- Retirement
Moving from decades of building wealth to relying on investments for income is a significant transition. At this point, many people begin to think more carefully about risk, particularly how much of it they are comfortable taking.
Meanwhile, those who are approaching retirement may feel concerned about the timing of taking income from investments in the current economic and geopolitical environment, when markets may seem more volatile.
However, de-risking a portfolio is often misunderstood. In practice, it simply means making your investments safer and more stable over time, although it can't remove risk entirely and factors such as inflation still need to be considered. It doesn’t need to happen suddenly, nor does it mean sacrificing potential for long-term growth.
So what is the right time to do it? Here we explore how to approach de-risking and some of the strategies available.
At a glance
- De-risking strategies may involve broader diversification of your investments and regular reviews of your portfolio to help manage risk.
- Selling investments during a market dip can harm long-term growth. Having a cash buffer set aside can help you avoid this.
- The right time to de-risk depends on your goals and need for income as well as your attitude to risk – it is about finding the right balance.
Making sure the money lasts
Everyone’s plans are different but most people share the same underlying aim: peace of mind their money will last throughout retirement.
In practice, this means choosing an approach to investing that can support you over the long term while also providing an income you can rely on.
But because markets fluctuate rather than moving in a straight line, this makes things less predictable. For that reason, some investors will choose to take a little less risk, to minimise the financial impact if markets do fall.
One of the key challenges when you start taking an income (known as drawdown) is that timing begins to matter more. Taking money out during market downturns can lock in losses and make it harder for your portfolio to recover. That’s why it is important to think about how much risk you are taking and whether you have enough time to ride out any ups and downs.
What feels like the right level of risk will depend on your personal circumstances. This can change over time, and the options available to you may also vary at different stages of life. For example, pensions usually can’t be accessed until age 55 (rising to 57 in 2028), which is worth keeping in mind when planning ahead.
Ultimately, there isn’t a ‘one size fits all’ answer. The best approach is the one that feels comfortable for you – balancing the need for growth with the reassurance that your money is working in a way that suits your life and your plan.
Diversification
De-risking a portfolio is often associated with reducing exposure to equities and increasing your allocation of bonds and cash. While this approach may work for some, it won’t necessarily suit everyone.
Equities can be more volatile than other forms of investments and therefore more prone to sharp falls and rises in their value. However, managing risk is not just about moving away from equities. Diversification across a wider range of asset classes – not just bonds and cash – can be just as important. By diversifying, you reduce your reliance on any single area of the market.
It is worth noting, however, that diversification does not necessarily eliminate loss. Any asset – particularly the safer ones, such as bonds – may struggle to match or beat inflation, which could erode the overall value of a portfolio over time. Safer assets do not necessarily guarantee security of capital.
A well-diversified portfolio is typically better able to cope when one part of the market comes under pressure. That’s why some investors look beyond traditional assets and consider options such as commodities or property, where appropriate. The right mix will depend on your individual goals and how much risk you’re comfortable taking.
Checking in regularly
Your attitude to risk is likely to evolve over time, often influenced by changes in personal circumstances or financial goals. It can be useful to periodically review whether your portfolio continues to reflect the level of risk you are comfortable with.
Taking a proactive approach to managing investments can help ensure that portfolios remain in line with changing needs.
Rebalancing a portfolio can also mean taking some profit from investments that have done well and reinvesting in areas with more potential for future growth. Over time, this approach can help keep your portfolio on track and support more steady, long-term growth.
Thinking in percentages
When drawing an income from a pension pot, it may be helpful to think in terms of taking a percentage of the overall pot, rather than focusing on a fixed sum.
As an example, someone withdrawing 5% annually from a pension pot worth £500,000 at that point in time would take £25,000 in the first year. However, in following years the 5% taken could be worth more or less than £25,000 depending on market fluctuations and the performance of the pension. Building in flexibility in this way can help reduce the impact of market downturns over the long term.
In contrast, taking the same fixed amount each year, rather than adjusting withdrawals, can create challenges if markets fall. In weaker years, you could end up taking out a larger proportion than planned, which may put more strain on your portfolio over time.
Another approach is to build a cash buffer to help maintain a consistent level of income in periods of poorer market performance. However, there are also drawbacks to this approach. Any cash held over longer periods may lose value in real terms, as it is not exposed to potential growth and may be eroded by inflation.
There is also the risk that a cash buffer may not be sufficient to cover extended periods of weak market performance. As a result, sustaining a 5% income (or any fixed withdrawal rate) could be challenging in certain conditions. This is an important consideration, particularly in high inflation environments, where the real value of withdrawals and the remaining pot could be reduced.
A blended approach
A well-rounded retirement plan often combines different strategies, shaped by your goals and your appetite for risk.
How you approach risk will depend on several factors, and these will influence when and how you might choose to adjust your investments over time.
Finding the right balance is not always straightforward. Reducing risk needs to be weighed against the need for your money to keep growing. It’s the combination of decisions you make, and how they work together over time, that ultimately shapes the outcome.
De-risking should feel like a considered and appropriate step – one that supports your overall plan and helps build long-term financial resilience.
It’s also worth remembering that de-risking doesn’t mean giving up on growth. With the right balance, it’s possible to support both your income needs and long-term financial security throughout retirement, however long it may last.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.
The levels and bases of taxation and reliefs from taxation can change at any time. Tax relief is dependent on individual circumstances.
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