By the age of 70, you will either have retired or be thinking about retiring imminently. It could well be, therefore, that you're already making withdrawals from that hard-earned pension pot. But that does not necessarily mean you have to stop investing straight away. Much of your pension pot will still be invested, or you may have a good enough income that you still have cash you can invest. However, your age will have a bearing on the asset allocation and structure of your investment portfolio.
Why is investing according to age beneficial?
Firstly, it is good to explore why investing according to your age is so vital. Does such an approach not sound a bit arbitrary? Technically speaking, yes, investing according to age is a little arbitrary. However, the reason it is so often crucial to investing is that your age can, and often does, affect your risk profile.
Risk profiles are highly dependent on investment timelines. Generally speaking, the less time you have until retirement, the lower your tolerance is for risk due to a shorter investment timeline. Plus, without a salary to bolster your income every month, you are more sensitive to losses in your investment portfolio. You no longer have your pay to top up your pension pot, nor is it there to cover your everyday expenses. Instead, your pension withdrawals need to cover your living costs.
When you get to 70, there is a high chance you will be making pension withdrawals, as well as a high chance that you no longer have a salary. Therefore, it is likely your risk profile will be similar to that of other 70-year-olds.
That said, other factors do come into play when considering your risk profile and why some investments may be suitable for some 70-year-olds and not others. For example, high, regular outgoings make your tolerance to risk lower. In contrast, if you have a large pension pot with very few outgoings, you could potentially take on more risk.
Investment considerations in your 70s
When you are in your 70s, there are likely to be specific considerations you need to consider when investing in addition to your risk profile.
Being 70 provides some guidance on what your asset allocation should be - assuming that you will soon retire or have already done so. Many fund managers would advocate having an investment portfolio with an asset allocation heavily weighted in bonds at this stage in your life. Bonds are a less risky asset than investments in stocks and shares. Plus, they can still provide some monetary growth. As a result, it is not uncommon to see a 70-year-old's portfolio have anything up to 80% of its investments be in fixed income products like bonds. The rest will consist of equities, alternative assets, and cash.
Size of your pension pot
Knowing the size of your pension pot will have a significant bearing on what investments are suitable for you. When you are 70, there is a fine line to be had when preserving your equity or capital balance against trying to provide an income. When a pension pot is big enough, it means that the equity does not need to be touched. Instead, the pension pot holder can simply live off the income.
However, most of us will need to withdraw from the capital part of a pension pot (and arguably rightly so!). But that is why asset allocation is so crucial. It's worth having investments where the capital balance does not fluctuate (which can be the case when heavily invested in equities) while providing an income, as bonds do through coupon payments.
When withdrawing from your pension pot, you should try to be aware of the most tax-efficient way for you to do so. This will vary hugely from individual to individual, given what they anticipate needing their money for in the future. For some, it makes sense to make use of the current 25% tax-free withdrawal. To others, they may want to keep their pension pot fully invested for a bit longer.
Standard of living
Finally, you need to factor in your required (or desired!) standard of living when making investments in your 70s. It could be that your pension pot is not big enough to fund the lifestyle to which you aspire. For that reason, you may have to rethink that standard of living altogether. Can you change it to make your pension pot stretch? Or, if not, are you happy to take on slightly riskier investments? You would be doing so with the hope that those riskier investments grow your pension pot more quickly. But then you do run the risk of losing investment value.
Investment ideas for over 70s
Bearing all this in mind, what are investments suitable for a 70-year-old? Below are some options that may be attractive to you if you are in this demographic. Remember, all investments can go up as opposed to down. Also, remember we're all living for longer. You may have to change your intended retirement age to help get your pension pot to an amount you are happy to retire with.
As previously mentioned, many fund managers would recommend having a portfolio heavily invested in bonds in your 70s. Bonds are a good investment class when you're in your 70s as they help preserve capital while also earning interest.
However, there are several types of bonds that may or may not be appropriate for your specific circumstances. Different types of bond vary in the amount of risk they hold. Government bonds are widely regarded as the safest type of bond and, as such, have a low interest rate. Consequently, you will not earn much income from holding these types of bonds. You will need to ensure they at least beat inflation, so your capital does not erode in terms of purchasing power.
At the other end of the scale are junk bonds. These bonds attract a higher yield than others to remunerate bondholders for the additional risk of holding them. The danger is that the bond issuer goes bust and cannot repay the investment amount, let alone the interest.
Somewhere in the middle are corporate bonds, which are arguably highly suitable for investors in their 70s. The reason being is that you will attract a favourable interest rate while also feeling less at risk of losing capital. Many giant corporations issue bonds regularly. If you do thorough due diligence, you should be able to find corporations that are highly unlikely to go bankrupt and thus able to repay your initial investment. An excellent place to start is looking at the rating that rating agencies assign to a bond and work from there. Ratings provide a quick and easy way to see how creditworthy a company issuing a bond is.
Dividend paying shares
If your risk profile allows, you may find that investing in shares that pay a regular dividend payment is a suitable investment. Working like a bond in some respects, dividend paying shares can help you preserve capital and earn an income. You may even benefit from capital growth as the share price increases.
Again, much like investing in corporate bonds, if research is thorough enough, you may find that the risk of your stock decreasing massively in price is small. Additionally, ensure when researching dividend paying shares, you check there is minimal chance of the dividend being cut or even stopped. To do so, you need to be comfortable that market conditions are right for a company to keep paying out at the rate they are. Additionally, you also need to be happy that their business model will continue to be profitable to such a degree that dividend payments are assured.
Alternatively, you may find it better to invest in an equity income fund instead of stock picking yourself. Equity income funds are run by investment professionals who have many years of experience. That experience means they can position a fund to do what a person in their 70s needs - attract some capital growth while also providing an income.
Somewhere between stock picking, buying specific bonds and investing in equity income funds is investing in a multi-asset fund. Many novice investors at 70 may find investing in such an asset type reassuring. The fund will invest in a specific proportion of equities versus bonds. The structure of any multi-asset fund will be set out in its investment objective and prospectus.
If a multi-asset fund sounds attractive to you, aim to identify funds that invest in a split of equities, bonds and any other asset class that you're happy with. Many multi-asset funds may even be income funds - thereby providing you with an income while trying to preserve your capital amount.
Perhaps the most significant advantage to a multi-asset fund is that you get all the benefits of other potential investments suitable for a 70 year - though to a lesser effect. For example, on days that equity markets have a good day, your capital will increase. However, it will not increase as much as that of an investor who chose a purely equity invested fund. Your return will be diluted by your bond holdings, which are not exactly correlated to equity markets.
Finally, don’t forget that you have worked hard for the majority of your life. It could be that you want to enjoy the fruits of that labour and one way to do that is to invest in wine. Doing so means you can either drink it and enjoy it in that way or try to get into fine wines, which can be good investments.
Investing in fine wines is not without significant potential drawbacks. For example, you may end up buying a corked wine. Another big drawback is that the market is smaller for wine. Wine is not as liquid an investment - no pun intended! - as it sounds. That said, if you know your wine, it can be a good way of using your knowledge to make a return. Or conversely, if you do not know your wine, it can be one of the more fun investments to learn about.
Investments for a 70-year-old
Investing as a 70-year-old is not something you should be scared of, even if you have stopped earning a salary. Investing into your 70s is not only perfectly sensible, but it can also be profitable. As ever, you need to ensure the investments you make are suitable for you, your requirements and your risk profile. By considering all these ideas, you will help ensure you preserve your capital and hopefully earn an income.