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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.

Are we all saving enough for retirement?

There finally seems to be some level of commitment at a government level to dealing with Ireland’s looming pension crisis. This is as a result of an ever-widening gap between what people are saving for retirement, and how much they will actually need to enjoy a comfortable retirement.

The OECD suggests that people on average should target a replacement income in retirement of 70% of their pre-retirement earnings. Higher earners probably don’t need such a high replacement level, as they often have other assets to call on, and enjoy reduced expenditure as mortgages and other debt tends to have been paid off. However for low earners, they require a replacement income of up to 90% of their pre-retirement earnings to survive, as they tend to need every penny that they earn just to get by. Currently the maximum state old age pension for a single person is €12,652 – this represents just 33% of the average annual earnings in 2017. And with less than half of the population (and only about a third of private sector workers) having any pensions savings at all, many people face survival at best, penury at worst in retirement.

 

Will the policy makers save the day?

The pensions crisis is one of the biggest challenges facing policymakers today. Think of the National Debt or Brexit on steroids! It just doesn’t get the coverage as it is such an enormous challenge and it is a problem that can be (and usually ends up being) kicked down the road for the next government.

The problem is that state old age pensions and also the pensions of public sector workers are paid for from current tax revenues. There is no pot of money set aside to cover these promises. Currently we have 5 workers paying tax for every pensioner who receives a pension. Over the coming decades, this ratio will drop to 2 workers for every pensioner. The problem is getting worse, so the options of policymakers are limited.

 

How are you fixed yourself?

Because the state is not going to rescue us, each of us needs to fund our own retirement to a large degree. Your own state of readiness depends on many factors, including

  • Your desired lifestyle in retirement
  • How much you will save between now and retirement
  • How much your employer will pay into your pension fund
  • How much you have already saved
  • What assets you may have to sell to fund your retirement lifestyle
  • What windfalls are likely to come your way – e.g. an inheritance.

Aviva carried out some great research in both 2010 and 2016, called “Mind the Gap” in which they examined the gap between what people are saving and how much they need. Their key finding is that Ireland has the third largest pension gap in Europe, with an average pension gap of €12,200 per person, per annum.  51% of people said that they are not prepared for retirement.

In order to achieve the OECD replacement figure of 70% of pre-retirement earnings, Aviva calculated the following average additional pension savings (not total savings) that people need to make,

  • For a 30 year old – €5,100 per annum.
  • For a 40 year old – €6,700 per annum.
  • For a 50 year old – €9,700 per annum.
  • For a 60 year old – €28,000 per annum.

(Source: Aviva’s Mind the Gap, 2016)

 

What needs to be done?

The state has a critical role through pension policy. Within the next few years we are certainly going to see auto-enrolment of all workers in pension schemes. This means that your employer will be obliged to automatically include you in a pension scheme, where a fund will be built up for you based on contributions from yourself, your employer and the state itself (through tax relief or some other credit system). Of course you will be allowed to opt out, but the default position is that you must be included in a scheme. This will be a major change in Irish pension policy and hopefully will have the desired effect of improving retirement outcomes for people. This approach has certainly been successful in other countries. We now need to see how auto-enrolment will be rolled out, as the devil is always in the detail!

However, as identified in the Aviva research, we all need to take personal responsibility too and save more. A very rough rule of thumb is that you should save half your age as a percentage of your earnings – a 30 year old needs to save 15%, a 50 year old should be saving 25% of earnings etc. This is a very rough calculation though, nothing beats your financial adviser examining fully your specific circumstances and advising the right contribution level for you. However it’s pretty simple – the quality of your retirement lifestyle will be a direct result of the assets you build up yourself.

We also need to educate ourselves better on where we actually stand in our own retirement journey. How much are you likely to have in retirement? Is that enough to meet your needs? What are your options to improve your situation? Are you missing tax saving opportunities?

At the end of the day, spending money today on retirement saving is hard, as there is no immediate reward. However hopefully you will live a long and happy retirement – this will certainly be hugely enhanced by the retirement planning you do today.

