7 questions to ask yourself today
As Mark Twain once said, “age is a question of mind over matter. If you don’t mind, it doesn’t matter!”
This is never truer than when it comes to retirement. We all look forward to the day when we can retire, free from the stresses and pressures of work, and able to do all the things we have always wanted to do. However, this may prove difficult without additional funding properly allocated during our working lives.
Whilst our vision of retirement will often differ, many of us share the same essential challenge; a drop in our income levels when compared to our previous earnings, with the risk of a corresponding fall in our standard of living. As studies of behavioural finance show however, many investors are often overly optimistic about potential outcomes. This tendency, when coupled with an inclination to procrastinate, especially when our lives and careers are progressing well, can have major (negative) long term repercussions.
It is essential therefore, that we regularly ask ourselves a number of key questions if we are to keep our retirement strategy on track:
1. How long am I going to live?
If we knew the answer to this question, planning for our retirement would be much easier. We are living longer today than at any other time in history, and with continuous advancements in health care, life expectancy is predicted to continue increasing.
According to the World Economic Forum (WEF), the population of over-65s will rise from about 600m in 2017 to 2.1bn by 2050, and Eurostat, the EU statistics agency has projected that there will be close to half a million centenarians in the EU-27 by 2050.
This is happening while state pension systems in most advanced countries, which were designed to fund retirement for around 15 years, are facing enormous pressure on their budgets, creating an ever-increasing funding problem, as fewer people are entering the work force, yet more people leave. As many countries have already delayed state retirement age to 67, the only remaining sustainable solution which is politically acceptable seems to be a combination of higher taxes and / or reduced state pension benefits.
2. How much money will I need in retirement?
According to a recent study from the World Economic Forum, the world’s six largest pension saving systems – the US, UK, Japan, Netherlands, Canada and Australia – are expected to reach a $224 trillion gap by 2050, a new study shows.
The study identifies a number of challenges to the global retirement system, including inadequate savings rates and a long term, low growth scenario, especially where savers continue to hold their savings in cash deposits.
With this background of mounting pressure on state pension systems globally, it is more important than ever to consider whether you have a retirement savings gap, and if so what to do about it.
This requires an analysis of your current financial situation, understanding your future needs, and then working out the financial requirements to achieve them.
When deciding ‘how much is enough’ in retirement, it is important to be realistic, taking consideration not only of your capacity to build capital, but also understanding what level of return to expect for your given investment risk profile.
The good news is that if planned early enough, a comfortable retirement remains a possibility for most people. The key however is starting to plan early.
3. When should I start to plan for retirement?
The short answer to this question is the sooner, the better.
Albert Einstein famously said that “compound interest is the eighth wonder of the world. He who understands it benefits from it, he who does not pays for it”.
If you start planning early enough it’s easier financially and also involves less risk, since time is the greatest diluter of risk in most asset classes. Leaving planning to a few years before retirement will reduce your flexibility and the number of options available. The advantages of long-term investing, such as benefitting from compound interest or risk-protection from market fluctuations, are an essential part of a successful retirement plan.
4. What is the best way to save for retirement?
This depends on a number of factors; these may include your time frame, tax status, current pension and investment provision as well as your planned country of retirement.
In essence however, retirement planning has two possible outcomes – either you outlive your money or your money outlives you. Forward planning can make the difference.
The classic way to save for retirement is via pensions, usually a combination of state benefits, or company or private pensions. It is important to remember however that pensions are often tax efficient when investing, but usually have some restrictions, either by way of early access or tax on eventual access / withdrawals / income. By contrast, non-pension investing can be less tax efficient (no tax relief on contributions) but can offer much greater flexibility, enabling you to access capital earlier if required.
This flexibility is important, since expenditure throughout retirement is rarely constant, with great variation at different stages, what is sometimes referred to as the three stages of retirement – ‘Go-Go, Slow-Go and No-Go’. Each stage will have different expenditure patterns and it is essential to plan accordingly, ensuring adequate liquidity to cover all eventualities. There is no specific formula, however, as each family’s circumstances and needs are different, and in practice a combination of each allows you to tailor a programme which will suit your own individual needs.
5. What about inflation?
Inflation is insidious, it constantly erodes the value of investors’ hard-earned wealth and over the long-term, even low inflation, has a significant impact on the real value of any investments or savings. Inflation does not need to be at headline grabbing highs to really impact wealth.
For a period of approximately three decades from 1990 onwards, inflation fell steadily, despite crises such as the dot.com bubble of 2000, the banking crisis of 2008 or the covid pandemic of 2020-2022.
But the invasion of Ukraine in early 2022, following closely on the heels of the pandemic unleashed aggressive inflation which is proving extremely stubborn in many parts of the world, and there remain long term headwinds caused by a number of factors including global demographics, the move to decarbonisation and also from deglobalisation (think of the inflationary impacts of tariffs).
A sound, long – term financial plan should ensure that this ‘quiet destroyer of wealth’ is a central consideration.
6. How should I invest before and after retirement?
A generally accepted strategy which has stood the test of time is to gradually reduce the risk level (volatility) of your liquid assets – whether pensions or investment portfolio – the closer you get to retirement.
Once you retire and you need to start drawing down on your capital, you may want to generate income from pension annuities, investments or other sources such as property.
7. How should I manage my savings and capital in retirement?
Market volatility
Volatility is unavoidable, but the relationship investors have with it changes in retirement. In retirement the focus typically switches from targeting growth to achieving capital preservation. Investors are less tolerant and more sensitive to market volatility in retirement because they are less able to add more money to their portfolio in the event of any falls and could suffer a permanent loss which impacts their retirement plans.
Sequencing risk
Closely linked to market volatility, sequencing risk looks at the timing of when markets rise and fall. Even small drops in a portfolio at the start of retirement can have a significant long-term impact on investments.
How can you reduce decumulation risk?
There is no one size fits all solution for investing in retirement so investing for retirement will need to be tailored to the individual. A common approach is to switch all investments into lower risk, income generating assets, such as bonds. This approach will be the right solution for some, particularly those who can comfortably live off the income. However, it does not entirely protect them from the risks mentioned.
To mitigate the risks, it is important to remove the immediate need to access the portfolio, changing how the annual income is taken from the portfolio. To achieve this, savings and investments can be split into three buckets, a cash buffer, a drawdown portfolio and a growth portfolio. The key is determining the balance between the three buckets.
Summary
In summary, retirement planning should be started as early as possible, saving as much as possible and ideally with a qualified, fee-based advisor who can help guide you through what can otherwise be a maze of possibilities.
Expert advice
At Blackden Financial we are a firm of Swiss licensed wealth managers and we have been advising our clients in Switzerland for the past two decades on just such matters. If you feel you may need advice now on how these potentially significant changes may affect you, we suggest you book a no obligation ‘discovery’ call. There is no commitment and no cost.
Contact us on +41 22 755 0800, e mail info@blackdenfinancial.com or complete our Contact Form here
One of our team will contact you and arrange a suitable time to discuss whether our service may be suitable for your situation and if so how best to proceed, step by step.