Retirement used to be so simple. You worked all the hours god gave you for years on end and then when you reached a certain age you simply stopped and put your feet up. Not any more. Nowadays people have bucket lists and want to see the world. They have second and third careers and they end up paying for their children later and later into life! People now live longer and expect more fulfilment, more challenges, new adventures and a new lease of life. Instead of winding down many retirees are now looking on their golden years as a time to really get stuff done. And that’s why they also need to make sure they have the money put aside to achieve this. The most common question people who have retired ask themselves over and over is ‘am I living the sort of life I want to live, now that I am not restricted by work?’ And hand in hand with that question is the most common fear of people approaching retirement; ‘will I have enough money to achieve the life I want to live?’
In this article we’ll start to look at ways in which smart financial planning can complement your emotional and mental planning for retirement and look at some of the retirement strategies you can adopt to ensure your golden years are going to be an incredibly rewarding experience and time of life.
Planning for retirement should be done years in advance. These days it would be crazy to just work for years on end and then one day just stop with no plan! Instead, you would ideally start thinking about it in your early 50’s and begin asking yourself what you’d most like to do when you finally down tools at work. Don’t just think about places you’d like to visit and landmarks you’d like to see but also about new things you’d like to learn, skills you’d like to gain, experiences you want to have, hobbies you want to take up and languages you’ve always wanted to learn. And most of all, if you want, think about other careers you might want to try if you don’t fancy sitting still in your retirement. At the same time, you should also be thinking about ways of investing so that you can keep busy earning money no matter what you want to do.
: If you indeed start planning your retirement a long way in advance, you will find that the distance from retirement allows you to carefully and thoughtfully make decisions on what kind of financial products and investments you need to put in place to achieve your plans. Most people will have looked at the transition to retirement pension (more on changes to the rules on TRIPS here) but what if you want to do more than retire on a pension? What about if you want to invest early and then build a serious portfolio of investments to manage when you quit your job? What about if you decide you do fancy a second career? What if you don’t want a second career but your finances look like it will be necessary for you to get one? All of these questions are exactly the reason that the very first thing you should be doing, at the earliest stage of planning, is a thorough personal inventory and financial assessment. This means sitting down one weekend, clearing your schedule and doing a full and frank assessment of all your savings, assets and investments as well as your current debts and liabilities. Then you need to project your assets (including your house and any equity therein) and income forward to when you reach retirement age and work out both what your savings will amount to and what your monthly income will be from your pension. Finally, you should work out your worst case scenario, (assuming all your rainy days come just as you retire) and think about how you would cope if that happened. A good way to do this is by starting with how much you spend in a year right now, taking into account all your worst habits and assuming that all the ups and downs you face right now are still going to happen in retirement. Once you have done this, the trick is not to make the mistake of assuming that on retirement you will spend less. In fact the opposite is true. You’ll no longer be at work so you’ll have more time, more energy and more incentive to go out and do things and spend money. You’ll be exploring, travelling, eating out more, at least for the first few years. So you need to assume your spending will increase by at least 10%. Lastly, once you have that figure in your head, you need to then budget for investable capital of 20 times that amount if you are going to retire at the age of 65. Then, ask yourself again – have I got enough?
Now you have a figure in mind for the life you want to live in retirement it’s time to draw up a plan on how to achieve it. Are you happy with your current retirement strategies? Have you already got enough? How short will you be after taking into account your current pension? Do you have a diverse portfolio of stocks that you think will bring strong investment returns in the future? If not, should you take more risk or should you scale back your plans? Alternatively, are you ready to try new things both now and in the future? This could be everything from small adjustments (such as taking in a lodger or renting a room on Airbnb) to investing in property and building a portfolio of property rentals and/or new builds for capital growth. Alternatively, you could think about equity release through home reversion or lifetime mortgages (which can release funds for your lifetime and let you (and your spouse) stay in the family home.)
At this point it’s probably worth sitting down with a good financial advisor. A decent financial advisor will help you to put in place the correct framework for your retirement and help you to maintain the discipline to stick to it. They will be able to identify the best investments for your plans and advise you on how to proceed. All you need to do is find an independent advisor who is not tied to any one product and who is not trying to steer you towards that product with their advice. As with many services in life, one of the best ways to find good advice is word of mouth. Speak to friends and family, colleagues at work and ask them if they know anyone who is trustworthy and independent. Alternatively, speak to your accountant or solicitor and see if they have built relationships with people they can recommend. And then when you have a couple of names, research them online and see if they have good reviews or testimonials from people. Finally, go and meet them and see if you click. Ask yourself if they feel like someone whose advice you could trust.
There are three core principles you should think about when planning and executing your retirement investments. The first and most important principle is to make sure you keep all of your savings safe and secure so that they will always be there when you need them. Secondly, you want your retirement investments to keep growing so that they will outpace inflation. And the third and final principle is to invest them in a way that avoids taxes and fees that will deplete your profits. Taken together you are aiming to put together a portfolio of retirement investments that is primarily secure but which will grow slowly and steadily without taking any risks. How do you do this?
Before you invest in your retirement make sure you have cleared any costly debts and try to live debt-free. Ideally this would include your mortgage but if that is not possible make sure you have no other debts. It is pointless to make investments whilst still paying heavy interest on credit card debts.
You can have the best investment strategy in the world but it’s useless without savings. Get in the habit of saving your money for retirement.
Slow and steady wins the race. Sensible long term investment will bring decent, inflation-beating returns but problems tend to arise when you try and get rich quick. Aim to be comfortable in your retirement, not to join the ranks of the super rich.
Don’t rely on other people’s advice alone. Whether you have recommendations from friends or family or from a financial advisor, make sure you know and understand (and stand by) your own decisions. Take advice from professionals for sure, but don’t rely on just one- get a variety of opinions. And when it comes to professionals always look for independent advisors, not commissioned salesmen who will be biased towards their company’s products and will likely be on commission for those products. Also avoid financial advisors who charge large fees. Instead, take the advice of one or two advisors with good reputations and then add that to your own research and to the advice given here.
If you’re offered something and you don’t really understand how it works, its probably best to steer clear of it. Stick with investments you understand and which you can follow and manage yourself.
Most investments will fluctuate in value somewhat. When you are planning your retirement investments, think about how comfortable you will be if parts of those investments have the chance of large rises or drops in value. If you know this volatility will make you panic or stress, don’t bother investing in such products.
If the government offers tax advantages for certain pension investments or property developments, take advantage of them while you can.
Diversify Your Portfolio – Invest in a number of different areas, from property to shares to savings accounts to bonds. And within each area of investment, diversify again. If you are investing in property, have a portfolio of strong, reliable and positively geared properties as well as one or two higher risk negatively geared properties for example.