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ROD THOMAS INVESTMENT

TEN STRATEGIES FOR A RICHER RETIREMENTWe all dream of a richer retirement but a significant percentage of people arrive at retirement age and feel very unhappy that their income is not what they wanted it to be. Unfortunate events may throw you off course. But it is true to say that the more you plan for the future and the more you review that plan, the more likely you are to end up financially secure in retirement.

In this article I will introduce ten strategies that will help ensure your retirement is what you want it to be!

1. Start saving early!Every financial advisor will tell you in the strongest possible terms that it pays to start saving just as soon as you can. A few people make sure that they do however many compromises they have to make elsewhere in their lifestyle. Others put it off until later, but later never comes.

It is very difficult to generalise, but here’s one rule of thumb that illustrates the time sensitive nature of putting money aside early. Assume that whatever time you start saving, you’ll need to put aside HALF of your age, expressed as a percentage of your income.

That sounds very confusing so let me illustrate…

If you start saving at age 25, put aside 12.5% of your income.If you start saving at age 40, put aside 20% of your income.

If you are on a low to modest salary, you might honestly laugh at the idea that you have any money left over to put aside for your retirement. But the reality is that if you don’t, you will end up having to rely on other sources of income which most likely will not support much more than subsistence living.

2. Work out your income needs in retirementYou’ve heard the saying; “if you don’t choose the direction of your ship it is anyone’s guess where you end up.” Not a good idea to end up in retirement without having followed a plan. And that plan needs to focus on the end goal of how much you are likely to need in retirement.

It’s a tough question. Here’s a couple of resources to get you started:

Firstly, I developed a checklist called ‘Roadmap for a Richer Retirement’ (download it here). It will help you start your retirement plan.

Secondly, in another article I’ve gone into more details about the four stages of retirement. I’ve talked about each stage, what it means and how much money you might need when you reach it. This report adds more detail to the Roadmap.

3. Develop your five pillars of retirement incomeIf you know how much you need, the logical next step is to decide where it is going to come from. It’s rare, these days, for anyone to rely on one source of money in retirement. Here’s an illustration of the five most common sources of income:

You will need to work out for yourself how to combine the possible different sources and end up with the retirement income you need. There is no perfect answer – we each have different resources and opportunities.

Some high ranking executives may have a wonderful company pension which combined with their state pension means they are comfortably off. Some of us may have worked for ourselves and plan to continue working – at least part time – to supplement our state pension and perhaps a modest private pension or savings through downsizing a family home. The permutations are endless. The key is to formulate a plan that works for you.

4. Focus on investment rather than savingsMany people confuse the two. However, when you are building a fund, long term, for retirement then the distinction becomes very important.

If I say “savings” most people think of bank and building society accounts. These pay typically 0.5% – 3.0% annual interest. The problem with these accounts is that if we allow for inflation, most of them do not even enable you to keep pace with inflation. In other words your money is losing value year by year.

By investments I mean placing your money where it can grow at a faster rate. This could be either through income alone, a mix of income and capital growth, or more rarely just capital growth. I’m very much against focusing on capital growth as a pathway to a prosperous retirement since it is always in the future, and by definition hasn’t happened yet! So it’s a very risky strategy.

However, there are many investments that can give you anywhere from 7% – 15% net income a year without worrying about the uncertainty of capital growth. This kind of return – particularly when you re-invest it, can really build your fund.

Here’s an illustration of the difference. Let’s take a savings rate of 2% annually and an investment return of 8% annually. In both cases we will assume that you have invested £400 a month for 25 years. That’s a total of £120,000 over the period.

1. If your money was in savings at 2% a year – you would now have £155,405, a gain of £35,405.

2. If your money was in investments returning 8% a year – you would now have £365,935, a gain of £245,935.

That’s a dramatic difference and illustrates the importance of a regular, good, annual return.

5. Beat the investment risk and reward conundrumThere are relatively few investments which are totally guaranteed to both produce the income predicted AND not to lose capital value. Shares are a prime example where there are no guarantees for either income or capital.

However, if you are making the switch from savings to investments you are going to experience a higher level of risk, which varies considerably from investment to investment. I personally don’t like taking more than very modest risks when planning for retirement, and the investments I speak about are designed to minimize risk but still provide way-above-average returns.

You will find that the mainstream financial services sector automatically equate higher reward with higher risk. My experience is that formula is frequently completely wrong. If you consider other sectors that are not usually part of a financial advisor’s experience – like commercial property – you can often find that high rewards are available, but with very modest risk because of the provision of security.

6. Make the most of tax free savings inside a pensionPensions have had a hard time recently since most of them have performed badly over the last 15 years. But there are investments which can be placed in certain regulated pension vehicles (self-directed pensions) which currently offer a return 7%-15% net pa.

Now for maximum growth you want to be able to:

a) Invest before tax rather than after. This can effectively increase your investment by whatever your current rate of tax is. So, for example, if you pay tax at 40%, if you invest £10,000 the government will give you tax relief meaning that your full investment amount is £16,666

b) Invest and pay no tax on the income received. Again, if you receive income of 8%, the whole 8% is retained in your pension.

Let’s illustrate what this means for a 40% taxpayer who decides to invest £50,000 for 20 years. And let’s assume they receive 8% net income annually from their investment.

Investment outside a pension

They invest £50,000. This is the actual amount you can buy an investment with.You receive 8% per year, taxable at 40%.The amount left to reinvest is 4.8% a year.If you do the sums, you will find that over 20 years the final capital sum they have is £127,701.

