30 Mar Volatile markets and your retirement plans
Whether you are in retirement, or planning for it from a long way out, market volatility presents challenges and opportunities. We look at some strategies to help keep you on track.
After more than 10 years of a rising bull market, investors could be forgiven for assuming that markets would keep marching onwards. But recent volatility sparked by coronavirus concerns provides a powerful reminder that things can change quickly.
The fact that stock markets have fallen so sharply is, of course, indicative of significant selling pressure. But deviating from your long-term plan in such a febrile market environment is typically an emotional response, not a disciplined one.
While the pain of short-term losses might leave you feeling anxious, there are some ways that may help you handle the situation, depending on where you are on your retirement planning journey.
20s – 30s
No one knows how future events will play out, or how markets will react in the coming weeks and months. What we do know is that whether the next move for markets is up or down, it shouldn’t matter to investors who have the time to ride out the peaks and troughs. It’s important to remember that corrections are an inevitable feature of investing, and that markets do recover in time.
Difficult though it can be, it’s important to sit tight and keep sight of your long-term objectives. At this stage of life, it’s far more important to have a solid retirement plan with a portfolio that reflects your long-term investing horizon.
It’s also worth remembering that if you are contributing to a pension or ISA every month, you will now be benefiting from lower asset prices and the potential boost provided by pound-cost averaging. So, it might even be a good time to consider increasing your contributions, if you can.
Keep in mind that contributions into a pension are boosted by 25% on day one, thanks to tax relief. It’s an advantage that applies no matter what markets are doing, and it will give your savings the potential to grow quicker.
40s – 50s
For many investors, particularly those who have built up significant wealth, current market turmoil could prompt discussions about reducing risk. That’s not surprising when you consider that research shows the emotional pain of a loss is twice as powerful as the feeling of making a gain.
But while your portfolio may benefit from some healthy rebalancing right now, a wholesale shift towards lower risk assets would crystallise losses and increase the probability of missing the recovery in markets when it comes.
If you are due to retire in the next five years, then it may be worth thinking about adding or increasing your allocation to less volatile investments. But if you’re in good health, you should probably still focus your sights as long term as possible, because retirement could last 30 years or more. Your financial adviser will be able to determine what mix of investments is right for you, based on your priorities and ultimate retirement date.
For many individual investors, the real risk is not saving enough and not giving money the opportunity to grow. Mid-life is a time to get back on track and kick your retirement savings into higher gear. It’s also typically a time when earnings peak. So, if you can afford it, perhaps you could increase your contributions to take advantage of upswings when the market inevitably turns back around.
It can be a worrying time if you need your pension savings to meet living costs. Market swings do disproportionately affect older investors who are taking income from their retirement pots. This is because a larger proportion of the portfolio must be drawn to maintain the same income. With progressively less in the pot, it becomes more difficult for the fund to bounce on any market recovery.
If you can, you should try to avoid taking money from your investments during periods of volatility. If you can reduce your level of pension withdrawals – or even put them on hold for a while – it could be better to dip into cash savings, rather than sell investments you might hold outside your pension plan. The more you can leave invested, the more time it has to hopefully recover.
Alternatively, if you are currently taking your annual income requirements as a lump sum, consider changing to a monthly or quarterly withdrawal to reduce the risk of realising capital during this market trough.
If you’re eligible to start drawing it, your State Pension could also provide some income without the need to sell investments. Next month, the new State Pension will rise from £168.60 a week to £175.20 per week – working out as an extra £343 a year for people able to get the full payment.
Delaying your retirement is a further option – although it may be a last resort. Continuing to work is a way to avoid withdrawing from retirement assets, and you’ll have more money to add to your pension pot. Of course, you also may need to see if your spending can be temporarily reduced, by cutting back on non-essential expenses.
Market volatility is normal, as is the feeling of being overwhelmed by the value of your investment portfolio moving up or down. But it’s worth remembering that market rises and falls are part of investing. No one likes to lose money, but history suggests that selling is usually an inappropriate response to unfolding events.
If you are worried, it’s a good idea to talk with a financial adviser.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are dependent on individual circumstances.