Investing for every life stage

The Anthology section features some of our best writing for clients. This piece for J.P. Morgan offers a three-stage income plan for ISA investment – whatever your age

AUTHOR: Emma Simon

EDITOR: Francis Jay

As we grow older, our needs and outlook change. The one consistent thing is that we need to invest for later life.

Income investment via an ISA has a key role to play here, however old you are and whatever stage you’re at.  Below we look at three life stages and suggest approaches which may help.

Remember this is a general view. Always consider your circumstances and needs. This will include your financial security and your family situation, as well as your attitude to risk.

35 years from retirement: growing your investment portfolio

If you want to build a decent retirement pot, you need to start investing early. In many ways, this is the most important step. You may change your underlying investments over the years and rebalance your portfolio, but if you continue to build savings by investing surplus income, you’ll make a big difference to your future wealth.

When you’re starting out – and may have relatively small sums to invest – the focus tends to be on growing the value of these holdings.

It’s easy therefore to overlook an income-focused approach. That might be via funds or investment trusts that invest in bonds or mature companies with a track record of using profits to pay dividends to their shareholders.

Re-investing these dividends this can be a powerful – and reliable way – to boost returns, thanks to the effect of compounding.

Those at the start of their investment journey typically have the longer time horizons. If you have 20-plus years before retirement and are then planning to keep your money invested beyond this date, you can afford to take a bit more risk with your money. This can lead to higher returns, although performance is likely to be volatile.

Setting up a regular savings plan is an effective way to help manage this volatility and can also suit new investors who with smaller sums to invest. Investing just £150 a month will mean you have put £9,000 aside after five years, before any investment returns are taken into account.

At this stage, investors may want to consider global investment trusts, where a slice of the portfolio will be invested in fast-growing emerging markets. Many of these trusts will offer growth and income options.

25 years from retirement: maximising your investments

Many people look to maximise their investments as their salary increases and demands on their earnings recede. An income-focused portfolio can help investors consolidate and build on earlier gains, growing the value of their capital and so boosting the income this yields.

For example, an investment trust may aim to pay a yield of 4 per cent a year. If this income is reinvested, then your investment should grow.

But many income-focused investment trusts also aim to deliver capital growth. For example, if a share prices rises from £100 to £110, but still yields 4 per cent, this means you are getting 4 per cent of a larger sum.

This combination of capital growth, plus reinvested income can be an effective way to maximise returns.

At this stage, investors may look to make larger one-off payments on top of regular savings plans.

Investors may also want to consider investment trusts focused on UK equity income, or those that follow a twin-track growth and income strategy.

After retirement: generating additional income from investments

Once you retire and stop earning, you still need to make your investment portfolio work for you. For people this means taking income from their portfolio to supplement a state or company pension and also to meet day-to-day living costs.

Others will find their income needs adequately met by their pension. They may want to keep their money invested and take out income on an ad hoc basis, to meet unexpected expenses — be it the holiday of a lifetime or medical costs. Future care costs, and inheritance may also be a consideration.

Income-focused investments can provide flexibility at this stage. In particular, investment trusts give retirees the freedom to take the dividends they need for living costs. They can also reinvest surplus income to help preserve capital through retirement.

Once people have stopped working they inevitably have a more cautious attitude to risk, because losses can’t easily be made up again.

Investments can go down as well as up. Past performance is not a guide to the future.

FURTHER READING: J.P. Morgan case study