The past few years have been the most challenging years ever experienced by investors.
For many clients, the recent market movements have led to more uncertainty about their retirement plans. We’ve met with many clients over the past months and they’re asking questions such as:
- Can I retire when I originally intended?
- Will I have to continue working?
- Will my pension run out before I do?
- What if these market conditions continue?
- Should I change my investment strategy?
The events that have occurred over recent years are largely out of your control, but there are factors you can influence. In this paper we provide some ideas about what you need to be doing now.
1. Get good advice
This is the most important step. If you had a medical condition that needed attention, you wouldn’t dream of operating on yourself. So when it comes to planning your finances for the rest of your life why wouldn’t you seek after the skills and experience of a good financial coach? A good coach will help you make decisions that are in your long-term best interests, and will act as a sounding board for your ideas, providing you with peace of mind.
2. Review your goals
There has been a lot of media reporting suggesting that people may have to work a few years longer than they intended in order to retire comfortably. Will this apply to you?
Very few people actually take the time to define their future income needs and plan for the lump sum that is required to fund these needs.
We suggest meeting with a financial coach who will help you define your future goals and then let you know if you’re on track to achieve them. If you’re not on track, isn’t it better to know now so you can begin some alternate action?
3. Assess your income, expenses and other resources
There’s only two ways to increase your surplus cash – earn more or spend less!
Assuming you need to create some extra income (to fund your retirement plan) we suggest you spend some time reviewing your spending. Have a look at the spending (both big and small )that you have discretion over and look at what you can change. In some cases it may not involve cutting an expense out completely – merely cutting down on the frequency of an expense may be more practical.
Don’t forget to look at your other resources. Do you have other talents or skills that can produce an income? Perhaps changing to a higher-paying job, or starting a second job.
4. Assess your risk tolerance
For some people the recent market volatility has forced them to re-evaluate their tolerance towards movements in their investment capital.
Over the long term, we expect that shares and property will produce better returns, on average, than fixed interest and cash. With the potential for higher returns comes the potential for negative returns.
Depending on your goals, you may need to invest in assets with strong growth potential in order to grow your capital to the amount required at retirement. If you’re uncomfortable with the level of fluctuation you could experience, you need to discuss this with your financial adviser to determine the appropriate compromise i.e. take less risk but work longer.
5. Protect yourself
What would happen if you became sick and unable to work? Would you still be able to make contributions towards your long term goals, or would you have to use up capital to survive?
A good financial plan includes insurance to ensure that your plan can continue, even if you’re physically unable to continue funding it.
At a minimum you need to ensure you have adequate insurance in the event of death, temporary or total disablement, suffering a heart attack or serious illness like cancer. Both members of a couple need to have cover.
6. Learn from history
Academic research has given rise to a concept called the ‘recentcy effect’. Given a list of events to remember, we’re more likely to remember the most recent, rather than the earliest. When investing, clients are more likely to expect their most recent experience to continue. So, when their investments are increasing in value, they believe they’ll continue to increase, and when markets are in decline investors believe things will fall indefinitely.
This thinking leads rational people to behave in an irrational manner and invest or withdraw money at the wrong time.
Over the long term, markets move in cycles. Downturns happen, and are difficult to predict. The long term direction of the stock market is up. We don’t know which direction the next 300 point movement is going to be, but we’re pretty sure the next 3,000 point movement is going to be in an upward direction.
If you’re saving for the long term, now is an excellent time to review your financial plans and ensure you get on track to achieve your goals.