Mike Lithgow began contributing to his pension at the age of 40, with the goal of retiring at 60. Now at 70, his plans have evolved significantly. Recently, he made the bold move to increase the risk associated with his £102,000 pension fund by investing more heavily in stocks.

A semi-retired film editor from Penryn, Cornwall, Lithgow feels confident in his decision to embrace higher risk due to his ongoing work commitments and an additional £240,000 in savings from selling two buy-to-let properties. Alongside his 67-year-old wife, Belinda, who has a teacher’s pension, they enjoy a combined pre-tax income of approximately £55,500 annually from state pensions and other sources.

While they are positioned for a desirable lifestyle, Lithgow is keen on maximizing returns from his pension. Many individuals, however, are falling short of a comfortable retirement, with the average pension pot around £20,000, as reported by Pension Bee. In contrast, Evelyn Partners suggests that securing approximately £795,000 is essential for a comfortable retirement.

If you’re struggling to meet your retirement goals, you might consider adopting a more adventurous approach to your savings, much like Lithgow. Here are some key points to consider.

Understanding the Necessity of Increased Risk

Beginning your retirement savings later means you must allocate more funds to meet your financial targets. While increasing risk can accelerate growth, it can also introduce greater volatility to your portfolio.

Determining the appropriate risk level for your pension can be complex, influenced by factors like age, retirement timeline, lifestyle aspirations, and existing assets.

If you intend to keep your investments active during retirement and use a drawdown strategy for income, there may be less need to scale back risk as you near retirement age. However, if you’re considering purchasing an annuity—a product that pays a fixed income for life—your portfolio could suffer significantly from market downturns just before retirement, reducing the size of your annuity income.

Gary Smith from Evelyn Partners emphasizes the importance of finding a careful balance: “You may need your pension to fund three decades of retirement, so managing risk while ensuring some growth potential in equities is crucial.”

Portfolio Diversity and Risk Management

Instead of committing to an annuity at 60, Lithgow opted to take a 25% tax-free lump sum from his Prudential pension to invest in a boat, transferring the remainder—£106,000—into a self-invested personal pension (Sipp) with Bestinvest.

Initially, his fund prioritized safer investments such as bonds, but now it consists of about 80% equities.

For seven years, Lithgow withdrew roughly £4,000 yearly, later increasing that amount to £7,000 after selling his rental properties in 2022. Despite these withdrawals, significant investment growth has allowed his fund to retain a value of about £102,000. Lithgow remarked, “Our income sources provide a stable retirement, allowing us to tread carefully without excessive risk. The fund has performed well even with our withdrawals.”

If you possess a guaranteed income in retirement, such as from a defined benefit pension or state pension, you may have the flexibility to adopt a more aggressive investment strategy with your savings.

Helen Morrissey from Hargreaves Lansdown points out that guaranteed income creates room for riskier investments in a Sipp. Ideally, you’d have guaranteed income for essential expenses, along with additional funds for discretionary spending.

For those without a defined benefit pension looking for a mix of security and flexibility, purchasing an annuity could cover fixed costs, while leaving part of your pension invested for variable needs.

The Potential Upside of Risk

While risky investments can offer higher returns, there are no guarantees. According to AJ Bell, a £10,000 investment in an average stock fund ten years ago would now be valued at approximately £25,308. In contrast, a balanced fund containing 40-85% stocks would have grown to about £17,049, while a defensive fund with 0-35% stocks would be at £12,664.

If this trend continues for another 25 years, the fully invested equity fund could reach £101,891, the balanced fund £37,954, and the defensive fund £18,048.

Common advice suggests that the percentage of shares in your portfolio should be calculated by subtracting your age from 100. For instance, a 30-year-old might invest 70% in shares, while a 60-year-old would invest 40%. This guideline is based on the idea that younger investors can withstand market fluctuations more easily.

Craig Rickman from Interactive Investor notes that this rule overlooks individual risk tolerance and investment experience while neglecting other asset classes like commodities and cash, which can enhance diversification.

Adjusting Your Workplace Pension Strategy

With auto-enrollment, workers aged 22 and older earning over £10,000 are automatically enrolled in company pension schemes, often placed in default funds that may not fit individual risk appetites.

Tom Selby from AJ Bell cautions that default funds might cause younger workers to take on less risk than they should, potentially hindering long-term growth. Older-style “lifestyling” pension schemes typically become less risky as the retirement date approaches, assuming an annuity purchase, which may not suit all retirees.

To tailor your pension investments, log into your account or contact your pension provider to adjust your retirement date and investment choices.

Considering When to De-risk

Assessing your portfolio’s risk frequently, especially as retirement nears, is critical. Several wealth management firms offer pension portfolios designed for different life stages.

Hargreaves Lansdown presents a structured approach to their pension plan, with a growth phase lasting until eight years before retirement, investing primarily in high-risk funds, followed by a gradual shift to a caution fund with a more balanced risk profile.

Recognize Your Risk Tolerance

Ultimately, there comes a time when taking on additional risk may no longer make sense, whether due to timing or because you have already secured enough for your desired retirement. Increasing risk solely to accelerate growth may jeopardize your financial future.