Matthew Yeates, Quantitative Investment Manager
New research from Seven Investment Management (7IM) has highlighted that many in the UK believe that early retirement is an impossible dream.
On average, people would like to retire at 62, but expect to have to keep on working until they are 67. One in seven are expecting to work to 75 and beyond, but only 4% actually like that idea.
A year on from the first survey we ran on pensions, we re-asked our questions to over 2,000 people and despite the raised profile of retirement saving following the introduction of pension freedoms and workplace pension schemes, little behaviour has changed.
Today some 35% are not saving anything, while a further 15% are unsure what their position is in reality and whether what they’re saving is the right amount. Some 12% admit to taking a ‘live for today’ approach rather than focussing on retirement plans – they’re not willing to forego pleasure today for happiness tomorrow.
Many are still having to ‘hope’ that everything will be okay in the end; 10% are looking to come into an inheritance, while one in 12 state that their issues will be resolved by downsizing and living off the differences in the values of their old and new homes. However, a study by the property company Savills in 2013 showed that downsizing from a typical three-bed to two-bed house would release £100,000 or more of equity in only 10% of UK locations.
Only one in ten say they are on track for a comfortable retirement. 39% admit they’ll probably need to increase the amount they’re saving.
For me though there is more of an immediate issue to look into. While we believe we need to talk about finances and encourage education about pensions, around a quarter (24%) don’t want to talk. Some 10% feel ‘caught in the headlights’, saying their limited understanding of retirement planning puts them off, and a further 18% say they try not to think about retirement planning because it makes them worry.
This lack of financial education is holding people back. While it does feel too scary an issue for many to think about, let alone talk about, I believe it’s a bit like the dentist. It’s not always as bad as we think it will be as we’re walking towards the surgery.
Working out what you need to do and, ideally, seeking financial advice can really help clarify your goals and attitudes to risk and put you on the path to a decent financial future. It’s great that people are in better health and longevity means that they can carry on working into their 70s. But a lot of people want to retire early and know they can’t – and for some retirement at any age is, unfortunately, just a dream.
According to our survey, just one in eight say they have consulted a professional adviser about their pension. The most common reason given for not taking advice was that they were in a workplace pension scheme (26%). Some 18% said they manage their own affairs; 15% felt their pension pot was not big enough; and 7% said they did not know how to find help. Some 12% blamed the costs and 6% said they did not trust anyone.
But even if you’re in a workplace pension scheme, taking a proactive approach is a good idea as you may need to do more. It will also help give you confidence in your approach and lower the level of anxiety – the nearly one in five people who tell us that they are anxious about their retirement future don’t need to be.
We calculate that saving £100 a month for 40 years in an investment fund generating 5% annual growth could give you nearly £150,000. Of that amount, you’re putting away £48,000 to achieve this. However, if you do nothing for 25 years, then you’d have to save more than £550 a month – setting around £100,000 aside in total – to catch up. It really is that simple.
Of course, you would have to take on board investment risk, and there are no guarantees available. Much of the advice out there is to take more risk at the outset as you technically have the time to be able to recover from any losses (given investments do go down as well as up) and reduce risk over time.
We’re challenging that thinking though, not least as this might be more than you are comfortable with and too many hits early on in your investing ‘career’ could put you off for life! This approach also ignores the fact that it is later in life, when your retirement pot is largest, that taking more investment risk is potentially most impactful.
Compounding is the process of generating return from both the capital you have put in and the investment gains you have already received. Early on there simply isn’t enough in the pot to build on until you’ve been investing a regular sum over a long period. At this point you’ve got more money ‘at stake’. Here compounding kicks in properly, and it’s also when you’ve also probably learned a thing or two about investment. So there is the potential for profits upon profits and investment risk to become meaningful compared to savings.
Now if this article were to prompt some pension planning…
