Three quarters (76%) of over-50s say risk appetite is key when planning for retirement, new research from Standard Life has revealed.
Two fifths (41%) of those yet to retire expect their risk tolerance to reduce as they approach retirement. In contrast, just 8% of over-50s yet to retire anticipate an increase in their appetite to take on more risk with their pension savings as they approach retirement.
The findings are part of Standard Life’s research examining how this cohort thinks about market uncertainty in relation to their retirement.
The firm said it suggests that the vast majority of people are aware that they either have less time to recoup losses ahead of retirement or may be running down their savings more quickly if taking an income from a pension in drawdown.
According to Standard Life, retirement savings are particularly vulnerable to market ups and downs during the ‘Retirement Risk Zone’; the five to ten years before and after retirement. During this time, many want to remain invested to continue growing their pension savings yet, at the same time, worry about market volatility given how close they are to retirement.
Dynamic Planner’s Financial Personalities research found the Retirement Risk Zone is the critical period during which the preference for certainty significantly overtakes a preference for risk-taking, as well as the fear of missing out on potential investment growth.
An individual’s financial personality can often change as they approach retirement, with the stakes of investing significantly higher than earlier in the accumulation journey. Preferences can shift from taking financial risks to preferring greater certainty of future investment values and retirement outcomes.
Claire Altman, managing director of individual retirement at Standard Life, said: “Investment risk is an ongoing area of focus for regulators, the industry and customers. The FCA’s Retirement Income Review highlighted that decisions for those approaching or in retirement have become much more complex with the potential for more risk, with a focus on the level of income withdrawn and the investments where savings are held.
“Attitudes towards risk will differ from person to person, but recent market volatility has clearly shown the impact this can have on an individual’s pension savings.
“Research from Oxford Risk has also shown that emotional reactions to market movements costs the average investor around 3% per year in lost returns. This is especially true for those in the Retirement Risk Zone, when many may be thinking about or already withdrawing their pension savings. During this time retirement savings are more vulnerable to any major losses which could have a knock-on impact on someone’s retirement lifestyle.”
Altman said that retirement income products, such as smoothed managed funds, offer a solution to the issue around investment growth versus risk, and over half (56%) of over 50s say their preference would be for steady medium-long term growth if sheltered from the short-term ups and downs of the stock market.
“Smoothed funds can be especially helpful during periods of volatility and are well worth considering as part of the wider mix of retirement income solutions,” she added.
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