Retire Inspired

The phrase ‘Retirement Planning’ is almost universally understood to relate to financial planning. But increasingly it is seen that there is more to retirement that just viewing this issue through a financial lens, i.e. planning for retirement.

As a financial adviser, I perhaps naturally focus on the figures – estimated pre-retirement earnings, fund projections, investment growth rates etc. But what sometimes is overlooked is getting the client to also envision what retirement will actually look like.

What do they plan to do in retirement, how they spend all the extra spare time, do they plan to do more travelling, what new interests/hobbies might they take up, will they engage in new learning etc?

When today’s retirees started working, perhaps in the early 1970s, the average life expectancy for retiring at age 65 was some 12 years for males and about 15 for females. Today the average is some 20 years and circa 24 years for females. Not alone can today’s retirees look forward to a much longer retirement, but in most cases, they are far healthier than in previous generations.

It is important that as people approach retirement, they have a good grasp of how their finances will be positioned so that they may look beyond the day of retirement. Some helpful questions to perhaps ask in the planning stage are;

• What do you plan to do in retirement, how will you spend your time?

• What are your major expenditures?

• What new or increased expenditures might arise in retirement, e.g. more travelling?

• Do you regularly shop around for better deals on items such as utilities?

• Will you perhaps downsize after retirement?

Recently I have been contacted by several people who have received their leaving-service and retirement options directly from the Pension company. They were originally going to choose the option they thought suited them. But upon meeting with me and going through the above questions, they felt more confident that they made the right choice for them and in some cases they made different decisions than initially planned.

One client was entitled to a substantial tax-free cash amount which she nearly missed out on as she did not fully understand the options. Another client who initially thought they were required to wait until age 65 to drawdown their pension benefits, was able to access their pension options.

The better you can envision retirement, the better you will be able to decide on financial planning options (e.g. what tax-free lump sum, whether Annuity or ARF, investment profile/risk rating of investment options etc).

Are you too young for a pension plan?

You are never too young for a pension plan. That’s it, end of article? But maybe you need to be convinced of this fact!

The benefits of starting your pension funding as early as possible are really immense. Now we are not suggesting that everyone should live a life of penury in their 20’s and 30’s in order to safeguard their lifestyle in their later years. But starting a pension plan early has a significant impact on your final retirement outcome and this is down to one main fact, the effect of compound interest.

The Rule of 72
To look at compound interest, it’s useful to consider a maths equation that is commonly known as “The Rule of 72”. This is a simplified way 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. Consider two examples of how you can use this below;

• If you are aiming for a return of 6% p.a., it will take 12 years for your investment to double (72/6% = 12 years)
• If you want to double your money in 10 years, you will need to achieve a return of 7.2% p.a. (72/10 years = 7.2%)

The impact on your pension plan
This rule demonstrates that a contribution made to a pension plan in your 20’s or 30’s has the benefit of time on it’s side to grow very significantly from the time it is made, to your retirement age. And because you have this time on your side, you will probably also be willing to take some risk with your funds, with the aim of achieving higher growth rates.

These higher growth rates may be achieved through investing in the likes of equity (stock market) funds. If you had invested in the S&P 500 Index of shares from 1st January 1985 to 31st December 2014, your investment would have achieved a Compound Annual Growth Rate (annualised return) of 11.40 per annum over the 30 year period! Now of course previous returns are not necessarily a guide to future performance, but they give a sense of what can be achieved over a long timeframe.

So when you put higher potential growth rates and a longer term together, the impact can be significant. Instead if you wait until much later in life to start your pension planning, you will probably want to be more cautious in your investment choices (to limit any downside risk), thus reducing your potential growth rate. You also won’t have the investment duration to benefit from the compound interest effect.

So yes, live your life for today while you’re young. But doing this with some investment in your future will yield great benefits when you do eventually hang up your working boots!

Pension and Investment Lessons from the Economic Crash: A Financial Broker Perspective

Think back to the start of 2008. The economic storm clouds were getting darker, there were rumblings about losses building in banks across the globe and investors were beginning to get nervous. And now race forwards 7 years and consider the lessons to be learned with the benefit of hindsight. Like all lessons, these are lessons that can easily be forgotten again!

