Planning your retirement lifestylePosted on: 15 October 2013 by 50connect editorial
Retirement is a much changed concept since the banking crisis and only effective planning now will ensure you have the lifestyle you want in later life.
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.
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 but there are so many variables and scenarios to bare in mind.
Currently one in five workers nearing the normal retirement age believes that they will never be able to afford to retire, according to a recent study (1). Twenty per cent of those aged between 55 and 64 years old – expect to have to continue working indefinitely. It found that workers living in the UK typically expect to spend 19 years in retirement but only have enough savings to last for the first seven years, leaving them with a potential 12-year shortfall! (1)
A dramatic fall in the Stock Market can see many people’s life style permanently affected as they face retirement with a dramatically reduced pension income. In August 2011 some retirees may well have seen themselves with 20% less income in retirement than those retiring in the July as a 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 the July could have an income of £1,000 a month, whereas their neighbour retiring one month later in the August, has only £800 a month - for the rest of their lives.
For some people, a 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 could make
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 (2).
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.
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 an insufficient or plummeting irrecoverable pot.
If you have a query regarding Pensions or Investments please call 01872 222 422, e-mail email@example.com or take a look at our website www.wwfp.net.
(2) Barclays Equity Gilt Study 2010
The value of shares and investments can go down as well as up.
Information given is for general guidance only, and specific advice should be taken before acting on any suggestions made. All information is based on our understanding of current tax practices, which are subject to change. Your home may be repossessed if you do not keep up repayments on your mortgage.
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