Don't make the wrong decisions with your money when you retire
I was asked recently by a company to speak with a group of their employees who were nearing retirement. They wanted me to give them advice on how they can prepare financially for the years ahead, what they need to be aware of and plan for etc.
Having worked with hundreds of people over the past number of years who are making that transition into retirement, I could share with these people what mistakes I have seen others make, and how they can avoid them.
There were ten areas in particular that kept coming up. So this week I will share five of them with the remaining five to follow next week. So, in no particular order the first five are
1. Taking financial advice from
You have a doctor, you have a solicitor, you probably even have a mechanic you use all the time, but who do you go to for financial advice? Unfortunately some people mistakenly believe that the person they read, or listen to on the radio, is their financial expert.
The majority of financial commentators you read or listen to do not work in the financial services industry, they work in the media. Because of this they have to speak to a general audience and sometimes their advice is very generic, and often sensational. Sometimes I think this is deliberate because it might get them some airtime.
A person I came across recently decided not to invest in a 100% capital guaranteed product because they read an article by the newspaper’s financial editor which put them off investing in the account.
It was lazy journalism at best, with a sensational headline making a general statement about a particular type of product. The journalist never mentioned any specific product or provider but running a mile from the type of account he was referring to was suggested.
Why he didn’t name and shame the providers and products we should run a mile from was a mystery. The person I met didn’t invest in the 100% guaranteed account because of this and left his funds sitting in an account earning close to 0% when he could have invested it, safe in the knowledge his capital was guaranteed as well as earning about 3% per year in the process.
2. Making the wrong investments
When people retire they may be in receipt of a lump sum payment from their pension fund and an ex-gratia payment from their employer, and both will be deposited into their account.
Invariably they will receive a call from their bank which has noticed the lodgement. So the bank calls offering its advice regarding investment options - with them of course.
It’s not that you should ignore them either, you shouldn’t. You should meet with them and listen to what they are offering, but do nothing for the time being.
Reflect on what they have said and get a second opinion and ask yourself, are you happy with the suggestions put forth. And if it sounds too good to be true, then it almost certainly is.
Remember, it’s easier to recover from losses when you are younger. Be sure your get the right advice because everyone is different and everyone's financial strategy should be unique. Take your time, don’t rush into anything
3. Not planning for the unexpected
Retirees think they won’t need the majority of their lump sum, and tie it up in accounts with terms of five years plus. Just because you are retired doesn’t mean you don’t need access to money in the event of an emergency. If something does arise, and your money is tied up in accounts where you have no access to or limited access with big withdrawal penalties, you may find yourself ending up having to borrow money to get yourself out of a crisis.
4. Too eager to spend it or give it away
When they receive that lump sum, some people are very keen to do something with it e.g. invest it quickly, or give some of it away to family members.
You have to be careful because some of this money may need to supplement your income in retirement, and will be used to pay large annual expenses like health insurance, holidays, car and home insurance etc.
And if you want to give money to your family, work out how much you think you need to hold on to first, and when you know what that number is, then you can give some of what’s left to them if you want to.
5. Penny Pinching
People entering retirement become concerned about spending too much and outliving what savings they have. They are concerned, and rightly so about the future cost of health care, nursing home costs and so on. And because of this they live in a state of paralysis waiting for the worst to happen.
And whilst it’s important to be cognisant of the future, it shouldn't affect your quality of life now either. You can find a happy balance where you can take that holiday every year without feeling guilty. You can’t take your money with you, so enjoy it, and don’t be afraid to loosen the purse strings once in a while.
Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie