How to Invest Your Pension Money...
Take a Step Back
As with most projects in life, it pays to take a step back from things and reflect. Before you start getting into the detail of how to invest your pension money, ask yourself some questions:
What sort of life do I want to live?
How much do I think that life is going to cost (month-to-month)?
What other things will I spend my money on (holidays, changing the car, double-glazing, etc.)?
Do I want to give any money away (with warm hands as opposed to cold hands!)?
How long do I think I’m going to live (that’s a tricky one!)?
These are great questions to ask as a starting point (except, perhaps, the last one!). They create a context, or framework, to answer the money related questions.
It’s Tricky!
The questions I’ve just mentioned aren’t easy to answer. It might take you a while to find answers you’re happy with and, even then, you might not think you’ve got everything covered.
That’s OK, though. This should be an evolving process. Something you think about on a regular basis so you can refine what you want life to look like and adapt as your thinking becomes reality.
You’re very likely to be wrong with some of your assumptions and predictions. No problem. At least you have some idea of what you want things to look like and what it will cost. That’s great progress!
You’re now probably ready to start thinking about what your pensions (or investments for that matter) need to do for you to support your plans.
Once some sort of plan has been established, positioning your money isn’t THAT complicated. Most people in my line of work seem to make things more complicated than they need to be.
Guaranteed Pensions
Let’s start with any money that’s guaranteed. By this, I’m referring to things like your state pension, any final salary pensions (also called defined benefit pensions) you might have and possibly things called annuities.
These are all forms of income that are guaranteed and, generally, paid for life so they’re VERY valuable. These forms of income are going to provide a bedrock of income for you.
Usually, there’s going to be a gap between your guaranteed income and what you plan to spend over the rest of your life. If that’s the case, don’t panic, it’s quite normal!
Your Pension Pots
This is where your pension pots or other investments come in. As I said, it doesn’t JUST have to be pensions that provide you with your future income. It could be things like ISAs, unit trusts, bonds and cash.
But let’s focus on your pensions. You need to consider:
What’s the shortfall between your guaranteed income and what you plan to spend?
How do you feel about investment risk (i.e., how much it goes up and down by)?
Your income tax position.
The overall picture of your financial status and if you want to leave anything to loved ones.
When you’ve got an idea of this, you can work out what you can ‘safely’ withdraw (each year, each month or as one-offs) without your money running out.
If working this out is a chore or a bit too tricky, we can help with some snazzy software that does it for you (sorry for the blatant plug!). You need to answer the BIG question of ‘HAVE I GOT ENOUGH?’.
Some Guess Work
There’s going to be a fair amount of guess work. You don’t have a crystal ball. As I said, though, that’s OK because this is an exercise that should be done regularly so you can see theory turning in to reality.
Inflation is a MASSIVE problem in the long-term. You need to account for that in your thinking and then you’re going to have to have a stab at how much investment growth you’re likely to get on your pension.
Investment markets are unpredictable but, saying that, typically, the more risk you take, the greater the long-term returns you can expect.
Our advice is always to be conservative. If it looks like you’re going to have ‘enough’ with a cautious investment growth assumption then you need to ask yourself if it might be more sensible to take less risk with your money.
If you’re a bit more ‘gung-ho’ and you NEED your money to grow at a higher rate to achieve what you want, then you might HAVE to take more risk but fasten your seatbelt!
The amount of risk you take is always a balance between what you NEED and what you WANT. There are thousands of investment funds you can choose but they’ll all have risk ratings you can attach to.
In terms of how to invest, we tend to favour funds that invest in 1000s of companies across the world so you’re not putting all your eggs in one basket. Keeping investment costs low is also important.
Finding the right funds does need a bit on ‘know-how’, I’ll admit, but it’s not beyond most people with some research and, perhaps, a bit of guidance.
Happily Ever After?
You probably don’t need me to tell you that life’s uncertain. That things don’t always go to plan. You need to start your journey EXPECTING things to go wrong and being prepared to deal with them.
If things don’t go wrong, good for you but, if they do, you’ll have your eyes wide open and be more willing and prepared to change course if you must.
By following these simple thoughts, you’re going to give yourself a good chance of success. That doesn’t mean you WILL be successful but, if things don’t work out, it won’t be because you didn’t to the right things.
Have fun with your thinking and, as ever, if you need a bit of help, do give me a shout.
Until next time…