18th July 2018
Avoiding taking a risk could be holding you back from many things; such as ticking skydiving off your bucket list or joining the local amateur dramatics club.
It could also mean that you are taking money away from yourself in retirement.
By being overly cautious with your pension investments now, you could be robbing your future self of income which would make your retirement much more comfortable.
How do over-50s feel about investment risk?
According to research from the London Institute of Banking & Finance, when it comes to taking risks with their pension fund, over 50s describe themselves as:
- Extremely cautious (25%)
- Moderately cautious (18%)
- Balanced (36%)
- Moderately adventurous (16%)
- Adventurous (6%)
What does that mean for pensions?
All investments bring certain risks with them. In fact, even if you choose not to invest your savings, they will still incur some level of risk. For example, if you keep your savings in a suitcase under the bed, there is a possibility of it being stolen, damaged or eaten by pests. On top of this, any capital which is not seeing above-inflation returns will be losing value in real terms. That includes the money under the bed, and any you have stored in cash savings accounts which are not providing an above-inflation return.
According to the research, 91% of over-50s want to maintain their current lifestyle when they leave work. If you are one of them, you will need to put a substantial portion of your current income away for the future. For example, figures from Aegon show that, if you currently earn £56,000 per year, you should be aiming for a target retirement income of £28,000. To achieve this, you will need to be saving 50% of your current income. This could lead to a retirement fund of £612,700, which will provide a potentially inflation-linked, annual income to meet your goals.
However, even if you are saving that amount each month, if the money you are putting away today is losing value in real terms, you will be fighting a losing battle against the rising cost of living, which will mean you never achieve the retirement lifestyle you aspire to have.
What is the answer?
In an ideal world, you should be able to save enough to retire, with a guarantee that you will reach your goals and be able to live your desired retirement lifestyle when you get there. However, as previously discussed, there is no way to effectively save money for later life, without taking some risk.
There is no reward without risk and removing any possibility of growing your pension in the name of avoiding risk does nothing but condemn yourself to a guarantee of losing money as you get older.
Other factors to consider when planning for retirement
The performance of your pensions is just one factor in the retirement planning system. It is important to make sure that your investments are paying off, so that you can ensure that you have enough money to take on the twists and turns of life. No matter how much planning you put into your retirement preparation, there are no guarantees that life will go the way you hope it will.
Unfortunately, some things are out of your control such as:
- The rising cost of living
- Your needs and interests changing over time
- Needing to pay for care sooner than you thought
- A family member needing financial help in an emergency
Therefore, preparation is key if you are to be ready to take on the curveballs life has in store for you.
You will also need to consider how you will access your retirement income. We have covered guaranteed annual incomes, but you may also choose to enter your fund into a Flexi-Access Drawdown arrangement, which enables you to take money out of your pot as and when you want to.
The potential to misuse Flexi-Access Drawdown is great, and research has show that some people are prone to taking too much out of their pension, too soon and leaving themselves in a difficult situation in later life.
Therefore, it is vital that you discuss your situation with a professional before making any irreversible decisions which could affect your financial stability for the rest of your life.
How can financial planning help?
We aim to help our clients to develop a strategy which will help them to achieve the retirement lifestyle they want, without facing more risk than they are comfortable with. That means that we will discuss all the available options with you and find a solution to quell your fears and put you in a better position to meet your financial goals.
For more information, or to get started, please contact Ben on 0113 262 1242.