We’re not stupid. We all know we’re going to need money if we want financial independence. We’ve all read the reports about people not saving enough for their future and having to work longer. Spend any time reading through the financial press about retirement and it can all be a bit depressing.
I want to show you a typical process we take our clients through. I’m not ‘bigging up’ our firm, (that would be cheesy). It’s just that I think of things in simple terms and I think most other people do as well. What we try to do for clients tends to be simple and uses a common sense approach.
Where to Start?
Have an open mind. Don’t think about the money side of things. Allow yourself to imagine a perfect retirement. What will it look like?
- What will you do with your time each day?
- Who will you want to spend your time with?
- What hobbies and interests would you like to pursue?
- Are there any charities you’d like to help?
- Where in the world do you want to see?
- How do you want to feel on a Monday morning!?
As Jean-Jacques Rousseau once said… ‘The world of reality has its limits. The world of imagination is boundless!’. Give it a go!
The Cost of Life!
Now let’s start getting a bit boring. You’ve created, in your mind, a picture of a great retirement, but you need to add some numbers to that. I suggest you start by finding out what you’re spending now. THIS CAN BE SCARY, but get to know your spending and it could become your friend. Be honest, though!
When you know what you’re spending now, think about how that spending will change in the earlier years of life after work. Attach some numbers to the retirement you imagined. How much will you need? Be generous, but be realistic.
We’ll all get to a point where we’re too old to do the things we used to. Think about this period of your life and how your spending might change. It’s likely to go down (notwithstanding care fees) so attach some numbers to that as well.
To recap, there are likely to be 3 stages of spending. Your ‘CURRENT’ stage (what you spend now), your ‘HAVE FUN’ stage (you’re living out the life you imagined!) and your ‘TOO OLD’ stage (it’s just all a bit too much effort!).
What Can You Count On?
Have a look at what income you KNOW you’re going to get in the future. Income that’s safe and secure. Income that won’t change, regardless of what happens in your life or in the big bad world of financial markets.
This could be things like your state pension (it’s really easy to find out how much that will be) or a final salary pension through your work. Working out what guaranteed income you’ll have isn’t too tricky, believe me!
Where Are the Gaps?
So, you’ve a pretty good idea of what you’re going to need to pay for the life you want. You also know what guaranteed income you have to rely on. There’s usually going to be a gap between the two and that gap needs to be filled!
Your ability to fill the gap will depend on the other money you have behind you. It could be pensions, investments, savings, money under the bed… It doesn’t matter where it is!
You’re going to need to draw from this money to fill the gap between your spending and your guaranteed income. There’s a bit of clever stuff you’ll need to do (account for inflation, interest, growth, etc.) but it’s relatively easy to see if you’ll outlive this money or the other way round!
Some Useful Admin
There’s something things you can do with your money that might make it last longer. This includes making sure any costs you’re paying are low, its invested appropriately, it’s tax-efficient and it’s held by the right person (in the case of a couple).
Over time, making your money as efficient as possible can give a big boost to how long it lasts so make sure you get this part of things right. Yes, it’s a bit technical but nothing you can’t handle!
Live Happily Ever After?
If you’ve got this far, thanks for reading. The key is to break it down in to steps. Mini-projects that, when put together, make up a framework for your financial future and security.
The trouble is, it will be wrong from the start! That’s no-ones fault, it’s a fact of life. You’ll be making A LOT of assumptions which won’t pan out. You’ll probably be wrong on:
- How much you think you’ll be spending in the future
- What level of growth you get on your money
- The level of inflation over the years
- The ‘unforseens’ that you didn’t, well, foresee
But that’s OK. The important thing is to revisit it regularly to see how far off track you are and to adjust along the way. Someone told me once that a flight to New York from London is off course most of the time. The pilot makes slight adjustments to make sure the plane lands in the right place. Your planning is a bit like that.
The End (Phew!)
I hope you can see that getting a plan for your future financial independence doesn’t have to be too hard. Yes, it requires some time, some thinking and some imagination but you can do that. I know you can!
I hope you’ve found this useful and good luck with your planning!