ARFs, AMRFs, AVCs, Annuities all form part of retirement planning, but as usual there's far more to it than products! Welcome back to Informed Decisions Finance Blog.
As part of my own motive to share information and to help others with their financial education I am a volunteer representative of the CCPC (State body that aims to help consumers, check out their website - tons of useful resources). I was delivering a talk to a large group last week in Dundalk, at the end of which we have time for Q&A. What struck me was that most of the questions relate to retirement planning, and indeed how to ensure that the planning we do is effective and of value to us when we get to the 'spending' phase after retirement. What also struck me is that in the past I have typically varied our topics, jumping from beginning to invest, to managing existing investments, regular savings, borrowings, mindset, education etc.
Based on feedback and also based on this recent experience the Blog will take a fairly heavy retirement-planning and indeed income-planning slant over the coming weeks at least. Having said that I hope to share ideas that are as relevant to those that are in 'accumulation' phase (mid-career) as much as it does to those that are in the 'spending' phase (retired or close to it!).
I was talking to a friend of the family a few weeks back, recently retired and full of energy. This lady loves life, has a huge network of friends and family and is looking forward to hopefully many years of good times! When she asked me 'what are you doing these days' and I proceeded to tell her, she informed me that she has only 1 major regret, that she didn't plan a little better financially for her retirement. She doesn't have as much income as she would like in order to do the stuff she would like. It got me to thinking, about my own situation, and indeed of the situations of many people that I have come across over the years who have one eye on their graduation from full-time employment to a more leisure-based lifestyle!
We all obviously have differing circumstances and different opportunities and constraints however there are at least 5 pretty common mistakes I have seen happen again and again. Here I share the culmination of those thoughts, into '5 common retirement planning mistakes', in the hope that they might be of value to you, or indeed to your loved-ones.
Common Mistake #1: Thinking We'll Want To Work Forever
This could very loosely fall into the 'not having a plan' category when it comes to our work/life! It is a thought that I see time and time again with people. They may be mid-late in their career, making lots of money and enjoying their work and based on that express zero desire to ever retire. And if I think I will never retire well sure then I have no need to think about planning for that graduation out of full-time employment. But as we all know things can change pretty quickly; something may change in our personal or work circumstances or indeed in the wider world that flips things instantly. A friend of mine who really loves his work and is really quite successful at it was recently diagnosed with a relatively rare condition that means he is hugely restricted in his ability to do that work....point being, that whether we wish it or not, we may not even be CAPABLE of working until we reach 70's or whatever 'forever' means to you.
Trouble with this thought-process is obviously that if we have little or no planning done and then we suddenly need to graduate out of full time employment there is a probability that we will be ill-prepared both financially and mentally for the shift that we now need to take in the short term. The impact of that may not be very good for your lifestyle and well-being during the years in which you would ideally like to have the most freedom and choice.
Even if you are one of those that thinks retirement is not for you, it might just make a whole pile of sense to make some preparations nonetheless. The worse case scenario is that you will learn something, you might just be more financial prepared for something other than retirement, and you might just be in a better position to perhaps have a little more free-time in years to come, as opposed to going from 100% work to 100% 'leisure'!
Common Mistake #2: Funding A Pension But Not Doing So Meaningfully
Having a pension, or being in your employers scheme does not mean you will have an income that you'll be satisfied with. Through no fault of their own, based on my own experience, I would estimate that a fraction of the people that have some form of pension have any idea what it will likely provide them with when they graduate out of full time employment. They may well know what they are putting into it every month, or what their employer is putting into it, but zero awareness of what they'll get out of it when the time comes. Even many advisors don't know what they are likely to get per month or year from their schemes. How backward is that!? Surely that's where we should be starting, and working backwards from their?
If for instance you wanted to generate a gross income of say €3,000 per month (separate to State Pension), and you want it to last you 30 years or so via investing in an Approved Retirement Fund (ARF), you would need to have in the region of €700,000 in your pot come the time you start to draw-down that income and it stand a strong probability of it not dying before you do! Check out last weeks' Blog to hear how much needs to be contributed in order to generate a €1m pension pot for some context.
