Transcript: Financial planning for retirement
Shirley: Hello, I'm Shirley Ballas and welcome to Rewirement, the retirement podcast from Legal & General. I'm on a mission to help you reset, reinvent, rewire for the retirement you want. Every fortnight I'm joined by fabulous retirees and would- be retirees, with their own unique take on retirement.
Tracy: Now that I'm entering my 50s, maybe it's a rite of passage and I need to start talking about these things with my friends.
Shirley: Plus my brilliant panel of experts will be diving in to tackle the big questions. They’ll share their suggestions to help make your post- work years the most exciting of all. There’s a reason this program’s called Rewirement. For many people, retirement involves a change of pace, a different outlook and a different day- to- day. But before you get there, it's important to put yourself in the best position possible, both financially and in your attitude to money. Fortunately, the experts are here to tell you what you can do at any age to get yourself ready and steady before retirement day comes. Emma Byron and Holly Mackay will be with me in the studio later, but first let's catch up on our retirement planning friends. I’m chatting to Debbie today.
Debbie: My name’s Debbie. I’m 50- years- old and I am still working. I think this time of life is particularly exciting because I feel financially more comfortable than I have done in the past. The children are less reliant on me, on us, should I say? And we're now looking forward to retiring sooner rather than later, and hopefully enjoying it while we still have the physical capacity to do so.
Shirley: She’s only just beginning her journey to working out her retirement finances. And I wanted to know what sort of questions are in her head. Debbie, what else do you think needs to be done to help you get to a place where you're really comfortable with your retirement plan?
Debbie: I think, first of all, I need to work out exactly how much I currently have. So, find all my pension pots, actually get answers about what the yield is going to be when I do retire and plan that way. Maybe it's time at the moment while we're relatively secure, touch every piece of wood I can find, to put more aside, maybe that's the answer, maybe I'll have to do that. I think if everything went tomorrow and we had to retire, we would downsize and we'd be okay, because again, it's down to house property value, isn't it? So, our house, if we sold it now, we could get something in the West Country, much smaller for a lot less money and be mortgage free. So, there's always that kind of safety net, if you like, but yes, maybe we should be putting more away.
But the other thing is that the retirement age, I mean, when will that be? When realistically, can you look to retire? It's so different now to how it used to be. I mean, my husband's a police officer, but he hasn't been in the force since he left school. So, the usual rule is 30 years and that's it, you retire, but he hasn't got that because he started so late. So, he's going to have to keep going until he's reached a certain amount of pension that he's built up. I don't know how long I'll have to work before I've got a decent amount saved up. It's all very different, very different now.
Shirley: Today’s society is a lot different. Isn’t it? Most people aren't thinking about that and what's going to happen when they turn 60 or how they're going to manage, well, not the groups of people I talk to, anyway. Debbie, when you retire, how much money do you think you're going to need? Would it be 80% of what you're earning at the moment, 50% of what you're earning? What do you think you will need when you retire, to live on?
Debbie: I honestly don't know, we haven't sat down and done the sums. I think we've always been assuming that because of my husband's final salary pension, we will be able to pay off the mortgage. So, in my head, whatever we've got from pension income from that point will have to do, and that's kind of where I'm at and that's probably not the best way to look at it. I should be thinking ahead more. But I think once the house is paid off, everything else you can make do with. I'm in a situation where, because I've worked in so many different places, I've got lots of little bits of pension and savings and stuff all over the place. And quite recently, actually, I tried to get it all in one place and I'm still doing that, and I absolutely hear you. It is so important for everyone to know where everything is, because if I can't keep track of it, no one's got a hope when I go.
Shirley: That's exactly what I'm going to do as well. Debbie, is it good to talk about money? Are you comfortable talking about money with your husband and your children?
Debbie: Yes. Very comfortable talking to my husband about it. That’s absolutely no problem at all. I think, as a society, we don't really talk about money, especially retirement and the savings and insurance and things like that. As you said, it goes back to death, doesn't it? People don't want to talk about that kind of thing, but I think that people should talk about it. I actually had a financial advisor in my very first job, so I was 21, and he came in and he talked to me very, very rationally about what I ought to be doing at that stage, and of course, I didn't, but I did make a start. And I think the more people that know about that early on and actually take it on board and listen and do something about it, they'll be a much better position when they get to retirement.
