Lifestyling: Managing Risk as You Approach Retirement

What lifestyling means

When you are saving for retirement, your investment risk should not stay the same throughout your life. Early on, when retirement is decades away, you can afford to take more risk because you have time to ride out the ups and downs of the market. As you get closer to retirement, the conventional approach is to gradually reduce risk, so that a sharp market drop right before you need the money does not undo years of growth. This gradual shift is known as lifestyling.

In a typical lifestyling strategy, a pension portfolio might start out heavily invested in shares, sometimes 80 to 100 percent. Then, in the ten or fifteen years before retirement, it slowly moves into less volatile assets like bonds and cash. By the time you actually retire, the portfolio looks very different from how it did in your thirties.

The gap in Islamic pensions

Most mainstream pension providers do this automatically. The challenge in the Islamic pension space is that many Shariah compliant providers do not offer lifestyling at all. That can leave investors fully exposed to the stock market right up to the day they retire. If a major crash happens in the wrong year, that can do real and lasting damage to retirement plans.

Taking too little risk

The opposite problem is just as real. Some people, worried about losing money, dial down their risk far too early. Sitting in cash or very low risk assets for decades sounds safe, but inflation quietly erodes the value of those savings. Over a 30 or 40 year career, taking too little risk can leave someone with a much smaller pension pot than they expected.

Knowing when to shift

The hard part is knowing when and how to make these shifts. There is no universal rule. It depends on your age, your goals, the size of your pot, your other sources of income, and your personal comfort with risk. For people who do not feel confident managing this themselves, this is exactly the kind of area where speaking to a qualified adviser, or using a provider that offers a thoughtful lifestyling option, can make a real difference.

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