Do not get left behind
It is old subject matter but given the number of queries I have recently received regarding this topic, I thought it would be useful to post what is hopefully a fairly basic but informative overview of what retirement planning incorporates.
What is a retirement plan?
At the risk of stating the obvious, a retirement plan essentially involves calculating how much you will need to have saved in order to retire comfortably and what you will need to do to reach that target.
It is fairly common knowledge that very few individuals reach retirement with sufficient savings to allow them to live out their post-working-life days free from financial anxiety.
The decisions and actions needed to make a success of this long-term endeavour are far less exciting than most other options we face over the course of our lives – So it is not surprising that when weighing up the decision between additional retirement savings and an exotic holiday, the former does not often win over frequently enough during our younger years.
It is only when we get much closer to retirement that the level of concern is usually high enough to evoke a rather urgent call to action.
Having the willingness and the capacity to plan for a successful retirement may not be enough to ensure success. It is a common misconception that having a retirement plan or an investment plan is the privilege of the wealthy. Our ability to successfully plan for retirement should not depend on how much we earn but rather on how much of our current income we can save.
Having a detailed, realistic and dynamic plan gives us the best chance of achieving sufficient savings to provide for ourselves into retirement and beyond.
What constitutes sufficient savings?
It is difficult to quantify what fits the definition of ‘sufficient savings’, as there are many variables that impact on the amount you are likely to require to sustain yourself in retirement. Ideally, the value of your investments at retirement need to be sufficient to buy an annuity or income stream that will replace your salary.
Your current earnings or cost of living is a good starting point to identify what this number is but it will have to be adjusted to account for inflation as well as a shift in your spending habits as you enter retirement.
To make things harder, the key variables are also constantly changing but the good news is that most of them can be influenced by active decisions we make throughout our lives and can be incorporated into a retirement plan.
Creating YOUR plan
A retirement plan is “YOUR” plan – you should have the highest level of motivation and the greatest vested interest in creating a successful strategy to meet your future needs. You know how and when your circumstances change and you ultimately have control of your financial discipline.
White Investments’ role is to partner you in the process. We have the expertise and experience to help you create a successful plan but we strongly encourage you to engage with us to fully grasp what it is you are trying to achieve and to understand how you are progressing in the future.
A retirement plan is not a static once-off task but a dynamic process that needs to be monitored and adjusted as often as your circumstances and the variables dictate.
Decisions to be made:
What investment vehicle to use – There are various investment vehicles that can be used to hold your retirement savings. These include Provident Funds, Pension Funds, Retirement Annuities and Preservation Funds. The main benefit of these vehicles is that you can shelter your investment returns from the tax man over the life of your retirement plan. You should consider which of these vehicles best suit your specific circumstance and which will give you the best chance of meeting your retirement target.
What platform to use – An investment platform provides the infrastructure to manage your retirement savings. By infrastructure we mean taking care of the administration of the plan and the means by which to implement the plan by investing in funds or products through your chosen vehicle. An investment platform that provides the ability to switch between funds across a variety of product providers at minimal additional costs is beneficial if you are planning on managing your asset allocation yourself.
What products to use – You need to consider any prospective fund’s full fee structure, asset allocation, expected returns and the volatility of those returns. Regulation 28 of the Pension Funds Act prescribes restrictions on the asset allocation that is allowed within retirement products. You need to ensure that your overall allocation across funds stays within the prescribed limits.
How much investment risk to take on – Your retirement plan should encompass a balance between your willingness, your capacity as well as your requirement to take on investment risk. You must ensure that your strategy is designed to generate the required investment returns to meet your objectives rather than to meet your tolerance for risk.
How you want to approach your retirement plan with an advisor – Do you want this to form a part of a wider financial planning process or do you just want to focus on this particular aspect of your financial plan. Clearly the more all encompassing a plan, the more useful it can be, but it does require more time to compile and greater disclosure of all your finances. Other potential factors to consider would include budgeting, risk management, investments outside of retirement, tax and estate planning issues. Do you want to pay someone a fee to assist you in setting up the plan and then monitor it yourself or do you want to pay someone to manage the whole process on an ongoing basis for you.
How you want to deal with any existing retirement savings plan – This will depend on your personal circumstances but you should evaluate your current scheme with the same vigour as you are approaching this additional plan. Do you or your employer make the monthly contributions? What are the fees associated with the group scheme? What has your existing schemes risk adjusted performance been like? What fees are you incurring under the group scheme and are there any other benefits included in the package? Is it compulsory to belong to the company group scheme or could you choose your own options for contribution?
Pitfalls to avoid:
Do not delay the planning process–the earlier you begin, the greater your chance of success. Contributing smaller amounts over a longer period can be far more beneficial, as a result of compounding, than starting later in life when you can make much larger contributions.
Do not withdraw your retirement savings when you switch jobs – If you belong to a group scheme you will be given the option to receive your retirement contributions as a payout when you leave the company/scheme. If you withdraw this income you will potentially lose the tax benefits and significantly handicap your planning process.
Do not fall into the trap of abandoning your retirement plan altogether if you cannot meet the required contributions – The reality is that most of us will find the amount we should be saving rather scary or even impossible. Contribute what you can regardless of it being enough or not – if you can cover 50% of your required costs by the time you retire it is still better than having no plan and relying on government, family or friends.
Do not think because you are part of a company scheme that you are automatically saving enough for a comfortable retirement – The amount you need to save is a very specific to you as an individual and its impossible for group schemes to be focused on each member individually. If you use a group scheme you must still understand what it does for you.
Do not utilise aggressive assumptions in your plan – Any strategy that involves forecasting must by definition incorporate some fairly hefty assumptions. A forecast is only as good as the assumptions made, so we strongly encourage you to be realistic and err on the side of conservatism to avoid a false sense of security when it comes to your retirement plan. Assuming a low level of expected inflation combined with excessively high expected returns can on the face of it make your plan look much healthier than it is likely to be in reality. The danger is that this can lead to a significant shortfall in your actual savings relative to your projections by the time you retire (Shortfall risk).
Partnering with White Investments
Should you choose to partner with us to create your retirement plan White Investments will:
i) Engage with you to gather all the necessary information on your existing financial situation and future objectives.
ii) Use this information to calculate a realistic and measurable target to aim towards.
iii) Outline and deliver to you a plan of action incorporating your individual circumstance and the key variables that we believe will best allow you to achieve your goals.
iv) Agree on the responsibilities for implementing and monitoring the strategy to ensure you stay the course.
Please contact White Investments if you would like to learn more about the ways in which we can partner with you to a more secure financial future. E-mail: firstname.lastname@example.org