Retirement planning

Planning for a century

As more of us reach the age of 100, financial planning is vital to ensure we have enough money to fund our lifestyles through a potentially long retirement.

Reaching the age of 100 may seem a rather fanciful prospect but if you were born in 1974 in the UK, as I was, your chances of becoming a centenarian are 20.4% if you’re a woman and 13.9% if you’re a man. Based on the latest estimates from the United Nations, there were 593,000 centenarians around the world in 2021 and it’s a fast-growing age group. Studies estimate there could be 3.7 million centenarians alive by 2050.

Better healthcare and lifestyles around the world, along with luck in the genetic lottery, play a big part in increasing longevity. Yet there is still no way to accurately predict how long any of us will live and this is a crucial factor when it comes to planning your finances. How do you ensure you have enough money to fund your lifestyle through a potential 30-40 year retirement?

Here are six things to consider when preparing your wealth for a long life well lived:

1. Define your long-term financial goals

Talking about money and your aspirations with loved ones is key to understanding what you want from life – for yourself and your legacy. Defining this will help build a framework for managing your wealth to achieve these goals.

2. Make your pension a priority

Pensions can be one of the most efficient ways to save for your retirement, so it may be worth ensuring you make the most of your pension allowances. In the UK, the benefits include tax relief on your contributions and tax free growth of the investments within the pension. In addition, pension funds do not form part of your estate when you die and are therefore free from UK inheritance tax. If you have a number of pensions, it may be worth consolidating them, although the associated risks and charges should be considered. Taking advantage of ISAs is another tax-efficient strategy for long-term financial planning in the UK.

3. Invest for the long-term

The power of compounding and diversification make investing for the long-term one of the best ways to grow your wealth. Make sure you are comfortable with the investment risk in your personal portfolio, and it is suitably diversified to meet your needs.

4. Contingencies

If you live to age 100, there are likely to be a few unexpected events along the way. However, the financial impact of these can be considered and options such as life insurance, income protection and critical illness cover can help to protect your wealth and provide peace of mind for you and your family. Life expectancy may be improving but it is no guarantee of good health, so the possibility of long-term care should also be considered.

5. Estate planning and gifting

As well as managing your wealth during your lifetime, it’s important to consider how it will be managed after you’ve gone. The first step is to ensure you have an up-to-date will or wills (if you have assets in more than one jurisdiction). Whether you plan to pass your wealth on to your family or have philanthropic ambitions, considering your options and putting the right structures in place is vital to ensure a smooth, efficient transfer. Structures such as trusts, family investment companies and donor advised funds may be appropriate.

6. Make a wealth plan

Having considered your goals and values, creating a wealth plan will allow you to visualise the financial route you need to take – right up to age 100. Using specialist cashflow software, a wealth planner will work with you to define your current and future financial circumstances and align them to your goals and values, enabling more informed financial decisions. We call it ‘investing with purpose’. The future is never certain, and your wealth plan can explore various scenarios to stress test situations. This means you can be as prepared as possible for the unexpected. Your wealth plan should be flexible and with regular reviews it can be adapted as markets, fiscal regimes and your personal goals and circumstances evolve.

At Nedbank Private Wealth, we can partner with you to understand your financial goals and create the most appropriate wealth plan. We work with clients and their families around the world, in tandem with their professional advisers, to help them achieve a life well lived – all the way to 100 or more!

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand how wealth planning can help them achieve their financial goals and objectives, or call +44 (0)1624 645000 to speak to our client services team.

If you would like to find out more about how we can help you with retirement planning or more general wealth planning support, please contact us on the same number as above, or complete the contact us form using the link below.

Any examples of investments and structures used are for illustrative purposes only. The inclusion does not constitute an invitation or inducement to buy any financial investment or service. None of the content constitutes advice or a personal recommendation. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.

Simon Prescott

Simon heads up the wealth planning division for the international business. He works with clients and their families, in tandem with their professional advisers, to help structure their investments and other financial assets to achieve their goals and aspirations through the development of bespoke wealth plans. Working in partnership with our teams of private bankers, he integrates the benefits of wealth planning alongside our broader wealth management and wealth structuring capabilities.

Simon has over 24 years’ experience of delivering investment and planning advice, 15 of which have been with Nedbank Private Wealth. His appointment followed the establishment of bank’s wealth planning function, where he was instrumental in its design, build and implementation.

Simon holds the Level 7 Diploma in Advanced Financial Planning, the highest financial planning qualification in the UK, and is a Certified Financial Planner^TM, a Chartered Wealth Manager and a Chartered Fellow of the Chartered Institute for Securities & Investment.

Is retirement planning more important than ever?

Although retirement planning should be carried out as early as possible, many of us only seriously review our financial situation a few years before we plan to retire. Recent events, however, highlight regular reviews of your wealth are more important than ever, as Simon Prescott explains.

We are often reminded that – in the words of a former UK prime minister, Benjamin Disraeli – “Change is inevitable. Change is constant”. This has certainly been the case with regard to later life planning. Then add into the equation the increasing amount of time that we’re spending (money) in retirement, and substantial changes in our expectations for life as a retiree. Meanwhile, governments around the world are regularly reviewing the needs of their populations in retirement. Here, we highlight three changes that we think those coming up to retirement need to be aware of:

1. Longevity

We all question how long we will live for, and a lot of factors affect the outcome. These can be known (such as your ancestry and lifestyle) or beyond your control and foresight (such as medical developments). Meanwhile, as many of us underestimate how long we will live for, the situation becomes even more complex because we are planning for an undetermined timeline with a finite sum of money.

