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Lessons from a Mexican Fisherman

We’d like to share a story with you that originated back in 1963 when published by the German writer, Heinrich Böll. It’s a very short story, but perfectly captures one of the key messages that we stress with our clients.

The message is that while the amount of money you have or build up for the future is important, it is far more important to know the life that you want to lead and to have enough money to live that life. Otherwise, what’s the “right” amount of money to have, how much is “enough” for you? Is it €500,000, €5 million or €50 million? These are simply numbers.

Instead, it is far better to identify the life that you want lead – where you want to live, how long you want to work for, what you want to be able to do and buy in the future and how much money you want to be able to give / leave to loved ones. Once you are clear on these important life choices, we can then help you put a price on this life that you want. That is the right amount of money for you, as that is enough to do everything that you want.

See below – the Mexican fisherman is very clear about how much is “enough”.

 

 “The Mexican Fisherman”

An American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large fin tuna. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, “Only a little while.”

The American then asked why he didn’t stay out longer and catch more fish.

The Mexican said he had enough to support his family’s immediate needs.

The American then asked, “But what do you do with the rest of your time?”

The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos. I have a full and busy life.”

The American scoffed. “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat, and with the proceeds from the bigger boat, you could buy several boats. Eventually, you would have a fleet of fishing boats. Instead of selling your catch to a middleman, you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually NYC, where you will run your expanding enterprise.”

The Mexican fisherman asked, “But how long will this take?”

To which the American replied, “Fifteen to twenty years.”

“But what then?”

The American laughed and said that’s the best part. “When the time is right, you would announce an IPO and sell your company stock to the public and become very rich; you would make millions.”

“Millions?” asked the fisherman. “Then what?”

The American said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evening, sip wine, and play guitar with your amigos!”

 

Now we’re not suggesting that everyone gives up work and goes fishing! After all, the Mexican fisherman doesn’t have much of a safety net here in case anything goes wrong – what if he gets sick or his boat sinks or what happens when he gets too old to go fishing? But his starting point is good, he knows the life he wants.

This is what we want for you. We want to help you to identify the life that you want and to then put a plan in place to ensure you achieve it, under all scenarios.

What does your future life look like?

What factors impact your investment returns?

Well there is no exhaustive list for this one – there really are so many potential factors that can influence your investment returns. When you ask a professional investor, they will often jump to factors such as the economy, sentiment and interest rates. All very relevant factors.

Some factors of course have bigger impacts than others. So, we’re going to set out below the factors that we see as potentially having the biggest impacts, focusing on the factors that you have some control over – either yourself or more likely with some assistance from us.

This is not an exhaustive list and these factors are not necessarily in order, however we’ll start with the factor that (maybe surprisingly to you) tends to have the biggest impact on investor returns.

 

Investor Behaviour

Are you surprised by this one? This factor definitely has the single biggest impact on investment performance. How many investors around the world panicked at the end of last year after the S&P 500 index fell 14% in the last quarter of 2018, and moved their portfolios to “safer ground”?  Thousands if not millions of investors did – and they all then missed the 11% bounce in the first 2 months of 2019.

We see this all the time… fear in falling markets and people selling as assets get cheaper, and greed in rising markets with investors then piling in and buying expensive assets. The key is to have a clear investment strategy… and to then stick to it.

 

Time

Time impacts investments in a number of ways. First of all, the earlier you can start investing allows the magic of compounding of investment returns to get to work. The longer you then invest allows this compounding to really deliver over time. This is one of the big reasons why we encourage people to take a medium to long timeframe with their investments. Also markets can be quite volatile over short periods of time, so investments held for longer periods tend to exhibit lower volatility than those held for shorter periods – another advantage of longer term investing.

Finally you will often hear us say that trying to guess the best time to either enter or exit markets is folly – none of us have a crystal ball. The key is to have a structured plan for your investments, and to then stick to the plan.