5 ways we help you stay on track that might leave you wondering!

We are in the business of helping you to achieve the life that you want to lead, through wise management of your money and by helping you to establish sound financial behaviours. We know from experience that developing a financial plan for you is the first step to enabling you to achieve your desired lifestyle, followed by years and years of relentless and rigorous focus on this plan. It will never be achieved by short term tactical genius and taking bets.

In relation to your financial behaviours, our role is akin to being your (financial) guardian angel! The biggest factor in wealth destruction is very often the investor’s own misguided behaviours and actions. As a result the most important role that we can play is to stop you making mistakes that will impact your wealth. This is sometimes the unseen work that we do, so we thought it would be useful to give you a sense of a few ways in which we add value, without you probably even realising it!

 

1. Keeping a long-term perspective

This is probably the biggest challenge for investors. You are bombarded every day by news of markets falling (this is followed at some stage by a rise again – every time), economic warnings, news of financial meltdown – all potential threats to your financial wellbeing. As a result you could be tempted to constantly make “tactical” changes. The problem is that more often than not, you’ll make the wrong changes and most of these doomsday scenarios never come to pass. Even when they do, they correct themselves given time.

So we avoid this short-term news and focus on your plan, which is all about your long-term financial health. We are confident that we have put the right strategies in place to help you achieve your goals over the long-term and we don’t get distracted by short-term noise. It might appear like we’re doing very little. In fact we’re usually doing you a huge favour by avoiding any unwanted activity!

 

2. Seeing volatility as your friend

Volatile markets are very good for your wealth! While they might (temporarily) be very bad for your nerves, there is a real upside to volatile markets. We are real believers that saving regularly is a core principle of long term wealth. When markets drop, your savings buy more assets – think of these opportunities as an asset sale! Market falls offer a great opportunity for buyers (savers). Unfortunately for many people, market falls result in the panic button being pressed and people getting out of markets – selling when prices are low. This is bad for your financial health… so we will help calm your nerves when markets are volatile.

 

3. We’ll encourage you to do very little

Constantly tweaking your portfolio makes an adviser look very busy, possibly even appear as an expert who is making highly brilliant changes for your benefit. Unfortunately in most situations, the opposite is actually the case. Developing a plan, developing the right investment strategy to achieve that plan and then sticking with the strategy (and right behaviours) over many years is the road to success.

 

4. We’ll follow the plan and not the markets

Following the markets means you’re driving while looking through the rear view mirror. You’re basing your future decisions on what is gone and behind you, rather than the road in front of you. We want to keep you looking forwards, as this is all you can influence. If we can help you do the right things that will have a huge impact on your future financial wealth, then we’ll have done a good job. So we’ll spend much more time talking about how much you are saving (and spending!) rather than investment performance, as these are the factors that will make the most difference to the achievement of your financial plan, and ultimately your desired lifestyle.

Yes investment performance is important. But it’s gone, it’s over. And it doesn’t tell us anything about the future. We can’t time markets any better than you can. Nor can fund managers. So very often those little tweaks will simply be the wrong action to take. Review the plan, change the plan as needed and adjust the investment strategy in line with the plan is the road to success. Not “brilliant” short-term bets.

 

5. Not getting bogged down in products

Similar to the last point, we can make the biggest difference to your financial health by helping you to avoid making mistakes, and by guiding you to do the right things to improve your future. This usually has very little to do with products. Of course, we will make sure that you have the right life cover, income protection and investment products in place, that goes without saying. But while keeping them under review, we let them do what they are meant to do.

Instead we focus on the more important items. Have you got your wills completed and up to date? Should you have Enduring Power of Attorney in place? Are your bank accounts optimally set up to enable you always to be able to access your money? Are you controlling your spending, in line with your financial plan? And are you saving enough for your desired future life? All nothing really to do with products, but these are the things that will make the big difference to you in the future.

 

In summary, it all comes back to developing your financial plan, and the strategy to achieve that plan. And then by all of us staying out of the way (while keeping everything under constant review) and letting products and markets do what they are supposed to do over many years.