Market crashes and bouts of extreme volatility are hardly pleasant for any investor. But if you are about to retire and need to crystallise some of your investments, they can feel downright frightening.
However, if you have planned your retirement strategy well, you should be reasonably insulated against the worst – and there are things you can do to minimise the repercussions.
You planned for this . . .
If you plan to retire this year, you have hopefully already taken steps to structure your portfolio accordingly. As Petronella West, chief executive officer at Investment Quorum, puts it: “If you’re in a long-only equity portfolio and you are due to retire, then you have not thought things through.”
The chart below looks at how the four Vanguard LifeStrategy funds, which have different levels of exposure to equities and bonds, have fared since the start of the year. This makes it clear that de-risking your equity portfolio by adding bonds to the mix would have gone some way towards cushioning the impact of the recent volatility – although with bond yields going up in recent weeks, especially on US Treasuries, fixed-income assets have also been under pressure.
Together with some de-risking, the other step you should take ahead of retirement is to build a decent cash buffer, from which you can draw income without crystallising losses when markets are down. West suggests a ‘three-bucket’ approach, meaning enough money in cash to cover about three years of expenses, another four years’ worth of expenses in an income portfolio, and the rest in global equities and other growth assets.
If you have implemented some version of this, there is a good chance you are in good enough shape to follow through with your original retirement plans without much adjustment. Your portfolio may have fallen in value, but it will recover eventually, and in the meantime you can draw on your cash – you are in a position to tolerate the volatility. Similarly, if you are relying on the natural income generated by your portfolio, there should be no need to make big changes to your retirement plans because those plans do not involve selling investments anyway.
Crucially, do not panic now and frantically turn your investment strategy on its head, even if it suddenly feels a little racy for your circumstances or risk appetite. While retirement does call for a degree of de-risking, people actually have a tendency to overdo it. Ben Yearsley, investment director at Fairview Investing, notes: “The biggest mistake is that many de-risk too soon. You could have 30 years or more in retirement, when you’ll be relying on your pension and investment pot. Therefore, you still need growth.”
So even if your portfolio has been more volatile than you’d like, remember that you do need equities for the long term, and sit tight. Advisers often tell of clients who decide to move into cash when markets are crashing, and then miss out on the recovery. These big trades are practically impossible to time, with the best market days often occurring quite close to the worst, so tolerating the volatility is really the only viable option. Vanguard research points to the fact that of the 20 worst trading days seen in global markets since 1980, nine happened in years that ended with positive returns – and conversely, 13 of the 20 best trading days were in years with negative returns.
Read more from Investors’ Chronicle
… but what if you haven’t?
Your position could be trickier if you have left changing your strategy a bit late, and you are a year or less away from retirement. This would normally be the moment to tweak and de-risk your portfolio, but now hardly looks like the best time to go about it. On the other hand, even if you wait, your time horizon is not very long, and there are no guarantees that things will not get worse before they get better – the tariff situation is hardly a done deal.
It’s a tricky call. Perhaps the biggest risk you run by retiring during a downturn is sequencing risk. If you draw too much from your portfolio when markets are down, it will be much harder for the pot to get back to where it was, even after a full market recovery has materialised.
The table below is a basic illustration of what sequencing risk could look like. Say you have a £500,000 portfolio and need to withdraw £25,000 a year (5 per cent of the portfolio) as you enter retirement. Then your portfolio dips 20 per cent during a market crash. In the first scenario, you wait until full portfolio recovery to start withdrawals. In the second, you withdraw at the bottom of the market. In both cases, the portfolio returns 6 per cent a year over the following years and you increase your withdrawals by 2 per cent a year to account for inflation.
Over a decade, the timing of that first withdrawal ends up costing you £9,400. This figure will increase over a longer period of time, if you withdraw after a market dip more than once, or if you withdraw a bigger percentage of the portfolio.
In practice, this means you should sell and withdraw as little as you can get away with when markets are down. But it doesn’t automatically follow that you have to postpone your retirement and keep working.
West says you should focus on working out how much money you are going to need and when, as well as what assets can or need de-risking now, against what can wait for better times. “You need to look at the individual holdings within your portfolio and try not to liquidate those that have been hurt by the current volatility,” she says. US investments can be especially painful at the moment, both because they have lost value in themselves and because the dollar is down. But UK equities, for example, have fared better over the past month.
If you have significant cash savings, and perhaps a guaranteed income from your state or defined-benefit pension, you might be able to afford to wait things out. On the other hand, if you are trying to build an income portfolio, check when the funds or stocks you are considering are due to pay dividends – it could be a few months until you actually receive the income, so you may need to start building the portfolio in advance.
Rethinking your income needs might also be an option. You may have planned to draw a certain sum from your investments every year, but depending on your bills and expenses, this might be more than you actually need. In times of volatility, Yearsley suggests withdrawing a percentage of your portfolio, rather than a fixed sum, to avoid taking too much if the investments have lost value.
We discussed ways to decide how much you can afford to withdraw from your portfolio in this article (‘The pros and cons of the 4% rule’, IC 14 Feb 2025). The 4 per cent rule assumes that you start retirement by taking that amount from your portfolio in the first year, and then increase the sum in the following years to account for inflation. If you are about to retire and your portfolio performance has suffered, it would be wise to calculate the initial withdrawal by applying the percentage to the new (lower) portfolio amount. Sticking with percentage-based withdrawals in the following years is also an option: it will make for a less regular retirement income but help make sure you don’t run out of money in the long term.
Tax-free lump sum and annuities
You might assume that retiring equates to crystallising your entire pension pot and taking your 25 per cent tax-free lump sum in one go. In current markets, this could be a painful move. Instead, modern pension schemes offer ways of taking the tax-free lump sum more gradually.
You could use an uncrystallised funds pension lump sum (UFPLS), which entails taking a lump sum from your pension, of which a quarter is tax-free and the rest is subject to income tax. A similar option is phased drawdown, where you only crystallise a portion of your pot at a time.
A key difference between the two is that if you opt for phased drawdown and only take the 25 per cent tax-free lump sum on the portion of pot you crystallise, you will not trigger the money purchase annual allowance (MPAA). This limits the amount you can contribute to your pension and still receive tax relief to £10,000, instead of the usual annual allowance of £60,000. If you are still working part-time or intend to resume doing so later on, it is worth keeping in mind. Your maximum pension contributions are still limited by your earnings.
Guaranteed income options also matter. If you receive the state pension or a defined-benefit pension, at least part of your income won’t be dependent on investment performance. Otherwise, you could choose to buy an annuity.
If that’s your plan, and you would like to do it now, the impact of volatility depends on what you are invested in and how much you de-risked your portfolio in preparation. With bond yields on the rise, annuity rates will also be going up, which – as David Goodfellow, head of wealth planning at Canaccord Genuity Wealth Management, notes – at least partially offsets the losses your portfolio may have experienced. For example, presently a 65-year-old couple could obtain an annuity rate of more than 7 per cent – rates are about the highest they have been since 2009. With base rate cuts on the horizon, this is potentially still quite a good time to buy an annuity.
But if you have an aggressive growth portfolio that has lost a lot, high annuity rates probably won’t make up for the hit you would have to take by selling all your pension assets in one go. Note that you also have the option of using only part of your pot to buy an annuity, keeping the rest invested. You could then potentially buy another annuity a few years later.