LOUISE FAIRSAVE: Building a retirement plan
TIMES ARE CHANGING. In today’s environment, each person needs to take greater responsibility for building a retirement nest egg. This is particularly so if they would like to retire before the revised retirement age for National Insurance benefit.
Indeed, if you are a high earner or have a wealthy lifestyle, you definitely need to consider your retirement nest egg every step of your working career. Today, let us look at specific circumstances of different stages in the financial life cycle.
Whether you hold a personal retirement fund or are a member of a corporate pension plan, there will be greater emphasis on investing. Corporate pension plans are transitioning from defined benefit schemes to defined contribution schemes which place a higher responsibility on members for the quality of investment returns.
A 28-year-old can take greater risks in investing as compared to a 60-year-old. The younger person can take a greater chance in going after growth by investing in equity type investments. Investing in shares or through a mutual fund would be an attractive option. There is potential for higher return on the investment, yet there is likely higher risk exposure should the related business fail, or if the share value plummets. For the 28-year-old, even if there is a financial setback, youth provides the time and opportunity to fully rebuild in the years ahead.
On the other hand, a 60-year-old will tend to invest more in fixed income type investments like bonds and term deposits. This type of investment will ensure sure and steady retirement income which may be needed in retirement in order to maintain an acceptable lifestyle. Taking the risk of losing capital on an equity investment is not an option because there is little earning time left to recover.
Similarly, by say age 50, with proper planning, most of the drains on income such as the cost of the care and education of children will either be fully taken care of or well managed through funds properly set aside.
With release from these drains, additional funds may then be put towards one’s retirement plan. A personal retirement plan will help close the gap between National Insurance pension from work and what you will need to maintain the standard of living that has become the norm while at work.
Securing your future
Expecting and understanding this financial life cycle is important. It will provide the motivation to start saving early for long-term financial success. One can more easily avoid being a fast-track conspicuous spender during the youthful stage. It is up to you to create a vision of your financial future and whatever you would like it to be and work towards it.
Many single people with modest incomes have managed to eke out a desirable lifestyle during retirement by careful planning and having the motivation to stick to their plans. You can too. A careful consideration of your projected financial life cycle will help you to be realistic in planning and in leveraging whatever income you do earn.
It would be helpful for you to prepare your own life cycle chart based on where you currently are in your work life. Plot your age along the X axis and your income along the Y axis. Then make the projection of what you expect of your financial future over the rest of your life expectancy (a good assumption for your life expectancy can be based on your family history).
Finally, extend your personal financial planning by estimating how you can hold on to as much of that income as possible towards strengthening your position of being comfortable during retirement. Even better would be planning to increase your annual rate of earning income in order to have a larger sum that can contribute to increasing your comfort level during retirement.
Your rate of income may be increased by getting a better job, getting better qualifications, moonlighting, training which will allow you to do a better job, or by working for yourself. However, a change in employer may affect your pension benefits, so you need to weigh these options.
The main point is that your attempt to examine your financial life cycle should assist in making your retirement years less financially stressful, as well as in releasing greater motivation towards achieving your most daring financial goals.
• Louise Fairsave is a personal financial management adviser, providing practical advice on money and estate matters. Her advice
is general in nature; readers should seek advice about their specific circumstances.