Seven Retirement Challenges that you should be considering…
People are living longer but retirement ages are only just changing. This means that we are spending a lot longer in retirement than we used to. In 1948 when the NHS was founded the life expectancy for men was 66 and for women it was 71. The retirement ages were 65 and 60 respectively. The ONS now says that a female who has attained age 65 is on average likely to live until 87 years of age. A 65 year old man will on average live until 85. This means that while on average retirements lasted between 1 and 11 years for men and women in 1948, nowadays we are looking at an average time in retirement of 20 years or more.
Your financial plan needs to adapt to this extended time in retirement and that’s why making sure our clients don’t run out of income in retirement is at the heart of our lifetime planning. Most retirement income systems were not designed to support our current longevity, so we need to build one that does.
The total liability of the UK pension system increased by £1 trillion in five years to £7.6 trillion by the end of 2015. These figures were from the office of national statistics. Steve Webb, former pensions minister, warned that only a third of the total was currently funded which meant that the rest would have to be financed by tomorrow’s workers.
We know that we are living longer and that our traditional sources of income are coming under fire from the market, interest rates and funding strategies, not to mention Corona Virus and the responsive measures that have had to be put in place.
At TWP, we believe it is time for every individual to take funding their retirement seriously and as such we build as robust a retirement income and savings strategy as we can with our clients in an effort to reduce their dependence on these strained traditional systems.
Especially given what’s going on with government subsidies in regard to Covid19, very few of us are confident that taxes will decrease in the future. In fact, most people agree that the trajectory of taxes is on the up.
Looking at stats from May 2018 we see that the highest distribution of our taxes goes to welfare and health. Next on the list is state pensions and then we start getting into education, national debt interest and defence. Further down on the list we see things like culture and the environment. These things will all change. The distribution of them will change and to be clear, TWP has no political stance on where we think taxes should or should not be spent.
At TWP we make sure that your financial plan considers taxes and positions your investment and your lifetime financial plan in the best way possible to protect yourself from needless liability. This all helps to make your money last longer for you.
4. Time in the Market
It is vital when building a retirement plan to understand the difference between compounding and simple interest.
If you start by thinking about simple interest at 7% over 10 years this means every year you’ll get 7% of your original investment added to your total. After 10 years you would have made £70 at £7per year on a £100 investment. If the interest had been compounding, meaning that you didn’t just get 7% of the original amount invested, but 7% of what your £100 had grown to in the previous year, the money would have approximately doubled. 7% of $107 is more than 7% of £100. £200 is more than £170. This means in 10 years, by compounding interest you would have 30% more with the same average return. Crazy, I know.
Missing cumulative gains in the market can be damaging and that’s why at TWP we focus on the disciplined approach that will leave you invested wherever possible, for the longest amount of time. It’s never too early start planning.
5. Sequence of Return
We believe every lifetime plan should be concerned with the concept of sequence of returns risk.
When you take money out in a down market it makes the road to recovery that much longer. If that down market hits you early in retirement it will provide an even more difficult hurdle. If I lose 15% of my £100 investment, I will have £85 left. I need to recover £15 to be back at even. That requires a return of 17.6% on my £85. Recovery is hard enough already. Now let’s say I take £5 for income in that same down year, an extra 5%. Now I need £20 to be back at evens. That’s a return of 23.5% on my £85. Having to sell in a down market to generate income is of great significance to a plan.
Whenever we do income strategising we always look to make sure we have some hedge against sequence of returns risk in our portfolios. There are lots of different ways to do this, so we help our clients use the one that’s most appropriate for them. Starting off with a down year can be hard to recover from.
We will all see bear markets at some point, but making sure we have a plan to address when we see it and how we react to losses at different times in our lives and circumstances is key to getting a successful plan together.
Inflation could have a significant effect on your retirement. Things could start getting more expensive too.
If you’re in retirement for 20 years or more and an average rate of inflation at 3% over 25 years will literally half the value of your income, then inflation can be a silent killer to maintaining lifestyle. People often site the fact that we spend less as we get older at this point but at TWP we always consider it a priority to inflation proof income flows wherever possible and suitable for our clients. Retirement planning should not stop the same day you stop working.
Retirement planning should go on throughout your lifetime. It should adapt to the changes in legislation, in the market, in your circumstances and to inflation as you go on through the rest of your life. In 1995 a first class stamp cost 25p and now its costs 76p.
7. Behavioural Finance
Warren Buffett famously said, ‘be fearful when others are greedy and greedy when others are fearful,’ and most of us understand that selling at the bottom of the market can be very detrimental to our portfolio.
Most of us understand that buying when things are expensive is also not the best strategy. However, because we are human beings and because losing money is a very scary situation many people attempt to sell away further downside when all the news is bad and when the press is telling you that the world is almost over.
At TWP, we study behavioural finance and the way that people act in different circumstances. Very few people sell right at the bottom and very few people buy right at the top; most human beings buy and sell somewhere in between. Our plans help to give discipline not only to the buying, but also the selling, side of investments to help make sure that your income lasts as long as it possibly can in retirement.