Common Mistake #3: Not Having A Plan For Ourselves
In Podcast 111 I had the pleasure of chatting with Derek Bell, Chief Executive of the Retirement Planning Council of Ireland, a charity founded to help people prepare for retirement. Derek shared some great insights as to the various aspects that we would benefit from considering when it comes to graduating from full-time careers.
For some of us that time might be 10, 15, 20+ years away and kinda hard to come up with some sort of plan, but surely it'd be both practical and indeed motivational to spend a little time and picture what it is we would actually do if we all of a sudden had 40 hours a week to ourselves!?
What date do you want to retire? That's a question not many of us can answer! Many of us can tell you when the State Pension will kick in for us (many can't also!). However, as for when WE would ideally like to not have to go to full time work, it's a little more difficult. Perhaps for some it'll be a case of doing so when they are financially independent; either have enough assets on which to live, or have sufficient other income that they do not have to trade their time and expertise for income. When will you be financially independent? Now there's a question that with a little help, guidance and probing most of us can come to a reasonable goal-based outcome on!
Common Mistake #4: Drawing Too Much In Early Retirement
JP Morgan are great for their studies and reports, and another such report was their study of the rate at which people in the US empty their pension pots really quite quickly once they stop full time employment:
They found that once participants hit age 60 and beyond, withdrawals were substantially higher than expectations. At age 60, 9% of participants withdrew an average of 51% of their account balances, with 23% of that 9% taking out 100% of their assets.
At age 65, 13% of participants withdrew an average of 57% of their balances, with 35% of that 13% taking out 100% of their assets; and by age 70, 52% of remaining participants had taken out an average 33% of their balances, with 20% of that 52% taking all of their assets. The net result being that by age 70, according to JP Morgan at least, there were not a lot of people with a lot of their pension pots remaining, which is quite scary for those people I'm sure.
We will be doing quite a few pieces on withdrawal rates from retirement accounts and managing ones' income in order to a) maximise the income we can take and b) have that pot last as long as we possibly can. We did cover Bill Bengen's 4% rule a while back, and we will be sharing development of thought around withdrawal strategies which I'm actually really excited about, in a weird sort of way!!
Common Mistake #5: Relying On The State Pension
When you hear that the State pension for a couple could be worth as much as a shade over €2,000 per month it is easy to appreciate why we would feel all at ease about planning for income once we stop working, 'the state has it all sorted'! No matter what way you slice it €2,000 per month is a lot of money, many of us work hard to generate that sort of income.
However, to suggest that it is more than enough to run a household; food, fuel, electricity, utilities, cars, clothing, repairs and maintenance, socialising, travel etc etc, is a bit of a stretch. I frequently see cases of retired couples who need at least €3,500-€5,000 in order to fund the lifestyle that they seek - that money either needs to come from savings, pensions or another income-generating asset (and adult children most often aren't the income-generating asset that parents had hoped they would be!).
Will the state pension last forever? Will it remain at the same 'real value' it currently is at? Who knows! While some would argue that no sitting government would be so bold/reckless toward their future prospects as to dramatically cut the contributory State Pension rates, depending on what the long term future holds their may be no other option, nothing is guaranteed, so lets not leave it to chance.
If we were to approach these 5 mistakes in reverse we could pretty-much boil this entire episode into the following:
- Be flexible about how long you will really want to work full time
- If you are going to fund a pension try to fund it as meaningfully as you possibly can
- Consider what sort of a future we want to have, what sort of life would we ideally create for ourselves
- Be careful when drawing down on your retirement assets, ARF or otherwise - don't obliterate it in the initial years, please!
- Don't rely on the State to provide 100% of your income in your later years
So there are 5 simple and hopefully useful ideas that can help us all avoid the 5 Big retirement planning mistakes!
Paddy Delaney QFA RPA APA Coach