Shirley: Is there anything you would change moving forward?
Debbie: Yes. I think I'm probably going to consider my kids more. It is a completely different state of play now with the kids growing up and getting onto the property ladder.
Shirley: So, Debbie, what the most pressing questions you have around financial planning for retirement and what questions do you think others will also be confused over?
Debbie: I'm not a 100% clear exactly, at the moment, what I will end up getting when I do retire. And I'm aware that things change as life goes on, and rates change and go up and down, and investments change. Bearing in mind, I have quite a few different pots of money in different places, it's not a 100% clear what I'm looking at. I'd like a little bit more education, really, and to understand more what each of these pots of money does, how it performs and what the effects of different things in the economy is going to have on it.
Shirley: Colin and Tracy are still working, but have a few options on their plate. I asked them to compare notes on where they seek advice.
Tracy: In the past, I have spoken to an independent consultant, many years ago, actually. And I think that was recommended through a friend. But I think my current context, at the moment, I haven't really sought advice in terms of where I'm sitting now, because it was a few years ago. I probably could go online and get some advice via the teacher's pensions, government pension, and maybe get in touch with people there to find out a bit more about what it's going to look like and what my options would be. I prefer face- to- face, though, and talking with somebody. So, I feel as though, perhaps, I haven't sought as much advice as I should have done because I don't know at the moment what my options are. I would probably go back to teacher's pension and maybe try and get another independent financial advisor, perhaps, to talk about ways forward and what it will look like in the future.
And surely, there must be some sort of badge of ... That they would be accredited to or signed up to, to know that they are a good financial advisor, providing robust advice and legal advice to you. Now, I don't usually talk about such matters with my friends, but perhaps we should, now that I'm entering my 50s, maybe it's a rite of passage and I need to start talking about these things with my friends.
Shirley: I mean, you don't have to tell them what you're worth. You don't need to say how much money you've got or what you're thinking about investing. You can just have a conversation about investment, about pension policies, about the future. What did they do for their children? What are they thinking about doing for their children? What are they leaving? Or talk about the mortgage, is it paid off? Isn’t it paid off? I think the more that you can communicate, the easier these decisions are to make.
Tracy: Talking about it is only going to help. Isn’t it?
Shirley: Colin, where do you seek your advice when it comes to your pension plans? Do you have anybody special, anybody in mind?
Colin: I did have, when I first set up the schemes, when I first started my unlimited company, there was a financial advisor, who'd been recommended to me by a friend who was just round the corner from where I worked. And I worked there for about seven years and it probably isn't a coincidence, but when I left that organization and went somewhere else, 80 miles away, it was never convenient to just pop round and see the guy to talk about where we're at, do we need to replan things? Do I now need to take out this sort of insurance plan? How would my pension go in? Although, he was only ever on the end of a phone, this was probably still pre- mobile phone days. So, yeah, he was good. What actually happened was that, fairly soon after I took out some of the schemes, that a lot of consolidations and mergers and acquisitions took place.
So, it seemed like every time your plan settled down, it then got acquired by somebody else. And then, two years later, somebody else acquired it. And so, it got to the stage where you thought, " I now don't know whether that's the plan that's suitable for me." So, that's probably about the time that I stopped contributing to them, and since then, I've generally done all the research myself, a lot of homework, very rarely rush into making any decisions of that type. My friends and family would tell you I'm a bit of a spreadsheet nerd, in that I put all the information into spreadsheets, analyze it, and that's how I make my decisions.
Shirley: Remember David and Marcus? Our choir singers. David retired after a career in finance, but Marcus is still working in his own business. I asked them if they prefer to educate themselves or take advice from specialists? David was first to answer.
David: I mean, because I've been involved in finance and I'm interested in it, I was never likely to ignore this field, but when you're busy and you're working all hours in practice, you don't do much more than make cursory checks on statements that come in. And even, when I look back at the information that I've received, when I've left jobs and so on, that they've been quite a lot of errors and inconsistencies in those, which I didn't pick up at the time. So, it is much more recent, I would say, from perhaps my mid- 40s onwards when I started to look in to a little bit more detail, but I'm still learning.
