Financial planning is important when you retire
Last week, I outlined five of the 10 most common mistakes I see retirees make all the time, and as promised I am following up with the remaining five this week.
1 Retiring without a plan
It amazes me how many people retire without a plan. They have no idea how much they need each month, where they are going to invest their money etc. If you are making it up as you go along, and you become complacent about your finances, assuming everything will be okay, you are putting your finances and your quality of life in jeopardy
And it doesn’t have to be a very complicated plan either. At a minimum you want to know, how much you need to spend each month, without the fear of ever running out of money.
2 Not changing lifestyle
You have a new income now that you have retired, and one of the biggest mistakes newly retirees make is not adjusting their expenses to reflect their new reality.
It does take a period adjustment to figure out how much you need. Before you enter retirement, you must take into account you will be living on a lower income, so you must figure out if it is enough to cover your annual outgoings.
If it isn’t, some think that because they have a large lump sum, they can use it to supplement their income. If this is the case, I hope the lump sum is big enough to last a long time because I hope you will be around for a long time!
So avoid the temptation if you can of using that nest egg of yours to help fund a lifestyle.
A great exercise I get people who are about six months away from retiring is to look at what their income will become and see, even before they leave, if they can live off it.
It might be a shock to the system but it is a great exercise to avoid surprises when you do retire. And you are giving yourself that breathing space now, before your retire, to look at ways you may have to adjust your finances.
3 Managing their own fund
The majority of people who retire nowadays, use their pension fund to invest in an approved retirement fund (ARF) rather than buying an annuity (an annuity is a contract where in exchange for a lump sum an insurance company would give you a fixed pension for the rest of your life). They do so because they have more flexibility with an ARF than they have with an annuity, and importantly the fund is not lost in death as is the case with most annuities.
Just because you start drawing down the minimum requirements from the fund (has to be 4% from your 61st birthday) doesn’t mean the funds aren't invested anymore, they are.
Where they are invested and what return you achieve each year will have a big influence on how long the fund will last and how much you can take from it each year.
If you are too conservative with the fund and invest everything in cash, it will quickly eat into the value of your fund. If you invest too much in high risk equites you run the risk of wiping out your fund, so you need to strike a balance and invest in a diversified fund that has exposure to a mix of cash, bonds and equities.
A mother of a client of mine I was asked to meet recently had an ARF and she needed to draw down 7% of the value of the fund to meet her annual outgoings. The ARF was invested in cash only and along with the 7% drawdown and the 1% annual management charge, the cash burn at that rate, would mean her fund would be exhausted in 14.7 years.
If her monies were invested in a very low risk ARF that achieved an annual return of just 2%, her fund would last for 21.3 years even if she continued to take 7% from it, each year.
Once you are retired, you can’t afford large negative swings in your savings, so where your funds are invested is incredibly important, as the example I have just shown demonstrates. Getting help in this regard is so important.
4. Continuing to financially
support adult children
It is hard to refuse a family member if they come to you for help because they are under pressure. But you have to remember your income will be largely fixed in retirement as will your savings.
Helping family out with lump sums and using your income to supplement theirs each month is doing you no favours because you won’t have the time to recover from financial difficulties, unlike them.
Unless you are absolutely confident and 100% sure that (a) you have the money to spare, (b) the reason you are giving it to them is a good one, then I would caution against giving lump sum gifts or loans, call them what you like.
5 Not reaching out and asking for help
This might be the biggest mistake of all, because the nine mistakes I referred to are the consequence of not getting the help and assistance of an independent financial professional.
Please reach out and get help if you need it, because the peace of mind it will give you and your family, really is hard to calculate.
Liam Croke is MD of Harmonics Financial Ltd,
based in Plassey. He can be contacted at firstname.lastname@example.org or www.harmonics.ie