You might think that having a guaranteed state pension or a generous package from your employer means you can move into retirement with ease. There’s a major problem with that perspective. While generous pension plans are valuable, your financial future may be at risk if you do not give thought to your entire financial life.
No Financial Plan
A professional financial plan covers all aspects of your life and finances. It takes your pensions, property, current expenses and likely future expenses (e.g. international travel, nursing or gifts to grandchildren) into account. A well-crafted financial plan will also consider your tax situation, charitable goals and estate planning.
Without a financial plan, your financial future will suffer. Without a plan, you will have no idea how to respond to a 2008 style financial crisis. You can have peace of mind to sleep each night when you know you’re ready to respond to any change, even if the government changes the rules on pensions!
Action Step: Meet with a qualified professional to create a personalized financial plan
Missing Restrictions Regarding Survivor Benefits
What would happen to your pension if you were to die or became disabled tomorrow? Does your spouse know what to do to next in order to maximise the value of the pension? If you’re like most people, the answer to both questions is probably no. If you make this mistake, your family will suffer added stress and pressure.
Fortunately, this mistake can be solved with a few hours of work. Start by creating a complete file of your pension information. Make sure that statements, phone numbers, forms and related materials are included in your file. Once your pension file is complete, take the time to meet with your spouse to review the documentation. With a complete file in place, you’ll feel more comfortable your loved ones know what to do.
Action Step: Create a file folder fully documenting your pension and related financial assets and discuss it with your spouse.
Investing Too Little Money
Financial experts constantly talk about the power of compound interest to create wealth over time. However, that process cannot happen if YOU save and invest too little money. The amount of money you should invest each year depends on several factors including your current income, the value of your current pension and the results of the investment markets.
Action Step: Review your investments from the past 12 months and determine how much you have actually contributed. Once you have this information, meet with a financial professional to determine if you are on track to achieve your retirement goals.
Too Much Investment Caution
Did you know that interest rates in the early 1980s were high – well over 10% – for many countries? That situation meant that retirement investors could purchase government bonds and earn a significant profit. Unfortunately, that circumstance is long gone. If your investment strategy is focused exclusively on low-risk government bonds and similar investments, your retirement savings will likely be eaten away by inflation. In addition, the value of the UK’s best known type of bond – Gilts – have been falling in recent months as investors have been worried about the future of the UK economy.
Action Step: Does your current portfolio – including stocks, bonds, savings and other assets – meet your long term financial goals for retirement?
Making Inheritance Assumptions
Everyone has heard stories about a friend who suddenly became wealthy when they received an inheritance. For most of us, relying on money from an inheritance is a major mistake. First, you have no ability to predict when (or if!) you will receive money from an inheritance. Second, it’s easy to overestimate what you might receive as an inheritance (i.e. your elderly relatives may spend all of they money for their own retirement). Finally, some people die with debts and loans and bankers are usually first in line to be paid before anybody else receives a payment.
Action Step: Take the time to think through your assumptions for retirement. Have you avoided developing a financial plan with professional guidance because you assume an inheritance windfall will suddenly appear? Wishful thinking is no way to plan for your future.
Making Property Assumptions
The success of property TV programs like Property Ladder and Safe as Houses have led many people to become excited about the value of Property. The implicit assumption for retirees -that selling their home will cover all of their financial needs. In fact, the Daily Mail recently reported that more than three million Britons plan to sell their home and “downsize” to a smaller home in retirement.
First, an ever growing number of retirees will attempt to sell property to fund their retirement. As more and more property comes onto the market, housing prices will decline. This a long-term risk to consider if your retirement is still many years away.
Second, selling your home means you will have to find somewhere else to live. The Daily Mail’s analysis found that the typical detached home sells for about £310,000 while you can expect to pay somewhere around £197,000 for a semi-detached home. That leaves less than £120,000 pounds as your gain from retirement housing downsizing. It may help but it’s not enough of a windfall to provide for your retirement needs.
Action Step: Seek out an estimate of your home’s value and what kinds of housing you would like to purchase next. In addition to the financial aspects, keep in mind the non-financial implications of moving such as being further away from family and facilities.