Given the number of unknowns, we believe it’s best to plan to the age of 100. Yes, this is above the current averages for life expectancy levels, but centenarians are a steadily growing demographic group.

Using the UK as an example, it is estimated there are currently 92,000 people aged 100 or older in the UK, up 44% since 2000. However, by 2041, the number of people in this group is expected to have grown by 78%. This is a particularly important consideration for women, who currently make up 80% of UK centenarians, and who may outlive their spouses by many years.

These are just some of the facts and statistics to be taken into account. In addition, for example, you also need to review the increasing chance of health risks – such as arthritis and dementia – that affect your quality of life and may result in you needing full-time care. These health risks have financial implications too, which should be discussed and factored into your planning.

2. Low interest rates remain relatively low, despite the increased cost of living

While interest rates have risen in a bid to curtail inflation, they still remain low compared to, say, the 1970s or 1980s. At the same time, we have seen stock market valuations fluctuate significantly.

This means the risks associated with investing remain a concern for many clients, not least since the returns derived from some investments are linked to the level of interest rates. This is particularly the case for those who have already retired and would struggle to generate a new income stream

Weighing alongside this has been the dramatic rise in the cost of living, particularly for basic costs such as energy and food.

And while many are confident that the cost of living will moderate – once the supply chain issues linked to the pandemic are finally resolved and the Russia-Ukraine war eventually ends – it is worth flagging that prices may continue to rise for other reasons, e.g. if the wage increases being demanded across many markets are subsequently priced into the cost of goods and services.

Taking into account all of the above, it’s likely that people may underestimate how much annual income they need over the long term or overestimate the level of withdrawals their portfolios can reasonably sustain.

3. Changing pension legislation

Over the past few years, governments around the world have updated pension legislation to adapt to ageing populations and other new trends. And they will continue to have to do so, particularly where individuals have insufficient savings. The UK is not alone in raising the qualifying age for state retirement benefits. Eligibility for Australia’s pension, for example, is rising from 65½ to 67 years by 2023.

And while small changes are regularly implemented – typically related to state pension payment levels and limits for the lifetime allowance – many have not thought through changes such as those introduced in 2015, which saw the pensions landscape in the UK changed radically as investors were no longer ‘forced’ to buy an annuity when they retired.

The new ‘freedoms’, however, mean there is no longer a definitive point when your funds are permanently transferred to an insurance product providing you with a set lifetime income (albeit typically with adjustments for inflation). This has implications for you as you will own all the responsibilities linked to drawing down on your pensions, entering that phase of life called decumulation.

Limited understanding of these changes, however, continues despite the intervening years and due to the complexities and risks (e.g. those of sequence, longevity and inflation) that come with the management of investments. But these are important matters to grasp to help ensure you enjoy a lifetime income over an indefinite period from a finite sum of money.

And as I started with a quote, it feels apt to finish with one. This time, it’s by American country singer and broadcaster Jimmy Dean, who stated: “I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.” This reflects the complexity of retirement planning, the balancing of multiple needs and aspirations and risks in order to achieve financial success in retirement.And whatever winds of change might sweep through the future life you have planned, we believe it’s important you should receive support as early as you can, ahead of retirement, in the form of a personal wealth plan. You should also make sure this is regularly reviewed, particularly as you approach the date when you’re looking to retire, and to reflect any changes in your circumstances, and those of your family. In providing the necessary details, it will allow you to live the life you aspire to in retirement and offer the flexibility to change tack as needed. Just get in touch for an initial conversation as we are here to help.

Sources: Australian Government, Financial Times; and Office for National Statistics

Simon Prescott

Are you part of the inheritance ‘SKI’ Club?

When it comes to your children’s inheritance, are you caught between a desire to provide enough financial security for their future while protecting them from over-entitlement? If so, you’re not alone. Perhaps it’s time to consider joining the inheritance SKI Club.

For many parents, leaving their children a financial nest egg to help safeguard their future is a key priority. We want to provide for our families and ensure their comfort and support them long after we’re gone.

But a growing number of high-profile, wealthy individuals are challenging some of the traditional assumptions about inheritance. It raises questions around whether more of us should join what the media has dubbed the SKI (Spend Kids’ Inheritance) Club.

Daniel Craig is the latest celebrity to shun the idea of passing on the majority of his multi-million-dollar wealth to his children, claiming he would rather “get rid of it or give it away” before he dies. “Isn’t there an old adage that, if you die a rich person, you’ve failed?” Craig asked in one interview. “I think Andrew Carnegie gave away what in today’s money would be about US$11 billion, which shows how rich he was because I’ll bet he kept some of it too. But I don’t want to leave great sums to the next generation. I think inheritance is quite distasteful.”

1. Help not hamper

Craig is not alone. Bill Gates, Andrew Lloyd Webber and Warren Buffet, among others, have all spoken about the importance of limiting the value of the inheritance they plan to pass on to future generations.

