Rory, Liverpool
asks:
I’m about to retire and have rejected an annuity. I would
like some flexibility on how I take my income - I know
drawdown has risks but how can I minimise them?Guy says:
A useful rule of thumb for retirement is that portfolios
should be able to sustain income of 4% a year for a long
time. There are no guarantees of this though and the
risks need to be covered and your situation updated
regularly, you should also plan for living much longer.
The priority at this stage in your investing life is to
manage your risks effectively. You will need to support
income from your portfolio and therefore I think you
need to be concerned about investing risk, inflation and
something called sequencing risk.
Investing risk is well known. Markets go up and down
and you need to choose a portfolio that gives you the
best chance of achieving your goals and offering you the
right level of protection. This means you need to make
sure you’ve got the right spread of investments that
will not all move together. I favour clients holding some
government bonds because they improve diversification.
Your need for income is likely to increase with inflation
and you should try and have a portfolio that offers you
protection against this. If you have all your money in
savings accounts you will have capital security, but you
are exposed to inflation. The way to hedge this risk is
to have investments in the stock market and to some
extent in property.
Sequencing risk affects you when you are periodically
adding or withdrawing money from your investments.
In retirement, it can mean that you earn a lower internal
rate of return than what you expected. Therefore, the
greater the diversification the less the ups and downs,
the less the sequencing risk and therefore the lower your
risk of running out of money. nMANAGING
YOUR
RETIREMENT
PORTFOLIO
Guy Myles is CEO of
pension and investment
firm Flying Colours. If
you have a question for
Guy email pensionsguy@
flyingcolourslife.com he’s
happy to answer your
questions.
For more advice,
contact Flying Colours on:
0333 241 9919
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