This week is Financial Planning Week, hosted by the Institute for Financial Planning and supported by Morningstar. All this week here at Morningstar.co.uk we’re offering insights into asset allocation guidelines for individuals in varying stages of life as defined by Financial Planning Week.
Monday's guidelines were for investors in their late teens through to their late 20s, or the ‘young, free and singles’; Tuesday's guidelines focused on those in their late 20s to early 30s, who might be 'making commitments'; Wednesday's were aimed at ‘young families’ of those in their mid-30s to approximately 50 years of age. Today, Thursday, we take a look at guidelines for investors who have more freedom to 'make choices' now that their dependents are independent. Brook Sweeney, Investment Consultant with Morningstar Associates Europe, explains more:
Moving on from the relatively simple asset allocation guidelines for younger investors, today we talk about those 'Making Choices' as defined by the Financial Planning Week’s five ‘life stages’ groupings. For the purpose of this article we have defined those who are ‘making choices’ as those aged 50-65 whose children have left home (and who did not have any children to start with).
Now that the kids are (hopefully!) capable of taking care of their own finances and you are starting to get closer to potentially retiring, a greater focus on planning for your retirement really needs to take place. To be honest, some of this planning should ideally have already taken place but all too often that's not the case. This is normally owing to the challenges of paying off a mortgage or financing a growing family.
At this stage you really need to ask yourself some serious questions, such as what sort of retirement are you expecting to have? Are you expecting to live a life of luxury or are you going to have a quite retirement? Are you going to sell the family home and move into something smaller so you can fund your retirement? Of course this latter question assumes that you can sell your home at a reasonable price considering the property downturn that has recently occurred...and could occur again. No longer can you expect your house to pay for your retirement. Are you going to work part-time in retirement? All these questions and many more need to be asked and the answers will affect your asset allocation decisions. Further, how you allocate your assets to invest for retirement also depends on how much money you already have in your pension pot. At this stage you really ought to be getting some financial advice, if you have not already. There is inheritance tax to consider as well as a number of other challenges facing people in this age bracket. However, for those that are going to go it alone without professional financial advice then there are some general guidelines to follow.
If you are getting close to 65 then it’s a good idea to reduce the equity component of your portfolio. However, going 100% into cash is not a great idea as you are potentially going to live for another 20 years (based on figures from the Office for National Statistics, there's a 50% likelihood that a 65-year-old lives to 85 and a 50% chance that at least one half of a 65-year-old couple will live to 91). Therefore, unless you have a really huge pot of cash then it is unlikely to be enough for your whole retirement. As such, we would guide you to be slowly reducing your equity component from 75%-plus for those who were in the previous 'young families' grouping down to about 60% by the time you reach the age of 65. If, however, your pension pool is relatively small then you could reduce this percentage down to about 50% or slightly lower because you are unlikely to be able to handle large market swings in your portfolio as you get closer to retirement.
This is a marked change in asset allocation strategy from your early years where you were in the higher risk bracket. You are now sliding down the risk scale as your investment timeframe is getting shorter and you will need to start de-accumulating in the foreseeable future (i.e. withdrawing funds from your pension pot). Friday's article will talk more about the 'in retirement' stage of your investing career.
At this stage of the game, as retirement approaches, things change a little bit and you should really be investing into your pension funds because of the tax advantages. While your ISA allowance is all well and good, as you get closer to 65 you are fast approaching the stage when you are going to be dipping into your pension fund as opposed to just adding to it. Thus the tax benefits of investing in your pension scheme become paramount.
Please remember that these are general guidelines to asset allocation as individual circumstances, and individual goals, may dictate something different. We really do recommended seeking professional financial advice at this stage as the retirement system is very complex and so are your individual circumstances. Sorry, but no longer are you young and carefree.
Check back tomorrow for more information on investing in retirement.
Morningstar Consulting Europe
Morningstar Consulting Europe engages with a variety of institutional clients, including investment firms, insurance companies, banks, plan sponsors, plan providers and foundations. The comprehensive array of solutions provided includes portfolio construction and management, strategic asset allocation, manager selection and investment governance/monitoring.
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