 

Asset Allocation

The choices that are made between different asset classes can have a significant impact on your investment – whether you are invested in equities, property, bonds or cash etc. or how much you should have in each of these asset classes. After all, the greatest stock selector in the world will have little impact on your investment returns if only 10% of your money is in equities… Asset allocation is an important driver of investment returns, and is a factor that we spend a lot of time considering when building investment portfolios.

 

Stock Selection

“Star” fund managers get a lot of media attention, but their impact in reality on the returns of investors is actually relatively small. Yes they can positively impact the return on a portfolio, but this impact is quite a bit lower than most of the other factors that are mentioned. Out-performance in stock selection is also a hard one to anticipate as past performance is not a guide to future performance. Just because one investment house outperformed in recent years is not very meaningful… Understanding an investment manager’s philosophy and strategy is a far better guide than recent performance when choosing a fund manager.

 

Investment Costs & Tax

There are a number of factors that create a drag on investment returns that must be managed carefully. You should be satisfied that you are minimising the potential tax impact on your investments, and that any charges and expenses applied to your investment are competitive. Costs matter – you must ensure that you are receiving value for these costs. We are always happy to chat though the charges that apply to any investments, and also the different tax strategies that can potentially be deployed.

 

These are just some of the factors that will impact the returns on your investments, and over which you have some control. We will always look to bring your focus back to the plan – what you are trying to achieve, the investment strategy put in place to get you there and to keep you focused on that. This is the best way to grow your investments and to minimise any negative impacts.

Be on your best (financial) behaviour in 2019

2018 ended with a bit of a sting in the tail for investors, where we saw a lot of volatility in markets and a modest correction. While many analysts are forecasting single digit growth in 2019, they are also suggesting that 2019 may be another bumpy ride for investors with more volatility in markets. We fully recognise that volatility can cause uncertainty and lack of confidence for investors, but it’s our job to help you to avoid making mistakes now that will hurt your long term financial future.

Here are a few habits and behaviours that we believe will stand you in good stead throughout 2019, and will prevent you from making short term mistakes that will negatively impact you in the future.

 

Your financial objectives are paramount – keep them in mind

First and foremost, remember your investment objectives, and crucially your investment timeframes. In most cases, these are medium to long-term – at least they should be if you are invested in any sort of risky assets. These time frames are critical to your investment success. As we have seen in recent months, markets regularly experience short-term volatility. To try and forecast market movements and time this volatility usually results in further losses – none of us have a crystal ball. Research tells us time and time again that staying invested is the key to long-term success. Investors who look to sell out at the top and buy at the bottom usually miss both points, and often by very wide margins.

 

Keep saving

When short-term volatility happens, some investors are slow to commit more money to their investment strategies. This is effectively trying to time the market. It’s important that you keep the faith! Keep investing, although talk to us about the best way to do this. It may make sense for you to employ a strategy such as “euro cost averaging”. This is where you invest a fixed amount at regular intervals. This ensures that if markets are moving around, you are buying in to the market at various price points. As a result you are not exposed to the risk of investing all of your money, to be followed closely by an immediate fluctuation.

 

Volatility is part and parcel of investing

Volatility is simply a feature of investment markets which go through periods of both calm and volatility, sometimes in line with the market cycle, at other times reacting to once-off events. At the end of 2018 we saw potential trade wars, Brexit and tech stocks losing their lustre among other factors that caused some jitters in markets. Times of volatility have historically proven to be bad times to make significant investment decisions, as strategies tend to be coloured by short-term factors. Don’t let your emotions cloud your decision-making.

 

A diversified portfolio is key

A far more robust approach to investing is to stick to the asset allocation approach that was used in constructing your portfolio, as this is more likely to deliver long-term success. There are endless examples of investors chasing that one sure bet – technology companies in the late 1990’s, bank stocks in Ireland and foreign property investments in the 2000’s.  All ended in tears. A key principle of successful investing is to stay diversified across asset classes, geographical regions and sectors. This will protect you against unforeseen calamitous events in a single area.