The debate goes beyond leaving what can be termed a ‘healthy’ inheritance, which provides financial support during your lifetime in the form of gifts, and can help provide stability for loved ones, as well as help cover the costs related to particular life stages. This could include your child buying a home, getting married or helping with the costs of grandchildren.

Instead, the focus aligns to Warren Buffet’s view, who is estimated to be worth more than US$100 billion, that children should not be left an inheritance so big as to hamper their own work ethic and personal levels of motivation. “Leave the children enough so that they can do anything, but not enough that they can do nothing,” he said, adding that his own adult children “pursue philanthropic efforts that involve both money and time.”

Bill Gates has gone further, apparently leaving his three children just US$10 million each – a “minuscule portion” of his wealth.

2. Striking a balance

Although we know money can help pave a path to a better life for your offspring, how do you find the middle ground between providing a financial cushion versus flat-out spoiling them?

For some, there are always going to be concerns that any gift might be frittered away on overgenerous purchases or pursuits. For others, meanwhile, the debate doesn’t focus on what to leave their children but when.

Even you don’t want to leave your children with a lump sum they may not be mature enough, as yet, to manage properly. There can be additional concerns around safeguarding large inheritances in the face of changing families, such as divorce.

Many parents, however, want to know how much of an inheritance is the optimal amount to leave to their children and when. The answers, of course, depend on your family’s personal and financial circumstances, but many agree it should be as much as the child has been prepared for.

This shifts the emphasis away from a discussion on the amounts of money to be transferred as children hit set birthdays or milestones in life, but rather the readiness of the children to receive that money. But when is enough enough?

3. Reframing the inheritance

One way is to use money to encourage an attitude towards compassion in our children and enable a channel for them to use family resources in a way that could make the world a better place. In addition, by repositioning inheritances as support for multiple future generations (and not just themselves), it also moves you all away from a stance that is set in stone – not least as we are learning new things about the world all the time.

Through the use of philanthropy you can also help your children really understand the impact of wealth. Here, setting up a donor advised fund or a foundation can be an alternative option to leaving a large, direct inheritance and can ensure at least a portion of your estate is used for good. And smaller initial sums can also be a way to give your child autonomy in a charitable endeavour, while ensuring they remain self-motivated in their career.

Discussions around money are often, of course, emotionally loaded. Here, it can be helpful to enlist support from professional advisers, who can help you navigate the potential pitfalls and ensure that you and your family are on the same page with regard to your financial wishes.

4. Bequeathing based on results

While the media depiction of the SKI Club conjures up images of celebrities extravagantly spending or giving away their fortunes, leaving penniless children behind after their deaths, the reality is different.

As well as deciding on the amount you want – and are able – to pass on to your children, it’s important to consider the alternatives that can help incentivise a strong work ethic for a time when you’re not around to say no.

One way of doing this is by setting out a plan detailing when more money may be gifted based on a pre-agreed set of parameters. While these are probably not best graded as a ‘test’ per se, there are opportunities to release funds to your children in an approach that aligns with their income.

5. Plan to be happy

In a world where more is often considered to be better and where we strive to give our children the best chance in life, limiting or reducing the inheritance you leave behind can feel counter-intuitive. However, with increased life expectancy, considering your own future needs – including a detailed wealth plan that covers day-to-day living expenses, as well as those you don’t want to consider, such as rising healthcare costs, and any unanticipated income needs – before settling on how much your children will inherit is vital.

Whatever your concerns, priorities or wishes around the money you leave behind, it’s important to communicate these to your family and ensure the approach is in everyone’s best interests, and there are multiple mechanisms to do this.

It’s also a conversation that I and my colleagues on the private banking team – as well as our wealth planners – have been pulled into, as we can help to facilitate the conversations and also be the ones that appear to be encouraging you to err on the side of caution. And we are equally happy sitting down separately with your children and helping them with financial education and where the emphasis should be in the future. All we want to ensure is that the approach you take is one that aligns to your wishes. It’s you who is the giver.

Sources: (1) Business Wire; (2) CNBC; and (3) The Independent.

Carlo Lourenco

Carlo joined the London office in 2010, and has over 20 years’ experience managing the complex affairs of high-net-worth clients. He takes pride in developing close relationships with his clients and intermediaries by listening and always placing their interests and needs at the forefront of his thinking.

Prior to joining Nedbank Private Wealth, Carlo worked for 10 years at Coutts & Co. He is a Member of the Chartered Institute for Securities & Investment.

Do you want to leave a legacy?

A true family legacy is more than the money you leave your loved ones. It’s about passing on a unique set of values, beliefs and purpose to the next generation. But while the wealth industry talks about ‘the great wealth transfer’, we look at what it actually takes to make succession a success.

Planning what happens after your death can be uncomfortable. Yes, you’re preparing and reviewing your will to ensure practicalities are dealt with and your assets are distributed according to your wishes. But it can be tough. It’s even more difficult to have conversations with loved ones about the less tangible things that really matter, like your legacy.

For some, the notion of legacy planning gets confused with estate planning given it’s another set of instructions about what happens to your assets and ‘chattels’ (i.e. belongings) when you die. For others, leaving a legacy feels like an approach reserved for the ultra-rich or (in)famous celebrities.

