By: Stian de Witt
As retirement approaches, many people reduce their risk profile by shifting their pension investments to more conservative assets like bonds and the money market. However, this traditional strategy, though designed to protect against market volatility, can actually diminish the future growth potential of retirement savings. Especially taking into account that most of the growth in your retirement fund occurs in the last 5 years.
Maintaining a higher level of risk may be the smarter choice for a longer, more prosperous retirement, provided that you work with a Certified Financial Planner.
Rethink risk with living annuities
Retirees have historically reduced their risk profile to safeguard against market downturns. However, with the introduction of living annuities, they now have the option to stay invested in more aggressive portfolios (with higher allocations to equities and property) that give their funds time to recover from any market corrections. Unlike life annuities, which lock income and portfolio structure in on retirement, a living annuity allows flexibility and continued growth potential, thus helping savings to last longer.
Time for the market to ride out volatility
A key benefit of staying invested in higher-risk assets is that, when markets dip, these portfolios typically recover and even exceed their initial value, thus offering better overall returns compared to more conservative allocations. For those with sources of income over and above their annuities, waiting for markets to recover can significantly benefit the value of their investments.
Combat inflation by securing ongoing growth
Moving savings into conservative, lower-risk investments, like cash and bonds, limits growth and may not keep up with inflation. In turn, this can cause a gradual erosion of purchasing power. Retirees need to ensure that their investments grow faster than inflation, even after accounting for taxes and fees. Maintaining a higher proportion of equities enables the higher returns needed to combat inflation and help sustain the desired retirement lifestyle.
Diversify between local and offshore equity
There is an importance in balancing a portfolio between local and offshore equities, recommending that at least 30-40% of assets be held in offshore equities to ensure geographic diversification. “This strategy not only reduces exposure to local market volatility but also provides opportunities to benefit from global economic growth, thereby enhancing a portfolio’s resilience.”
Mitigate sequential risk
At NMG, we’ve seen that a market crash within the first two years of retirement can reduce monthly income by up to seven years if a portfolio is not well-structured. This ’sequential risk‘ highlights the importance of maintaining an aggressive portfolio, but adding a “cash bucket” to draw and income to give the aggressive portfolio time to recover from early market dips, thus safeguarding long-term income. The past few year’s changes highlight the importance of working with a professional financial planner
Optimise the tax strategy
Finally, while tax implications are often overlooked, they can have a profound impact on one’s retirement income. Smart tax planning can reduce the effective tax bracket in retirement, with potential tax savings of up to 15% translating to an additional 2- 4 years of retirement income.
While the traditional approach of reducing risk near retirement may have served retirees well in the past, today’s financial landscape offers new opportunities. By embracing a more aggressive strategy that allows for growth, flexibility, and tax optimisation, retirees can secure a longer, more prosperous future.
* De Witt is the head of financial planning at financial advisory firm NMG Benefits.
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