As with many things in life, the investment needs of any person will change as they age. To give people an idea of how theirs might develop, we’ve separated the investment lifecycle into three distinct periods.
Earlier this month, we examined the formative years of your 20s and 30s, as your career kicks off and you begin looking to the long term future and finding your feet financially. This included things like getting started, accepting risk and finding a professional to work with.
Today, we’re looking at the next step. Broadly speaking about your 40s and 50s, we’ll be looking at the all-important years where you’ll lay a lot of the foundations for a comfortable life in retirement. So, here are our top tips for investing in your middle age.
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Arguably the most important of all our points, this is also by far the easiest. Ultimately, the best thing you can do when investing for the long term is to, well, stay invested. This is why we recommend having money saved for a rainy day before you start your investment journey, or at least set some aside regularly as part of your plan.
The ability to leave your money invested is an advantage both during times of calm and times of volatility. During the recent uncertainty, we dove into the numbers behind disinvesting. The outcome, almost invariably, is that staying invested leads to better returns. Those who disinvest run the risk of missing the sharp, often one-off periods of recovery that tend to come after a large drop.
Skittish investors that prefer to pull their money out of the markets at the first sign of trouble often end up, in the long run, losing out financially. It can seem counterintuitive to refrain from acting during a turbulent time but, other than the financial soothsayers and lottery winners of this world, people are better off staying the course and weathering storms, no matter how severe.
Consider your retirement goals
Ideally, everyone would have a very clear idea of what their ideal retirement looks like by the ripe old age of 25. With this much foresight, it would be easy to plan, save, and manage finances accordingly to make sure you hit your distant targets.
For most of us, though, this is simply not the case. We are far too preoccupied with carving a path in our career, establishing ourselves financially and (hopefully) socialising to be on top of a situation that won’t materialise for many decades. As you venture out into your 40s and 50s, it’s important to get a handle on what you envisage retirement looking like – you can do this earlier of course, with many choosing to lay down at least a broad plan in their 30s.
Having clear goals set out means that you can adjust your saving habits accordingly. You might consider opening up a personal pension (SIPP) to take advantage of the tax breaks – read on for more about this – or just stepping up your contributions where you need to – this, too – if you decide to want the finer things in life after work.
The average Brit works around 11 different jobs across their career and will accrue a workplace pension at most or all of them, while the state pension is there to top up your top. Ultimately, though, the general consensus is that you should consider providing yourself with a pension income that’s around 60% of your final salary for a comfortable retirement. This is going to take some figuring out; put aside some time and lay down your goals in detail.
Step up your contributions
In our first post of this series, we looked at how younger people can make a positive start on their long term investment journeys. With other concerns knocking long term finances down the pecking order, those in their 20s and 30s can be forgiven for setting up an account, making regular payments and largely ignoring their investments.
This next instalment is where you need to get serious. If you want to hit those retirement goals you’ve laid out for yourself, or buy that new car you’ve had your eye on, decisions you make now can make all the difference. Principally, the period of middle age is when smart investors up their contributions, pushing an already growing pot up a gear.
At this point in your life, you’ll hopefully be earning more than you have at any point in your career. A lot of people tend to become more ‘financially resilient’ as they get older, so we think your level of investment in your future should grow to reflect that. You can lower your risk level if you want to, or you can raise it to attempt to meet more medium-term goals, but ultimately the key is to get serious about saving.
Higher earnings mean that relief when doing tax returns is vital. In the next section, we’ll talk about how to make the most of personal pension (SIPP) relief during these years of high earning potential.
Use tax-efficient vehicles and allowances
This point actually applies across a person’s entire investment lifecycle but is pulled into sharper focus during our middle age, because it’s here that the sums we invest become more significant. Whether you’re investing £2,000 or £20,000, it’s vital that you don’t end up paying more in than you need to.
Fortunately, this is where ISAs and SIPPs can help. These are all designed to make investing as tax-efficient as possible, with tax-free yearly allowances and tax breaks at withdrawal that make them ideal options for any long term investors.
For a full break down of the tax benefits of these different investment vehicles, visit our Stocks and Shares ISA, SIPP pages. They have different limits and stipulations to be aware of but are both excellent ways to protect your money in the long term. The General Investment Account (GIA) does not come with a tax-free wrapper but is free from yearly limits, so is an ideal option for investors that have exhausted their ISA and/or SIPP limits for the tax year.
Assess your existing investments
By this point in your investment lifecycle, you’ve probably got at least one investment portfolio up and running. Whether you’re regularly adding to a stocks and shares ISA or investing for the long term with a SIPP, how much do you actually know about the relative performance of your investments?
Now is the time to make sure that your money is best placed to work for you in the coming few decades. You’ll want to consider how fees might be eating into your returns, how tax-efficient your current investments are and, crucially, how effectively your existing portfolio is actually producing returns. If you don’t like what you see, it’s often free and easy to switch between wealth managers, a decision that could lead to compound gains in the long run.
It’s quick and easy to switch to Moneyfarm, and we won’t charge you anything to join. If you’re interested in discussing your current situation or how a Moneyfarm portfolio could help you meet your goals, or even to initiate a switch, give us a call or drop us an email. We also offer a comprehensive, no-obligation portfolio review to our clients – we just ask for some basic information on their existing investments and create a full analysis of where their money is working for them and where it could be doing more.
Middle age is a time to enjoy where you’ve gotten to, plan for the future and analyse how your savings have been performing for you so far. Following these tips should put you in good stead to enter the next phase of your investment lifecycle, the years approaching and settling into retirement, with confidence.
