Imagine the scene; you have spent your life living frugally, saving efficiently and investing wisely. You enter your well-earned retirement financially secure and excited for the years ahead.
The future could pan out in one of two ways; the first could lead to continued security and the financial freedom to enjoy your retirement as planned; the second might lead to the unfortunate disappearance of that security and the resulting stress that would involve.
The sad truth is that the things that lead people down the second path are usually easily avoidable; as it’s rarely investment problems that are the cause of a poor retirement strategy.
As you approach that important retirement age, it is vital to have a plan for your future lifestyle – to ensure you have enough, forecasting in the costs of all the things that help you to relax and enjoy yourself, but also considering any additional costs that may occur, such as new adventures, nursing care or medical costs – and to manage your money efficiently to meet your needs and desires.
Having a Lifetime Cashflow Forecast can help you to understand your options and also to avoid making mistakes which will impact on your future security and happiness.
Here are the five most common pitfalls that you can avoid through careful planning.
1. Helping too much
We all have a natural desire to help our loved ones, but helping too much can lead to harming our own plans.
It’s all too common for people to dip into their retirement funds to give money to their children, grandchildren and other relatives. There’s nothing wrong with lending a hand or giving gifts, but you have to know what you can afford to give away or lend and stick to your limits. Don’t be afraid to admit you can’t help.
And it’s not just money, you have to worry about! Arguably, one of the most precious resources is time – make sure you use it wisely and ration it out prudently. Looking after grandchildren or elderly parents should be a joy, but if it means you are tied up all the time, at the expense of your own fun and desired lifestyle, you may come to resent the situation. Look for other solutions to help, so that everyone is happy – be prepared for difficult conversations and stick to your guns.
2. Buying a second home
Having your own little getaway or spending your winters in the sun may seem like a fantastic prospect, but it’s important to be realistic. How often will it be used by you? Are there other parts of the world, yet to be explored? Will you rent it out? How quickly can it be sold in the event of an emergency?
A huge portion of your retirement capital can be tied up in a second home, and from experience we know there are often unexpected costs involved. In the past, property values have appreciated, but there is no guarantee that this will happen in the future. If you want a second home in retirement, make sure you have a significant liquid financial cushion – you can’t eat bricks!.
Debt can sometimes be considered a financial management strategy rather than something to steer clear of in retirement. Some financial advisers may recommend investing cash to earn a higher return than the interest rate of the debt, instead of paying off the debt altogether. However, if interest rates increase and the cost of the debt exceeds income, problems can arise.
In some situations, debt can be your friend – e.g. if you need to release funds from your property to fund a better lifestyle, but do tread carefully and ensure you read the small print! Avoiding debt during retirement where possible, will help avoid financial uncertainty.
4. New business ventures
A lot of retirees choose to do something different and feel that they still have something to give. As a result, many decide to start new businesses or go self-employed. If this is something you’re considering, be careful – make sure there is a robust business plan and separate your retirement assets from the new business. Only risk capital that you don’t need to sustain your standard of living as a failing business can erode your retirement savings quickly.
5. Absence of a spending plan
One of the most common mistakes to make is not planning your spending. Many retirees don’t know how much money they can afford to spend in the early years to ensure they have enough capital to last into their later years. Surveys suggest that people believe they can spend 7% or more of their savings each year safely, however, financial planners and economists say the spending limit is closer to 4%.
Our experience is that everyone is different and their differing lifestyles mean that spending plans will vary and need to be revisited each year to make adjustments in the interest of efficiency and future security.
Magenta can help you to create and monitor a financial plan to ensure that your retirement years can be relaxed and happy, avoiding common mistakes and ensuring you don’t spend time worrying about your money.