generating wealth for the future.

In this article, we look at why you might want to invest during retirement, how to balance risks with your retirement goals, and where to get help building and maintaining your investment portfolio.

• Working out your goals during retirement
• Working out your expenditure during retirement
• Why might you want to invest in retirement?
• What’s different when investing before and after retirement?
• What are the risks you need to consider when investing in retirement?
• How to choose what to invest in
• Seeking financial advice
• FAQs

Working out your goals during retirement

Ideally, you will have considered your goals long before retirement. Whether (or how) you invest during retirement depends on your income, investments, and savings, and the lifestyle you want to lead.

When planning for your retirement, you will probably have considered questions like:

• What lifestyle do you want in retirement? This is the first question you should ask yourself, as it will determine how much you will need for retirement and at what age you can afford to retire.
• When do I want to retire? Do you want to retire early, or carry on working? Maybe you’d like to access your pension and carry on working part-time?
• Where do I want to live? Do you want to stay in your home, downsize or move elsewhere in the UK or abroad?
• Do I want to travel? Are you keen to explore the world, or would you rather take the occasional holiday?
• Do I want to help family? Do you want to provide support to children or grandchildren, such as by contributing to school fees or a children’s pension?
• Do I want to pursue hobbies or interests? Are you keen to pursue an existing or new interest or focus on building knowledge through education or learning?
• Will I need healthcare? If you’re not in the best of health or are concerned for your future wellbeing, you may want to allocate money for future healthcare.
• Do you want to pass on wealth to the next generation? Do you want to spend the bulk of your money on enjoying retirement, or do you want to ensure there’s a significant amount of wealth to pass on?

Once you have decided on your goals, it makes planning for retirement simpler. This is because you can predict how much money you’ll need for your retirement and at what age you can afford to retire, also giving you an idea of whether you can or want to invest during retirement.

Working out your expenditure during retirement

There are many factors to consider when working out your expenditure for retirement. The simplest way to do this is to consider the money you must spend and then look at the money you’d like to spend.

Examples of money that you must spend include:

• Normal expenditure. This includes housing costs, food, transport, insurance, utilities, broadband, etc.
• Healthcare costs. You may have these partly covered by private medical insurance, but it’s wise to factor in any associated costs (such as mobility equipment) you may need in the future.
• Debt. If you are likely to enter retirement with debt, you’ll need to plan for this. For example, you may need to pay off the rest of your mortgage, any loans, or credit card debt.
• Taxes. If you have to pay income tax, you’ll need to consider this. It’s also wise to talk to a financial adviser if you are likely to have to pay capital gains tax or if your estate is likely to be subject to inheritance tax.

Examples of money you’d like to spend include:

• Travel. If travel is part of your retirement dreams, you’ll need to factor in the costs and make sure you can afford it.
• Hobbies and leisure. If your hobbies or leisure interests cost a significant amount, estimate how much you’re likely to spend on them.
• Family support. This is any money you’d like to give to family to support or help them achieve goals such as getting on the housing ladder. Consider whether your family structure might change. For example, will new grandchildren be born during your retirement?

There are two other vital things to consider when working out your expenditure during retirement. The first is inflation. Each year, inflation means your money is worth less, and things cost more. To find out more, read our article on accounting for inflation in your retirement planning.

The second thing you should do is maintain an emergency fund. A financial safety net can provide peace of mind and prevent you from tapping into your long-term investments for unplanned costs.

For more information, read our article on working out how much you need to retire.

Why might you want to invest in retirement?

Firstly, you may have arrived at retirement age without the full means to achieve all your retirement goals. Successful investment in retirement may give you an additional income to help you realise your goals.

Secondly, investing can help you put your money to work to beat inflation. When saving for retirement, you’re putting money away and hopefully watching it grow. When you retire, you dip into the money you’ve put aside, which diminishes. Investing is a way of helping to preserve the money you already have. Depending on how much you have and where the money is invested, you may be able to spend the investment returns rather than your accumulated capital.

