RETIREMENT – A LIFE WORTH LIVING OR DREADING!
Want to retire and enjoy life? Age is irrelevant here. You can be 67, 35 or even 25. What matters is that your financial situation enables you to make that choice; that you are able to retire on the income you target.
How likely is that on a scale of 1 to 10? Well, for the majority of people in the UK, the needle is stuck steadfastly and does not flicker even momentarily from 0! Most will be forced to carry on working into their 70s as one of the ‘grey-set’, the fashionable retail retirees – if those jobs manage to survive the horrid year-long lockdown. Others will chase yield in the incredibly high-risk mini-bonds investment market. This is a place you definitely do not want to chance your arm with your retirement pot and savings. Horror stories such as London Capital & Finance abound, along with bottled spring water straight from the tap and lucrative car-parking rentals in Grimsby.
Early Years & Big Ambitions
Everyone dreams of success from an early age: a fantastic brilliantly paid career, a beautiful house filled with a wonderful family, and freedom to choose to work, travel and help others. As life flourishes into early careers, pursuit of success peaks. The end result for most is however a miserable fail. For a miniscule few – blessed with a smattering of luck – there is a partial threadbare achievement. For all, there is a clinging onto the hope for some good fortune and luck to turn life completely around.
Sadly, what passes everyone by, no matter their age or stage in adulthood, is that a massively improved quality of life and outlook can be accomplished through planning life and planning finances.
The Big Retirement Questions
How do you earn the right to choose when you retire? How much do you need in your retirement pot? Where can you invest your savings to earn the returns as securely and as safely as possible.
All relevant questions. And, as we just argued, literally almost everyone fails to plan ahead since they are forced to live for the moment; the pressures of modern life and of having to keep up. Many have pensions which they hope will do the heavy lifting when the time comes; but most have no idea what is happening to their pension pot or whether it will prove sufficient in the end.
Hope is no friend here; you need to know!
The hard truth is that the majority of pensions will fall dramatically short as they are underfunded and pared back by fees, commissions and costs. Recent research shows that the average UK pension pot, after a lifetime of contributions, is a little over £61,000. This is not going to deliver much; in fact, based on current annuity rates, the fund will scrape an average yearly income of £3,000. This will provide the pensioner with £250 gross income per month. When this is added to the new annual state pension of £9,339.20, the total pension income just creeps above the projected minimum viable level for a single person, owning his home, and living a very frugal life – not what you had in mind!
Do you know what your pension pot is projected to be at on the date of retirement? Perhaps you need to find out?
How Big Does the Retirement Pot Need to be?
The answer to this question depends on your financial circumstances and expectations. In round terms, if you wanted to enjoy a gross monthly income of £5,000, your pot needs to be £1,000,000 with the money returning 6% per annum. That calculation assumes a zero capital drawdown. A smaller pot is needed if the monthly income is based on a combination of capital drawdown and annual return. This latter calculation is much more complex and is beyond the scope of the discussion within this post. But to give some rough indication, a fund of around £250,000 is required to provide an annual income of £18,000 (£1,500 per month) based on a much more conservative return than the gutsy 6%.
Now you have some idea of how much you need to build for a happy, enjoyable retirement. And, it is some distance away from the average fund size of £61,000!
How Do You Secure the Return
This may seem the most troublesome question to answer, but it isn’t. In fact, it is one of the easiest provided you have the necessary skills and experience. There are multiple ways of achieving the rate of return we have suggested: 6% per annum. These include investing the pot into one or more stocks that enjoy a dividend yield of that percentage or higher. And, there are many quality companies that fit this exact specification such as AT&T.
This is a chart of the historic dividend yield for AT&T which shows that generating the required return is well within everyone’s abilities and is comfortably achievable. However, the fund will need to be actively managed from time-to-time; it cannot be presumed that the return will always be a given, so adjustments will have to be made to the stocks being held. However, this is not complicated; it is a process. What is interesting from this brief illustration is that it points towards achieving better fund performance through self-management (SIPPS) since there will be substantially fewer draining fees and commissions to pay.
The Rule of 200
I call this approach to strategic wealth investment as ‘the rule of 200’. But this is not merely a question of stock picking for high yield dividend returns. The first challenge faced is building wealth as rapidly and safely as possible. This process will be featured in a separate post. For now it is important to make some basic changes to how you are approaching life and and in particular your finances.
Steps you need to take:
- Find out everything about your pension: the good, the bad and the ugly:
what is the current balance of your fund?
what % contribution are you making each month and is it enough?
is your employer making a balancing contribution as well?
where the money is invested – what instruments and markets?
what is the current performance of the fund?
what is the current projection for funds at retirement?
- Determine what you need as monthly income for the lifestyle you seek
- Determine how much capital you need in your retirement pot to achieve that income and understand all the options
- Take all the necessary steps to build sufficient capital
start a SIPPS if required
open a stocks and shares ISA – this step should not be skipped over – do it!
- Routinely reassess your financial position and adjust.
- Take steps to build sufficient capital
- Learn to trade and invest
- Develop a savings habit
Changing fortune, improving life opportunities are not all about now! A far better approach is to plan for the future, locking in certainties, not groping for out-of-reach possibilities. Pensions and savings should not be hidden in the the dark corners of your mind. You can no longer afford for that to continue. Instead, build wealth and your retirement fund and benefit in the future – as it may be much closer than you ever thought possible.
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