Optimal Asset Allocation in your 50’s

Reaching your fifties can represent a shift in outlook towards investments. The aggressive growth strategies of younger years are influenced by a desire for preservation of that hard earned wealth.

At this age, there is still a reasonable amount of time before retirement. However, removing too much risk too soon can inhibit returns for what should often be seen as a lifetime investment strategy.

In this article, we’ll explore asset allocation for UK investors in their pre-retirement phase.

Assessing Your Fifties Investment Profile

Your fifties are likely to be the years when you attain more senior roles. But the fifties bring changing circumstances:

• Income is at its highest.
• Mortgages and other debts are declining.
• Living costs for family may be reducing.
• Parents may need greater support.

Everyone’s individual situations are different, and others can find that the reverse of the above is true, especially with career changes, children at university or a house move.

Either way, circumstances tend to be more complex and benefit from a thorough assessment of your financial planning.

Setting the Right Asset Allocation Mix

A popular starting point is to hold your age as a percentage of the overall portfolio, in company shares. This also suggests a dynamic approach in that you change allocation as you approach retirement. In consideration of the main asset classes:

Company Shares: While paring back on higher volatility holdings, stocks still provide growth to counter inflation and fund retirement. It is worthwhile bearing in mind that investment term is likely to be thirty years plus, as opposed to the ten to fifteen years to retirement.

“Fixed Interest” investments can have a place too:

Bonds: Government and corporate bonds tend to reduce volatility and are more aligned to annuity purchase.

However, it is also important to consider:

Cash: A good cash reserve caters for the unexpected and gives certainty of value for one off items of expenditure. In addition to personal cash reserves, reserves may also be required for other assets on within the business.

Property: Property tends to be a reliable income producer, albeit that liquidity can be an issue and a cash reserve is required to maintain it.

Agricultural and business assets: It is important to consider sensible succession planning to ensure that wealth can move down the generations.

Reviewing assets regularly ensures that the level of investment risk stays within the agreed parameters.

Choosing the Right Investment Products

Utilising the most suitable products is key:

Pensions: Transferring capital into pension becomes more attractive as you approach the age that you could withdraw it if you choose to do so. You may even decide to shift wealth from ISA to pension, using salary to justify the amount contributed.

This is also a good time to consider extracting capital out of the business by way of company pension contributions.

ISAs: Maximise ISA allowances each year. Invest to preferred allocation within ISA for tax-free growth, tax free income and the ability to access IHT-relievable investment in later life.

Adapting Allocations Closer to Retirement

Within a few years of retirement, allocations can be tilted to a more conservative stance, on the assumptions that withdrawals will commence:

• Raise cash to cover significant one-off retirement expenses.
• Build bond exposure to align with annuity purchase or a sensible withdrawal strategy.
• Reduce equity exposure, shifting focus from growth to income/stability.
• Limit high risk assets.

 

Protect Wealth Through Diversification

Diversifying within each asset class also defends against concentration risk:

Equities – Mix UK, US/European, emerging market, and sector-specific equity funds. Include a blend of growth and value stocks.

Bonds – Diversify across government, corporate, high yield, index-linked bonds. Vary duration’s and credit qualities.

Cash – Use cash ISAs, short-term gilts, money market funds.

Property – REITs provide access to this asset class with low minima to invest.

There are many investment approaches available that can achieve all of the above, in an accessible, simple and cost-effective manner.

Summary for Fifties Investors

Your fifties represent an important opportunity to take stock of what you have achieved and what lies ahead of you, consider the retirement that you wish to have and to start planning towards it effectively.

However, financial planning is not without its risks at this age. By working closely with a financial adviser, you can achieve a far more personalised plan and approach retirement with confidence.

Speak to our team at Fiducia.