For some, the pandemic has accelerated their retirement plans. They may no longer want to contend with an uncertain outlook or they may reason that someone needs the job more than they do. They may have found that a furloughed lifestyle rather suits them and be keen to extend it. If you are looking at your pension pot and asking yourself whether retirement is possible, here are five basic rules.
You need to bear in mind that there is no way round the simple retirement maths; you have a pot of capital with which to generate an income. To ensure that pot is large enough to support you in retirement you need to save more, take more investment risk or get lucky. Or you can manage the other side of the equation – spend less and keep earning. Nevertheless, while you can’t change this basic maths, there is some basic good practice that can help you achieve retirement faster.
This is particularly pertinent at the moment. Most advisers have one client who didn’t listen to their advice and sold out during the volatility in March. Those clients will have lost out on six months’ worth of dividends and, more importantly, will not have participated in the recovery in stock markets. The FTSE All-Share has risen around 25% from its lows. An investor currently in cash would need to wait 25 years or more to achieve the same return. Selling at a time of crisis is a quick way to destroy your wealth and set back your retirement plans.
Work out how much you really need
There is an important psychological leap at retirement. Rather than being able to replace anything you spend with a salary, everything you spend eats into your retirement pot. This is nerve-wracking and can see some risk-averse retirees build bigger and bigger pots and struggle to take the leap. It can help to work out how much you really need to live the lifestyle you want. Cash flow modelling allows you to build a picture of your needs in terms of holidays, household maintenance and day to day living. This can provide much-needed reassurance.
Have a plan B
Having a back-up plan can also help with the fears that come with letting go of a steady income. Whether it is letting out the family home while you are abroad, or taking a small amount of paid work, it may never happen, but it can make you feel better about taking the plunge. Equally, it can help you ride the rough and smooth of markets. To achieve a decent retirement, you will need to hold part of your investments in higher risk, higher volatility assets. If you have a plan B, you may not need to sell out or take an income when markets are low but can wait until they have recovered.
Mind your fees
High fees will erode your pension pot quickly if you’re not careful. This is partly important post-retirement when the pot is getting smaller all the time – fees can become a larger part of the pie. This is not to say that you should go for the cheapest option, but just that you should make sure you are getting value for money. If you are invested with an active manager, make sure they are delivering over and above an ETF, for example.
Take risk opportunistically
Instead of looking to sell in March, it may have been a time to be looking at markets opportunistically. While market timing is generally shunned by experienced investors, there can be little doubt that investors should consider a market crash as a time to top up on areas they had previously dismissed as too expensive. There was a brief window to buy technology at relatively low prices, for example. If you need to take higher risk to achieve retirement faster, it is far better to do it selectively and with bite-sized chunks of your portfolio.
There is no magic bullet for a quicker retirement. You can’t go back to your twenties and start saving. Nevertheless, you can speed up the process with basic good practice. You may find yourself on permanent furlough sooner than you think.