My wife is not particularly engaged and she didn't do a frontline role. She was secretarial for the general management. And I think it's fair to say there's more linguistic than numerate in terms of her skill preference. So, I involve her in the decisions or I tell her what I'm planning to do, but she really does leave it to me. She has, I think, after I made one error, I mean, the worst financial decision I probably took was on her final defined benefit pension with the bank that she worked. So, she's never quite forgiven me for that, but hopefully I do get more things right than the wrong in regard to her pension situation.
Marcus: I'd like to be in the room when David's wife hears that he thinks she's more literate than numerate. There are three of us directors in the firm where I work and our financial interests are therefore very much intertwined and that's been fantastic because the three of us have gone through this journey together and have had a lot of chance to talk through and discuss how we wanted to do things. So, I think that's been my main support group and my main way of finding out the options.
Shirley: It's great to hear how our would- be retirees are looking ahead and asking the big questions. So, what do you need to ask yourself to get the basics right in retirement? And do you need to have it all worked out before the big day arrives? I'm joined, once more, by Legal & General's Emma Byron, managing director of retirement income, as well as Holly Mackay, founder of Boring Money. What a dream team to give your financial planning a boost, welcome both. Emma, for some people, their retirement might be almost as long as their working life. When do you begin to even work out the numbers for that?
Emma: I think, if you look at it in that way, then it feels like a insurmountable task, really, to undertake. I don't think any of us start our working life thinking about planning for the next 30 years. That's for sure. Most of us all work out what we're going to be paid, and then what that means we can afford in rent or mortgage and how many times a week we can go out. So, I think people should try not to see it as something completely different to that. The first step is really to understand the assets that you've got, what retirement income sources you might have. So, get your health in order. Think about all of those sources of assets, think about maybe consolidating your pension pots, so you've got all of that information in one place, to make it easier to manage.
The government certainly offers a very basic tracing service for lost pensions, but we'll also at Legal & General, we'll be launching our own tracing service later this year, which will help people to do exactly that. Find everything they've got, put it in one place. I'd always say though, it's not just about what you'd consider to be retirement assets, but also any other assets that you have, like bonds or savings accounts, ISAs, et cetera. So, in the same way as you, at the start of your working life would be thinking about what money you're going to have each month, it's the same thing really for retirement, getting that in order. And then, you can start thinking about a different range of scenarios, none of us know how long we're going to live for, or how long we're planning for, or therefore how long that money needs to last you.
So, rather than try to pin yourself on the average life expectancy, I don't think any of us would consider ourselves to be average. I think it's about looking at about a different range of scenarios. How would you manage if you live to 110 versus if you live to 80, and think about it in that way, rather than trying to pin yourself to a single lifelong plan.
Shirley: Okay. Do you have to have it all worked out in your 40s or can you adapt and change your plans as you go along?
Emma: Well, I'd hope you don't have to have it all worked out in your 40s. I'll be 40 in a few months and I certainly haven't got life all worked out, that's for sure. So, I think as you approach your 40s, it's is a good time to be thinking about it. You want to make sure that you are thinking about retirement early enough on, to make sure that you save enough money. And also, I think that people get familiar with some of the concepts and the products and so on, that you might want to use in retirement. The earlier you do that, I think, the easier it is when you come to retirement, doesn't feel like such a daunting decision, if you've engaged with your retirement savings much, much earlier. In terms of if you end up living longer than you expected, again, it's about, I think, scenario planning, thinking about if you did live longer, is there a different source of asset that you might want to draw down on?
So, perhaps you'd want to use your housing equity, for example, as a backup plan, if you run out of money or you live longer than you expected, and then obviously having some form of secure, guaranteed income through retirement, such as an annuity or a defined benefit pension, if you're lucky enough to have one of those, also, will just give you a bit of peace of mind that you will have sufficient money to at least meet your basic living needs.
Shirley: Lots of notes there. Holly, what sort of people do you get coming to you for help with their retirement finances? What are the most common questions you hear?
