Retirement planning is one of the most important aspects of managing our financial affairs, and undoubtedly right up there with the most challenging too. This is for the simple reason that while you can be fairly certain of how long you can be building your pension pot, no-one can tell how long a retirement they will need to fund.
This gives rise to the startling concept of longevity risk or, more simply put, outliving your money. With people regularly living several decades past retiring, this is a very real risk that we all need to mitigate. Yet at the same time, nobody wants to stint themselves in what should be their golden years just in case they should live to 100. With these kinds of “known unknowns” in play, it’s easy to see why retirement planning is very often what leads people to seek professional advice.
We can all get serious about our pension planning by taking on board some key principles as early as possible, however.
First is taking a cold hard look at your income needs and how these can be met in the round. A guaranteed income may be secured via a defined benefits scheme or purchasing an annuity with your pension pot. However, these may not be options, nor generate the sums you need.
Even less likely to are simple cash savings, due to the erosive effect of inflation. It’s quite scary to contemplate that, over 20 years, the effect of 2% inflation would bring the spending power of a £25,000 pot to under £17,000.
In contrast, the value of an investment portfolio can powerfully compound over the years. It can also be constructed to provide an attractive, stable income alongside capital growth when you actually retire. The other options may play a part in your plans, but when it comes to achieving the long-term income you need, an investment portfolio is likely to have the starring one.
How that portfolio should be managed is largely a question of time-horizon. Younger investors have the luxury of time on their side to ride out bumps in the markets and thus can generally afford to take on more risk exposure. That’s not to say, however, that those nearing or in retirement should de-risk excessively. Rather, it’s about holding a mixture of assets that give you the best risk-adjusted return for your stage of life or, to use industry parlance, having a dynamic asset allocation that is readjusted throughout the accumulation and decumulation phase.
Invest in the best
It is easy to see that though people might be happy to start off managing their own pension savings, it is highly likely they will turn to the professionals once the more complex questions come into view. The stress of managing such an important and (hopefully) large pot of money shouldn’t be discounted either.
In general, a professional money manager will invariably generate far superior investment returns to an amateur. When it comes to securing the right blend of income and growth for your retirement savings, and at an appropriate level of risk for your age, there really is no contest.
You should see engaging an expert to manage your retirement funds as an investment. Yet as ever, you must ensure you do not pay too much in fees or miss out by tolerating lacklustre returns. Small differences on either side of this equation can have a significant effect in any situation. Over the timeframes involved with pensions, the effect can become immense.
In summary, my pension prescription is as follows: first, be realistic about longevity, living costs and inflation; second, get help in balancing risk and reward carefully - and dynamically - over the years; and third, keep a keen eye on your manager so returns are maximised and not excessively eaten into by fees.
Last and perhaps most important of all, remember that while it is never too early to get proactive about your pension, it’s never too late either. There are some really superb financial planning and investment advisors out there, so don’t settle for less.