The real intention, however, is that you ensure the beliefs and principles that have underpinned the creation of family wealth are passed on to the next generation, which is just as important as ensuring assets pass as tax-efficiently as possible. It can provide immense comfort and reassurance that the wealth that you’ve worked so hard to grow and protect will continue to be used, or invested, according to the values you’ve espoused.

So, what does it take to ensure your succession plan is a success?

1. Connect the generations

There are so many challenges in today’s world. Families grow and relationships may quickly become complex and diverse – multiple marriages, family disagreements and blended families are just some of the reasons. Today’s work presents multiple challenges to succession plans and can dilute the values that are important. As Mary Humphreys, senior manager at Nedgroup Trust, explained in a recent webinar: “A lack of family connectivity can threaten the success of the generational wealth transfer, as the following generations are too removed from those who created the wealth.”

Despite these challenges, we know there are a number of ways you can create and build your legacy. It ‘simply’ involves helping successive generations to understand your motivations and values, and to consider your principles as a guide when making decisions.

And while this isn’t always the easiest of hurdles benefactors face, it’s not actually that difficult if you frame your history (and that of your money) as a story – and one which doesn’t have to rival the intricacies of War and Peace given it boasts nearly 600 characters.

2. Have a conversation

With families often becoming more complex, speaking to your family about what matters to you is a good starting point. Sharing the origin of the family business or its wealth, helping them to understand how the financial aspects have grown, what decisions you’ve taken at key moments, and the issues that are important to you, can help them be part of the narrative.

Over the years, this can help articulate a set of values that become family values.

And even if the topic is not something you’ve discussed before, it’s never too late. Just opening a conversation about the practicalities of transferring your wealth could provide a useful starting point.

3. Prepare a letter or statement of wishes

hether you are a natural narrator or not, another starting point can be to write a letter/statement of wishes to help formalise what’s important to you and how you would like your wealth to be managed after your death.

Many people find these useful as they are not legally binding and do not need to overcome the same hurdles that drafting a will requires. As such, creating and reviewing your statement of wishes alongside your will is a good idea, not least as it is confidential and will not be published, as a will currently is post probate.

In our view, Peter de Vena Franks, campaign director at Will Aid, summed it up nicely when he stated: “[a letter of wishes can] be key to managing family expectations, wealth, the family business and general family dynamics”¹.

Your statement of wishes can help guide and explain decisions made around the distribution of assets and provide a template for you to guide the preservation, protection and growth of the family wealth in line with your values.

4. Establish more formal structures

While you may already deem the discussion to be complex, and investment and wealth structures would add to that complexity, it’s worth considering the various options available to help protect and preserve assets, not least as these can also help instil family values into future generations.

One relatively simple option for UK families is establishing a donor advised funds, which can help you embrace philanthropy without the administrative and regulatory burden of a foundation.

Donor advised funds can be set up through a specialist provider to deliver a cost-effective, tax-efficient way to invest in causes that are important to you.

There is also the option of setting up philanthropic funds through a foundation or a focused family investment company, which can be useful for those who want to leave behind a broader philanthropic legacy or who hold a particular cause dear. Adding family members from successive generations as part of the decision, or oversight, process can also help ensure they are on board with your enduring aims and values, and can provide everyone involved with a deeper insight into what the family wealth means and what it can achieve.

No longer the preserve of the ultra-wealthy, family office service providers can help establish a deep sense of connection within the family, helping to manage different personalities, entrenching core values and helping to educate the next generations on the guiding principles surrounding family wealth. Providing a structured environment and supported by a family officer, they can be a key part of next generation planning and uphold a family vision of future wealth.

And, if you or your spouse are not from the UK, leaving your wealth in trust can help you retain some control over how your wealth is managed after your death through the involvement of trustees, who are (professionally) mandated to manage and oversee the distribution of assets in accordance with the terms set out in your trust deed [also known as a trust instrument in some locations]. Here too, you can guide these individuals through pre-set controls, and set out the values and purpose behind your wealth with a letter or statement of wishes that can put in place the approach that can be maintained in the future.

Whatever you want your legacy to be, the key to making it happen and ensuring that your successors uphold it, is to start having conversations about the stories behind your family wealth – how it was built, what it means to you and why you made the choices you’ve made along the way. Share your values with them and help everyone really understand what your wishes, hopes and ambitions for the future are.

If having those conversations feels overwhelming, or you just need a little support to get started, we can help by facilitating those discussions, helping you establish a clear idea of what’s important to you and how best to express that and – only then – determining how best to share it with the next generation.

If you would like to find out more about how we can help you with wealth planning support, or specifically help planning your retirement, please contact us on the same number as above, or complete the contact us form using the link below.

Simon Prescott

How long will you spend in retirement?

Thinking through life in retirement is complex because we are planning for an undetermined period in life with a finite sum of money. However, even if you know when you will retire and understand how your finances might map out, longevity remains an important influence on the quality of life as Simon Prescott explains.

It is only in modern times that large numbers of people globally have been able to enjoy a stage of life known as retirement. The time from when we stop work and become a retiree has increased significantly in the last 100 years.