 

Look at what you’ve already achieved

While of course we are always at pains to point out that past performance is not a guide to future performance, at the same time it’s sometimes worth looking back and seeing where you came from. This hopefully will give you confidence in the future! Look at an investment that you’ve had for a long time – this could be an old pension fund, a children’s education fund or even your family home. Or for example, just look at stock market returns over any 10year+ time frame. With very few exceptions, the results are extremely heartening – often that policy that you haven’t touched has been your stellar performer! This will give you a sense of how the passage of time is an investor’s friend, and this will hopefully bolster your confidence to stick with a consistent investment approach throughout good and bad times.

Often it simply makes sense to sit down with an expert who will look dispassionately at your situation and reassure you, or guide you towards a change. We would be delighted to help you.

Important: Past performance is not a guide to future performance

5 reasons it’s time to review your pension

At the start of a new year and as outlined in our other article this month, we all tend to take stock of how we manage our finances. We look at our financial habits, ways of saving money and managing our spending better. This is also a great time of year to take a hard look at our retirement planning, to ensure it is in the best shape possible.

Here goes on five reasons why we think it’s a good time now to do so.

 

The State Pension picture is far from rosy

Where do we start on this one! There is a lot of uncertainty over the long term viability of the state pension due to the fact that the ratio of people working compared to retired people is reducing from 5 to 1 today, to 2 working to 1 retired by 2050. As the numbers of those working reduces in relation to the numbers of pensioners receiving benefits, there will be less money coming in to the central government coffers, with more going out. Who is going to pay for the benefits, as the government actually hasn’t saved any money for future pensions?

In any event you can’t rely on the state if you want any more than a subsistence lifestyle.  The maximum state (contributory) pension is currently €243.30 per week for a single person and €442.30 per week for a couple. While this will increase marginally from March 2019 as announced in the most recent budget, it’s not a lot of money if you fancy going on the odd holiday!

The state is looking to address this problem – we’ve already seen retirement dates and eligibility for state pensions pushed out. For anyone born in 1961 or later, they won’t get their state pension until age 68. We’re likely to see further such developments in the future. Could we possibly see retirement ages being pushed out further again, benefits being reduced / means tested or stricter qualifying conditions? Nothing can be ruled out.

The government has recently announced a move towards mandatory pensions to also help address the situation, so watch this space… The reality is that it’s up to each of us individually to look after our own retirement needs, if we want a nice lifestyle to enjoy later in life.

 

Life Expectancy

We’re all living longer now and can thank our healthier lifestyles, better diets and medical science for this! While this is certainly good news, it also comes with a price. If you live longer, you need a bigger nest egg to see you through these years. Savings in retirement will need to last on average for at least 20 years in retirement for female clients who are aged 66 and 17 years for males when they retire, based on current mortality rates. Indeed more and more people will now be retired for 30 – 35 years. What size of pension fund would you need to maintain your lifestyle for that period? Many people seriously under-estimate the size of their required fund to maintain a chosen lifestyle over such a long period of time.

 

It’s time to take Control

Well it’s probably quite obvious but the longer that you pay into a pension fund, the more you can expect to receive when you retire and the more likely you are to achieve your financial goals. Be realistic about how much it will take to achieve your goals. As a very rough rule of thumb, you should aim to save “half your age”. So if you are 40 years old, you should aim to save 20% of your income each year from now until retirement to build up a decent fund. If you wait until you are aged 50 to start, you should then aim to save 25% of your income each year.

Of course, this is only a rough calculation. We will help you develop a far more tailored picture for you, taking account of any existing benefits that you have already built up, and will help you to implement a plan that is right for your particular circumstances.

 

Compound interest is your friend

The “Rule of 72” is a simple maths equation to determine how long an investment will take to double, given a fixed annual rate of interest. All that you have to do is divide 72 by the expected rate of return. The answer is the number of years it will take for the amount of money to double.