Holly: We get all sorts, is the honest answer, we had about half a million people on our site last year, from people with millions of pounds to invest looking for tips, to people who had 20 pounds a month to save into an ISA. So, all sorts. What I would say is amazing, pretty much everyone I ever talk to about money, secretly feels really stupid about it. They assume that everyone else is smarter than them, better at math than them, richer than them, more organized than them. So, I tend to spend a lot of time saying to people, " It's not that you're dumb, it's that the industry explains it in such a boring and a complicated manner."
So, I try and put people at ease. This is baffling for many of us. The most common questions I hear, I think, are sometimes it's just, " Where the hell do I start? Should I be saving into an ISA or a pension? Or what do I do there?" Risk is a really, really common question. People saying, " How much might I lose?" Actually, is the thing that most people start off wanting to know, " How much could I make?" And then around retirement as well, people even ask, " When can I retire?" As if that's the job of a pension company to tell them that, it's, I think, because it's such a baffling area, people expect that someone's going to tell them what to do. So, it's trying to work with people to help them understand the choices that ultimately are theirs to make. Of course, when you retire is up to you. And as we'll go on to discuss, I suspect, dependent largely on how much money you've got saved up, but also in what you want to do.
Shirley: We heard a few different experiences of advice from our Rewirees. What would you recommend in regard to advice?
Holly: I think is difficult. I mean, the reality is that advice still can be quite a tainted brand and lots of people don't trust financial advisors, but the world has changed over recent years. And there has been a split now between advisors getting any sort of financial encouragement to recommend any particular brands. So, that bias that was there in the past, isn't there anymore. And I think, in general, the profession is a lot tighter, a lot better than it used to be. Something else other people don't really know, is that you can pay on an hourly basis for financial advice. You don't have to lock yourself into a lifelong relationship, and fees range from about 150 pounds an hour to 200 pounds an hour.
So, sometimes, if you just want a steer that you're not doing anything daft, you might be able to look at that as an option. And there are other services. One, I think that's quite interesting for people coming up to retirement is called a cashflow modeling service. Now, this will set you back typically about two or 3, 000 pounds, but you sit with an advisor and you say, " This is how much I've got." And they work it through with you and effectively see if your plans are affordable or whether you're likely to run out of money or not. So, there are bite- sized ways you can get financial advice without having to think that it's an ongoing relationship for life.
Shirley: Emma, from your experience, what do you think are the common pitfalls people have in terms of their mindset? For example, do people assume they won't live as long as they do? Do they overspend in the first few years?
Emma: I think the first mistake people often make, or the common pitfall for people is that they've put their head in the sand. They're scared to think about retirement. They don't understand the terminology. People who have to kind of bite the bullet and spend a day really thinking about retirement and trying to understand it. And there's lots of tools out there and information out there from the government in terms of Pension Wise and also on providers, websites and so on. So, I think the second one, as you mentioned, people do underestimate how long they'll live for. Often, people will use an indication of how long their parents have lived for and expect that that's how they themselves will live for. But as we know, people are living longer and longer thanks to medical science and healthier lifestyles, and so on, is much more related to education, socioeconomic factors, lifestyle factors, do you drink lots, do you smoke?
None of us are average. Looking, there's life expectancy calculators out there, that would allow people to plug in some information and see how long they are expected to live for. But by definition, that's an average. So, some people will live for a lot longer than that and some people for less time. So, I think around that point, it would be back to, I think it's planning for different scenarios and really thinking through if you were to live significantly longer than you expected, how would you manage that? I think, in terms of overspending in the first few years, that there's a mixture of evidence around that. We see and we expect that the jubilation and excitement of being retired, off you go on many cruises and fulfilling the travel desires that you might not have been able to do, when you're retiring or giving grandchildren money, et cetera and now you have access to this additional funds.
So, I think there is definitely a risk that people fall into that trap, but saying that, as long as you've thought a little bit further ahead, and you still, despite that perhaps excessive spending in the first few years, are comfortable, you have enough to last later, that's not necessarily something you can't do, but again, it's just about thinking through and planning for the different options and having some flexibility in your spending.