Research has shown time and time again that “stock picking” investors rarely out-perform the market. Yes some hit lucky and beat the market, but the majority would be better off in a fund that tracks a stock market index, or a professionally managed active fund.

Why is that? At the end of the day, people make poor investment decisions because they are human. They see stock markets racing ahead, and then decide to buy in. Or indeed (as during the economic crash) when there are huge falls in the market, investors decide to jump ship. And of course this is exactly the opposite of what we should do, i.e. buy low and sell high. Your financial adviser will help you to do the right thing, and often that might be to sit tight and do nothing at all. 

Every Financial Broker will know the horror stories of one-way bets and sure things. Surely, if you had a genuine one-way bet, you’d tell no one about it! So the “guaranteed” returns that were coming from apartments in far-flung places and the certain returns from Irish bank shares were shown up for what they are – investments with risks attached, just like all other investments. Your Financial Broker will ensure you have a diversified investment portfolio that matches your risk tolerance. They will caution you against these “sure things”!

In the past, when people were asked about the amount of risk they were happy to take, they bullishly took on more risk, with the hope of gaining greater rewards. However the folly of this approach was laid bare when the crash came and investment losses increased. Many investors realised that they were ill equipped to deal with these losses, either financially or emotionally.

Having a Financial Broker in your corner will help take the emotion out of your investments. Their financial advice will be based on experience and knowledge of the highs and lows of the markets over many investment cycles. Their only interest is in your financial goals and objectives and how best to achieve them. From their experiences as a financial adviser, they have learned that there is no quick route to success.

Instead they will bring rigour and a structured methodology to the financial advice that they offer. So apart from fulfilling their traditional role as your financial adviser, a Financial Broker can be your financial conscience!

Pensions, are they still worthwhile?

I am working in my office right now and was trying to come up with this month’s segment. My father in law came out to ask how business was and we got talking about Pensions. I was stressing how some people do not really value the concept of saving for retirement. He said, “Thank god I have my Pension secured, I know a lot of people who used to have a good standard of living who are struggling now in retirement”. His words, not mine.

As such I thought I would write about a question that has come up quite regularly from people who have arranged to meet with me to discuss non Pension products. That question is an inquisitive “Are Pensions actually worth paying into?” It is too broad a question to completely explore in this segment, but I will try to at least give people something to think about.

The biggest immediate benefit of saving in a pension is the tax relief you get at your standard rate. To save €100 into a savings plan, you have to invest €100. To save €100 into a Pension would cost up to 40% less after tax relief. You also get tax free growth on an investment in a Pension; you pay regular tax on any growth on normal savings/deposit accounts.

I am finding that some people actually like the fact that they cannot get their hands on their Pension until retirement. That is to say, they know that they can’t spend it impulsively like they would if it was available to them.

One of the things that many people find understandably difficult is putting themselves in their own shoes in the future. Imagine you are retiring next month and you have nothing but the state Pension, how would you manage? Some people have chosen to rely only on rental properties for their Pension and I would suggest that between 2007 and 2012 some of them have had a very stressful retirement.

Saving into a Pension doesn’t have to be your only source of retirement income (you can purchase rental property aswell). I find that once people start a Pension they don’t actually miss the money that they are putting aside. They also don’t think of it as something they can spend now and as such they have started the good habit of saving now for their eventual retirement.

People can argue the merits of saving into a Pension, but I would ask people to really think about how they intend on subsidising a drop in income at retirement. Whether you are an individual or a couple, the same conditions may apply once you cease working. The big question is will you have saved provisions to subsidise it.

Pensions: Exercise for your long-term financial wellbeing!

I have a wife, three young children and I work for myself. It can be tough to find time to get the exercise that I would like. I know exercise will help me feel better and will more than likely be extremely beneficial to me in the long-term if I keep it up. As such I have started to do a boxcercise class.