  • If you are aiming for a return of (say) 8% p.a., it will take 9 years for your investment to double (72/8% = 9 years)
  • However if you are more cautious, you may only be aiming for a return of (say) 3% p.a. In this case it will take 24 years for your investment to double (72/3% = 24 years).

So starting early, having the opportunity to take on a bit more risk in the hope of achieving higher returns and then having the benefit of time can have a seriously positive impact on your pension fund. It really is a case of starting sooner rather than later.

Then there’s the question of how to achieve higher growth rates. First of all, a long-term perspective is critical, particularly if you are investing in the likes of stock markets. For example, according to historical records, the average annual return for the S&P 500 since its inception in 1928 to 2017 is approximately 10% p.a. Now there have been a number of crashes along the way and of course previous returns are not a guide to future performance, but they give a sense of what can be achieved over a long timeframe when one is willing to accept a level of risk.

 

And then there’s the Tax Benefits

Clients who are paying income tax at the higher rate of 40%, effectively receive a 66% increase on their pension contribution when investing, i.e. by foregoing €6,000 in net pay, €10,000 is invested in your pension. Pensions are pretty much the final frontier for such generous tax reliefs. Also any contributions paid before 31 October next can be used to reduce your 2018 tax bill. This applies to contributions to personal pension plans (e.g. PRSAs, Retirement Annuity Contracts) and employment pension schemes (i.e. AVCs – Additional Voluntary Contributions).

In addition to tax relief on contributions and your fund growing free of any tax (DIRT, CGT etc.), clients can also avail of a tax free retirement lump sum up to €200K. In most circumstances, a structure (Approved Retirement Fund – ARF) can also be put in place at retirement that enables tax efficient wealth transfer on death to your estate of any remaining fund.

 

There’s 5 good reasons to review your pension now. Please give us a call and let us help you achieve the lifestyle that you want in retirement.

What does your future life look like?

We hope that you have experienced the quiet evolution of our role in recent years. Going back in time, the role of the financial adviser was to help clients to identify gaps that they had in their portfolio of financial products, to find the best products to fill those gaps and to then put these products in place for clients. While this is still an important strand of what we do, our role has evolved in recent years into a much broader and more valuable service.

Now our role is one of being your financial guide, of helping you to identify the life that you want to live, and then helping you actually achieve this life. Today our most powerful conversations don’t start with a long discussion about your money – your assets and debts, your income and expenditure. Instead the conversation centres around you, yourself. Your hopes and dreams, what you want to achieve in your life and what living life on your terms looks like.  When you are clear about your desired future life, only then does the conversation turn to being able to afford that life and how we can help you make the life you want a reality.

While developing a financial plan that will guide you to achieve your desired life requires all of our expertise, experience and financial planning tools, the process of achieving it is relatively straightforward. We take you through four main phases of work when working with you on our full lifestyle financial planning service.

 

Discovery

This is the most important of all of the stages. This is where we help you to identify and articulate your lifetime goals and ambitions, where we help you to visualise your future life in your own terms – the type of life that you will lead, the possessions that you will own, the positive impact you will have on the lives of others, what you will do and achieve in your life.

Until you know the answer to these questions, what are you financially planning for? Just building a pot of money with no idea of what it will allow you to do?

During this phase of work, we revert to the important old adage of “having two ears and one mouth for a reason”. Our role in this is to carefully ask you the right questions that will enable you to visualise your future life. And then we listen intently. It is not “airy fairy”, instead it is the most important conversation that we will have together, as we get to understand your hopes and dreams.

 

Planning

The second stage is where we apply our expertise and tools to develop the roadmap that will get you from where you are today to achieving the life that you want to live. As part of this, we may use some clever technology that enables us to map out your future cashflows for the rest of your life – how much money you will have every year and whether you will have enough to live the life that you want. Of course we are making a range of assumptions around this, but these assumptions will be fine-tuned during the lifetime of your plan to increase the accuracy of the forecasts.

