When you started saving for retirement in your 20s and 30s, the sole aim was to build up your money. At that age, you could afford to take more chances with higher-risk investments that could potentially deliver a better return. In those early years, you’ll have had time to compensate for any losses, but as you reach retirement, this approach needs to change.

When you come to take your pension (which you can do from the age of 55, or 57 from 2028), you might choose to keep all of your money invested in the pension, and draw an income from it over the years. There are various ways to take a regular income – read our brief guide to pension drawdown to learn more about one of the most popular methods.

But you also have the option to take up to 25% of your pension pot as a tax-free lump sum. You can then choose to spend it right away – perhaps to pay off a mortgage, buy a luxury holiday or a new car – or you might decide to invest it elsewhere.

You may also have other investments – such as ISAs, shares, bonds, property or other assets – that will provide other sources of income in retirement. But, once you begin to take money from your retirement pot, you should aim to protect your wealth by switching your investments to ones that offer a stable return and a lower risk of volatility.

Reducing risk in your investments as you approach, or enter, retirement is important if you need your retirement pot to provide an income for the rest of your life.

For example, if the value of your retirement pot drops because it’s exposed to external factors like recession, and you continue to take money out, it’ll be much harder for your pot to recover its losses when the stock market rises again.

Unless your investment strategy accounts for this, one market hiccup could put you in danger of running out of money.

Decide what you want to spend your money on

You may be happy drawing down a monthly income for day-to-day expenses, but many people also retire with particular goals in mind. It could be to take regular holidays or the trip of a lifetime, helping children or grandchildren onto the property ladder, or you might be more concerned about preserving your wealth to leave a legacy for your family. A set of clearly defined goals will enable you create a plan for your money that helps you achieve what you want.

If your retirement pot is large, you might decide you can afford to take a chance with some high-risk investments that will potentially give you a better return. But if you need to maintain your current level of wealth in order to achieve the income you want, then you’ll need to take a more cautious approach. That’s because investments can go down as well as up. It’s critical that you understand just how much risk you’re willing – and can afford – to take.

According to the Office of National Statistics (ONS), the average life expectancy of people who reached their 65th birthday in 2021 is 85 for men and 87 for women. So, if you’re planning an early retirement at 55, you may need to maintain your income for another 30 years – or even longer.

The Bank of England expects inflation to rise to around 11% this year. That’s bad news for people who have already retired and are drawing down money from their investments, because their retirement pot is unlikely to grow at a level that keeps pace with the rising cost of living. Hopefully, 2022 is a blip and inflation at this level is a one-off, but over time, even low inflation levels will reduce the value of your savings.

According to a 2021 report by Standard Life Aberdeen, two-thirds of retirees surveyed are overly-optimistic about how long their retirement pots will last. This means they are likely to run out of money unless they significantly curb their spending. Being realistic early on in retirement, and managing your retirement pot responsibly, is crucial. As we’ve already explained, you’ll likely rely on it for decades to come.

Taking advice from a qualified expert, like an Amber River financial planner, is essential if you plan to continue investing during your retirement.

Not only can they help ensure your investments and savings are sufficiently diversified to lower your exposure to risk, but they can also review your plan regularly to make sure your retirement income and goals remain on track.
They can also ensure any money taken from your pension and investment portfolio is managed in the most tax-efficient way, and handle all of the admin and paperwork, leaving you free to relax and enjoy your retirement.