Retirement seems a long way off but time has a way of passing without you realising. Days can drag as weeks, months and years flash past. I often think about some of the financial mistakes I’ve made in the past and how much further along in my plans I could be now had I learned certain lessons earlier in life. There’s little value in dwelling on the past though. My plan is to be able to give up paid work at the age of fifty which is just over fifteen years away. I may decide to continue working at that point, but the plan calls for me to be able to make that choice on my own terms without being trapped in the “rat race” and having to work for someone else to make ends meet. So far, I’m on track but I’m impatient. I want to have more and I want it now.
I’m signed up to a pretty good pension through my employer but a private pension, and state pension, will not be enough to give me the quality of life I desire in my later life. I want to be comfortable in later life, not having to worry about paying for either food or electricity because I can’t afford both. It seems tragic to me that most people work hard for their best years and then have little left over in retirement. As our society changes and we generally live longer, the strain on the economy is starting to tell. One only has to look at the NHS for proof of this. I’m not convinced that the same level of welfare will be available to people in my generation when they get to their retirement, as is available to those currently in their retirement. Something will have to give at some point.
In my experience, most people do not really understand how pensions work. I’m not an expert either, but I think I have a better understanding than the average person. The same people who think that pensions are “safe” tend to think that the stock market is “risky”. These people will be surprised to learn that many pension schemes are actually linked in large part to the performance of the stock market, with pension contributions used to purchase units in trusts or funds that are invested in various stocks. The two, pensions and the stock market, are so closely linked that to say one is “safe” and the other is “risky” is just a completely absurd statement to make. The only risk here is not having a full understanding of what your retirement plan is or how it will be achieved.
Will you want time in the sun after retiring? You'll need more than just a basic pension.
In FU Money, Dan Lok talks about your “number” which is the amount of money at which you will have the life you want. I can’t remember the specific items on Dan Lok’s list, but he details all the different things he spends his money on and arrives at an annual figure. I think Dan’s figure was in the region of $600,000 per year, but I’m ready to be corrected on that. Not everyone will have the same figure. Some people will have more modest desires and they could be happy with £12,000 per year, assuming they have no costs for housing. The point is to have a figure and an idea of what life you want. Make a list of all your different financial commitments and what they cost. Use that as the basis for your figure for retirement. The earlier in life you think about this, the better your chances are of achieving it. I have a figure in mind that will see me live a comfortable life when I hit fifty. I’m not going to talk about my figure specifically as it is private to me, but I will talk about my strategy for reaching that figure.
I made a decision when planning my retirement to ignore inflation in an active sense. If I was to factor inflation into my planning I would drive myself insane looking at spreadsheets and calculations. My somewhat simplistic approach is to assume that my cost of living in fifteen years will increase in line with inflation, but the value of my investments will also increase roughly in line with inflation and perhaps even outpace inflation. If we are looking at annual inflation of roughly 2%-3%, then so long as the value of my investments increase by more than this, I am doing well. Generally, the stock market will have peaks and troughs but over an extended period it will return anything from 3%-8% and sometimes more. Most cash savings accounts offer a derisory return of under 1%.
I have three main areas that I invest in; property, stocks and bonds. The primary goal is to generate passive income; income that is generated for me without any work needed from me.
I’ve spoken before about how I don’t think Buy-To-Let is a good idea for most people. I invest in property through crowd funding, which are generally large apartment blocks or student accommodation. I buy shares in these properties and earn rental income as dividends. Each month I roll up my dividend and reinvest that money into more shares in those properties, as well as using some of my earned income to buy additional shares. At present, I’m getting a 5% return on this investment. Rather than my return depending on just one or two dwellings, my investment is spread across dozens of different dwellings which reduces the risk to my investment.
I also invest in the stock market. I have shares in five different UK companies. I chose each stock after careful consideration and research. A good starting point for anyone looking to understand the stock market is the book Shares Made Simple, which I have linked below:
One requirement I had was for the stocks to have a stable dividend record. I now receive a dividend ten months of the year from my portfolio of stocks. Again, each dividend is rolled back up into the overall investment. There are lots of different platforms for buying and selling shares. For those investing modest amounts, there are platforms that offer a certain number of commission free trades per month, such as Trading212. I don’t personally like Trading212. I find the interface complicated and difficult to navigate. Some people swear by it though. There are other platforms that offer various levels of commission to buy and sell shares on an ad hoc basis, with smaller fees charged for regular investments where you invest a certain amount each month.
I use a service from a high street bank that is simple to use and charges a very low commission for regular investments. If I want to sell my shares, the commission is higher but I have no intention of selling these shares. My dividends are paid directly into my bank account and then I either use them to purchase more shares, or I direct that dividend to a different investment.
With interest rates being so low for regular savings, I choose to keep my cash in Premium Bonds. I know this will not make sense to some people as Premium Bonds do not generate a return as such, but rather pay out monthly prizes. My reasoning is that a typical cash savings account will generate just a few pounds for each thousand deposited. This is not really of any value. It’s a good idea to have some money that is fairly liquid and Premium Bonds offer that. I can sell the bonds and have the money in my account within a couple of weeks. For any major emergency I have a decent credit limit that I can use whilst those bonds are being sold. It’s difficult to envisage a situation where I need to pay for something that cannot be paid for by credit card until those funds are free. There is also the possibility that the bonds will win a big prize. To me, there is more value in a potential big prize than a definite insignificant return.
Education is the key to understanding the stock market.
I’m approaching a point at which I need to spread my wings and look at foreign investments. I don’t feel comfortable keeping all my eggs in the UK basket, especially with Brexit looming on the horizon (something I’m still not convinced will actually happen, but that’s a different subject). I think the next part of my financial education will be looking at how to invest in foreign markets without paying lots of commission. Whether or not Brexit actually happens, I don’t think we will see major capital gains in the UK stock market for a few years. I’m also concerned about investing in the US as I see their political situation as a powder keg ready to explode at any moment. Perhaps something in Europe or the Far East could be an idea, but I definitely need to do my research.
The only risk with investing is not doing the research. Investing without research is gambling. You might win, but you’ll probably lose. One of the best bits of advice I have discovered is that in any investment opportunity there is a winner and a loser. If you don’t understand the investment, then you are probably the loser and someone else is making money at your expense. There are two areas of a person’s financial life that should receive a lot of personal attention; your mortgage and your retirement. In my experience, these are the two things that people ignore or only give a small amount of attention to every so often. As some of you will know, I’m a mortgage advisor and I speak to people about mortgages for over thirty hours a week. It never ceases to amaze me how many people will base their decision, not on qualified advice, but rather the opinion of a friend or family member with no qualification or experience in the field.
Take control of your financial future. It does not cost much to learn, especially in the internet age where there is a vast library of information available for free. There really is no excuse for ignorance in 2018. I’ve included some links to some books that I have found useful in improving my financial education. I hope you will find them just as useful.
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