We will show you whether you are on track to lead the life you’ve visualised, and if not what you need to do to get on track. We can demonstrate the impact of unforeseen events and how to plan for them, the impact of your goals changing and of course the actions you need to take, or financial habits and products you need to put in place to achieve the plan.

 

Implementation

This is the phase of work we are often most commonly associated with. It’s also the most straightforward of all of the phases. This is where we put the required financial products in place that will play a role in helping you to achieve your goals in life.

 

Your ongoing guidance

Regular contact and scheduled meetings sit at the heart of lifestyle financial planning. The ongoing interactions turn the plan into a real journey towards you achieving your lifetime ambitions. These regular meetings are the opportunity to review and restate your goals, consider again the assumptions used, review the progress and performance of the actions and products that were implemented, and to keep you on track in terms of your behaviours with your money and investments.

To help you stay on track, we know that we need to be with you at every turn, helping you to navigate your way towards your dreams. We value our appointment as your financial guide and will be in your corner helping you to make the best decisions possible throughout your life.

 

Our job is done only when you are living the life that you want to lead.

Do you know what your future life looks like and whether you will be able to lead it or not?

Is it time to save regularly for your retirement?

Paying tax bills can be a challenging time for both business owners and sole traders alike. Of course if your business is very successful, tax is simply an expense that needs to be met when your tax payment deadline rolls around. However, there are also many small enterprises that don’t enjoy the comfort of high levels of excess cashflow. For these businesses, the tax payment deadline can be a stressful time, gathering all expenses together and working with your accountant to identify ways in which you can legitimately reduce your tax liability.

Pension contributions are rightly viewed as one of the most effective ways of reducing your tax liability. The challenge is often having the spare cashflow to make that pension contribution while also being able to meet your tax payment! And as a result, the pension contribution often gets reduced or indeed removed in order to meet the tax liability. The unintended consequence of this is that your retirement plans and future lifestyle are now at risk.

So what’s the alternative?

The approach that many sole traders and business owners take to overcome this problem is to make pension contributions regularly (usually monthly) throughout the year, rather than leaving the pension contribution until the last minute. This approach has a number of advantages.

 

You’re putting yourself at the top of the queue

Leaving your pension contribution until the end of the year results in this payment being based effectively on money available, rather than your retirement plans. The outcome is often a reduced pension contribution and when this happens, the loser is your future self. Your retirement plan is being paid after everybody else, putting you right at the back of your cashflow queue.

The alternative is to work with us on identifying a sustainable regular amount. By then making this contribution regularly each month, you have accelerated yourself to the top of the queue, putting your future self before other expenses. After a while, this simply becomes another regular expense of the business (like your rent, salaries, power and other monthly payments) but now you are truly working for yourself and not just to pay other people’s bills.

 

Life is easier at year end

Consider an individual business owner who wants to put aside €20,000 – €25,000 into a pension plan each year. That is quite a significant amount to find at year end at the same time that your tax bill is due. The alternative is to pay maybe €1,500 per month into a pension plan. At the end of the year, you are then only looking to find the balancing amount of €2,000 – €7,000. If your company has had a very good year, a larger balancing pension payment might also be possible.

Yes, by adopting this monthly payment approach you are increasing the regular overhead of the business. But you are doing this now with your own interests at heart. The flip side of this coin is in how you are making life so much easier for yourself at the end of the year, when your tax payment is also due.

You also need to consider though your options in case your business goes through a difficult period. We always advocate flexible retirement plans that enable you to change your regular contribution amounts or indeed take a break from them if needed. We want you to fully look after your future self, but we also recognise that you can’t do this while blindly ignoring your current business environment.