In the UK, if we look back to the early 1900s, life expectancy at birth was around age 47 for a man and age 50 for a women. However, back then, a great many people born unfortunately died in childhood. It was only if you survived childhood you had a good chance to live to your 50s or early 60s, but that still did not translate into any length of time in retirement. Since then, living standards have risen substantially and, with the progress in healthcare, nutrition and clean water, life expectancy at birth is now 79 for a man and 83 for a woman. This incredible progress is set to continue, albeit at a slower pace.

This is still someway off the record for the oldest person in the world, who died in 1997 at the amazing age of 122 (Jeanne Calment), but I am not overly convinced that many of us would actually like to live for that length of time given the increasing number of challenges it would bring.

A study of individuals on their death beds asked what they regretted in life. Very few stated that they were disappointed due to anything that they ‘did’ in life. Instead, the regrets were what they ‘didn’t’ do: didn’t holiday enough; didn’t finish work early enough to spend time with the family; didn’t buy their dream yacht; etc.

Okay, it’s easier to look back and realise what could have been possible, but what is key here is hindsight. It would be significantly easier if we could look forward and deal with the difficult question – how long will I live?

If you live in the UK, the Office of National Statistics is a good starting point. The numbers show that if you’re a 60 year old man, your life expectancy is 85. If you’re a woman, it is 87. These are averages, so there is a 50% chance you will die younger and 50% older, but these figures also include some of the poorest in society who, sadly, do die younger. The highest life expectancy is among people who live in Kensington, the lowest is among Glaswegians.

On a percentage basis, the chance of a 60 year old man reaching 100 in the UK is 9.5% whereas, for a woman, it’s higher at 14.5%. Interestingly, this rises further since longevity increases as you age. If a man reaches his 80 birthday, his life expectancy increases to 89. If he reaches 90, it goes up to 95!

When considering a mixed sex couple both aged 60, the chances that one of them reaches 100 is 24% (one in four). So, although there are currently over 14,400 centenarians living in the UK, this is anticipated to rise to over 21,000 by 2030. That’s a lot of cards being sent out by the monarch.

Despite this evidence, many believe we are not going to live for a long time, underestimating life expectancy. This can lead to spending too much of your investments, pensions and savings early on in retirement, leaving too little to enjoy later on in life. And remember it is extremely important if you are married or in a partnership, to consider the survival probability for couples rather than for an individual. Planning using life expectancy rates for one person only may spell financial ruin for the other.

Life expectancy at birth (years) for selected counties

600

Source: UN

The additional time we now have to enjoy in retirement is great, but what impact could these extra years have on your wealth? A topical factor is inflation, sometimes called the ‘thief that keeps on taking’.

If you have opened a newspaper recently and turned to the financial pages, it is highly likely that headlines will have focused on the increasing inflation figures being published around the world and whether these elevated rates will be temporary or stubbornly remain over a prolonged period.

Over a long time, the compounding effect of inflation can have a significant impact on the real value of your money. For example, an inflation rate of 3% per annum over 25 years erodes the real value of money by more than half!

During your working life and when you are accumulating your assets, the income you’re earning and the inflow of new funds tend to hide the real effect of inflation. So, you only really become aware of its ravages when you have lower levels of income, such as in retirement.

Another major factor is health, many of these additional years may be spent in poor health. While Jeanne Calment is an extreme example, I don’t think any of us assume her last 20 years involved early morning skiing sessions or long holidays. However, what would be needed is a level of income and assets to ensure comfort and a continued enjoyment of life, albeit at a much slower pace.

Daniel Ives, a former University of Cambridge biologist who researches cellular ageing, summed it up succinctly by highlighting that it’s “not living longer but dying longer”. And the level of wealth can contribute to your level of health, with healthy life expectancy at birth differing by 12 years between the best and worst local UK authorities, as an example.

Regardless of whether you end up having an average life expectancy, or you become one of the future centenarians, there are implications. And while those due to underestimating your life are understandable, on the flip side, being too cautious or not maximising use of your various savings and investments throughout your expected life could also leads to regrets. It could mean you’re not living life to the fullest, or you could leave a much larger estate for inheritance tax purposes behind than was necessary.

Whatever age you reach, we can help you plan to meet your future goals and aspirations. Through the use of cashflow planning, we can help determine what finances you are likely to need in early retirement, what should be set aside for a comfortable later life, and what can be gifted to children, grandchildren or charitable causes without the recipients of your generosity having to first wait for your demise.

You never know, a plan for your wealth would likely also help with a plan for health, and that’s certainly a conversation for starters!

Simon Prescott

Achieving financial success in retirement

In this webinar, we explain what clients should be aware of as they transition from a career, or running a company, to retirement, and how they might achieve financial success in a phase of life called decumulation.

Many of our clients have worked hard during their lives to grow their investments, pensions and savings so they can enjoy financial independence in retirement. But how can you make sure you will have enough to live off over a period which may span 30 to 40 years, given the many risks facing retirees? The answer lies in a dedicated financial planning and investment approach that seeks to help you understand those risks, how they can be managed and what plans you can put in place to enjoy your retirement in the lifestyle to which you’ve become accustomed. It’s a solution only available via a few wealth managers.

