Have you heard of Larry Fink? He may not exactly be a household name, but he’s the billionaire co-founder of BlackRock – the world’s largest asset manager. The numerous honours he has received over the years are evidence of the high regard in which he is held – both by his industry peers and society more widely.
In recent years, his annual letters to investors have focused a great deal on demographics and how society is changing. One of his most important conclusions is that if humanity has changed over the past century, we need to revise our understanding of retirement and how we fund it. Or at least, give more thought to it.
This week, Wealth Manager Tom Fleming talks about fine-tuning your retirement investment strategy so you can afford to live a long life.
About a third of our lives is spent trying to find something to do with all the time we have rushed through life trying to save. Ensuring that we are comfortable and secure during those years requires some measure of care and forethought.
For many people, once they hit 40 or 50, they start thinking about the after-party. This involves giving more thought to what they might do once their careers are no longer the key focus of their lives.
But open the papers and you will discover a world of uncertainty and rising costs. Is the idea of a financially comfortable retirement increasingly far-fetched? You’ve spent decades putting money into pension pots. And you’ve become accustomed to a certain standard of living. By the time retirement starts to come into focus, the question at the forefront of your mind is “How much of my savings can I spend annually without outliving my money or losing my buying power relative to inflation”.
If this is a question that keeps you awake at night, now might be the time to check in with us and review your current circumstances. When you begin your career in your 20s, retirement is probably the furthest thing from your mind. Then when you are in your 30s, 40s and even 50s, there is always something else for which you could be saving other than retirement. But really, it is never too early or too late to make minor alterations and make sure that you are on track.
Financial adviser William Bengen famously reconstructed annual investment results from periods such as the Great Depression, World War II and the inflation-riddled 1970s and came up with a maximum safe withdrawal rate of 4% – the “Bengen rule”. He has tweaked it a little over the years, but he has demonstrated that if you spend 4.5% of your assets in your first year of retirement and then increase that annual amount every year by the rate of inflation, then your money should last you at least 30 years – all other things being equal.
Implementing this method requires a certain amount of portfolio rebalancing and is not without its challenges. That rebalancing is definitely something with which Investment Quorum can help.
But before we even go down that route, there are a few things that you should start considering – as early as possible.
Start with a few basic questions. Do you know what income you are going to get at various points as you approach retirement? Do you intend to retire completely or are you planning on doing some part-time work? How will that sit alongside your state pension? Do you envisage any windfalls from inheritances? Are you planning on taking an income from your investment portfolio?
As far as your actual pension is concerned, before you even look into an investment strategy, you should consider whether or not you want to take on any investment risk. If the answer is no, then you might like to consider an annuity. And if you have any underlying health conditions, you might qualify for an enhanced annuity rate. Perhaps your preference is for certainty, and never having to worry about money. There is no “one-size-fits-all” solution.
No two people have the same idea of what constitutes an ideal retirement. So everybody has different spending needs. Start by reviewing your current monthly outgoings. How much do you spend every month on paying off debts, paying bills and covering essentials, as well as those non-essentials that are still... well… essential to making life fun? Then think about how your spending might increase or decrease once you’ve retired. For example, you won’t have to commute. And you might have completely paid off your mortgage. However, you might want to travel more or enjoy a new leisure activity – which will push up your non-essential spending. Don’t forget to allow for any large outlays you may have planned – such as helping your children get onto the property ladder.
The concept of a job for life needs to be updated. So the chances are that you will have accumulated a number of different pensions from various employers over the years. Working out the total value of your pot might involve tracing and contacting previous employers to identify various pension providers. Needless to say, retirement spending is not exclusively about what’s in your pension pot. You may have any number of other sources of income – such as investment portfolios or properties that you are letting out.
You can always adjust your current financial arrangements if you don’t think that your current pension savings will be enough to cover your expected retirement spending. Another option is to make lump-sum payments into your pension. It’s worth bearing in mind that should you exceed the £60,000 annual allowance (the largest sum you can potentially save in your pension pot in any given tax year), you can use up to three years’ worth of unused annual allowances.
The younger you are, the more likely it is that your pension savings will be invested based on a high-risk strategy. This is simply to maximise potential returns on your investments. As you near retirement, however, it will make more sense to opt for a lower-risk strategy. The closer you get to needing to access the money, the more the emphasis should be on preserving the wealth that you have accumulated, rather than growing it. Lower-risk strategies tend to mean a lower probability of loss. The flipside, obviously, is slower – but more predictable – growth. But if you want to do everything you can to ensure that your savings last a lifetime, de-risking your portfolio might be preferable. One of the things we do – and indeed continue to do over the course of our relationship with you – is determine your attitude to risk. This helps us establish the right strategy based on your risk appetite and goals.
For many people, after a lifetime spent working, retirement cannot come soon enough. But that does not apply to everyone. Many people actually end up finding retirement less fulfilling than they thought they would. Early retirement might not be an option if their savings are less likely to cover what they need to enjoy the years ahead and maintain the lifestyle that they want. More people nowadays opt instead for a phased retirement, slowly reducing the hours they work over a few years. Interestingly, only 44% of people see retirement as giving up work altogether. The increased prevalence of flexible working patterns has been a contributing factor: more people want to step back rather than step away. This gives them the opportunity to continue contributing to a pension. Some people may even decide to start a small business with the lump sum they get at the start of retirement. Different types of retirement suit different lifestyles and different financial goals. We can help you establish what yours might be.
There are no two ways about it… retirement can be complicated. Some people receive retirement packs from their pension providers that stretch into 30 pages or longer, and filling in the requisite forms requires high-levels expertise and knowledge that not everybody has.
Making decisions about your retirement can be stressful, and you should do all you can to check that your strategy is the right one for your golden years. Get in touch with us and make sure that your plans are on track for the retirement you want.
