7IM and the London Institute of Banking and Finance publish more findings of their joint research focused on people who are on the road to retirement or have retired.
Mark Zuckerberg, Facebook’s founder, once warned “The biggest risk is not taking any risk”. Of course, it is easy for someone to say this (a) in hindsight and (b) when they have a significant financial cushion to allow risks to be taken – after all Zuckerberg is a multi-billionaire. For the ‘average’ Brit, however, some four fifths (78%) believe that they would rather be safe than sorry according to the 2017 Financial Lives report from the FCA. And recent research from The London Institute of Banking and Finance and 7IM shows that the ‘average’ over 50 person also struggling to take up Zuckerberg’s mantra with regard to investment risk.
The research found that some 91% of the over 50s want to maintain their current lifestyle after they’ve retired, just under half (47%) want to leave behind a decent inheritance and more than a quarter (28%) would like to take early retirement. However, perhaps because of their attitude to investing, the ability to achieve these financial goals is proving more difficult. So some 50% of the age group don’t feel well prepared for retirement. A similar percentage (47%) of the over 50s who have yet to retire think they need to save more, while 38% accept that they may have to work longer than they originally planned.
7IM, however, believes that there is an alternative approach to achieving financial goals and aspirations – and that involves stepping up risk. This approach would not be suitable for everyone given how personal the approach to risk is, and 7IM would never recommend people taking more risk than they are comfortable with after the pros and the cons have been weighed up. But it is this very conversation that we are keen to prompt.
In joint research with the London Institution of Banking and Finance, investors were asked to rank their attitude to investment risk between 1 and 5. People picking 1 were almost entirely focused on minimising losses. Those selecting 5 saw their focus as one that always sought to maximise the potential returns. The resulting percentages were compared against 7IM’s client base who were in the same age bracket to see if there were differences given just one quarter of those surveyed had sought financial advice.
25% of those surveyed chose the extreme of minimising investment losses. Meanwhile 7IM has only a handful of clients in the lowest risk category in the 50+ age group. This is likely since the latter are already investing – and therefore understand that investments can go down as well as up – and probably want more than their spending power keeping pace with inflation.
2: Moderately Cautions
18% of survey respondents selected this level of risk as one with which they were comfortable. This compares to a similar level of (16%) of 7IM clients.
36% viewed themselves as sitting in the middle of the risk spectrum between wealth preservation and wealth creation. When we review this same approach among 7IM clients, some 56% of clients fall into this category.
4: Moderately Adventurous
16% saw themselves fairly adventurous i.e. more prepared to maximise potential investment returns. This compares to 25% of those with money being managed by 7IM.
5% of those surveyed stated that they always tried to maximise potential returns. Meanwhile at 7IM, the percentage was lower with just 3% in the highest risk profile, reflecting the age group in focus here and since many investors can baulk at investing in the highest risk profile available.
On an aggregated view, therefore, more of the more cautious 7IM investors were likely to have stepped up a level of risk versus than those surveyed – an action 7IM could see as shrewd given the support they get from financial planning.
The approach is also backed up by research published last year in the discussion paper, ‘Challenging Traditional Attitudes towards Risk and Retirement’. It highlights how reducing risk in the approach to retirement could negatively impact investor outcomes – an approach that many investors adopt, and with some unwittingly given this is the default option for many pension funds. Known as lifestyle funds, there is an estimated £100bn+ behind them.
An example, however, can highlight the impact of only a modest increase in risk. Here, 7IM modelled returns for two theoretical investors who had each saved an average of £7,500 a year between the ages of 30 and 60. They started paying in £500 and increased that amount by £500 for each year of employment, which both seeking to retire with an annual pension of £22,000 a year.
One of our example investors invested in a moderately cautious portfolio, which aims to deliver a return of 4% a year over the long term. The other took a step up the risk ladder, and invested in a balanced portfolio which aimed to achieve 5% a year over the same timeline.
At retirement, as a result of the risk decision, the first had a portfolio worth around £375,000 and the second had £425,000. And while both withdrew their £22,000 a year, the first ran out of money at 86. The balanced investor meanwhile still had around £275,000 invested at this point.
More findings of the research will be released over the coming weeks.
Before you go
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The London Institute of Banking & Finance is a financial education body, established in 1879. It is a registered charity, incorporated by Royal Charter. It is an awarding body for professional qualifications in the finance sector, personal finance qualifications in schools at Levels 1, 2 and Level 3, and for under-graduate and post-graduate degrees in banking, finance and investment.
The research was undertaken by Opinium who surveyed 2,000 UK adults aged over 50, with assets of more than £50,000 (including property and pensions). The participants were recruited via a random sampling method to help avoid selection bias, developed in conjunction with the London School of Economics. It takes various demographic variables (such as age, gender and region) into account to provide a representative sample of the demographic being surveyed.
Seven Investment Management LLP is authorised and regulated by the Financial Conduct Authority and by the Jersey Financial Services Commission. Member of the London Stock Exchange. Registered office: 55 Bishopsgate, London EC2N 3AS. Registered in England and Wales No. OC378740.