Planning your retirement – six big mistakes to avoid
Sadly, it’s a fact – people make mistakes with their retirement planning all the time. Here are six sure ways to scupper your retirement plans, but more importantly solutions that should help to get you back on track.
Many of our clients come to us at a point when they start thinking about planning for the future, thinking about what options they might have about giving up work, how much they’ll need in retirement and when it might be feasible to retire.
Planning for retirement isn’t easy. We see some quite common issues and I thought that highlighting these, either so that you can avoid them, or even identify you’re doing them and change things as soon as possible. I summarise the main mistakes as follows:
Problem 1: No written plan
Many people go through retirement with no clear plan as to how much they are going to need from one year to the next. They’ve no clear plan where their income will come from. And there’s no clear plan that shows how long their money will last.
Solution: A written plan
Having a clear plan in place, you’ll know where you are and where you’re going. Of course, it will need reviewing and adjustments may need to be made each year as your objectives changes. However, having a plan in place will help to ensure you remain “on track”.
Problem 2: Giving away too much, too soon
You have carefully planned your future income needs, but then the “bank of Mum and Dad” kicks in. Maybe you’re asked to help with everyday living expenses, student debt, house deposits, or if the children come up short. Maybe this is in the form of gifts. Or it could be a loan. The problem is that parents then run the risk of not having enough for their own needs, either now, or in the future.
Solution: Make sure you’re OK first
I’m afraid that you really do need to be a little selfish here. Of course, we can plan gifting into your financial plan, but you need to make sure that you’re going to be OK first. This might sound harsh, and obviously every situation is different, but there is something about achieving financial independence and not having to rely on others. You can maintain your own financial independence, whilst also teaching your children these important values.
Problem 3: Using over-optimistic assumptions for returns
Think back to the endowment scandal days when the maturity value of your plan was dependent on you achieving 9% per annum returns. Yes, you might achieve these returns one year, but it’s not sensible to assume that you will achieve them every year and your plan will very likely prove unsuccessful.
Solution: Conservative approach
Be a little more conservative in your assumptions. As a rule of thumb, a withdrawal rate of 4% should be sustainable, but of course this very much depends on the level of risk at which you are investing. Be sure that your investments and pensions are positioned to avoid huge swings in value and maybe look to keep part of your portfolio as cash to provide for income when investments are down in value.
Problem 4: Taking too much risk
The old adage rings true; if it sounds too good to be true, it probably is! Depending on your risk appetite and your ability to cope with losses, you might wish to only include high risk investments as a very small part of your portfolio, or potentially avoid them completely. Clients often under-estimate the risk of their portfolios and what suited them when they were in their 30s doesn’t necessarily suit now that they are in their 50s or 60s. Many think they are in cautious investments, when in actual fact they are invested at much higher risk than they thought.
Solution: Portfolio analysis and construction
Your financial planner should be able to model the potential losses or gains on your portfolio and therefore explain how vulnerable you might be in the future. They’ll look to construct a portfolio that not only fits with your attitude to risk, but also your capacity for loss and, most importantly, your needs and objectives. If you can achieve your goals with a lower risk portfolio, why invest at higher risk and potentially risk the lifestyle you’d dreamed of?
Problem 5: Struggling to adopt a spending mindset
It’s hard to change the habits of a lifetime. After many years of working hard and saving hard towards your retirement, many struggle to adapt to spending, rather than saving. Some will take an overly cautious approach to spending and then find that they have missed opportunities. Maybe they could have retired earlier. Maybe they could have travelled more. Maybe they could have spent more time with loved ones.
Solution: Prioritise your goals and what’s important to you
Be clear about what is a sustainable level of income and then prioritise what really matters. By thinking about the things that are really important to you and that really make you happy, you can prioritise your spending on these things.
Problem 6: Believing “you’ll be OK”
Many financial advisers don’t provide you with a financial plan, a clear action plan. If you don’t have a plan, or you don’t understand the plan that your financial adviser or financial planner has provided you with, you may not be “OK”.
Solution: A good financial plan
If your financial adviser can’t provide you with a plan, or if they’re focused simply on growth of your investments or pensions, without consideration for your need to take risk and future income needs, then maybe it’s time to move on?
We’d be delighted to help more clients avoid these mistakes, helping them create a cohesive financial plan and investment and pension strategy that helps provide clarity, security and freedom.
If you are concerned at any of these problems for yourself, or if you have any friends, family or colleagues that could benefit from working with us, then please do get in contact.
Please note: This blog is for information only and does not constitute advice. The information is aimed at retail clients only.