Planning your retirementPosted on: 11 October 2011 by Andrew Stallard
Lifestyle in retirement for many over 50s conjures images of hobbies, holidays, interiors and fashions. But achieving that lifestyle is governed by the choices you make in life.
Some choices, of course, are more important and have more impact than others. What you choose to do with your pension and investments is one of the really important choices in life, because it affects your lifestyle in later life.
The dramatic fall in the Stock Market last month has seen many people’s life style permanently affected as they face retirement with a dramatically reduced pension income. August retirees may well have seen themselves with 20% less income in retirement than those retiring in July as the recent sharp fall in the Stock Market reduced the value of share based pension funds.
What that 20% difference means is that someone who retired in July could have an income of £1,000 a month, whereas their neighbour retiring one month later in August, has only £800 a month- for the rest of their lives.
For some people, the plummeting FTSE100 may mean having to postpone retirement. Others may have to spend the rest of their lives on a reduced income.
What a difference a month makes. Your style of life and living depends very much on your finances. So how do you protect your pension and investments against the volatility of the stock market?
We pension geeks use something called 'life styling'. It means automatically moving your pension fund gradually to less risky investments as you approach retirement: moving money held in pension funds out of shares and into lower risk bonds, property and even cash during the last five to ten years before your retirement. It also means exchanging potentially larger returns on shares for lower, but theoretically more certain returns on more cautious investments.
Pension funds predominately invest in shares, but with the risks of a volatile market, why use shares in pension funds at all? What benefits can shares give your pension and investments at all? Well, simply put, alongside the greater potential risk is a greater potential return.
But this might not be a good idea for everyone's pension and investments. Moving money just because retirement is approaching means moving out of shares no matter what is happening in the market and with no regard to wider economic events.
The stock market is not predictable, and the peaks and troughs it produces may not coincide with your own personal timetable. An unthinking Life Styling plan may well result in selling shares just after a crash before prices have had a chance to recover.
Though it may surprise you, given the current market conditions, over time shares have been shown to provide the best returns over the long term. Looking at figures from the last 50 years, equities have out-performed cash and gilts (1).
Another problem is that few of us can be certain of our retirement date ten years in advance. Plans change, health problems may occur and not least, who can be certain of continuous employment?
The ideal investment is low risk and high return and just like the tooth fairy still remains illusory. What is real and solid, however, is the importance of recognising and being comfortable with the level of risk in your pension and investments. This is where your independent financial adviser can make a really important difference.
Mention 'life style' and for many people it creates an image of hobbies, holidays, interiors and fashions. Life style is basically the style in which you live your life. It's about the choices you make in life.
The better advisers will help you understand thoroughly the risk in your pension and investments and help minimise risk and maximise your return.
With considerable variation in pension fund performance careful planning and research from your adviser can vastly increase your chances of a financially secure retirement. The key is in really communicating during those final five to ten years on a much more regular basis to ensure you take gains and maximise rewards rather than having a plummeting irrecoverable pot.
The value of shares and investments can go down as well as up.
Past performance is not a guide to future performance.
Source: (1) Barclays Equity Gilt Study 2010
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