How should I invest before and after retirement?
24 February 2025
Question by Boring Money reader
Hello,
One thing I do not understand is allocations when investing - what percentage should the allocations be to a single fund/ETF? Also when the time comes to retire, how do you drawdown your funds? If you have 5 ETFs, do you take 4% from the worst ETF, once a year, once a month? As you hope the funds could still grow...
Thanks.
Answered by Boring Money
Hello,
Understanding portfolio balance and ETF allocation
This question may look straightforward, but there are a lot of complex issues tied up in it and it goes to the heart of creating a robust investment portfolio. The allocation to each ETF will very much depend on what those ETFs are investing in. Your aim should be to get the broadest possible balance in terms of markets, sectors, and asset classes. You will also need to ensure that your ETFs match your risk parameters and investment goals.
Global ETF strategy and US market exposure
With that in mind, your largest weighting may be in a global generalist ETF – such as one based on the MSCI World. This will give you around 75% in the US, 5% in Japan, 4% in the UK and another 3% in France and Canada.[1] This may seem a chunky weight in the US, but it is the largest economy in the world, with the largest companies and the most liquid stock market.
Diversification through regional and sector ETFs
If you think that’s a bit too heavy in the US, particularly given the unpredictability of the new Trump administration, you might want to balance that out with other single country/region or sector funds. For example, an ETF based on the FTSE All Share, or Eurostoxx 50, for UK or European exposure. To diversify further, you may want to include some emerging markets, or even single sectors. It is worth being careful on the technology sector, as any global or US-focused funds will already have high technology exposure and you may need more balance.
Fixed income considerations for retirement
If you are nearing retirement, you might want to add in some fixed income exposure. The Vanguard Global Bond Index fund would be a popular choice, perhaps balanced with some UK exposure through an ETF like the Amundi UK Government Inflation-Linked Bond ETF. This will help mitigate the highs and lows of stock markets.
When it comes to retirement, you may need a whole new investment strategy, and it is worth taking advice on structuring your retirement income. It can make such a difference to your long-term wealth and there are some hazards, so it can be worth the outlay for an adviser.
Retirement income strategy and the 4% rule
That said, if you have other sources of retirement income – the State or Workplace Pension, rental properties and so on – your strategy of taking 4% from the ETF pot each year could work. The 4% withdrawal was a rule of thumb devised by the late financial adviser William Bengen. It still makes some sense in that it is just below the current yield on 10-year government bonds (4.5%), and just above the yield on the UK stock market (3.6%).
Managing long-term portfolio sustainability
However, if you need the money to last you a 30+ year retirement, this may not work so well. Recent research has shown that a 4% withdrawal rate may deplete retirement funds too quickly. Equally, it may be worth rethinking the idea of taking capital from the worst-performing funds. At all stages with stock market investing, you are trying to buy low and sell high. Taking money from the worst funds would be doing the opposite.
Equally, you may end up with a very concentrated portfolio, which brings significant risks. Over the past few years, it would have seen you put more and more into the technology sector, and while that may have boosted your overall returns, it would also have left you with an unbalanced portfolio, vulnerable to significant volatility.
Portfolio analysis and platform tools
Most of the major fund platforms will allow you to analyse your portfolio on a ‘look through’ basis to see where you are invested, and your largest positions. These can be imperfect tools, but they can help you achieve a better-diversified and more stable portfolio. This is important if you are relying on your investments for day-to-day expenses.
Ready-made solutions and professional support
Equally, some investment platforms will also help you construct a portfolio, and even offer ready-made strategies, which you select based on your investment parameters. You could pick one that is focused on income, for example, and this would save you the trouble of trying to manage withdrawals yourself, but would also keep some allocation to growth assets.
Hopefully this helps to answer your question!
---