Shirley: And I think, like you said, also, I mean, I find it's difficult to even talk to my ... It's difficult. People don't want to talk about finances, but it is a subject that needs to be pushed and you have to talk about it, I feel.
Emma: Agree. I mean, from my perspective, I think it's the last remaining taboo in the world, people are much more open about sex and different things like that. But money is really the last taboo, people don't discuss how much money they earn. People don't discuss what savings they have, even with their closest family. And really, it is something that needs to change. Not that it means people have to go around and shouting about how much they're worth, but certainly they need to be able to discuss that in order to make sensible decisions.
Shirley: Is it ever too late to start saving for retirement?
Emma: It's usually the meaningful moments in people's life where they start to think about saving or pensions, I often use the example that when you're in hospital, after having a baby, you're given a bounty pack, which has lots of leaflets in there about setting up wills and that sort of thing, because that's usually the time at which people would think about that. Once you have children and you think, " Well, I better have a will." And start thinking about those things more seriously. So, I think it's not necessarily a typical age where people start thinking seriously about things. It's normally something that happens in their life. I mean, certainly as you, as I said, get towards your 40s and you've probably been working for 20 years, you start thinking, " God, how much longer am I going to be working for?" And that's the time where you do start to think a little bit more about whether you've been saving sufficiently for your pension or not.
And I think, definitely people approaching their 40s should be encouraged to take a financial MOT, if you like, and look at what they've got today and are they saving enough? Because at that age you still got time to correct the amount you're saving, if you've been undersaving up until that point. So, you've got time to improve it and make sure you're going to have the retirement that you want.
Shirley: Lots of people don't save nearly enough into their pension. What are the options when there won't be enough to live on when they retire?
Emma: Clearly, if someone is reaching retirement age and they haven't saved into their pension, it's a little bit late to use a pension as the source of your retirement income, but people typically will have other assets. So, if they've been prioritizing buying a house and paying their mortgage throughout their life, which meant they had nothing left after paying all the bills to save into a pension product, their house is an asset that they can utilize. And many people, particularly coming to retirement now, who don't have huge amounts of pension savings and may not be lucky enough to have a final salary pension anymore. They do have a lot of housing wealth, and they may want to downsize there, which gives them one way of accessing that money. Or, if they want to stay in their home, then using lifetime mortgages is another way in which you can utilize the equity in your house in order to provide you with money to live off in retirement.
Shirley: What do you think are the possible pitfalls when people manage their own pension income?
Emma: People often don't plan for different scenarios. They'll plan for the average market return that they expect. And so, when there's significant falls in the market, they find that they haven't really allowed for that. I think people also often panic quite a lot in times of market downturn and then choose to do things which are not necessarily the most rational, such as switching to cash and so on, which would mean the assets wouldn't recover. I think another thing that people should always consider and I'm sure, or I hope, Holly would agree with me is having enough liquidity or a cash buffer around. It's important that you have some level of cash buffer available to you. That doesn't always mean just keeping it in cash, that there are different liquid assets you can use where you could be able to access the money easily, but you're earning more than a cash return. Products such as fixed term annuity product, zero income annuity products, allow you to put the money away, but should you need to surrender it or partially surrender at any point then you can.
Shirley: This is so interesting. Holly, any other do's and don'ts for minimizing the worry in the run up to retirement?
Holly: Yeah, Shirley, I think pensions are like kind men. You only realize in your 40s how attractive they are and when you're in your 20s, they're just boring. Most of us will always look to our retirement and think, " Golly, I wish I'd done more earlier. I wish I'd started." So, I think we just have to get over that and park that. We are where we are. To me, I worry about things that I can't see. I worry about things I don't fully understand. So, I think the starting point is work out how much you've got and think of your retirement income like a cocktail with three shots. You've got your state pension, the full state pension, if you're eligible for that, you can check on the government's website, is about 9, 000 pounds a year.
The second element will be any workplace pension you have, that might be an old final salary scheme. It might be a workplace pension you have today. Now, find out how much you've got in total in your workplace pensions. And a helpful rule of thumb, I think, is to work out how much that might buy you, a year, in terms of retirement income. Divide it by about 20 or 25 and that'll give you an indicator of what annual income you might expect from that chunk of money. And then, the third short is just other sources of assets you have, as Emma said earlier, that might be some cash savings, perhaps some rental income, any ISAs. So, I think jot it all down and just get a very loose feel for how much you're looking at. Then, when you actually can compute that and see it in front of you, then you know what your options are.
