Three dilemmas every investor needs to address sooner rather than later
We recently published an article “Investors Post Retirement Abandoned by Pensions Industry” (click here to view) and we have received the following letter from Scott Kennedy of FMA – Astute Financial Management Associates Ltd which we have replicated below for the benefit of our UK expat readers wherever they may be.
Three dilemmas every investor needs to address sooner rather than later
Effective retirement planning is more important than it ever has been as a result of pension freedom changes and an ageing population. It is absolutely essential that people have at least a basic plan in place in terms of how they will fund themselves in later life. There are an awful lot of people out there that do have a basic idea or a concept in their mind, but what they haven’t necessarily done is taken it to the level of detail below, so it’s more of an aspiration rather than a reality.
In light of this, there are three potential investment dilemmas that investors could find themselves getting caught up in if they don’t act soon.
Now versus the future
In a lot of cases, people opt for what will give them a smaller reward they can reap the benefits from immediately, rather than employ patience and receive a greater reward over the longer run. This is a particularly serious problem in today’s society due to life expectancy increasing as people find themselves in better health when they are older.
People need to look at retirement as they might have done 20 or 30 years beforehand when they were discussing how they might be able to afford a house or a wedding, for instance. That same concept that people use up to the point of retirement is something they simply need to continue to employ on an ongoing basis.
Before pension freedoms were introduced, clients only had limited options as to how their pension savings could be used to provide income throughout retirement. Now though, many more factors have to be taken into account including life expectancy, future inflation and future spending patterns. This is particularly prevalent for Expats living in Turkey, as inflation is a major concern and can have a huge impact on your living expenses and future spending power.
For a lot of people retirement is not a one-day-in-a-lifetime scenario, it’s an ongoing stage of life except the balance between work and leisure is gradually changing for them. Many Expats retire fit and healthy, and may still need, or even want to work for a period of time because, in its own way, the employment income they generate is retirement income and that salary is helping towards meeting their aspirations.
There is now a growing realisation that the state is not the only means to deliver retirement income going forward, and by itself will not deliver a level of income that will meet the needs of most people. There are of course ways for people to make up any shortfalls in their retirement income via a range of different options. These can include working, saving more and re-budgeting, or even restructuring existing savings to be more tax efficient.
Many pension experts believe the best strategy for ensuring a prosperous and happy retirement over the long term is to enlist the help of an adviser.
Visualising a long-term plan
The second dilemma, is that many clients can find it difficult to visualise how much money they will actually need in retirement and instead focus on how much money they feel they would like.
Although people think about their total savings, including pensions producing an income they want to live on, the reality is that the income people need to live on is based on their consumption.
What are you going to spend? How much you want to spend dictates how much you actually need. If we go back 15 or 20 years when there were a lot of occupational pension schemes around, the aspiration was that people worked for a company for 40 years and when they retired the target income was two-thirds of the income that they earned while working. That was deemed to be comfortable because you had the state pension on top of that and that would make up some, if not all of the difference of pre-retirement earnings.
Research from Old Mutual Wealth shows that a vast majority of clients simply settle for what they know they can achieve financially, rather than making their cash work as hard as possible. The research also found that many clients were guilty of failing to understand the ramifications from small differences in annual income and not making the most of retirement savings plan available to them.
The reality is we’re in much more of a DC [defined contribution] world where you contribute, you make investment decisions and your retirement income is going to be dependent on how much you’ve put in and how well you’ve invested. Some of that is then going to be down to market conditions at the time.
Currently market conditions are not favourable for savers either in the UK or abroad and particularly in Turkey as inflation is higher than local cash deposit rates. This is why it is important for Expats to ask themselves ‘what do we believe our expenditure will be and factor in inflation by around 10% per annum.
Thinking the unthinkable
While many people find it difficult to talk about, the issue of ill health in later life needs to be addressed and the financial implications of residential care are often brushed to one side too. Again this is a particular issue for Expats living in Turkey as they cannot rely on a state healthcare system or the UK NHS as Turkey is outside of the EU. Many Expats are not properly prepared for possible ill health, which remains the biggest risk to your finances in retirement.
We think of long-term retirement income planning as the “retirement smile” – the expenditure curve that begins with higher income needs when individuals are younger and able-bodied wanting to do the things they’ve aspired to during their working life, decreases as they become frailer and increases again when they are in need of long-term care. Because of diseases such as dementia people can be physically fit but mentally unwell, and therefore they’re going to be living a lot longer and care costs will need to be met.
Historically, thoughts of leaving the family home as a legacy for the children has been commonplace. In the future this may not be possible as it may be needed to help fund care costs in one way or another. Not taking these needs into account and using up savings too quickly may in fact have an adverse impact on your children financially as they may have to help to cover care costs.
Out of the three dilemmas, this is the issue that clients are getting more understanding of as many people have already experienced this with their own parents. It may be something that people don’t want to think about though or it could be that their financial situation is much more about living for today and letting tomorrow look after itself.
A lot of people assume that the family will take care of it, but it could be that they aren’t in the position to provide that level of care. I think it’s partly a generational thing and I think it needs to involve conversation across generations within the family as early as possible when planning income needs.
If you would like to find out more information about making better provisions for your retirement please contact us via the links below.
Scott Kennedy Cert PFS
ASTUTE FINANCIAL MANAGEMENT ASSOCIATES LTD
Tel: +9 (0533) 845 7296 +9 (0533 842 3598)
Astute FMA are Independent Financial Advice Consultants & act as Financial Intermediaries ONLY.
We are not a bank, we do not accept deposits and we do not hold clients money.
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