Why it doesn’t always pay to be cautious in retirement

You’ve saved up for decades, you’ve reached the day that you finally stop work, and the rest of your life stretches out before you. So why are you suddenly nervous about going out and spending your hard-earned cash?

On one hand, you might look at your pot and immediately book that round-the-world cruise. Or you might look at it and wonder how on Earth it’s going to last you for 20, 30, or even 40 years.

To avoid depleting their fund too quickly, many retirees make the mistake of being too cautious in retirement. Here’s why.

Keeping your money in cash often means it loses value in real terms

It’s easy to understand why you might want to take the fruits of your labour and ‘bank’ your pension pot at retirement. You might think about moving it all to somewhere where it’s guaranteed and won’t lose value. If you left it in the stock market, its value might fall, and you don’t want that risk.

However, think about it this way. If the return you’re getting on your savings isn’t keeping pace with inflation, it is losing value. Assuming an inflation rate of 2% (the Bank of England target), something that costs you £100 in 2020 will cost more than £148 in 20 years’ time. So, if you invest now, that £100 would have to grow to £148 in 20 years just to be worth the same in real terms.

In October 2020, the Consumer Prices Index (CPI) in the UK was 0.7%. So far, so good. Prices are not rising very fast, which means that your money will go further. However, recent research from Moneyfacts found that there were no easy-access savings accounts that paid an interest rate higher than inflation (unless you’re an existing customer of the ICICI Bank).

Simply put, if you invest your money in an easy-access savings account now, it’s highly unlikely to keep pace with inflation.

If you were prepared to tie your money up in a fixed-rate bond, then you have dozens more choices. But, with inflation set to rise in 2021, you may not be making a ‘real’ return for long.

So, what can you do about it?

Cash v shares – what’s the long-term comparison?

As you approach retirement, you might decide to move some of your fund into cash. As an investor, you might be worried that stock market volatility will affect your portfolio. You’ve worked hard to save that money and you don’t want to lose it!

Alternatively, you might decide to keep your fund invested – even as you start drawing down an income from it. Over time, stock market returns will a) generally exceed returns from cash and b) typically outstrip the inflation rate even though there may well be sharp corrections in markets.

For example, here are the calendar-year returns for the FTSE All-Share Index over the past 30 years.


Source: Vanguard

The chart shows that there have been eight years during this period where returns were negative. However, the average annual return over the whole period is 9.9% – even taking the dotcom bubble and the global financial crisis into account.

It’s not just UK equities that have generated a good return over time. The MSCI World Index – an index covering 23 developed market countries including the UK, US, Germany, and Japan – shows that global markets have also produced positive returns.

Here’s the annualised returns of the MSCI World Index over one, three, five and ten years, and since its launch at the end of 1987.


Source: MSCI

Over the last decade, the index shows an annualised return of 10.81%. Between 31 December 1987 and 30 November 2020, the annualised return of global equities was 8.21%.

Shares vs other asset classes

Over time, equities in the UK and the wider world tend to generate positive returns, despite some short-term turmoil.

But how do equities compare to other asset classes?

The chart shows the value of £10,000 invested in 1990 in a range of asset classes.


Notes: Cash = ICE LIBOR – GBP 3 month; global equities = the MSCI World Index; US equities = S&P 500; UK equities = FTSE All-Share; inflation = Retail Price Index, (Jan 1987=100); global bonds = Bloomberg Barclays Global Aggregate; European equities = MSCI Europe; UK gilts = ICE BofA; UK gilt (local total return) emerging market equities = MSCI emerging markets; all shown gross of taxes and of fees and in GBP.

Source: Bloomberg and Factset and Bank of England, as at 31 December 2019

Here, you will see that if you’d kept your £10,000 in cash, you’d have generated a return that beat inflation. Your savings would have grown to £36,071.

However, if you’d invested your £10,000 in UK equities in 1990, it would have been worth almost three times as much (£102,992) in 2019. If you’d invested in US equities, you’d have generated a return more than five times better, with your £10,000 growing to £210,250.

