While every saver is different, there are a few golden rules that everyone should stick to when it comes to investing for retirement.
Here we run through some of the prime principles…
Seven rules: Below, we reveal the key principles everyone should stick to when it comes to investing for retirement
DON’T WITHDRAW MORE THAN YOU NEED
With your retirement savings easily accessible in drawdown, it can be tempting to take out more than you need, but this is a mistake, according to experts.
Not only is your cash subject to tax once you take it out of a pension pot, but, if it’s sitting in the bank rather than a fund, you are also missing out on the opportunity for it to grow further.
Having the money to hand might feel like the safe option, but it could leave you short later in retirement. With most drawdown pensions it’s easy to get at the money when you want, anyway.
Graeme Clark, head of private clients at wealth managers Courtiers, says: ‘While you might want to hold a small amount of your savings in cash as a buffer or in case of an emergency, you shouldn’t take more than you need to from your pension pot.’
HOW TO MANAGE YOUR INVESTMENTS
When you invest in a fund, you are usually given the choice between income (Inc) and accumulation (Acc) units — whichever you choose you are still investing in the same fund, but this determines what happens to any dividends which are paid out.
When you are investing to grow your money, accumulation units are best as they mean any dividends you receive are immediately reinvested for you, which helps to grow your cash more quickly.
But when you are in retirement, it’s usually better to opt for income units, which automatically pay out any income. This saves you the cost and hassle of remembering to do it yourself.
MAKE SURE TO SPREAD OUT YOUR MONEY
Every investor should make sure their money is spread around different types of investments and across different regions.
Known as diversification, the idea is that if there is a dip in the stock market, not all of your investments will be hit at once because they will each do best in different environments.
Making sure your income comes from a range of sources such as bonds, property and company shares should mean you have a steady stream coming in regardless of what is happening in the economy or stock market.
PICK AND MIX TO SUIT YOUR NEEDS
Spreading your money doesn’t just apply to the types of investments you pick.
Thanks to new pension freedom rules, retirees have more flexibility with their savings than ever.
Pensioners can split their pension pot into different types of deals to suit their needs.
You might put some of your money, perhaps to cover your essential bills, into an annuity, which provides a guaranteed income for life (see tomorrow’s pullout for more tips).
Another chunk might go into drawdown, where you can invest it to grow it further.
Sean McCann, chartered financial planner at pension firm NFU Mutual, says: ‘Don’t put all your eggs in one basket.
‘You don’t have to take all your pension savings in one go and you don’t have to put the whole lot into drawdown or an annuity; you can spread your savings across different products.’
DO AN ANNUAL FINANCE CHECK
In a retirement that could easily span 20 or 30 years it is likely that your needs will change over the years, so it’s important to check your investments regularly.
Mr Clark says: ‘It’s important to review your portfolio once a year and if your circumstances change.’
Checking your investments is key to making sure your funds are performing as expected and to tinker with your choices if, for example, one has badly underperformed or changed its strategy or manager.
As you move through retirement you may also want to switch to less risky investments as you will have less need to keep growing your money.
Don’t check in too often, though, as it’s easy to get spooked if there’s a dip in the market.
Finance check: Keeping an eye on your investments is key to making sure your funds are performing as expected
REMEMBER YOUR INCOME GOALS
It’s easy to get side-tracked from your strategy when you read about exotic funds that have doubled investors’ money.
But if what you need is income, then these funds are not much use to you.
Remember the reasons why you picked your investments and only change them if they’re not performing or your needs have changed.
Not only will this keep you on track, but it will avoid your returns being eaten up by the costs of buying and selling funds.
Mr Clark says: ‘Frequent trading can eat into returns so buy and sell funds as little as possible.’
DON’T GET OVERCHARGED
Each pension provider has a different charging structure and it is important to work out which is best for you.
Some providers will charge a flat annual rate, others will charge you each time you want to withdraw money.