During this webinar, we explain the importance of transitioning from your time in a career, or running a company – known as the accumulation phase of life – to the time when you draw down on your assets in retirement – known as decumulation.

We also highlighted the other opportunities that the planning process should offer in terms of ensuring your withdrawals are sustainable, while also considering your plans for helping out your children and leaving a legacy.

This webinar is part of a series of articles and updates provided to help you understand the complexities linked to life as a retiree. More articles and updates can be accessed here, as well as details of our retirement planning support.

Any examples of investments and structures used are for illustrative purposes only. This webinar does not constitute an invitation or inducement to buy any financial investment or service. None of the information constitutes advice or a personal recommendation. Individuals should seek professional advice, based on their jurisdiction and personal circumstances, before making any financial decision.

Simon Prescott

Decumulation matters for retirees

As the number of people and timelines in retirement grows, how can we ensure that the funds we have accumulated in investments, pensions and savings will cover us to the end of our days in decumulation, even if we won’t give up work?

There are financial needs and goals at every stage of life, and a well-structured wealth plan, that is unique to you, will help you progress and, ultimately, achieve these goals. By the time you reach your 50s and 60s, having accumulated sufficient wealth for your retirement, the hard work is now done and you have reached one of your goals – to retire. Your plan is complete. Or is it?

The answer is not necessarily. This is because the time spent as a retiree, having taken steps to slow down the pace of life, is actually far more of a challenge financially than your life to date. You have reached a potentially complex stage called decumulation.

The dilemmas you face are partly due to the number of decisions you have to balance when relying on your accumulated, but potentially finite, investments, pensions and savings to either completely fund your spending needs, or top up your reduced earnings as your sources of earned income become fewer.

As well as the ramifications of becoming increasingly reliant on your investments, pensions and savings – sometimes for 40 years or more – complexity also lies in the number of additional risks you become exposed to beyond those categorised as investment risk.

So what risks should I be aware of?

Although most conversations you have about risk actually focus on the umbrella category of investment risk – which still applies in decumulation – we believe there are three additional key risks you should understand:

1. Inflation risk

If you have opened a newspaper recently and turned to the financial pages, it is highly likely that many of the headlines will have focused on inflation. The debate centres around whether the price increases (under the banner of inflation) are likely to be temporary (i.e. the rate of increases will start to quickly decline as ‘normal’ economic activity returns) or whether the higher levels recently experienced will continue over a prolonged period.

Inflation can be called the ‘thief that keeps on taking’. Compounded over a long time, inflation can have a significant impact on the real value of your money. An inflation rate of 3% per annum over 10 years, as an example, actually means the value of money is eroded by around a third.

During accumulation, any additional income earned and new funds tend to hide the real effect of inflation. So, you only really become aware of the ravages when you have lower levels of income.

Inflation is most concerning when the rate is higher than the return generated by any low risk investments you may hold – and the longer inflation increases remain, the more likely it is for those price increases to perpetuate themselves. Unfortunately, in modern times, people are not used to having to deal with inflation and may struggle. If you live in the UK, as an example, inflation has been relatively benign since the mid-90s, so why would you have dealt with it?

Regardless of the debate being forged by central banks, it is also worth understanding that your own level of spending determines your personal level of inflation, depending on the goods and services you’re buying. You could even find your inflation rate is actually higher than the monthly figure published by your national government.

2. Longevity risk

Medical advances and an ever increasing understanding of how we can maintain better health mean we are typically living longer than ever before. The benefits of being active for many more years and spending more time with loved ones are clear, but they come with the risk you could outlast your wealth.

A couple in their early 60s today – and it’s estimated that about 75% of the UK population are part of a couple – has a 25% chance that at least one of them may join the exclusive club of centenarians. Many people doubt their chances of living past their 100^th birthday, but it’s a probability you should take into account to ensure your financial future stands the test of time.

3. Sequence risk

Often confused with volatility – which is the measure of market increases and decreases in value – sequence risk is the more pernicious and is not very well understood. The risk is created by a combination of the sequence in which returns are generated and by continual withdrawals from the portfolio. If investment returns are weak in the earlier years of retirement, coupled with unsustainably high withdrawals, the two can dramatically impact the long-term value of your portfolio, irrespective of whether you see higher investment returns later on in your retirement journey.

Sequence risk is generally highest at the start of the decumulation stage, when you begin to rely on your financial assets to fund your spending and when your time horizon is the longest.

However, while sequence risk is often a matter of luck, there are steps you can take to mitigate its impact.

So what help is available?

One of the questions we recommend any client should ask their wealth manager is whether they have specific services aimed at supporting them throughout retirement. Many don’t, as they have a focus on investing in accumulation, and yet the various aspects at play and the balance you need to achieve in retirement mean you should seek a specific service which focuses on decumulation.

In addition, throughout the accumulation stage, you may have taken advantage of the tax allowances, exemptions and reliefs available to you, and invested your money into vehicles, such as ISAs and pensions. In retirement, it is just as important, if not more so, to use these as thoroughly as possible. As such, it is essential you withdraw from your investments in a particular order that will be unique to your circumstances.