 

You gain from Euro Cost Averaging

Making a single payment each year increases your investment risk. We never suggest that you should try and time the markets and indeed investment risk works both ways – sometimes you gain and sometimes you lose. But the situation that you want to avoid is being up against a deadline (for example the tax deadline) to make a pension contribution at a time when you feel uncomfortable with the investment conditions.

Making a regular contribution significantly reduces this risk. If markets have been performing poorly, well then you are buying in when prices are low – just where you want them to be when you are entering the market. Of course if instead markets have been steaming ahead and you have a nagging doubt that they may be near their peak, they are now relatively expensive. With a monthly contribution, you are now only committing one twelfth of your full year’s pension contribution into the market at that time, rather than potentially the full amount. So in effect your regular payment strategy is smoothing your entry points into the market and as a result reducing your investment risk.

 

We all like to avoid incurring more regular expenses in our business. However this is one instance where it makes sense. Because you’re bringing yourself to the top of the queue.

 

We would welcome the opportunity to discuss your own pension contribution strategy – please give us a call and we will help you to put your future self first.

Retirement Planning is about more than money

When you think of retirement, what do you think about? Is it those additional games of golf, spending a few months every year in the sun and lots of time with the grandkids? Or instead do you think about your pension fund and silently worry that you might not have enough money to do all the things that you want to do?

Yes, we recognise the important role that we play in minimising that financial worry and helping you to build up a pension fund that will allow you to live your life in retirement on your own terms. We do this with clients every day and to be honest, this is “meat and drink” to us! However we also recognise how important it is for us to help you to take a much more holistic view of retirement, and that is our focus here.

So let’s assume that together we’ve done the best job possible on the financial side and that you have the financial means to live your life to the full in retirement. What else do you need to think about?

 

Being together fulltime

Think about it – day one of your retirement. You wake up, not to the sound of the alarm clock but at your leisure. Your spouse who has been at home fulltime for the last few years is busy about his/her usual routine. Where do you fit in?

There are of course many ways to approach this. The wrong way is probably to just assume everything is now changed because you’re around! Instead you need to recognise that your partner may love their routine and don’t want this changed too much. Equally they need to be aware of the momentous shift in your life, and that you may struggle for a while to build your own new routine, both of your own activities and hopefully shared activities.

This is not the time for the “bull in a china shop” approach! Instead awareness of each other’s space, routines and hopes for the future together are crucial. The key to this is talking about it and working through it together.

 

Long days

The thinking around this needs to begin long before retirement. The working day, including your commuting time often punched in 11 or 12 hours every day. That’s a lot of time to fill now, so how are you going to do it? Are you going to play lots of golf? Are you going to study or do voluntary work? Are you going to spend time out and about visiting all those places you’d been promising to see, but never had the time?

Have a plan and fill as many of your days as possible with activities that interest you and make you feel good about yourself. Keep your mind and body active. Your life will be one long day after another if you end up falling asleep in front of afternoon TV shows!

 

Mind your health

The simple task of getting up and going to work was good for your health, often followed by some exercise in the evenings. Now is the time to increase the focus on healthy habits, not cut back on them. You have more time now to exercise than ever before, so use it. That might be golf, it might be a brisk walk or a visit to the local gym – the instructors there will devise a fitness programme suitable for you.

Apart from the physical benefits, this will also be very important for your mental health. Physical exercise makes you feel better about yourself, so reap the rewards both physically and mentally.

Stay aware of maintaining your mental fitness too. Spend time with friends, do the crossword, read and study. Stay sharp.

With more time on your hands, you also have the opportunity to spend more time preparing healthier meals for yourself. The excuse of another takeaway because you’re late home just won’t wash anymore! Make good food a hobby – taking the time to get fresh, healthy ingredients and then spending a bit of time on food preparation.