Another common reason for investing is that, from age 55 (or 57 from 6 April 2028), you can withdraw 25% of your workplace or personal pension pot as a tax-free lump sum. Some people use this money to generate higher returns.

What’s different when investing before and after retirement?

Investing before and after retirement involves distinct considerations and strategies due to the shift in your financial goals, risk tolerance, and income needs.

Investing before retirement means you have a longer timeframe to generate returns. It’s safer to put money into riskier investments such as stocks and shares because you can wait for the market to recover if there’s a downturn. This is also why many people shift investments into lower-risk categories as they approach retirement. This helps protect them from a sudden drop in investment value on the eve of retiring.

When you’re younger, you’re also likely to be more focused on wealth accumulation rather than income generation. Because you’ll have income from employment or other sources, you’re also less likely to need to dip into your investments.

Things change after you retire. Your main focus is likely to be on retirement income generation and you may have less risk tolerance. This may encourage you to allocate more to income-generating assets like bonds or dividend-paying stocks, or you may choose to purchase an annuity. If you remain invested during your retirement via income drawdown, it remains important to remember that retirement is likely to last multiple decades, and allocating too high a percentage of wealth to lower risk assets rather than global equities can seriously impact your retirement goals.

What are the risks you need to consider when investing in retirement?

There are many different risks you need to consider when investing in retirement. These include:

• Inflation risks. Savings accounts tend not to keep up with inflation, so you may want to invest in assets such as global equities that historically provide a hedge against it. However, this is not guaranteed.
• Longevity risks. The longer you live, the more income you need. You may decide that buying an inflation-linked annuity gives you more security than investing. Or you may choose to combine the two.
• Liquidity risks. Some investments can’t be converted into cash without a significant loss of value. You could keep part of your portfolio in liquid assets to combat this.
• Tax risks. You need to be aware of the tax implications of your investments. Always get independent advice on this topic.
• Market risks. Some investments are highly sensitive to market conditions. You need to make sure you have a diversified portfolio so that your finances can be less impacted by a market downturn.

To manage these risks, it’s important to regularly review your portfolio and stay informed about market conditions.

How to choose what to invest in

What you choose to invest in is up to you. However, your investments need to meet your needs and priorities.

As we’ve seen, you may want to opt for lower-risk savings and investments that give you a reliable income. You may also wish to add a manageable proportion of higher-risk investments that could result in higher returns. You may have other considerations, such as putting money into ethical, ESG investments.

Wherever you want to invest there’s nothing to stop you from going it alone. However, building a successful portfolio takes time, skill, and experience. If you’d prefer to use that time to enjoy your retirement, you may want to work with an independent financial adviser on your retirement planning.

Seeking financial advice

If you’d like more advice on investing during retirement, Alan Boswell Group can help you. Our independent financial advisers can help you create and manage a portfolio with the level of risk you’re comfortable with, which is designed to help you meet your retirement goals. We can also help with retirement planning and cashflow modelling to help you to live the retirement lifestyle you envision. To learn more, call a member of our team on 01603 967967 today.

Please note, the value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.

The value of tax benefits depends on your individual circumstances and the laws concerning these can change.

None of the information in this article represents a recommendation about the income you may receive in retirement.

FAQs

Are retirement investments risky?

Retirement investments carry varying degrees of risk depending on the types of assets you choose to invest in. Generally, the potential for higher returns is associated with higher risk.

What is the best way to invest retirement money?

There is no one-size-fits-all answer to this question because your chosen strategy should depend on various factors, such as your risk tolerance, timescales, financial goals and overall financial situation.

Should a 70-year-old be in the stock market?

If you are in good health, you may live for many more years. If you are comfortable investing for the longer term, depending on the level of risk you’re prepared to take, you may want to invest in the stock market.

What should a 70-year-old retiree’s asset allocation be?

We would strongly recommend discussing this with one of our expert, independent financial advisers as this will depend on your goals and the amount you have to invest.