For example, it is often the case that drawing from the least tax-efficient investments first is prudent. This allows the more tax-efficient investments to grow and reduces the effects of the cost of tax dragging on your investment returns. However, it is vital you understand your overall goals before determining which investment to draw on first. Say, for example, you are planning for the next generation, you may want to leave your pension untouched given these are considered to be outside of your estate for inheritance tax purposes.

Active investment management is key

In addition to the wealth planning support, you should make sure your investment portfolios are being actively managed. Not only will active asset allocation help mitigate the effects of inflation risk, which we described earlier, but it will also help you benefit from the various underlying characteristics of individual asset classes. For example, an asset class we regularly invest into is property.

Our difference, however, is we would always seek to do so via investment trusts. These can be sold down even in very volatile markets due to their closed-ended nature, and at times when other (open-ended) property funds are likely to quickly be gated, as we saw in the months following the Vote to Leave in 2016 and again in 2020. The easily accessible, liquid nature of investment trusts is extremely important to retirees in decumulation, given you could need to access your investments at any time.

In addition to the use of active asset allocation in generating returns, an important aspect of meeting retirement withdrawals is rebalancing. While the approach is not relevant for every client, many would benefit from a dual portfolio approach, where your portfolio would be split and managed across two levels of risk.

In this scenario, the cautious risk portfolio has the objective of lower-volatility, steady returns to meet your withdrawal profile, while the higher risk portfolio aims to provide longer-term growth over your retirement period. The more cautious portfolio serves to protect more of your capital from large market movements, due to the mix of asset classes typically held, and helps to mitigate sequence risk. The second, higher-risk portfolio, meanwhile, is usually invested in riskier assets, such as equities and property, which help you to manage both inflation and longevity risks.

Active rebalancing from the higher risk portfolio to the more cautious risk portfolio needs to be undertaken when the time is appropriate to ensure that the level of investment risk across both portfolios is in line with your overall risk profile and tolerance. Through the dual portfolio approach, active investment management and active rebalancing can help overcome the competing risks of longevity and sequence.

Ultimately, however, we also realise that many of the reasons behind your choice of a wealth manager is not just down to their technical expertise, but also whether they have really listened to your needs and treat you as a valued client – and not just a number. You also need to be confident that the same due care and attention will be paid to you today will continued to be the case in the decades to come, year in and year out – an approach we are always happy to explain.

This article is part of a series of updates written to help you understand the complexities linked to life as a retiree. More articles and updates can be accessed here, as well as details of our retirement planning support.

If you would like to find out more about how we can help you with wealth planning support, or specifically support when planning your retirement, please contact us on the same number as above, or complete the contact us form using the link below.

We do not offer a tax advisory service and nothing in this article constitutes tax advice. We would always recommend you seek professional tax advice in relation to the impact of any investment structure or transaction on your personal tax position. We are, however, happy to work with your tax advisers, or to provide an introduction to a suitable tax adviser should you wish.

Simon Prescott

Is early retirement a wise choice?

Cameron Walker examines what retirement means today, and considers whether early retirement or remaining in work for longer is the wisest option.

In the history of man, retirement is a relatively new concept. Looking up the term in a dictionary, it defines a state in which people retire as they have either reached a predetermined age or are not healthy enough to continue working. This definition naturally leads to a huge number of different scenarios, but this divergence is amplified further given we probably have our own personal timeline as to when we will retire as well.

Whatever that timeline is, we then need to look to the standards that society sets out. In the UK, as an example, that timeline has changed over the last few years, pushing the current state retirement age of 66 (up from 65 in October 2020) gradually up to 67 for those retiring between 6 April 2026 and 5 April 2028 – adding a month to the current date for every month.

There is a further incremental increase planned to push the date out to 68 if you retire between 2037 and 2039. And, although this won’t be confirmed until July 2023, there are no guarantees that there will not be further changes – after all, the age of 68 was only originally due to come in between 2044 and 2046 – seven years later.

Even if you will not be planning to live off the state pension, it can be useful to cover the bare basics, not least given the current age of 55 (when you can start to access a private pension scheme) is also set to change to 57 on 6 April 2028, meaning the gap between private and state pension ages reverts back to 10 years.

But people have very different views on when they want to retire, and while you may have accumulated sufficient wealth, there may be concerns that the lower level of activity – mental and physical – are valid reasons to retire sometime in your mid 60s. Conversely, post the pandemic, many have thought through what they want from life and decided they want to stop working as soon as is practicably possible, even if it means adopting an extreme saving and investment formula, known as Financial Independence, Retire Early (FIRE), which sees people put away 25% to 50% of their income.

For those keen to retire early, a 2017 study from the University of Amsterdam will be welcomed as it suggested those retiring early could enjoy a longer life. The study focused on Dutch civil servants, with those taking the option to retire early 42% less likely to die within five years than those that chose to remain in work. I am sure that those who have felt pressure from work-related stress, which in turn can lead to hypertension and the risk of associated conditions, such as strokes or cardiovascular disease, can see the upside.

However, there were flaws as the sample for the research was predominantly male. While various other European studies have supported some of the perceived health benefits of retiring early, there is a considerable weight of conflicting research.

These studies flag the potential downside of leaving a stimulating, demanding and well-paid career, to ‘starting’ a life with less focus and, possibly, limited means of earning new income. Many people’s social lives revolve around work and once that timetable is removed, it can be more difficult to remain active and involved socially, and, in turn, avoid the resultant pitfalls of depression and low self-esteem.

