You want to enjoy your money, and you also want to avoid running out of it before you die and having to rely on loved ones or the state, so managing investment risk in retirement is crucial.
In working out how much you can afford to spend, advisers have traditionally used what’s called the 4% rule.
Professor of Retirement, Wade Fowl from the American College explains this rule.
“The 4% rule was developed by a financial planner in the US using US historical data in the 1990s”
The rule highlights the market volatility and that you can’t just assume an average return and base a retirement plan and offer on it.
US historical data found that the worst-case scenario was that someone could withdraw 4% of their portfolio.
After that, their money would last exactly 30 years before running out.
Interest rates are low today. This makes retirement more expensive.
“I do worry about things like the 4% rule in the context of someone retiring”
There is also what is called the ‘bonds rule’.
According to the rule, a 50-year-old should have 50% of their portfolio in bonds and 50% in stocks. At 75 the asset allocation should be 75/ 25 and so on.
Of course, everyone’s different but in most Wade Foul wouldn’t recommend reducing exposure to stocks during retirement.
“I think as a starting point the question should be broadened. So it’s not just an asset allocation but also product allocation because I think your asset allocation can adjust if you have more income from outside the portfolio to rely on”.
Furthermore, research suggests that once you retire you should not decrease your stock allocation.
Instead, as you get older, try to keep it fixed at a level you’re comfortable with.
“All those different ranges can provide sustainable strategies if it’s incorporated into a good overall plan”.
Finally, having a good adviser in retirement is essential. There is no greater wealth than your peace of mind.