Invest inside a pension

Same money of £50,000. Only this time the tax relief means you can now invest £83,333.The pension receives income of 8% a year, paid gross and no tax liability.Do the sums and over 20 years the pension fund will now have £388,411.

The difference is very substantial and means that you are far more likely to end up with a better income if you have a tax free fund rather than one built on taxed income.

However, a word of warning. If your pension fund invests in assets like shares – which have performed very badly – then all the tax breaks in the world will not make up for lack of growth! Read elsewhere in this report about the investments I personally prefer for long term investment for retirement.

7. Choose the right pension vehicleAll pensions are not the same. The big issue, as I explain in my book, ‘The Pensions Disaster’, is that mainstream pensions are primarily invested in shares and bonds. Both of which have performed very badly – shares since around 1999 and bonds since the bank rate was cut to 0.5% in 2009.

If you understand the need to create strong growth before retirement and receive good income from your fund after retirement it is simply not good enough to leave things to chance. There are certain regulated pension vehicles (like SIPP’s and SSAS’s) which can hold a wider variety of investment and provide the opportunity to do better.

These pension wrappers will also enable you to take control of your pension rather than leave it with others who may not have the same views as you do.

If you are disappointed with the performance of your pension, or it is frozen, then often the best place to start is with a pension review. My company, Avantis Wealth, currently offers this (through our preferred IFA partner) free of charge and without obligation. Visit www.avantiswealth.com/pension-review/ and register.

8. Divide your plans into two – before and after retirementPlanning for a richer retirement becomes easier if you understand a simple distinction. Consider anything you do, investment wise, prior to retirement as focused on building the largest possible retirement fund.

Then after retirement the focus changes to taking the largest possible income from that fund.

The strategies for growth for the future, and the strategies for income now, are likely to be different. Many investors don’t appreciate the distinction.

Let’s come back to the capital growth versus income question because it becomes very relevant here. I speak to many investors who are planning on buying property for their retirement as it “always goes up in value”. This is placing reliance on capital growth in the future.

I’ve got a special interest in property investment and have a portfolio myself. Some of these properties were

purchased in 2005 and 2006 – just before the property crash. I can say definitely that prices do not always increase, and in some cases I have property where the value is still below the pre-crash price!

If you are in the pre-retirement growth phase, the important point is to consider the total return on your investment, which is made up of annual income and capital growth. But since future capital growth is always uncertain to some degree I suggest that you discount your projections of growth by at least 30% to be on the safe side.

Here’s two examples of investments – which would you prefer in your portfolio:

1. A property with a net income of 4% and possible capital growth over time of 4%. Total potential return of 8%.

2. A structured investment with absolutely zero capital growth, but a guaranteed income, year after year, of 8%.

I’d say that number 2 wins hands down – and this is by far my preference for retirement or other medium to long term investment planning.

9. Annuities are dead. Long live income drawdownThe recent government changes to pensions announced in the Spring Budget 2014 are far reaching and fundamentally underpin the message I have been sharing for three years, viz “Annuities are bad value”. Again my pension book explains exactly why this is.

The good news is that there is a positive alternative to annuities called income drawdown, which has (in my opinion), three big benefits over annuities…

• You retain ownership of your pension fund rather than “selling” it to an insurance company.• You have wide flexibility over the level of income you take and when you take it.• If you have chosen the right pension vehicle, you can be invested in assets which produce excellent

income, meaning that you could have significantly more income than from an annuity.

10. Review and rebalance your plan for a prosperous retirementJust like following a map, you need to check periodically where you are. Life changes in many ways – jobs, family, health, location, opportunities and more all impact your plans.

As a minimum I suggest you take stock every five years. Here’s a quick checklist of what it pays to review:

• How much you thought you needed in retirement. Any changes?• Are you on track with where you expected to be at this point?• If not, what changes can you make to get back on track?• Any changes to the Five Pillars and how you planned to split your retirement income between them?

Tough decisions may be called for and some of us may find we have to choose between indulging ourselves now and risking not having the retirement income we want in the future, or cutting back things we enjoy.

Now its over to you!I’ve scratched the surface in this report with the intention of helping you focus on good strategies which really can help you achieve a prosperous retirement in the future. Planning for retirement can be very exciting and ultimately rewarding. The level of your success will depend on these four critical elements:

• How soon you start planning for retirement – the earlier the better• How much you are able to invest for the future• How wisely you invest• What pension vehicle (and therefore what investments) you choose to adopt

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DISCLAIMER

Avantis Wealth Ltd is not authorised or regulated by the Financial Conduct Authority (FCA).

Avantis Wealth Ltd does not provide any financial or investment advice. We provide a referral to a regulated advisor who will offer appropriate advice, or to the company offering an investment who will determine your suitability for the investment prior to any offer being made. We strongly recommend that you seek appropriate professional advice before entering into any contract. The value of any investments can go down as well as up and you might not get back what you put in. You may have difficulty selling any investment at a reasonable price and in some circumstances it might be difficult to sell at any price.

Do not invest unless you have carefully thought about whether you can afford it and whether it is right for you and if necessary consult with a professional adviser in accordance with the Financial Services and Markets Act 2000. These products are not regulated by the FCA or covered by the Financial Services Compensation Scheme and you will not have access to the financial ombudsman service.

Information is provided as a guide only, is subject to change without prior notice and doesn’t constitute an offer of investment. Some investments may be restricted to persons who are high net worth, sophisticated or professional investors or who take independent advice from an authorised independent financial advisor.

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