Best retirement planning
 
The best financial management involves planning to ensure that your goals are achieved as efficiently as possible. Creating objectives and prioritising can allow you to amass sufficient funds to provide for a long and prosperous life in retirement. What follows is a guide of how you too can create the best opportunity for achieving the retirement of your dreams…

A financial strategy specifically geared towards helping you achieve your desired retirement. By calculating the future value of your retirement goals, accounting for your current provision and expected investment growth rate you can determine the level of savings required
Financial plans of all varieties (retirement plans, education plans etc) follow the same basic premise. You should clearly define your objective and, from there, establish how you can achieve it by saving


6 steps to creating financial plans

This should be your goal in today’s financial terms. If you unsure of figures the following may help;
 

Example:
 

Retire in 30 years on 60% of your current take home pay of £3,000 pm (net)

Having established what you wish to achieve you have to apply a monetary figure to this. Factors that have to accounted for include inflation rate and estimated terms
 
Example:
 

Monthly retirement income = £1,800 pm net (3,000 x 60%)
Estimated tax rate = 20%
Monthly retirement income = £2,250 pm gross (1,800 / 80%)
Annual retirement income = £27,000 per annum gross
Estimated inflation rate = 2.5%
Annual income required in 30 year = £56,635 per annum
Estimate life expectancy in retirement = 20 years
Retirement pension pot = £1,132,700 (56,635 x 20)

Any provisions that you hold specifically towards your objective should be accounted for. This can be made up of either a lump sum amount, regular savings or a combination of the two. At this point only the lump sum amount that you have accumulated towards your target should be considered since the regular amounts will be accounted for in stage 4.
 
The one key factor you have to determine now is what rate of return you expect to get from your investments. Bear in mind that risk and return are inextricably linked, the higher the return you hope to achieve the greater the level of risk you will have to take. Of note, although returns in excess of 10% may be achieved this only tends to occur in high risk portfolios and, even then, not with a high degree of consistency. As an indication a fair return to aim for would be 5-8% per annum without a high risk strategy
 
Example:
 

£50,000 currently invested which is being added to by £300 pm
Expected return = 5% p.a.
The lump sum’s expected return by retirement = £216,100 (50,000 x 1.05^30)
Regular contribution is accounted for in the next stage

Now you know both your objective and your current provisions it is possible to easily calculate your shortfall;
 

  • Financial shortfall = Objective – Current provision

The shortfall can then be broken down to establish what your savings requirement is to achieve your objective based on your expectations of investment return.
 
Example:
 

Shortfall = £916,600 (1,132,700 – 216,100)
Savings required to cover shortfall = £1,095 pm
Current provisions = £300 pm
Additional investment = £795 pm (5% p.a. returns)

Knowing how much you require to invest to achieve your objective doesn’t necessarily mean that it will be achievable. In these circumstances it can be worthwhile to reassess either your goals or financial plan with the latter being preferable where possible. The areas to consider are;
 

  • The assumptions made in the calculations
  • Would taking a higher risk for a greater investment return be acceptable to reach your goal

Example:
 

Accept higher risk. Expected return now = 7% p.a.
The lump sum’s expected return by retirement = £380,600 (50,000 x 1.07^30)
Shortfall = £752,100 (1,132,700 – 380,600)
Savings required to cover shortfall = £621 pm
Current provisions = £300 pm
Additional investment = £321 pm
Using a pension structure would reduce how much has to be invested because tax relief can be claimed and the employer may match contributions. Even using only the former then a higher rate tax payer’s additional investment would reduce to £193 (321 x 60% due to 40% tax relief)
Accepting additional risk would require you to review and amend your pension fund’s investment strategy

Any form of financial plans should be reviewed on a regular basis which will allow you to confirm whether or not you are on track to achieve your goals. In most occasions some of the underlying figures used to calculate your objectives are based on assumptions. Small variations can make large differences. Reviewing regularly, at least once a year is recommended, can allow you to catch these changes before it becomes too late
 
Example:
 

Inflation rate is averaging 3% rather than 2.5%
The annual income in retirement would increase from £56,635 to £65,535
Due to the higher inflation rate the retirement plan’s objective will increase by over 15.5% to an additional £178,000
If recognised immediately the additional amount would require an extra £147 pm investment (over 30 year). Not checking for 10 years would, by contrast, require an extra £339 pm instead (over 20 years)

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Creating a retirement plan gives you a better opportunity to achieve early retirement. It will show the level of contributions and investment return required. These can then be modified to enable you to retire early. For example, it may highlight that you have to accept a greater level of risk, contribute more or a combination of the two.
 
