For many people, the idea of retirement brings mixed feelings. On the one hand, it could mean greater freedom and the opportunity to spend time pursuing various hobbies. However on the other hand, there are potential financial challenges. They could increase in the coming years, as the State Pension age is expected to increase to 68 over the next two decades. Since it already amounts to just £164 per week, it could prove to be inadequate for most retirees.
While this is a cause for concern, it may be possible to improve your retirement savings prospects. Here’s how I’d seek to achieve that goal and, in doing so, overcome the challenges posed by a relatively unappealing State Pension.
One challenge facing individuals is deciding how much risk to take with their capital. Taking too much risk can, of course, lead to losses from which it’s difficult to recover. At the same time, though, not taking enough risk can lead to poor returns which cause financial difficulties in older age.
As such, it may be worth focusing on your time horizon. If, for example, you’re expecting to work for another 10 years until retiring, then it may be worth taking risks through buying a variety of shares. Other options, such as bonds and cash ISAs, may be unable to offer significant returns and, in some cases, could even fail to outperform inflation.
Or, if you expect to retire in a short timeframe, or are already retired, then it may be worth taking less risk and, instead, focusing to a greater extent on income. Doing so could help to boost State Pension payments, as well as provide greater financial stability.
Wherever a portfolio is invested, perhaps the key move to make is diversifying. As ever, there are major risks facing the UK and world economies which could impact negatively on a range of asset prices. Brexit now looks set to ramp-up in terms of its uncertainty, and this could make international-focused stocks more appealing, for example. Meanwhile, the prospect of a US-China trade war could cause a general slowdown in world economic growth that benefits defensive shares on a relative basis.
While an individual’s time horizon can help to determine the level of risk which may be worth taking, it can also impact on the performance of their investments. At times when volatility in asset prices, such as shares, is high, it can be tempting to seek to capitalise on short-term price movements. The idea behind this may be to buy low and sell high over a short time period. However, with such price movements difficult to predict, doing so could be a risky strategy.
As such, focusing on the long term may provide an investor with a better risk/reward opportunity. With the FTSE 100 currently trading around 1,000 points below its all-time high, it could offer good value for money over the long run. Although there may be near-term uncertainty which causes paper losses for investors, its track record shows that buying shares now is likely to lead to a recovery over the coming years.
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