Monthly Archives

June 2022

Jun 20
0

How to weather inflation in retirement

By | Retirement Planning

For the first time, it now costs £100 (on average) to fill up a car. Petrol prices have soared as oil prices have surged across the world – partly due to sanctions on Russia, a major global oil producer, over its invasion of Ukraine. Yet inflation, as a whole, has also been rising for some time. The overall cost of goods and services in the UK has now risen 9% in the 12 months prior to June 2022; the highest since the 1980s. This presents challenges to working households, of course. Yet what about those in retirement? 

Below, our financial planning team at WMM here in Oxfordshire offers some ideas to help pensioners (and those near retirement) to protect their savings and income.

 

Be wary of raising spending

With living costs going up, it is natural to want to meet the increase in your expenditure via higher levels of withdrawals from your pension. Yet this could result in your fund shrinking disproportionately. In the worst case, it could lead you to run out of money later in retirement. If you need to spend more on your essentials then perhaps you have other investments that could be used to provide a more efficient income stream. However, take care to not hold too much in cash, as inflation will erode the value very quickly.  

 

Consider working longer

Unfortunately, not everyone is in the position to draw upon multiple income streams to provide extra retirement spending. For some, it may be best to delay retirement for a few years – letting you build up more qualifying years on your National Insurance (NI) record so you can get more State Pension income. You need 35 “complete” years on your record to get the full new State Pension. Remember, the income rises each year by at least 2.5% under the “triple lock” system and usually follows/beats inflation – protecting its value. Working longer could also give you more time to contribute to your pension pot.

 

Remain true to your strategy

When inflation rises, it eats away at the “real returns” from your investments. For instance, if your overall return for one year is 7% but inflation is 5%, then the purchasing power of your portfolio has only grown by 2%. With inflation at 9% in 2022, many investors are tempted to take on more investment risk to try and keep up. Yet this is not always appropriate with an investor’s time horizon, personal risk tolerance and long-term strategy. 

This is not to say that you should sell your investments! However, those in/near retirement should be wary of changing the investment plan agreed with their financial planner simply to account for the present economic landscape. Although inflation is high right now, it could return to “normal” levels (2%, or close to it) in the coming years. Taking on more risk than you are comfortable with is likely to lead to costly mistakes later (e.g. “panic-selling” if the markets fall suddenly). If you are at all concerned about your investment strategy in light of the current 9% inflation rate, speak to your financial planner. They will hear your concerns and perhaps draw attention to important information or principles that you may have missed. 

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

Jun 13
0

Investing in a recession: a short guide

By | Investment Planning

Nobody knows if the UK will enter a recession in 2022. Yet if it does, how can you ensure that your investments are protected? Some argue that the best safeguard is to invest in “actively managed” funds; i.e. those which employ a professional manager to “time the market” for you (aiming to sell shares before a crash, and buying others before they rise). However, this approach to investing rarely works. Over the last 10 years, for instance, only 17% of actively managed funds have beaten the S&P 500 benchmark. So, how can you invest in a possible recession (which usually, but not always, accompanies a “bear market”)?

 

#1 Continue contributing

There are two main ways to view a stock market crash. Firstly, you could see it as a disaster to avoid at all costs. Alternatively, you could see it as an opportunity to buy more investments “on the cheap” (due to falling share prices). This latter approach is helpful to show why continuing your contributions – e.g. to your pension – on a monthly basis is usually the best approach for individual investors. By drip-feeding your money, you limit the temptation to try and time the market and increase the likelihood that, over the long term, your portfolio will follow the market in its upward trajectory.

 

#2 Keep calm

During volatile markets, one of the worst things you can do is panic and sell investments out of knee-jerk reaction to bad news. Almost inevitably this only serves to crystallise your losses and potentially miss out on the (eventual) market recovery. Stay focused on your long-term goals and remember that you expected volatility along the journey when you originally crafted your strategy with your financial planner.