And we don't have endless options. And for most of us, if the numbers written down in front of us, don't look appealing, our options are either to spend less or to delay retirement and consider some sort of part- time working or indeed delaying retirement entirely for a few years. But I think we've always got to start by just trying to get a sense in our head of what that number is and trying to work through it. I would say as well, Pension Wise is the government's free source of help and guidance for people on this, you can phone them up. They can't tell you exactly what products to buy, but they can give you a very good steer and talk you through all the tax consequences and all the jargon and all the gobbledygook around it and help set your mind at ease a bit.
Shirley: What if someone has a one- off expense they want to make happen, like a big bucket list holiday.
Holly: Oh, doesn't that sound great right now? I'd love to go on a big bucket list holiday right now. I think the only thing, I think, when it comes to pensions and retirement income, I've seen it with many people that perhaps don't trust the financial services industry or they feel nervous. And that for some people, there's a tendency, as soon as you can get your hands on your pension, you want to take it all away and stick it under the mattress and it's mine and it's in my control now. There can be disastrous tax consequences if you rip great big sums of money out of your pension, do read up on it, consider even taking one- off financial advice or at least make sure you check out the tax consequences because I've seen lots of people get burned that way.
Shirley: Emma, can you summarize for us the steps people should take when thinking about how to use their money in retirement? Presumably, they need to start by working out exactly what they've got.
Emma: Yeah, absolutely. So, I think there's probably four main steps. The first being, really, find out all of the assets that you've got, the second thing, and this should be quite obvious to people, most people budget on a monthly basis and know how much they need to cover, rent, mortgage, food bills, et cetera. So, working out your basic necessities, I think, is the next part. And then, I think, trying to plan what your other expenditures, non- discretional spend would look like for 30 years is a near impossible task. So, I'd say, think about that maybe over the next five years, how many holidays do you think you'll go on? How often do you think you'll go out for meals with friends, family and so on.
So, what's that non- discretionary spend that you would need? What sources of income have you got that you're definitely going to get for the rest of your life, irrespective of how long you are going to live and is that enough to meet those basic needs that you've set out in the second step? And then, you can start thinking about the other assets where you may have more flexibility to draw down on those and move the amount you're spending up and down. So, working that into a retirement plan, it is important that people don't just plan for a best case scenario, that they also think about what would happen if stock markets fell or if they lived longer than expected, or should they need to have care costs later in life, to make sure there's a bit of a buffer there and give them even more financial security.
Shirley: Gosh, I should write a book on this, I feel so educated. Well, there's a lot to think about, but great to know you don't have to have it all figured out in one go. I hope that's helped you map out the path to planning your finances and staying on top of them between now and retirement. You can find out more about retirement planning legalandgeneral. com/ retirement. Next time, we're looking at what to do when you actually get there and how to enjoy the lifestyle you've dreamed of in your Rewirement years. Subscribe on your podcast listening platform. You'll get it on your device as soon as it's available. Thanks for listening. I'm Shirley Ballas, and I'll catch you next time.
How do you ensure you have enough money to fund the retirement you’d like? What are the options to provide you with an income? This episode tackles these questions and more, making sure you are well informed to make plans.
Shirley Ballas chats to people approaching this exciting stage in life and gets advice from financial experts - Holly MacKay, editor of website Boring Money and Emma Byron who is Managing Director of Retirement Income at Legal & General.
Founder of website Boring Money
Holly has worked in the investment industry for about 20 years.
She set up Boring Money which is an independent business to help normal people who don’t have PhDs in finance make some smart investment decisions quickly and painlessly.
Managing Director, Legal & General Retail Retirement Income
Emma leads the Retirement Income business at Legal & General. Her team specialise on providing a range of income solutions for more than 600,000 customers.
Emma joined Legal & General in 2014 from Oliver Wyman, where she was a Principal Consultant to the insurance sector on strategic, risk and capital management.