How should I invest when I want to retire in less than 10 years time?

Richard | Hull| 25/06/2020 | 49

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Richard's question in full

I have been paying into Vanguard Lifestrategy for a few months now, despite losses during the peak of the coronavirus outbreak I am now making gains again now. I regret not putting more money into the market at the very bottom in March, but I thought things were going to get a lot worse and I'm quite a cautious investor, but instead the recovery took me by surprise. I still would like to put more money in but but not all in one go, but feel time is against me. I'm 50 now and hope to retire at 60. This gives me just 9.5 years to pay in and grow, do you think this is a long enough period to invest in or am I now stuck with low interest bank accounts? I also read your weekly blog today that was sent to me, it mentions that if we experience higher inflation this could hit shares and particularly bonds. Now this is somewhat concerning, but it may be years away and I can't afford to sit on the sidelines waiting for the dips to arrive. I have my money split between Vanguard LS 60 & 80 with slightly more in 60. So basically my question to you is - with only a ten year timeframe, am I coming to the end of my investing life and should now stick with cash if shares and bonds are likely to take a hit in a few years? But where else is there to go for a health return?

Holly Mackay's Response

First up Richard, I can't give you financial advice. I'm not a qualified adviser and also I don't know your full financial picture. So I am just sharing some food for thought here - hope it helps you to make the best decision for you.

Yours is a really common question and a very hard one at that.

It is a bit like asking me if you should go ski-ing again aged 50. The odds suggest that you will be fine. But the older you get the riskier it gets, and the greater the chances of any broken bones doing more damage and taking longer to heal. But would you say to any 50 year old friends that they shouldn't go ski-ing? Probably not. But if they break a bone, they'd be bloody unlucky and you'd feel guilty. Welcome to my world!

Loads to say.

First up:

Your timeframes. You are only 50. And there is no rule to say that when you hit 60 you need to take all your money out of the stock market.

In retirement we have 2 basic choices. We take our retirement savings and trade them in for a guaranteed and fixed annual income till the lights turn out. (An annuity). OR we keep invested in the stock markets, typically taking a lump sum on retirement and then drawing down a regular chunk every month or year to supplement our income (Drawdown).

Annuities are certain. But right now with interest rates so low, you don't get much and you prevent any potential upside (and of course downside) from markets. As a rule of thumb, take your pension savings and divide by about 20 or 25. That's a rough guide to how much you'd get a year if you buy an annuity.

However, if you live to 90, for example, 30 years from 60 to 90 is quite a long time to lock yourself out of the stock market. So don't assume that these next 10 years are all you have left to be in the markets. You may of course take some of your pension savings as cash when you're 60 (25% is tax free), keep some invested in a 'drawdown' pension and then trade it all in for an annuity when you're older. So maybe revisit your assumed timeframes for continuing your relationship with the stock market?


I think markets in March took us all by surprise and will continue to take us all by surprise for the rest of the year. No-one knows what is going to happen. It's a bit like having a teenager - you just know they're going to be stroppy at some stage but you don't know when or how long for. As we cannot predict the future, drip-feeding in can be sensible. I should think it will mean this year that you get some months where you buy cheap. And some months where you buy near the top. So be it. People to claim to call the market are usually pub bores who gloss over facts!

Cash rates are rubbish and going nowhere fast in the short-term. (We might get inflation at some point which will change this but I think we're some way off that.) So you are facing the most unpalatable choice. Rubbish cash. Or potentially ugly markets. I personally think bonds are a bit pointless right now (but that will anger some people who will violently disagree!) There is no easy answer so it's just a case of mitigating risk. My personal view is that with a 10 year + window you can ride out any storms in markets. As long as you don't bottle it and sell if things get bad. That's a bad mistake to make. If you make your bed, you have to keep lying in it!

Let's think of it in a more day-to-day way. If you tell me that you think stock markets will not grow over the next 10 years, that is similar to saying that you think there will be next to no growth, innovation or opportunity with companies - no room for any big global brands to become bigger and more profitable than they are today. 10 years is a very long time to hold such a pessimistic view for.

A key example is climate change: in order to meet the goals set out in the 2015 Paris climate agreement, investors need to allocate an additional $1.5tn per year to renewable energy and other low carbon projects – and to do so very soon, within a decade or so. Someone's got to get that money!? This will drive growth, expansion and change. See what I mean? There will be some sectors which will grow whatever the broader doom and gloom.


Now to the funds you mention. Vanguard is a big credible low-cost global name. It's as safe a pair of hands as you can get. So that box is ticked. 60% in shares is like a single measure gin and tonic. 80% is more like a double. Bigger highs. Bigger lows. In my analogy however the 80% doesn't necessarily equal a bigger hangover if you have long timeframes. If you think back to my earlier comments, you only lose money in stock markets when you are a forced seller. So although the 80% in shares will be more uncomfortable at times, if you don't need to sell - it doesn't matter. And if you think that you will have some money in 'drawdown' pension products after 60, well your timeframes are longer than 10 years.

So maybe your 60% stuff is your 10 year pot. And your 80% stuff is your longer-term stuff? (And really, for 10 years or more, I suspect many people would actually select the 100% version but of course this will be more volatile.)

(Vanguard is a good player but they are passive. People will argue about whether this is the right approach for markets which are likely to fall further. You are in safe hands as I've said and I don't want to overload you. But as you become more comfortable with investing, do read up on the difference between active and passive funds in different market conditions. Not a critical one for today though - don't want to bombard you!)

Read up on annuities and drawdown

I think the first thing to do is to read up on annuities and drawdown. Revisit that 10 year timeframe in your head. Expect great volatility and even a potential crash - that way you can't be surprised. Drip feed in. Make sure you balance your innate caution with making your money work hard enough. Make sure you have enough cash around to weather any short-term needs so you're not a forced seller. Set up a plan and stick to it. Split your money into short-term (cash), medium term and long term pots.

I just worry that with lots of people living longer than ever, nervousness now will force people to sit in cash for 30 year timeframes or even more - and as weird as things are today - that doesn't feel like the right approach.

Hope that helps.


P.S. Money Advice Service has an annuity calculator so have a play on that. Hargreaves Lansdown and AJ Bell Youinvest typically have good information on drawdown. If they fry your brain, try Standard Life for more reading.



Just be aware...

We are not regulated to give personal financial advice - This isn’t full-fat regulated financial advice. Boring Money is a publisher and not regulated by the FCA. 

This means we can't help with specific personal circumstances or recommend specific investment products. It also basically means that if we say something daft, you have no recourse to come back and complain.

We’re only allowed to give you a steer or share an opinion or tell you the facts - That said, we promise that our answer to you is an independent unbiased perspective with no commercial gain to make. If you need regulated financial advice, you can find a good adviser via sites such as Unbiased & Vouchedfor.

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Holly Mackay

Founder and MD of Boring Money, Holly Mackay has been working in the investments space since 1998. She read Modern Languages at Oxford, with a special focus on Mediaeval French which was deeply interesting and arguably utterly useless.

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