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Drive your retirement savings

03 August 2018 | Markets and Economy

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Drive your retirement savings

Commentary by Garrett Harbron, head of Vanguard UK wealth planning research.

In some ways, investing for retirement is a bit like driving a car. Driving has some advantages over walking, usually getting you to your destination more quickly and with less effort. However, the advantages of driving are largely determined by how far you have to go. You'll save a lot more time and effort if you're crossing the country than if you're going to the end of the block. Similarly, the longer you have until retirement, the more work investing (as opposed to saving) can do for you, making your retirement goal easier to achieve.

Another way investing is like driving is that, like a car, a good investment portfolio has an accelerator and a brake. In an investment portfolio, though, the accelerator and brake aren't pedals on the floor, but equities and bonds. Equities are the accelerator of your portfolio. They generate most of the returns and can help you get to your destination more quickly. Bonds, on the other hand, are the brake. They may not do much to help you when stock markets are on the rise, but they can help slow you down (reduce your losses) when stock markets aren't doing as well.

Risk isn't always bad…

Some investors avoid stocks because of the risks involved, deciding instead to load up on bonds, which tend to be safer. While this approach will likely result in a portfolio that is less risky than one which holds equity shares, it's like driving down the road with your brakes on – you won't get to your destination very quickly that way.

Consider an investor saving £500 a month in a portfolio consisting entirely of bonds earning 2.5% (our median forecasted return for bonds over the next 30 years). As our chart shows, it would take around 45 years to accumulate a pension pot of £500,000. That same £500 a month saved into an all-equity portfolio earning 6% would only take about 30 years – two-thirds as long.

Time to accumulate £500,000

Time to accumulate bar chart

Source: Vanguard.

… but don't drive too fast

Of course, in investing, like driving, pressing on the accelerator too hard and for too long can be dangerous. All-equity portfolios tend to earn higher returns, but they also take on much more risk. This can cause investors to sell during market downturns, turning paper losses into real pound losses. That's the investing equivalent of crashing your car because you were driving too fast.

When driving, getting to your destination quickly and safely requires using both the accelerator and the brake. When investing for retirement, achieving your savings goal requires a combination of equities and bonds. Too much of either will make it hard to reach your destination, but the right combination can make your journey much smoother.

Garrett  HarbronGarrett Harbron
Head of Vanguard UK wealth planning research

Investment risk information:

The value of investments, and the income from them, may fall or rise and investors may get back less than they invested. Past performance is not a reliable indicator of future results.

Other important information:

This document is designed for use by, and is directed only at persons resident in the UK.

The material contained in this document is not to be regarded as an offer to buy or sell or the solicitation of any offer to buy or sell securities in any jurisdiction where such an offer or solicitation is against the law, or to anyone to whom it is unlawful to make such an offer or solicitation, or if the person making the offer or solicitation is not qualified to do so.

The information in this article does not constitute legal, tax, or investment advice. You must not, therefore, rely on the content of this article when making any investment decisions.

Vanguard Asset Management, Limited only gives information on products and services and does not give investment advice based on individual circumstances. If you have any questions related to your investment decision or the suitability or appropriateness for you of the product[s] described in this document, please contact your financial adviser.

The opinions expressed in this article are those of individual authors and may not be representative of Vanguard Asset Management, Limited.

Issued by Vanguard Asset Management, Limited which is authorised and regulated in the UK by the Financial Conduct Authority.

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