 

Remember your value

You have so much to offer in terms of experience, expertise and time. Some people can retire with a perceived loss of value. Previously a company and colleagues relied upon you, and now that is gone. All that actually needs to change here though is that previously you were paid for your time and expertise, while now you can still offer this but maybe without payment. You will do it on your terms, only in areas that interest you, at times that suit you and in ways that make you feel good about yourself. You will add enormous value, whether that’s to a voluntary organisation, coaching a sports team or mentoring less experienced business owners.

 

Having your finances in order is very important for a happy and satisfying retirement. But it’s the other factors that will make you feel good about yourself and will help you live your life to the full for many years to come.

Is Income Protection really necessary?

Income Protection is sometimes described as the glue in a financial portfolio. The most devastating impact on your financial situation is likely to be caused by a loss of your income, and the inability to replace it.

Unfortunately, people lose their jobs from time to time. However inevitably what tends to happen is that these people pick up new roles elsewhere or take a new path in their careers. As a result, their income may drop for a period of time, but will usually pick up again before too long. These people are in the fortunate position of being able to work.

Being unable to work because of illness or injury is a whole other matter. Little or no costs are moved from your life, in fact new costs may emerge such as medical expenses, care fees etc. On the income side, there are social protection benefits available, but in reality these deliver no more than basic subsistence payments. So there is often a lot less money coming in, with sometimes more going out…

Income protection protects your most important asset in the event of illness or injury – your income. And yet at the same time, it still doesn’t find its way into everybody’s financial portfolio.

 

Your most important asset?

We have just reviewed some very insightful research carried out by Friends First among Irish consumers that shines a light on this issue, with some very interesting findings. First of all, when asked to rank their financial assets in order of importance, the findings were,

  1. Our home (67%)
  2. Our savings (57%)
  3. Our pensions (48%)
  4. Our income (43%)

While the findings might not be surprising in that we all have an emotional attachment to our homes, without their income, these people will lose all of the other assets (maybe bar their pension). Your income is the enabler of all of the other assets, and therefore is the most critical one to maintain.

 

How long could you cope?

The research then went on to ask how long employees could cope without their income where they are reliant on social protection, using their savings and maybe selling some assets. The findings here were startling when compared to the reality of income protection claimants.

  • 44% of people said they could cope for 3-6 months only.
  • 30% said they could cope for between 6 months and a year
  • Less than 8% said they could sustain themselves financially for 2 years or more.

However the average duration of an income protection claim is 6.5 years! And that’s an average, many last longer than that. So while having the foresight to maintain a nest egg to see you through a year or two of income loss is extremely laudable and wise, on its own it just might not be enough.

 

How much of your income do you need to protect?

This is a really important question. While income protection still enjoys the benefit of tax relief at your marginal (highest) rate, it’s another household expense that none of us enjoy. After all, you’re paying for a benefit that you hope you never collect! It is really important that we spend time together looking at your specific situation, your expenses and how they might be impacted by a loss of income. You want to have enough cover to meet your needs in the event of a loss of income, without paying too much along the way. You need to consider any sick pay schemes that you might have access to through your employer, as these might impact the cover levels and cost of a policy to meet your needs.

When asked by the researchers, two thirds of respondents felt that they would require a replacement income of between 50% and 75% of their current income levels. Just over a quarter felt that they would need to protect between 25% and 50% of their income, while 7% felt they would need a replacement income of less than a quarter of their current income. It may be that this last group are approaching retirement and/or possibly their incomes are significantly in excess of their expenditure. Otherwise they may be a little unrealistic about the level of income they would need to replace!

How much replacement income would you need?

 

We all have a range of financial challenges; making our money go further today, investing wisely, saving for retirement and protecting our main assets. In addressing this final one, never underestimate the value of your income – it is the one single asset that you really can’t live without.

Your 70’s onwards – looking after yourself & others

In this final instalment of our age-related articles, it is now the turn of the more senior members of our communities – all of you in your 70’s and older. This group have some very specific financial challenges, so here are some thoughts on wisely managing your financial affairs.

