Retirement is a time of fundamental change with a new chapter ahead and new opportunities. However, for many it can be daunting, particularly for those who have enjoyed senior positions and are perhaps leaving a long, successful and satisfying career behind. Awareness of the challenges retirement poses is the first step in making this transition successful."So why is retirement so complicated?"
A question in one format or another that we hear regularly. And certainly until 20 years or so ago, it was relatively simple. You retired at a prearranged age after a lifetime of paid work and had a state pension and perhaps another pension from your place of work. You then looked forward to a life of leisure and freedom. It may not have been quite as simple as that in practice, but this was the vision for many people.
But what is the vision today? You can choose when to retire. More and more of us are indeed choosing to work much longer. Partners, parents and children increasingly have greater expectations. There are so many more choices to make – where and how will you live? how will you spend your time? with whom? will you carry on learning? will you develop new skills? how will you manage your health? what will make your life meaningful? The financial implications of retirement
And there are the financial implications of retirement. The last five years have witnessed immensely challenging economic, fiscal and investment conditions, which bring new challenges to retirement planning and demand new approaches. Having tax efficient savings and investments will become increasingly more important.
The enormity of the credit crisis was the result of a decade or more of pressure building up as the whole of the West’s banking system moved along a near-fatal path and, the consequences of it which will take years to resolve.
The media has also broadcasted some ‘wrong thinking’ articles about best-performing investment funds. However, the reality is that it is almost impossible for any one fund manager to be consistently upper quartile.
Against this backdrop, the customer needs to proceed very cautiously. The industry has not been good at delivering sustainable investment solutions. Most people have had some bad experiences at some stage in their lives; be that poor performance, high charges or ill-considered advice. So what should you look at when managing your future wealth?
To make sense this important process, I believe there are four key areas; 1. Set clear goals
This is the easy part – or is it? Competing demands for investable income and assets include home ownership, holiday home ownership, school fees, retirement planning, and estate planning.
Establishing a minimum income requirement at the latest (oldest) target retirement is helpful – the ability to maintain a certain minimum lifestyle in retirement, not surprisingly, turns out to be a very high priority for most once this issue is raised.2. Agree a risk profile
Advisers are required by their regulator to establish their clients’ risk profiles. Each of us will have tendencies to be either a lower or higher risk investor. However, when investment markets are romping away, our appetite for risk is enhanced. The reverse is also true. Furthermore, many low-risk investors still like to deploy a small part of their wealth on which they are happy to take higher risk.
But what does risk mean? It is often confused with volatility. Equities are incredibly volatile because of the underlying pricing mechanisms, but they can produce the goods over the long term. Banks are now vulnerable to the very different risk of banking failure. British government debt (gilt-edged securities) were named gilt-edged because they was regarded as the safest investments in the world but is this still true?
In the post-credit crisis world, the safest home for money may now be achieved by investing in a well-diversified portfolio of the world’s biggest companies. The ‘mega-caps’ are a modern phenomenon and these new businesses have become the powerhouses of the world economy, enjoying stronger balance sheets than Western banks and governments.
So how can risk be minimised? Firstly, being in the right asset class at the right time is vital, as is being out of the wrong asset class early. This can be quite challenging for the larger investment houses as they may not be able to sell substantial holdings without upsetting the market – so, small is beautiful. Investment managers are often criticised for encouraging clients to buy when markets are rising, but not being so proactive when markets are falling. But, taking profits early will substantially reduce risk and volatility over time.
Diversification within investment portfolios is also important. It can take time to build a well-positioned and diversified portfolio and sometimes investing monthly for six months or more provides a pragmatic solution.3. Understand your adviser’s terminology
Many people are often impressed by an adviser but did not really understand what had been said. It is dangerous for the client to proceed with a recommendation which they do not really understand. A good wealth manager needs not only to avoid jargon, but be able to present ideas clearly.4. Don’t overlook tax implications
Against the backdrop of hard-won investment returns, it is doubly important to ensure that taxation is minimised, because without tax-efficient investment, taxation will usually erode investment returns to a point where savings may devalue.
For a 40% taxpayer, investment in approved pension arrangements will broadly double your wealth compared with investing in a taxed environment. Even for a basic rate taxpayer, there is an enhancement. Stocks and shares ISAs can also be expected to enhance wealth, as would utilising annual CGT exemptions. VCTs are incredibly tax-efficient, but great care needs to be taken. There is so much to consider!Conclusion
Although it may be difficult to imagine a vision for the future, those nearing retirement need to start planning today to gain the most out of the next chapter of their lives.
Retirement planning is not rocket science but, without good advice over some difficult issues, there are plenty of potential pitfalls. Managed well, it will enhance lifestyles and help in the achievement of personal aspirations. Done badly, it is just another way of losing money!By Alex Brown, Consultant