Imagine what a retirement that would have bought you, compared to being cautious and leaving your money in cash!

Working with a financial planner can ensure you get the balance right

Every investor is different, which is why it’s so important to have a bespoke plan that fits your circumstances. You might have different sources of income, different life goals, and a different tax situation from other clients.

What we can do is put a robust plan in place to ensure you can life the lifestyle you want with the money you have. If you don’t, you could end up being too cautious in later years and risk running out of money.

An initial chat is always at our expense, so please get in touch to find out more about how we can help you manage your income in retirement. Contact us today or call 01372 404417.

Please note

The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investment (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available.


Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.




Reviews and Ratings for Financial adviser Ray Martin, Kingston-upon-Thames

We’re highly rated

We retain a 5-star rating on VouchedFor, an independent service that enables clients to review their professional advisers. VouchedFor verifies the reviews and testimonials we receive, so you can be confident that they are authentic. 2018, 19, 20, 21, 22 and 23 Top Rated Adviser, as listed in The Times

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Our former financial adviser was retiring and recommended Ray to us. He alleviated the constant worry of where to best invest our savings without too much risk. We’re very pleased with the results over the last 10 years. He explains things in layman's language, which we appreciate, and gives us the confidence we have made the right choices. What more can people expect?


We had pension policies and investments that needed sorting out ready for retirement. We didn't know what to expect from a financial adviser. We assumed that he would simply advise us where to get the best deals. How wrong we were. Ray took us right back to basics. He made us carefully consider what we really wanted to achieve. He has allowed us to start to really enjoy our retirement.


I needed financial advice about pensions and investments as I approached retirement. My wife was in the same position. Ray Martin worked out a comprehensive plan for putting my pension provision and savings into proper order. He did the same for my wife. He has continued to provide us with advice ever since. Ray is always straightforward, open and proactive.


I was approaching retirement and wanting to look into limiting taxation and Inheritance Tax, as well as providing for my wife. Ray provided sound advice to switch from my current arrangement to a Drawdown Pension and ISA investments. I have now retired and have started seeing the benefits of his advice. The returns on my portfolio have increased beyond expectation. Ray performed extremely well.


I had sold my house and didn't know how to invest the money. Ray invested very wisely and there has been about a 5% increase every year. He listened to our queries, gave answers that we fully understood and followed any requests. He always had time for us, and never rushed us. We would have been financially at a loss without his help.


Ray has been advising my wife and me for about 20 years. He is everything one could hope for in a financial adviser: wonderfully enthusiastic, extremely well informed, completely trustworthy and scrupulously observant of the regulatory requirements. He is able to explain complex matters very clearly, and so far, his advice has always been first class.


I had money to invest and had no idea how to go about investing it and hopefully making a gain. I have three children and wanted advice about inheritance planning. Ray is very patient, very clear when he explains things, he is very interested in me as a person, totally trustworthy and is an excellent listener. We have never been disappointed! He`s been brilliant.


I had just been widowed. Ray sorted out and simplified what was a very complex set of investments into a much less confusing portfolio. I have been extremely happy with everything Ray has advised over the last 12 years. Whilst moving with the times, he has dealt with all aspects of my investments wisely and given me all the guidance and help I have needed.


As the financial director of a company, I was seeking to get advice on how to plan and invest for retirement. Without a doubt, Ray Martin helped me understand and plan how to fund my retirement. Ray has been with me every step of the way. His advice has been invaluable. I retired and achieved my annual income goal. His continued advice is helping me in the next stage of my life.


I needed some advice regarding my late mother’s estate. I had also retired and required advice on how to manage my private pension. Ray was extremely helpful, and his advice was very clear and easy to understand. I came away from our initial meeting feeling very relieved and less stressed. We have just had our first yearly review and I was surprised how well my investments had done.


In the last 10 years, my circumstances have changed with the passage of time. Ray has guided me on how to protect and make my money grow. He listens carefully to my needs and gives clear, concise advice in a professional manner. He and his team are always accessible and patient with my questions and their approach gives me confidence that my finances are securely looked after.


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