5 SAVING MISTAKES TO AVOID
Pensioners often only discover too late that their savings might not be enough to adequately support them during retirement. finweek spoke to a number of specialists to identify the mistakes typically made in saving towards retirement – and how to avoid t
MISTAKE NO 1: DOING NOTHING OR THINKING YOU ARE TOO YOUNG
“If you do nothing you will have nothing. Do something. However small, it is better than doing nothing,” stresses Lionel Karp, a retirement specialist with Chartered Wealth.
Worryingly, many young people adopt an attitude of “I’m still young. I’ll worry about retirement later”. Then, suddenly, later is upon them and they have lost many crucial years of saving. “You are never too young to start saving,” says Certified Financial Planner Ricky Williams of Anfield Investment Planning. “The culture of saving for retirement should start with your very first pay cheque because this establishes a habit of saving. The sooner you start, the better your chances of a comfortable retirement,” Williams says.
MISTAKE NO 2: MESSING WITH YOUR PENSION FUND AND RETIREMENT ANNUITIES
Long service is mostly a thing of the past, with the younger generation frequently changing jobs. Not preserving pension fund contributions by transferring these to the new employer or to a preservation fund is, says Williams, “financial suicide”.
Anne Cabot-Alletzhauser, head of Alexander Forbes Research I nstitute, says: “Treat your pension f und as sacrosanct. Wealthy or not, don’t mess around with i t. Treat i t as though it i s the only thing you will be able to l i ve on. “It is there to be your safety net and might be all you have if the rest of your wealth is wiped out.” A retirement annuity (RA) is the only retirement product that you are not allowed to touch before age 55, Williams tells finweek. “But if you stop contributing to your RA it becomes paid up. While it carries on growing, it does so at a reduced rate. Not only will you suffer an early termination penalty due to noncontribution, but you won’t have enough money at retirement.”
MISTAKE NO 3: FAILING TO GET PROFESSIONAL FINANCIAL ADVICE
“People don’t want to pay for advice. Financial planning
“Treat your pension fund as sacrosanct. Wealthy or not, don’t mess around with it.”
still has the connotation of selling life insurance and risk. There is a massive misunderstanding about the difference between dealing with a life insurance agent and a financial planner. The first deals with the risk side, such as death and disability and income protection. The latter is a specialist in retirement and financial planning,” says Karp.
“Don’t try and do it yourself. There is a saying in law that a man who defends himself in court has a fool for a client. The same holds true here. The concept of taking and paying for advice is a critical part of the education process,” says Williams.
A good financial planner will plan for a client’s funds to provide an income for life and even outlast them. This is generally achieved by making sure that a client’s portfolio is individually tailored, well-balanced and diversified, which ensures that a client’s money works hard for them and in their best interests.
Diversification, both advisers maintain, is crucial. “You have to have a bit of cash, gilt, property and equity and then you need to repeat the same thing offshore. As you get older, generally equity exposure is reduced to more property cum interest-bearing returns in order to mitigate risk,” says Karp.
MISTAKE NO 4: ELECTING TO TAKE TOO HIGH A PENSION DRAWDOWN AND ERODING THE CAPITAL
“You should always aim to only draw down the percentage income that your funds are producing, that way you will never run out of capital,” cautions Williams.
Taking a high drawdown percentage has the potential to erode capital and negatively impact the ability of that pension fund to provide an i ncome for an i ncreasing l i fe expectancy.
“Be aware of how much you are drawing in relation to how much it is reducing your capital,” says Karp. “In an ideal world one should obviously try and take as little as possible, but sadly, this is not always achievable.”
MISTAKE NO 5: INVESTING THE BULK OF YOUR SAVINGS IN HIGH-RISK VENTURES AT A MATURE AGE
Too often pensioners l ooking to bump up their retirement pots are seduced by get- rich- quick schemes. The old adage, “If it looks too good to be true, it generally is,” holds true.
“A mature age i s exactly the time you l ook to conservatism, the rationale being that if things go wrong you don’t have enough time to come back,” cautions Karp. “A young investor can bounce back from losses sustained by a high-risk investment even if the market is down for 10 or 15 years, because they have the time to come back from that.”
A good financial planner will plan for a client’s funds
to provide an income for life and even outlast them.
Anne Cabot-Alletzhauser Head of Alexander Forbes
Ricky Williams Certified Financial Planner Anfield Investment Planning
Lionel Karp Retirement specialist with