Retirement freedoms

Ensure your future income will allow you to enjoy the lifestyle you want.

Preparing for retirement is like getting ready for a journey – it never goes quite as planned. But the better the plan, the better the outcome. When things go wrong, you want to have the flexibility to adapt to changing circumstances. You never know what retirement will be like until you get there.

It’s also important to remember that retirement is not a single event. It is a process that begins long before you leave work and continues for the rest of your life. Retirees finally have the freedom to choose how to spend their time. While some people want to relax after a lengthy and stressful career, others are ready to move on to the next adventure.

The simple fact remains that those who prepare a financial plan are more likely than those who don’t to have a realistic idea of their retirement income and whether it will meet their needs. A personalised financial plan also means that if your projected income falls short of your requirements, you’ll likely have a backup strategy to help make up the difference.

Enjoy a new lease of life

But retirement is a challenging new phase in life. While it ranks high on the scale of stressful life events, it also provides the opportunity to enjoy a new lease of life. You are likely to enjoy the freedom to develop new interests but on the other hand you may feel lonely, isolated and bored at times. An important step is to plan your goals and work towards them.

Unfortunately sentiments about a lack of preparedness for retirement go hand in hand with a lack of knowledge about what someone actually needs. That’s why a professionally prepared financial plan helps determine, with a greater degree of accuracy, what it will actually take to facilitate a chosen retirement lifestyle and goals.

Chosen retirement lifestyle

Then, ask yourself what income you will need to accomplish your chosen retirement lifestyle and what factors might affect your ability to fulfil those wishes. You may find there are non-financial factors that have a significant impact on whether or not you achieve your objectives.

However, planning for an uncertain life expectancy in retirement unfortunately means some individuals may face the possibility of running out of money before they die, as they could save less during their working life and spend more in retirement than is appropriate for their circumstances.

Main questions to consider

One of the main questions you need to consider is, ‘What do you anticipate to be your major sources of expenditure in your retirement years?’ The answer greatly depends on your circumstances, your family and your retirement plans. Many retirees aim to travel in retirement, at least for a portion of the time. In retirement you may be planning to travel as tourists throughout the world, to visit family or to enjoy holiday properties located in the UK or elsewhere.

It’s also a time when you may want to carry out some renovation work on your home, or move to the country or city, start a business, spend more time with friends and family, go back into education, learn a new language or to play an instrument, start a new hobby, take up a new sport, join a gym or fitness group, or do absolutely nothing.

Thinking ahead

How our retirement plans may change in response to the coronavirus pandemic.

The coronavirus (COVID-19) pandemic has touched virtually every part of our lives and is having a widespread impact across all aspects of financial life, including retirement plans.

As a result, a significant number of people aged over 50 and in work are potentially considering delaying retirement (15%) by an average of three years, or will continue working indefinitely on a full or part-time basis (26%), as a direct result of the COVID-19 pandemic, according to new research[1]. The findings also suggest that people, particularly those who have been furloughed or seen a pay decrease, would benefit from a financial review to assess their options before changing their plans.

Delay retirement

Data from the Office for National Statistics currently shows the number of workers aged above 65 years is at a record high of
1.42 million[2]. However, if people change their retirement plans in response to the pandemic, this could increase considerably.

While, on average, those who plan to delay their retirement expect to spend an additional three years in work, 10% admit they could delay their plans by five years or more. These figures are significantly higher for the 26% of over-50s workers who have been furloughed or seen a pay decrease as a result of the pandemic. 19% of these workers will delay, and 38% expect to work indefinitely.

Future plans

Some retirees nearing retirement age might need to be flexible with their plans for the future. It’s uncertain just how long it will take for life to return to normal, and while some people may still be able to retire right on schedule amid the COVID-19 crisis, others may need either to postpone retirement or consider retiring early.

As a result, the impact of COVID-19 on stock market performance may also be leading some retirees and those close to retirement to question their investment strategy, but what’s the right approach? Understandably, the impulse to react – and to protect what we have – is strong.

Regular revision

Retirement planning and financial planning, in general, are not ‘one-and-done’ exercises. It’s much better to think of them as fluid and as requiring regular revision. Attempting to time the market and avoid volatility by making dramatic changes to your portfolio can cause harm to your long-term investment results.

With many areas of the global economy coming to an abrupt halt, markets have see-sawed between gains and declines as investors weigh the potential impact of massive stimulus initiatives by governments and central banks.