 

Stay healthy

A decline in health costs money, no matter what support you get from insurance policies and the state. Your house may need to be modified, you may need to pay carers, you may need to install expensive equipment etc. There are a whole range of areas in which ill health costs money.

While of course this is not fully under your control, do everything you can to stay healthy. Eat well and continue to exercise as much as you can, even a short walk every day makes a difference. Look after your mental health too – maintain social contact with family and friends and keep your hobbies and interests going as much as you can. Staying healthy will be a boon for your finances.

 

Stay aware

Help yourself make sound financial decisions. When you are making decisions where there are sizeable sums of money involved, do your research. This might be a significant purchase or getting some work done around the house. If you’re not comfortable doing this research yourself, ask a trusted family member or friends to help you. There are loads of great resources available on the internet to help you make better decisions. If you don’t know where to find them, ask someone who does.

Unfortunately there are always less savoury characters in our society. There are countless stories of people targeting elderly people in their homes with a range of scams, usually under the pretence of doing some “much needed” work. However this usually results in shoddy work that is hugely over-priced and sometimes results in these conmen stealing from you when given access into your home. Never buy from someone at your door. If you want to, take their number with a view to carrying out your research first. And run this by your family or trusted friends before you actually do anything. If the person at your door is genuine, they will completely understand you taking your time in deciding to buy whatever they are offering.

 

Claim everything due to you

You probably spent around 40 years working and paying tax, now it’s your turn to receive. Know all of your entitlements and claim them, whether it’s in relation to social welfare rights, free schemes for the elderly or other such supports. You’ve earned the right to these supports!

 

Continue to invest wisely

This is one area where it’s really important to work with a financial planner. They will help you identify what your life goals are and to develop a financial plan and investment strategy to ensure your goals are achieved. Your goals might be around living life to the full for the next 10 years, maybe building a war chest for long-term care later in life or indeed your goals might relate to transferring money in a tax efficient way to your loved ones. In fact you will probably want to consider a whole host of different scenarios and potential outcomes. Your planner will help you look at all of these.

These goals need careful planning and a wise investment approach. Simply locking all of your money up in a deposit account is often the wrong strategy. Get help to identify your goals and to invest wisely.

 

Begin wealth transfer now

Wealth transfer is often a tricky area. Apart from the odd gift, people often don’t want to face it “until they are gone”. However on the other hand most people hate the idea that after their death, they may leave their loved ones with a significant tax bill. This may for example force the sale of the family home.

Now is the time to ensure that you leave a lasting legacy and not a tax bill. Planning your wealth transfer should be in train now. There are tax exemptions that allow you to transfer wealth to others while you are alive without incurring a tax bill. Know what is available to you and how you and your loved ones may benefit from a structured estate planning approach. Your financial planner is the person in your corner on this one.

 

Make sure your wishes are clear

It is your money and for you to do with it as you see fit. Make sure your wishes are crystal clear, irrespective of what the future holds for you. Should the day come where you lose your mental capacity, it is very important that you will have an Enduring Power of Attorney in place that will ensure your affairs can continue to be managed as you would wish. Of course, ensure whoever will carry out this role is very clear about what you would want.

Likewise your Will should reflect how you wish your assets to be distributed upon your death. As part of this, don’t be afraid to talk to us about death. Trust me, it’ll happen to every one of us! A recent survey in the UK of more than 2,000 people found that 30 per cent of people are uncomfortable seeking financial advice to talk about death. This undermines their financial outcomes as beneficial plans are not implemented.

Also more than half of people aged over 55 haven’t discussed bank accounts, insurance, investments and personal possessions with their family. This reticence to discuss these issues unfortunately stores up challenges for bereaved family members down the road.

 

At this stage in life, make sure all your financial decisions reflect what you want. A family member or trusted friends can help you with those everyday decisions. As your financial planner, we want to help you to make wise financial decisions to ensure that all of your life goals are achieved and enjoyed.