Saving via a pension is the most common form of investment vehicle used to build up retirement wealth. So long as you intend to retire after the minimum retirement age of 55 then this is usually the best route. If you wish to retire prior to 55 then you should not use a pension plan except in limited circumstances such as when your profession, via UK rules, allows this. Companies and schemes that purport to being able to help you to access your pension early should be treated with suspicion including even overseas UK pensions that otherwise legitimately follow HMRC’s rules
There is a huge range of investments that can be used to save towards retirement. These include bonds, shares (stocks), commodities, mutual funds, investment trusts and hedge funds. There is a varying degree of risk and expected returns that these generate along with huge divergences between performances on offer.
 
Risk and return are related, so to achieve higher expected returns you have to accept a greater amount of volatility, though there are many ways to limit the level of risk that you are exposed to.
 
There are different routes to investing including using stock brokers, insurance policies and investment platforms. Each will have costs associated with them though the costs should be far outweighed by the returns on offer. This is similar to using a pension. For example, a Self Invested Personal Pension Scheme (SIPPS) only allows you to hold investments in a tax efficient structure rather than providing any investment return by itself. It becomes worthwhile as soon as the tax avoided on the investments held within it offset the cost of the policy.
 
Each form of investment method will have benefits and drawbacks. These include cost advantages and limitations to which investments can be accessed. It is not unusual for some investment methods to allow access to closed funds (i.e. a type of investment that normally cannot be purchased), institutional funds (i.e. those with lower costs but high barriers to entry), pre-selection (i.e. investments are vetted for investor security), and a huge variety of choice
Many people seek out professional advice when they are dealing with their finances in the same way as they would go to a doctor if they were ill. Using a good financial advisor will enable you to save time and effort. They will help you devise suitable financial plans along with appropriate investment options to achieve the level of expected return that you hope for whilst explaining the risks involved. They should then review with you your objectives and investments on a regular basis. When trying to find the best financial advisor for you aim to avoid bad advice by looking for these signs
Financial advice should be applied on an individual basis. There is is no product that will suit everybody all of the time. There are, however, certain products that will always be better such as;
 

  • A pension when the tax breaks outweigh the costs assuming you are comfortable with their disadvantages
  • Replacing like for like policies if there is a cheaper option accounting for all costs
  • QROPS pension transfers for UK pension holders based outside the United Kingdom when their benefits outweigh their pitfalls

There are investment options covering the full risk spectrum. The exact mix will be dependent upon your requirements. Out of the huge range available there are aspects to be wary of;
 

  • High cost investment trackers (funds that track a financial index should not be near or exceeding 1% p.a.)
  • Closet trackers, which are managed investments that track an index (you will be paying higher fees than you should)
  • Poorly performing investments (some investments continually underperform against their peers over the long term)
  • Liquidity (certain investments may prevent access for long periods of time due to redemptions being suspended. This is ok if it does not comprise too high a percentage of your overall investment portfolio and you are aware of it)
  • Taking excess risk (the risk of investments can change depending on market conditions and time. For example, holding cash as a long term investment is a poor option. Likewise, investment grade bonds are placed as being very low risk though if high inflation sets in as a result of unprecedented money printing (quantitative easing) this could cause a nasty shock. A lot of people are blasé about the risk posed)
  • Choosing an investment just because it appears cheap. Investments can come with hidden costs. For example, a bank account may not charge anything but with minimal interest it is not where you should hold money long term. Always look at net returns (after all costs are accounted for) and volatility. An ideal investment will increase returns for the same volatility or reduce volatility for the same returns
Yes though not without risk. As an example, one of the US stock markets has produced a return of over 12% p.a. (before costs) following a simple strategy of investing regularly. The risk, however, is that this is not guaranteed and that the return only occurred under 40% of the time. It would also necessitate continual investing when markets suffer large drops which can exceed 50%. There are other investments, one of which we use, that have returned over 20% p.a. As you may imagine these experience substantially higher volatility than most people are comfortable with. For example, our utilised investment – which has a 20 year track record – has experienced monthly gains of 65%+ and drops of 35%+. It therefore tends to be incorporated, when utilised, as a small section of a person’s overall portfolio.
 
There are ways to minimise risk when investing though, as mentioned before, expected higher returns necessitate greater risk. A return of 10% per annum is probably a fair upper limit for an investment portfolio to achieve with a reasonable chance of success
Successful investing is only a small part of becoming wealthier for most people. The major reason is due to implementing a suitable financial plan. This allows them to highlight areas to improve thereby creating a greater chance of achieving their goal. For example, they may realise that they are investing too cautiously, thereby getting too low a return, or that they are simply not contributing enough to their goals.
 
To highlight why investment performance is only a small factor consider someone who invests £100pm extremely successfully for their retirement. Even if they achieve 12% p.a. over 30 years it is massively insufficient if their cost of retiring comfortably is £1 million. An appropriate retirement plan would have shown a requirement to save £461pm at a return of 10% per annum. This could prompt the person to save more now, in a less successful investment, without impinging their lifestyle too much. It is this conscious effort that makes them wealthier

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How retirement planning makes you wealthier written by Liberty Wealth average rating 5/5 - 13 user ratings