For me, exercise is not just about feeling good now; it’s about trying to feel good in the future. It’s about trying to condition my body to be healthy and strong and in the long term I hope it might extend my life. I know that exercise can improve my immune system which in turn may allow me to be more active in my later years.

A Pension is a personal retirement savings account (PRSA). You could say its exercise for your financial wellbeing. It’s about putting the work in now, so that you may benefit in the long term, particularly in your later years when you may not have the same opportunities to enhance your financial health.

There are days when for numerous reasons I really don’t want to get out to do the boxcercise. The days I push myself to get up and do it, I feel better and the days I give in and rest, I feel a little guilty. I can honestly say that any client that comes to me at retirement is happy when they have a Pension of their own to drawdown. In many cases they express remorse that they didn’t save more when they had the opportunity to do so.

Like exercise, the sooner you start contributing to a Pension the better the potential long term benefits. I know that I would prefer to retire as young as I can, but I also know that will be very much dependant on my physical health and my financial health. In both cases, I can only commit so much time/money now, but a little bit of both is better than nothing of either.

Questions on old Pensions left behind...perhaps even ones forgotten!

In this article I will run through some of the most frequently asked questions in relation to old paid up pensions. These are pensions that you may have had with a previous employer that you never moved or enquired about at the time you left employment.

How do I get information about my old Pension?

In most cases you should be receiving annual benefit statements with general details (including the value) of your Pension. If you are unsure where to look, the company’s human resource department (or Employee Pension department if there is one) is a good start.

Can I bring my pension with me when I move employment?

In most cases, when you leave employment, you have several options. Indeed you are entitled to request “leaving service options” which sets out exactly what you can do with your Pension. This can intimidate and confuse people but if it’s explained correctly I find people are more confident moving their Pension into their own name.

Will I lose out if I move out of the old Pension arrangement?

The only way of knowing is by enquiring about the benefits currently on the Pension plan, but in many cases you can actually benefit from moving your Pension funds into your own name.

If you do move a pension to your own name one of the biggest benefits is that you get direct access/information sent to you personally about you Pension. Some people like having complete control over their Pension and like not having to contact a Trustee (or old employer) anytime they want information regarding their Pension.

What can Drumgoole Financial Services Limited do for you?

Part of my job is to help people arrange their pensions together into an efficient/transparent portfolio. In simple terms this means you know exactly what you have and where you have it.

When many people move on from a job, they leave their Pension paid up (sitting idle) in their old Pension arrangement. I have had clients contact me who have had no correspondence in relation to their Pension for one reason or another.

Clarity of Pension advice. . . . . . .

I have had numerous meetings with people locally who have contacted me because they had an experience with a door to door Pension salesman from a specified Pension provider. Some of the following are quotes used by people I have met:

• “This salesperson does not listen to what we were saying and only wanted to discuss specific things that were encouraging us to take out a policy”

• “I found this salesperson very pushy. They stated that their Pension company had the best investment funds and the cheapest charges in the industry”

Charges

A Pension policy where there are significantly high up front charges in the first few years are not always the cheapest or cost effective in the long run. In many cases there are certain bonus’s linked to these plans, but many people might not meet the criteria to benefit from these bonus’s that can distort the quote you receive.

I have sat down with several people who had been contributing to this Pension plan and after a couple of years are shocked with the value. There was one client who was shocked to learn that it stated on his Pension statement that these savage early charges would also apply to any potential increase he makes to his pension in the future.

Fund Performance

On any given month, many of the top Pension providers can say that they have one/some of the best funds in a specified field. This does not make them the best Fund manager in the market. For example a company may have a fund that did well from a specified timeframe (exactly 5 years) right now, but another company may have better fund performance figures over a 10/15/20 year period.

Confidence in saving for your Pension

If you are not fully confident or convinced by what a salesperson is saying then you should always consider getting a second opinion. A person who can only sell a pension , investment or Life assurance plan from the one company is only able to discuss these products in how their company has instructed. Different Pension providers have different charges and most of them nowadays do not do up front charges because many people might have to stop and start Pension payments as their situation changes.

Not sure? Give me a call . . . .

If you are not sure of what you are being sold or told, please do not hesitate to contact me.