Plan for a successful retirement
The importance of planning for retirement should not be postponed. Many people don’t give much thought when they are young to considering which path to take because planning for the future, especially finances, can be overwhelming – preferring instead to postpone their decision for another time in some non-existent hypothetical future.
Retirement planning should be without stress and complexity. Rather an examination of your options made with confidence and purpose. Feel confident in your financial future. You are never too old nor too young to save.
One of the biggest risks we all face is the potential of running out of money in retirement or even towards the end of a working life. This can become a personal tragedy. People may work their whole lives to accumulate enough wealth for a comfortable retirement only to find they’ve come up short.
For example, many people believe that their State pension will provide for them when they stop working. The truth is that a State pension on its own will not cover everything such as food on the table, healthcare or a comfortable life. Discovery at that stage of the game will certainly be an unwelcome surprise.
To help minimise the risk of running out of money, pose to yourself a number of key questions. Complementary to what should be a mandatory review to determine your own attitude to investment risk and the historical performance of investment assets, keep the following questions in mind when making a retirement or long-term savings plan:
1. How long will your savings/investment/portfolio need to provide for you?
2. How can cash withdrawals/distributions and inflation impact the performance?
3. How do you set up a primary objective in relation to an investment strategy?
4. How can you prioritise important trade-offs to get the balance right?
The first looks almost impossible, right? Often referred to as the “investment time horizon”, the best thing to do here is to look at life expectancies and work backwards. At age 51, life expectancy is 83, for a 65-year-old it is 85 and for an 81-year-old it is 90 (source: UK Office of National Statistics, 2011-2013).
This gives you an idea which you should allow a certain margin of error for.
An investment time horizon must also consider the effect of withdrawals you will make during retirement; otherwise, cash flow. A common fallacy is to assume that with an average annualised return of, say, 10%, by way of an example, it must therefore be safe to withdraw 10% without drawing from the capital base. Nothing could be further than the truth! Returns vary greatly from year-to-year and inflation can erode the capital base and the return. A more modest level of return should be envisaged to cater for such outcomes, which normally results in a higher level of savings to achieve this.
Third on the list is the primary objective of the investment/retirement plan. Having covered time horizon and cash flow, the key leading up to retirement is a “growth objective”. To allow for inflation and cash flow, you need to maintain the value in “real” terms to preserve the capital base and maintain the income. If you wish for any residue to pass onto a relative other or children, then you also need to identify an “end value”.
Finally, what are the important trade-offs to you? In other words, you need to prioritise a combination of all of the above, which means you must at least consider the rate of withdrawals (cash flow) required to meet your expenditures and add in the growth objectives before, during and after retirement in order to minimise the risk of running out of money.
For example, high returns will require tolerance to greater volatilities associated with them and, therefore, understanding the trade-offs of different strategies is important as each strategy themselves. These are known as likely “outcomes” or “scenarios” which can be visually illustrated by:
■ any combination of returns between 2% (low risk/low reward) and 10% (high risk/high reward);
■ measured against a capital base (e.g. €500,000);
■ over a time-horizon of, say, 30 years;
■ comparing the required withdrawals being taken against none at all.
Like they say, do the maths. Once you have an illustration outlining your final objective, you can work backwards to where you are today, with a view to fully understand how you can achieve a successful retirement. In any event, take objective and professional planning advice and precision in minimising the risk of loss for the future.
This article is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investments or course of action.
By Raoul Ruiz Martinez
Raoul Ruiz Martinez is a resident and independent consultant for Finesco Financial Services Ltd., Glasgow and advises clients on private financial matters in both the UK and throughout Europe under the MiFID regulation. Finesco Financial Services Ltd is authorised and regulated by the Financial Conduct Authority (FCA). Some of the services provided are not regulated by the FCA because they are not included within the Financial Services and Markets Act 2000. | 289 561 333