7IM joined This is Money for an Investing Show Live hosted by Simon Lambert, the editor of Thisismoney.co.uk. The discussion included 7IM’s Justin Urquhart Stewart and Matthew Yeates. Here are the three things we took away from the evening.
1. The world really has changed
For decades, many people have benefitted from being enrolled in a workplace pension that provided defined benefits, based on their final salary, for as long as they lived. However, the number of people in schemes of this type is reducing fast.
Instead, people now could be enrolled in schemes that deliver a defined contribution. In addition, investors have frequently adopted an approach that automatically reduces the percentage of equities held in their portfolio as they get nearer the day they retire.
This is known as the ‘lifestyle’ approach – a mix of investments in a portfolio which alters as individuals reach pre-set ages. Investors might have as large as an 80% allocation to riskier assets early in their lives to help them build up their savings. In the event of a big set-back in the equity markets, such as the one we saw in 2008, their portfolios had the time to ‘recover’.
Meanwhile historically, people were forced to turn their pension savings from a lump sum into an ongoing fixed payment for life, called an annuity. As people approached retirement that level of risk was traditionally reduced to try to protect their accumulated wealth, so it did not suffer a big investment hit just before that time. After all, the bigger the pot, the better income an annuity gave them annually, which gave retirees certainty.
Annuities, however, are no longer the sole answer – you can now also stay invested up to and through retirement. With these changes come new choices for your investments.
2. Cautious investors face a challenge
Cautious investment portfolios tend to have a large percentage invested in bonds. However, the 200-year record low environment for interest rates has reduced our expectations for the future investment returns from bonds, creating problems for portfolios relying heavily on bonds to meet their projected returns.
Meanwhile, equity investments are in the midst of the third longest bull run since World War II. However, that run can’t and won’t run forever. We know that bull markets do not simply run out of steam, but a catalyst can cause them to cease – and there is no warning as to when that could strike.
If, therefore, you cannot aim to meet expectations from either of these asset classes, then alternatives have to be found to try to meet your investment needs over the long term. Multi asset investing and diversification across s broad range of investments can help, and it’s your responsibility to make sure that your money lasts throughout your retirement.
3. Investors may need to revisit risk
We now live much longer than our parents did. Only as far back as 1980 a man retiring at 65 might expect 13 years of retirement. Now it is over 18. However, men typically underestimate how long they’ll live by six years and women by eight years. This means that savings have to last longer than for previous generations and for longer than we’re expecting them to.
In addition, our savings are having to work hard to beat inflation – now at 2.7% – and that’s without the support of interest rates. So, we asked ourselves what the options were to enable our investments to stretch further as we lived longer.
This led to us running some research into investors’ options. We concluded that solving this problem requires balancing various risks. It could be a combination of saving more while you’re working (savings risk), looking to retire later (job risk), taking a lower income in retirement (lifestyle risk) or seeking a higher investment return (investment risk).
Here we have to be clear – we are definitely not advocating that everyone needs to take more investment risk. Risk is a very personal choice. But, given that this is a risk on which you probably can make a decision more easily than some other risks because you’re in control, having a conversation now about how a revised level of risk could help you meet your future financial aspirations and goals could make sense.
We hope that this take-away from our conversation with the people at This is Money helps you think through some of the topics that affect your investments and pension plans. Perhaps it prompts some conversations as to what approach would best suit you. We would be happy to talk through our experiences and explain how we have helped clients decide what the best investment approach might be for them.
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