Economic uncertainty

The barrage of news is unrelenting. On a daily basis, we hear about more COVID-19 cases, job losses, economic concerns and oil price shocks, to mention just a few. But long-term investing is ultimately about avoiding selling out of the market during periods of economic uncertainty and crystallising losses. Staying invested means you’ll be able to benefit from any potential recovery, and it helps to remember that volatility is actually the norm for stock markets.

To give yourself the best chance of achieving your retirement investment goals, the right mix of asset classes is essential. An effective strategic asset allocation is one that takes enough risk to give your portfolio the potential to grow, but not so much that you feel uncomfortable – and therefore more likely to withdraw funds at the wrong moment.

Better option

Whether you decide to postpone retirement or retire early depends on your situation. If you still have a job and your savings have been impacted over the last few months, delaying retirement to give yourself more time to prepare may be a better option.

On the other hand, if you lose your job and don’t know when you’ll be able to find another one, you might choose to simply retire earlier than you’d planned. If you have plenty of savings set aside, you may be able to enjoy retirement comfortably. Otherwise, you might choose to go back to work in a few years when jobs aren’t so scarce to build a stronger retirement fund.

Source data:
[1] Opinium Research for Legal & General Retail Retirement ran a series of online interviews among a nationally representative panel of 2,004 over-50s from 15–18 May 2020.
[2] Office for National Statistics, Labour market overview, UK: May 2020

A PENSION IS A LONG-TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.

Building a strategy that meets your financial needs

Preparing ourselves for life to be really strange for some time.

The only constant in life is change, which is why individual financial life planning should not be a one-off exercise. Reviewing your finances regularly is essential if you want to stay on track to meet your financial goals. Making sure your finances are in the best possible shape will also make sure you stay on course to achieving everything you want.

Everyone has been affected by the coronavirus (COVID-19) pandemic and the measures needed to control it. It’s likely that coronavirus will loom over us until we have an effective vaccine, so we need to prepare ourselves for life to be really strange for some time.

Changes in your financial circumstances

As situations in our lives change, it’s important that our financial plans are updated by carrying out regular reviews. One of the main reasons why you should review your financial plan regularly is to reflect any changes in your financial circumstances, be it internal or external. You’ll also have different goals and priorities as you enter different stages of your life. So where are you currently?

Early career

You’re likely to be just starting out in your career and might be feeling a little unsure how to implement a budget or manage and maximise your cash flow. A house deposit may be on your horizon, or perhaps you are considering your investment options, but you’re just not sure how to get started. It’s never too early to start looking at your financial position.
When you first begin earning an income, budgeting is the critical financial skill that you need to master. Developing a suitable budget and building the discipline to live within your income so that you don’t fall into a debt trap is key.
Once you learn to contain your expenses to available income, you should start building savings into your budget. The emergency fund will have the first claim on your savings, and this is an urgent and important task.

Initiating some investments for retirement is another key task at this stage, even though the goal may seem too much in the future to be relevant now. Investments for other goals are optional at this stage and can commence once your income and savings stabilise.

Middle-aged

This is the stage that you’ll find the most demanding. You’re settled in your career, a young family means your expenditure has increased, and you are looking to repay your mortgage fast while also funding your children’s education and/or childcare.
Receiving professional financial planning advice will help you manage an increasingly complex budget, as well as looking to ensure your family is protected in the event of something happening to you. Of course, you may also want to know if you can afford an annual holiday to enjoy the family you now have.

Implementing a plan early in this stage will allow you to reap the benefits later on in life, as well as providing security for your family and any other dependents.

Pre-retirement

You may now be looking to leave the workforce soon and want to find out if this is financially possible. Your children are now adults and your expenditure has steadied, so you may be starting to look seriously at your ideal retirement lifestyle.
By managing your personal finances prudently so far, this stage of your life will be the golden stage for your finances. Your income is higher and seeing an upward growth trend, while your expenses have stabilised, resulting in growing savings.
Being mindful of expenses is important even at this stage, and the focus of budgeting is to maximise on savings and investments. Managing your investments is critical in this period. Many of your goals are close to being funded, and the investments may need to be rebalanced to reflect this.

Your life and other protection requirements should be updated and aligned to your current and future situation. Now that you have accumulated wealth, it’s time to consider how you would like to eventually distribute your estate in the most tax-effective way.

Retirement

You have finally left the workforce and are looking at how to maintain a steady income, discovering what benefits you may be entitled to, and how to maximise these.

Budgeting becomes the focus of finances once again during retirement. The object now is to control expenses to stay within the available income. Managing your investments to generate income and protect it from rising inflation also becomes a primary investment activity at this stage.

