Savers are often tempted to manage a retirement/investment plan themselves, but a lot is at stake when preparing for and moving through the retirement journey. Poor decisions could mean having to work longer, or, in the worst cases, running out of money during retirement. Here are some common traps to watch out for.
1. Cash levels and life expectancy
Savers nearing retirement can underestimate their investment time horizon. If you are retiring at age 60 and in good health, you might need to plan for 30 or even 40 years.
Too often, savers hold far too much cash in low-interest savings accounts, where its real value is eroded by inflation. When it comes to building and protecting wealth, stocks and bonds are more suitable long-term assets. Typically, cash should cover about 6–12 months of expenditures. This is also true in retirement, to avoid being forced to sell investments to cover funding needs.
2. Optimising pension contributions
Pensions are vital to building long-term wealth, due to the generous tax relief on contributions, and the ’snowball’ effect of compounding investment returns. But some savers opt to build up funds in savings accounts during their working life, at the expense of their pension pot. Only matching the minimum contribution required by law (8% of earnings) can lead to a shortfall in later life. Some savers could be forced to delay retirement, or may even run out of money.
Higher monthly pension payments can make a big difference to your overall retirement pot over time. In the illustrative example – see below – a £400 monthly contribution (8% of their annual salary) sees the saver end up with a pension worth £333,000 after 30 years. But paying in just £100 more each month (a 10% salary contribution annually) leads to a pot worth £416,000 after the same time period.
3. DIY investing and tax inefficiencies
Investors can be prone to emotion-based decision-making (eg. panic selling when markets experience sharp falls),excessively risky holdings, and failing to stick to a long-term strategy. Failing to fully optimise available tax breaks and wrappers, such as the capital gains annual allowance and ISAs, can also prove costly in the long run. A financial adviser can ensure your investments are set up tax-efficiently and have the best chance of long-term success.
4. Overlooking the importance of financial protection
People often insure their personal belongings, but neglect to insure the most valuable asset: themselves. Insurance provides a vital safety net against future unforeseeable expenses that can plunge you, or your loved ones, into financial turmoil or even debt.
This is particularly important for households with a sole earner, or company directors. Small businesses may struggle to survive if a director/key employee is unable to work due to illness, or passes away unexpectedly. Insurance payouts can help to cover the loss of a key employee or director. If you’re a business owner then funding a life insurance policy via your company (rather than personally) can be very tax-efficient, as premiums are deductible against corporation tax.
A financial adviser can help you understand your income needs and build a bespoke retirement plan that matches both your lifestyle and financial goals. Call 03300 564 446 to speak to one of our experts, get in touch via our contact form, or request our factsheet on planning for retirement.
This article is for general information purposes only and does not constitute financial advice or a personal recommendation. Past performance is not a reliable indicator of future results. Investments can rise or fall in value, and you may receive less than you originally invested. Tax treatment depends on individual circumstances and may change in the future.
