3 practical ways to protect your retirement savings from market volatility

Category: News

Accumulating the wealth you need to support a comfortable lifestyle in retirement could take years of work and careful planning. It can be a satisfying journey to build the funds you need to achieve your life goals and desired lifestyle.

Unfortunately, the unpredictability of financial markets could disrupt even the best-laid retirement plans.

Indeed, with global elections and an ongoing cost of living crisis, 2024 has been an uncertain year for investors.

Yet, there are steps you could take to safeguard your retirement savings from market volatility. Here are three practical strategies to consider.

1.Diversify your investment portfolio

Diversifying your investments could minimise the risk of volatile markets negatively affecting your portfolio.

In simple terms, “diversification” means spreading your money between different types of investments.

There are many ways to achieve this. You might diversify across:

  • Asset classes – like equities, bonds, funds, and property
  • Geographical locations – including countries and regions
  • Time frames – such as investments held over the short, medium, and long term
  • Sectors and industries – like information technology, real estate, and energy.

Distributing your investments across these categories could help to limit losses in your portfolio. For example, if one geographical region underperforms, another could make gains that counteract this loss.

The chart below from JP Morgan shows the performance of six global stock market indices between 2013 and 2023:

Source: JP Morgan

As you can see, performance across all regions varies. There is no single region that consistently outperforms the others.

So, by spreading your investment risk across global assets, profits in one region could balance weaker performance elsewhere.

As an example, in 2020, the UK FTSE All-Share index fell by 9.8%, making it the worst-performing market of these six. So, had you invested all your money in the UK stock market that year, you’d likely have seen the value of your portfolio fall.

On the other hand, if you had spread your money across different geographical regions, your losses in the UK might have been offset by gains elsewhere. Indeed, shares in the US S&P 500 index rose by 18.4% in the same year, while shares in the Asia ex-Japan index rose by more than 25%.

2. Invest for income

Another way to protect your retirement plan from the potential effects of a volatile market is to consider investing for income. For example, you could add fixed-income investments, such as bonds and gilts, and dividend-paying shares to your portfolio.

These investments may provide a valuable additional income stream during periods of uncertainty while allowing you to leave your principal investment untouched so that it might continue to grow.

A key benefit of adding such investments to your portfolio is that they aren’t directly affected by market volatility in the same way that the price of fund units or individual shares can be.

Fixed-income investments

Fixed-income investments, such as bonds and gilts, pay out regular returns as income. If you buy a bond, you’re effectively loaning money to a company or government. In the UK, government-issued bonds are known as “gilts”.

The rate of interest you receive annually remains the same for the entire term of the bond, and when your investment “matures”, you’ll be repaid your original investment. So, bonds and gilts could provide a relatively “safe” way to build a steady income from your investments.

Indeed, bonds are considered to be lower risk than other types of investments, such as equities. What’s more, gilts in the UK are backed by the Treasury, and it’s rare for stable governments like this to default on debt obligations.

Yet, it’s important to note that you could face penalties for withdrawing your money before the bond’s fixed term. Also, over time, the real-term value of your bond could be eroded by inflation.

What’s more, while bonds are relatively safe compared to equities, there is always a chance that bonds could default if the borrower goes out of business – lower risk does not mean no risk.

Dividend-paying shares

Dividends are the percentage of a company’s earnings that are paid to shareholders as their share of the profits.

Dividend payments are typically made several times a year to all shareholders, and you can either take these as income or reinvest them into additional shares. The amount you’ll receive will depend on how many shares you hold.

The income you can receive from dividends could be valuable in retirement, especially in volatile markets, as you can still receive dividends even if share values are moving unpredictably.

It’s important to remember that shares usually represent a higher-risk investment than bonds and gilts. Additionally, dividends are not guaranteed. While you may well continue to receive dividends during periods of poor performance, some companies might pause dividend payments if they face financial difficulties.

There may also be tax implications for receiving dividends on shares that you hold outside a tax-efficient wrapper such as an ISA.

Read more: How you could create an income from your investments

3. Purchase an annuity

An annuity is an insurance product you could buy using a lump sum from your pension savings. It will provide a guaranteed income, usually for the rest of your life.

This could reduce the risk that you’ll need to sell valuable investment assets during periods of market volatility.

What’s more, the income from an annuity is usually fixed, which may provide valuable peace of mind – you’ll know that you have a reliable income each year of your retirement, whatever happens in the financial markets.

There are many types of annuities to choose from, so you may benefit from seeking financial advice. A financial planner can help you choose a product that suits your specific circumstances and retirement goals.

It’s worth bearing in mind that annuities are not suitable for everyone. Compared to alternatives, such as pension drawdown, annuities typically lack flexibility. Once you are invested in an annuity, it’s usually not possible to change your mind. You’ll also miss out on any potential future growth your lump sum might have benefited from, had you left it in your pension.

Get in touch

We can help you review and adjust your retirement savings plan regularly to ensure you stay on course to achieve your goals, even during volatile periods.

To find out more about how we can work together, please get in touch. Email info@lloydosullivan.co.uk or call 020 8941 9779 to see how we can assist you.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (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.