A study has found that over-50s are taking more investment risk and embracing high-risk investments. In some cases, this may fit into their plans, but taking too much risk could place their retirement plans in jeopardy.
According to Schroders research, 28% of investors aged between 51 and 70 plan to allocate more of their money to high-risk investments. Among those aged over 70, 22% said the same. Among the high-risk investments people are choosing are emerging sectors, like electric vehicles, or newer assets like cryptocurrency.
There are many reasons why an investor may be increasing their level of risk. For some, it will align with their circumstances and goals. However, others are choosing to take on more risk amid a low interest rate environment because of the temptation of potential high returns. It is important that every investor considers their risk profile when making decisions, and for those nearing retirement, taking too much risk could place their long-term financial security at risk.
Traditionally, investors have reduced risk as they neared retirement
Investment risk needs to be tailored to your situation and goals. However, there are two reasons why those nearing retirement or who have already retired have traditionally reduced investment risk:
Your investment time frame is likely to be shorter. As a rule of thumb, the longer you will be investing, the more risk you can afford to take. This is because you have a longer time frame for short-term market fluctuations to balance out.
You may rely on your investments to create an income. If you’re already retired, you may use your investments, including your pension, to create an income. As a result, choosing high-risk investments could harm your financial security.
Yet, this isn’t always the case and it’s become more common for retirees to maintain, or even increase, the amount of investment risk they take.
This is partly as retirement is becoming longer due to increasing life-expectancy, so there is a longer time frame to invest over. The 2015 Pension Freedoms also changed how retirees access their pension. In the past, it was common for retirees to use their pension to purchase an annuity, which would then provide a guaranteed income for life.
An annuity is still an option, but flexi-access drawdown has become more popular. Under drawdown, retirees access their pension savings flexibly while the rest usually remains invested. Leaving pension savings invested can help it grow further and provide an income throughout retirement. Drawdown can provide pensions with flexibility, but means that retirees need to take responsibility for managing withdrawals and investments. You alsoneed to keep in mind that investment returns cannot be guaranteed.
So, if you’re retired and thinking about increasing the level of investment risk you take, you’re not alone. While it may be something you’re considering, taking on too much risk could affect your goals.
Reviewing your risk profile in retirement
Whatever the point in your life you’re at, it’s crucial to carefully review how much investment risk you’re taking. When you’re in retirement, it’s even more important, as you may not be earning an income from any other sources and instead rely on your investments to meet your income needs.
Too much risk could mean your investments experience greater volatility and there’s a greater risk that investment values could fall. However, if you don’t take any or enough risk in retirement, you could miss out on potential returns that could help you create an income and greater security. So, setting out a clear risk profile that considers your goals and circumstances is essential.
Your risk profile needs to consider many different things, including:
How long you will invest for
What other assets you will use in retirement
Your overall attitude to investment risk
Your capacity for loss.
It can be difficult to objectively look at your circumstances and understand what level of risk is appropriate for you, or understand how your risk profile should influence the investments you make. That’s why we’re here to help you understand how investments can support your retirement. Please contact us to arrange a meeting.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment 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.