 

#3 Ensure diversification

One of the difficulties of staying true to your investment strategy during a volatile market is that your mixture of assets can veer off course. For instance, suppose you started a portfolio one year ago with a 60:40 split of equities to bonds. 12 months later, the market crashes and leads your equities (shares) to comprise a smaller part of your portfolio – such as 45:55. Eventually, it may be necessary to rebalance everything (e.g. by selling bonds and buying more shares) so you stay on track. However, when should you do this and which assets should you sell? Here, a financial planner can help ensure that you choose the right approach and avoid concentrating too much of your portfolio in a single asset, market or company.

 

#4 Remember your plan

Before you built your portfolio with your financial adviser, you should have addressed a set of crucial questions that would help you know how to navigate a possible future recession or bear market. One of these is: when will you need the money? If you were looking to use the money within the next 5 years, for instance, then you likely will have “de-risked” your portfolio by moving more of it into “safer” assets – e.g. dividend-paying stocks and bonds – in case a crash occurred before your withdrawal date. However, if you knew that you had 30+ years to invest before needing to withdraw it, then you could decide to take more risks. After all, if a crash does occur in that timeframe (and history strongly suggests that at least one will), then you have plenty of time for your portfolio to recover. Remembering your original investment plan, therefore, can help bring clarity regarding the best way forwards if the UK enters a recession.

 

Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).

 

Jun 06
0

An example of a financial planning “road map”

By | Financial Planning

What is a financial planning “road map”, and how does it benefit you? Just like a long road trip, a financial road map plots your life journey towards your financial goals. Not only does it help you determine where you are right now, but it reveals the different directions you could go and highlights the distance/work required to reach your destination. Here at WMM, in this article we offer an example of what this can look like. We hope this is helpful and invite you to get in touch to discuss your own road map via a free, no-commitment consultation.

 

Location

Where do your finances stand right now? Gaining a clear picture of your assets and liabilities is key to determining where your goals are realistic. For instance, perhaps in your case the former includes £50,000 cash savings, a £300,000 pension pot, a final salary pension (from a previous employer), a house which is nearly paid off and a large share in a business that you founded. 

However, your liabilities might include your outstanding mortgage, some personal debt (e.g. unpaid credit cards) and a loan used to invest in your business. 

It is also important to determine the “liquidity” of your assets; that is, how easily they can be converted to cash, for spending. Your business share may be an asset on paper, for instance, but does it produce a regular income? Could you sell it easily and generate a healthy profit if you wanted to, or would you have to lose a lot of value and income in a ‘fire sale’ if needed?

 

Destination

What would you like to achieve in the future? Perhaps you’d like to retire early, at 57. Or, maybe your dream is to travel the world with your spouse after the kids have left home. Whatever your goals, wealth will play a key role in making them a reality. Here, it is important to consider some vital questions to give the best chance of success. For example, how long are you likely to live? (Be optimistic!). What are your income and expenses likely to be in retirement? 

Perhaps your costs will go down since the mortgage will be paid off, the children will (hopefully) be living independently and you no longer commute to work. However, your lifestyle may rise in retirement as you take up new hobbies, make home improvements and travel. Living costs will also be higher due to inflation. Your pension and other savings will need to account for all these factors, and more.

 

Organisation

With your goals now established, it is time to construct a plan (the “road map”) to move you towards them. Suppose your goal is to retire at 52. Assuming your financial planner agrees this is possible, you can start crafting a strategy to achieve this. 

For instance, you will need to factor in that you cannot access your State Pension until much later (e.g. 67 or 68). Also, you cannot access pension funds until age 55 (rising to 57 in the future). So, initially you will need to draw from other income sources – such as your ISAs, regular savings and perhaps income from Buy to Let (BTL) property. This can also make sense from an inheritance tax (IHT) perspective, since ISAs and BTL properties are not automatically exempt from IHT like a pension pot is, or your family home (assuming its value falls under your IHTfree allowance). 

If you also intend on leaving an inheritance to your loved ones, then the plan will also need to ensure that you do not spend so much in retirement that nothing is left for them when you die. Here, a financial planner can help determine a “safe withdrawal rate” for your pension – so there are sufficient funds for a comfortable retirement, but also funds left to pass down later.


Invitation

Interested in finding out how we can optimise your financial plan and investment strategy? Get in touch today to arrange a free, no-commitment consultation with a member of our team here at WMM. 

You can call us on 01869 331469 

 

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult us here at WMM (financial planning in Oxfordshire).