Harvey Jones
20.09.2019
Should you leave your portfolio invested in retirement?
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Until recently, retirement was all a bit biff bang wallop. You stopped working at a pre-set date, bought an annuity, and spent the rest of your life attending to the garden. I'm exaggerating, but not much. Retirement really was simpler and quicker, back in the day.
Now the cliff-edge retirement is increasingly a thing of the past, as growing numbers carry on working into their late 60s and 70s. Many ease themselves into retirement rather than stopping overnight, by picking up part-time or consultancy work, or starting a business doing something close to their hearts. Some are doing it to stay active and social, others simply need the money. They might do a bit of gardening as well, but they have a lot more to attend to than that.
Although the death of the annuity has been exaggerated, sales have gone into a marked decline. Annuities fell out of favour after the financial crisis, when yields tumbled, and shrinking numbers were willing to lock into low interest rates for life. Today, many prefer to leave the bulk of their pension invested to continue growing, while drawing down regular sums to top-up their income. All of which is great, but also a bit more risky. There is always a price to pay for flexibility and freedom.
Why lifestyling is no longer cool
You may have heard of something called “lifestyling”. It sounds like the type of thing Instagram influencers might do, but in fact it used to be a sensible financial planning manoeuvre. Lifestyling involving slowly shifting your portfolio out of riskier assets in the final years of your working life, to avoid being punished by a last-minute market meltdown right before you retire. In practice, this meant shifting out of stocks and shares and into lower-risk alternatives such as bonds and cash to protect your capital. Many pension schemes did this automatically. Broadly, it was sensible. If the stock market crashed the day before you bought your annuity, you still slept soundly. However, this approach doesn't work if you plan to keep your portfolio invested in later life, as growing numbers now do. Instead, you have to maintain your stock market exposure, to make sure your money continues to grow in real terms.
The case for staying invested
As life expectancy rises, many of us could spend 20 or 30 years in retirement. If you shun the stock market over such a lengthy period you will miss out on an awful lot of dividends and growth, and will be much poorer as a result. In the longer run, history shows that stocks and shares deliver much higher returns than almost every other asset class – and there is little sign of that changing. Nobody in their right mind would want to leave long-term money in cash, given today's rock bottom interest rates, especially as they career into negative territory. The outlook for bonds is similarly negative. At time of writing, 10-year US Treasuries yield just 1.72% while a 10 year UK gilt yields just 0.63%. Both are likely to fall further.
Astonishingly, a quarter of the world's government bonds, worth around $15 trillion in total, now trade on negative yields. This means many investors are effectively paying governments to borrow their money. If you want your investment portfolio to maintain its real value in retirement, and ideally grow a little, you need to maintain at least some stock market exposure, ideally through dividend-paying shares or low-cost collectives such as exchange traded funds (ETFs). Expats do not need complicated bond structures with-rip off advisory charges, but can do this affordably through an offshore platform with a competitive range of funds.
Don’t ignore the stock market
Many investors are nervous about stock markets at the moment, and understandably so, as the longest bull market in US history seems to be running on fumes. Yes, stock markets are volatile, but in the longer run, you simply cannot afford to shun them.
Also, people have been calling a crash for the last decade, and those who took them too seriously have made a costly mistake. In the 10 years to 31 August, the US S&P 500 delivered a total return of 181%, which rises to 242% if you reinvested all of your dividends over that period.
That's an annualised return of just over 13%, with dividends reinvested but before inflation. If you had put your money in cash, you would have been lucky to get 1% or 2% a year.
Dividend-paying stocks are particularly attractive, with the FTSE 100, for example, currently yielding around 4.3% a year, and the S&P 500 offering 1.88% – plus any capital growth on top. Dividends tend to rise steadily over time, as most companies look to increase their payouts every year. This means you are locking into a rising income stream. You still need a piece of that action, even as you get older.
How to limit the risks
The downside is older people have less time to recover their losses if stock markets do correct. If you have to withdraw money after your retirement portfolio has fallen in value, this will further deplete your pot, and lock you out of the subsequent recovery. One way round this is to build an emergency pot of money in cash or bonds, that you could live off while waiting for markets to fight their way back (as they always do, given time).
Alternatively, you could mix and match – buying a good old-fashioned annuity with some of your pension, to ensure your essential spending is covered, then leaving the rest invested to continue benefiting from stock market growth. This certainly isn’t biff bang wallop. It takes careful planning. Get it right, though, and the results should be knock out.
Harvey Jones has been a UK financial journalist for more than 30 years, writing regularly for a host of UK titles including The Times, Sunday Times, The Independent and Financial Times. He is currently the personal finance editor of the Daily Express and Sunday Express, and writes regularly for The Observer and Guardian Unlimited, Motley Fool and Reader’s Digest.
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