Good news, says Jay Palmer in Barron’s: life expectancy is rising fast. The average American can now expect to live to 78 – up from 62 just a few generations ago. And thanks to enormous strides in medicine, if you make it to 65 you are very likely to live into your 80s. Make it to 75 and the odds are good you’ll reach 90. Many of us will even “break the century mark”.
Sounds great, says Eleanor Laise in Smart Money. But not everyone’s happy: financial planners make “longevity sound like some kind of affliction” in their panic about how we pay for it. If you retire at 65, says planner David Yeske, “there’s a good chance your assets will have to support you for 30 years”. But if there is even moderate inflation (say, 3%), your cost of living will double every 24 years. “If your income doesn’t do the same, you’ll have a continuously eroding lifestyle… that’s a depressing way to retire.” Indeed, says Laise, but it’s far from inevitable. A “bit of careful planning” from as early in your working life as possible will ensure you don’t have to live on noodles in your nineties. At present, 51% of working adults spend fewer than four hours a year planning for their old age. That just isn’t enough. So what should we do? asks Stephen Ellis in The Daily Telegraph. Ellis asked independent financial advisers (IFAs) how they are preparing to fund their own retirement. Here are seven of their best tips.
“Make pension contributions until it hurts.” Most IFAs do exactly as they tell us to do. They “pump money into pensions” to take advantage of the fact that contributions attract tax relief at your top rate of income tax – that means it costs only £600 for a 40% taxpayer to boost their pension fund by £1,000. It is madness not to take advantage of this.
Use a self-invested personal pension. Sipps are very popular options with IFAs, says Ellis. These allow the individual to choose assets – shares, bonds, investment and unit trusts, and commercial property – to place in their own pension with the same tax benefits that conventional pension funds attract.
Have property in your Sipp. Many IFAs hold commercial property inside their pension funds. As they have to rent premises for their businesses anyway, it can make sense to buy these and rent them to themselves. Others see buildings as a sensible investment regardless. IFA Marlene Shalton has, for example, just pooled her Sipp with her partner to buy an office. “When we come to retire, we can sell the property or leave it as a source of income.” But don’t forget that property should not be all you have: “it is not always easily sold, so you need to have other plans and investments as well”.
Own a business. IFAs often own their own businesses, says Ellis. Typical is Arthur Dornan, who runs the IFA Carterbar in Teeside with a partner. “We have ploughed all our available cash back into the business and are looking to buy another firm,” he says. “That means we have not had the cash to pump into a pension. I do think that building up a viable business is a better way to plan for your retirement… you can always sell it and invest the proceeds.”
Educate your children. “The great unknown is how long one will live,” says IFA Trevor Jones. “My parents made sure I had a good education, which paid off as I was able to help them in their retirement. I believe that is a message that is still appropriate to families today.”
Don’t ignore Isas. Peps and Isas don’t attract tax, says IFA Harry Katz. That means you can use them over the years to build up a “considerable non-taxable income”.
Pay off your mortgage. Debt stops you saving, says Katz. “I paid off my mortgage in my 40s by always paying any extra I was asked for when rates rose, but then never reducing what I paid when they fell.” That said, Katz is wary of using his home to finance retirement. People talk about trading down, he says, but “the idea of working hard for a lifetime only to end up reducing your basic standard of living does not appeal.”