In addition, the extra hours of newfound freedom need to be filled and there are often financial implications tied to the need to find something to do for the 168 hours there are in a week.

The reason there isn’t a definitive conclusion from research is partially due to the sheer volume of potential scenarios, and we can all dismiss the results since many view research as lies, damned lies and statistics. It also links back to my first point that having a choice on when to stop working and embrace a life of leisure is a relatively recent concept.

The UK state pension and an official state retirement date were only introduced in 1908 with The Old Age Pension Act. In that year, only one in four people reached the age of 70, and people tended to die on average 23 years before ever reaching the official retirement age!

The current system was introduced in 1948, when a 65 year old could expect to spend 13.5 years receiving the benefit.

By 2016, people were spending an average of 24 years in retirement. And, although the figure for 2018 showed a slight drop to an average of 21 years on a pension, this was due to the UK state pension age being equalised at 65 years for men and women in 2018.

The chart below shows the official state retirement age and the years of anticipated pension pay out based on life expectancy at birth.

Average years spent in retirement

Longevity is also difficult to pin down as life expectancy doesn’t stand still. A 65 year old in England could expect to live on average to almost 84 if they’re a man, while if they’re a woman they could expect on average to live to 86. However, the longer you live, the longer you’re likely to keep on living. If our 65 year old man was 70 today, he could expect to live to nearly 86.

So what does this mean for you?

The earlier you start to think what you want from your retirement, the sooner you can put in place a plan to achieve it. In addition, it is worthwhile seeing retirement as a new phase in life with new challenges and opportunities, and determining how to make the most of these. With this in mind, we believe you need to ask yourself three simple questions:

What does retirement mean to me?
How do I want to live?
How much income will I need to achieve this?

The question missing here is how long will I live in retirement – a question no one can accurately answer, even with lots of data about your lifestyle and your family’s longevity. In reality, there is nothing you can do to guarantee a longer life, although there are steps you can take to ensure you get the retirement you wish for, however long it lasts.

Clients of Nedbank Private Wealth can get in touch with their private banker directly to understand to answer your questions and help you make more informed financial decisions on what is right for you, or call +44 (0)1624 645000 to speak to our client services team. Our cashflow modelling software helps you plan and adapt to real life events by highlighting whether your future income, from investments or other sources, will cover your anticipated financial needs. It also forms part of our retirement planning support.

If you would like to find out more about how we can help clients manage their wealth, please contact us on the same number as above, or complete a form using the links towards the end of the page.

Any examples of investments and structures used are for illustrative purposes only. This article does not constitute an invitation or inducement to buy any financial investment or service. None of the information constitutes advice or a personal recommendation.

Cameron Walker

Cameron began his career with Nedbank Private Wealth as a private banker in 2002 and has more than 25 years of industry experience.

In his current role as head of private banking in Jersey, Cameron has responsibility for our team of wealth management professionals on the island, building long-term relationships through delivery of excellent client experiences. He is also responsible for leading our relationship with Nedbank Private Wealth in South Africa, a key strategic partner for whom we provide international custody, managed investments and banking services. Cameron continues to maintain a number of client relationships, ensuring our services evolve with clients’ changing needs.

Cameron is a Chartered Member of the Chartered Institute for Securities & Investment.

Simon Prescott,

1. Define your long-term financial goals

2. Make your pension a priority

3. Invest for the long-term

4. Contingencies

5. Estate planning and gifting

6. Make a wealth plan

STAY UPDATED BY EMAIL

About the author

Simon Prescott

Simon Prescott

Connect

Biography

Simon Prescott,

1. Longevity

2. Low interest rates remain relatively low, despite the increased cost of living

3. Changing pension legislation

STAY UPDATED BY EMAIL

About the author

Simon Prescott

Simon Prescott

Connect

Biography

Carlo Lourenco,

1. Help not hamper

2. Striking a balance

3. Reframing the inheritance

4. Bequeathing based on results

5. Plan to be happy

STAY UPDATED BY EMAIL

About the author

Carlo Lourenco

Carlo Lourenco

Connect

Biography

Simon Prescott,

1. Connect the generations

2. Have a conversation

3. Prepare a letter or statement of wishes

4. Establish more formal structures

STAY UPDATED BY EMAIL

About the author

Simon Prescott

Simon Prescott

Connect

Biography

Simon Prescott,

Life expectancy at birth (years) for selected counties

STAY UPDATED BY EMAIL

About the author

Simon Prescott

Simon Prescott

Connect

Biography

Simon Prescott,

WANT TO KNOW MORE ABOUT WEALTH PLANNING?

About the author

Simon Prescott

Simon Prescott

Connect

Biography

Simon Prescott,

So what risks should I be aware of?

So what help is available?

Active investment management is key

SIGN UP TO OUR WEALTH PLANNING UPDATES

About the author

Simon Prescott

Simon Prescott

Connect

Biography

Cameron Walker,

Average years spent in retirement

So what does this mean for you?

SIGN UP TO OUR WEALTH PLANNING UPDATES

About the author

Cameron Walker

Cameron Walker

Connect

Biography