Adequate health protection is critical, as health costs can throw your income off the rails. Life insurance may be relevant only if it is required to protect retirement income for your spouse, and debt should not be a big part of your finances at this juncture.

Retirement matters

Staying invested and giving your money the greatest chance to grow.

Perhaps the most common investment advice is to stay invested. But with markets being so volatile, the ease of sticking to that advice has been sorely tested in 2020. Even though we’ve seen global markets bounce sharply from their March lows, understandably there will still be those investing for retirement who remain worried and wonder what the best approach is for the remainder of the year and beyond.

Depending on what stage of retirement planning you are currently at, if time is on your side, the evidence shows that remaining invested for the long term is one of the best things you can do for your overall retirement wealth. While it can be tempting to take money out of the market in the short term, it is highly likely to deliver lower overall returns.

Influenced by market sentiment

It’s important that your long-term investment objectives are at the forefront of your mind and you align your actions with them. Any dramatic changes to an investment stance in the current environment is likely to be costly. It may make sense to consider doing things gradually or waiting for more stability.

Another consideration is that market liquidity can be poor in the current environment, which makes transactions potentially more expensive. With the omnipresent 24-hour media, it is too easy to become over-influenced by market sentiment, which makes decision-making with long-term consequences particularly difficult at times like this.

Diversification

Investment diversification will also help protect your investments from adverse market conditions. Diversification can be neatly summed up: ‘Don’t put all your eggs in one basket.’ The idea is that if one investment loses money, the other investments will make up for those losses. It’s one of the best ways to protect your investment portfolio from the many forms of risk. Diversification can’t guarantee that your investments won’t suffer during times of market volatility, but it can improve the chances that you won’t lose money in the long term, or that if you do, it won’t be as much as if you weren’t diversified.

Portfolio review

Once the present coronavirus (COVID-19) crisis has subsided and market volatility has normalised, consider taking the opportunity to review your portfolio. Bear in mind that future income levels expected from the portfolio may have altered, for example, bond yields may have changed in either direction depending on credit rating, while future dividends from equities may be reduced at least temporarily, even if historical equity yields have risen.

Pension drawdown

There have been nearly twice as many people seeking pension drawdown advice according to Unbiased, as pension withdrawals have reached a new high in the wake of the coronavirus crisis. But those acting without professional financial advice risk making some big mistakes. If your pension fund has been diminished due to recent market events, only time will help it recover – and taking money from an already depressed investment reduces the potential for recovery in your portfolio. So be careful how much you take out of your pot while it is still invested, or consider suspending withdrawals.

Patient investor

If appropriate to your particular situation, reacting to short-term market events by making dramatic portfolio changes makes it difficult to stay on course to achieve your investment goals. While many investors feel they have to do something during a market downturn, history shows that the disciplined, patient investor will often be the one rewarded when markets return to their upward path. It’s worth remembering that reacting to a market decline by selling an investment guarantees a loss that otherwise only existed on paper, and being out of the market can prevent you from participating in any gains when the markets bounce back.

ACCESSING PENSION BENEFITS EARLY MAY IMPACT ON LEVELS OF RETIREMENT INCOME AND YOUR ENTITLEMENT TO CERTAIN MEANS TESTED BENEFITS AND IS NOT SUITABLE FOR EVERYONE. YOU SHOULD SEEK ADVICE TO UNDERSTAND YOUR OPTIONS AT RETIREMENT.

INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.

TAX RULES ARE COMPLICATED, SO YOU SHOULD ALWAYS OBTAIN PROFESSIONAL ADVICE.

A PENSION IS A LONG-TERM INVESTMENT.

THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN, WHICH WOULD HAVE AN IMPACT ON THE LEVEL OF PENSION BENEFITS AVAILABLE. PAST PERFORMANCE IS NOT A RELIABLE INDICATOR OF FUTURE PERFORMANCE.

PENSIONS ARE NOT NORMALLY ACCESSIBLE UNTIL AGE 55. YOUR PENSION INCOME COULD ALSO BE AFFECTED BY INTEREST RATES AT THE TIME YOU TAKE YOUR BENEFITS. THE TAX IMPLICATIONS OF PENSION WITHDRAWALS WILL BE BASED ON YOUR INDIVIDUAL CIRCUMSTANCES, TAX LEGISLATION AND REGULATION, WHICH ARE SUBJECT TO CHANGE IN THE FUTURE.

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Month: August 2020