Money missteps to avoid as you retire Retirement marks a new phase in your life and you need to plan accordingly By Gaurav Ghose, Financial Features EditorPublished: 21:00 August 17, 2013Gulf News Share on facebookShare on twitterShare on emailShare on printMore Sharing Services0 Retiring within a year or two? Looking forward to more golfing and taking those long holidays, which you could never manage while working? Well, good for you. The reality, however, can be different for different retirees. Sure, for some of you, it’s the day you were waiting for, for the past few years. For others, it could be unnerving, not knowing what to do and how to plan for the new life that awaits you. And it’s much more gets harder for those with insufficient funds in their savings pot. For those approaching retirement or those who have just stepped into it, financial management through your post-work life becomes all the more important. The retirement period marks the beginning of a new phase in your life and you and your family need to adjust and plan your future accordingly. “Money management and planning is extremely relevant around the time of retirement, especially since the retiree is going to be dependent on the income generated from their savings rather than from what was until the other day a steady monthly salary,” says Krishnan Ramachandran, chief executive of Barjeel Geojit Securities, an investment advisory firm in Dubai that caters to more than 40,000 Non-Resident Indians (NRIs) in the region Few actually consider what retirement actually means to them. “Do they want to travel more, how much income they are likely to receive in retirement and whether their finances are aligned to their retirement goals,” says Sarah Lord, wealth planning director at Killik and Co., one of UK’s leading retail stock broking advisory firms, which in addition provides financial advice and investment management services. As you prepare for and subsequently welcome the new life, financial advisers warn would-be and new retirees to avoid the following common money missteps while at the same time being acutely aware of some basic financial issues to remain safe, relaxed and happy. The possible missteps to avoid Taking a lump sum out of the savings at the retirement age: Usually at 65 in the UK, for example, one can take a tax free lump sum from the pension. However, as Gurnos Stonuary, business services director, Nexus Insurance Brokers, says “if they do that, they can reduce the capital sum of their savings and hence the regular payments they take. With inflation, this can affect the value of the regular payments they receive together with the purchasing power of the amounts.” Having debt obligations at the time of retirement: Long-term debt obligation, especially closer to retirement, is an absolute no. The last few years prior to retirement has to be totally debt free, emphasises Ramachandran. For example, he says, home loan repayments, which normally stretch 10 to15 years, have to be planned in such a way that they do not extend into the retirement period. This also includes any short-term debt, for example, personal loans and credit card liabilities. Injudicious spending immediately after retiring: With those with healthy savings at the time of retiring, the temptation to spend some of that, almost immediately, is always there. “A common issue is that new retirees treat themselves to a new car or an expensive holiday, pay off any outstanding debt and find that their available capital has been significantly diminished, and either start to eat into their savings at a faster rate than they planned to, or have to re-adjust their lifestyle to compensate for the lower level of income,” says James Thomas, regional head at Acuma Independent Financial Advice. Adds Stonuary, not identifying what you want from your savings, the goals you want to achieve in retirement such as a world cruise and in the process allowing your savings to be frittered away is something you should avoid. This lack of planning brings into focus the issue of lifestyle adjustment, which is probably a difficult situation for many. The adjustment to a new life, says Ramachandran, calls for a mental acceptance of the fact that spends on luxuries and impromptu spending needs to be curbed. “The call of the hour is to focus on essentials that one needs to lead his or her retirement plans. The game plan is ‘self-first’ before you commit for others, especially in relation to money matters,” he says. As Lord points out, “making rushed decisions could have a negative impact on your financial wellbeing for the rest of your life.” Making unwise investments out of panic: Stonuary points to the common mistake, especially those of you with not enough savings, to succumb to putting your savings into unsafe investments lured by high returns, which could result in loosing some or all of your savings. Also, entrusting or investing your savings with friends or relatives instead of taking advice from an independent, qualified financial advisor may not be wise, he adds. Specialist advice is crucial when it comes to annuities. Often, people are offered annuities at retirement. Annuities turn a capital sum into a guaranteed level of income for the life of the pensioner. Options include the possibility of a regular increase in line with inflation, and a guarantee of payment for at least 10 years if the annuitant dies early. Annuities may be made jointly with a spouse also. However as Steve Gregory, partner at Holborn Assets, an independent financial advisory firm in Dubai, says that “annuitants often fail to consider the options and select the best for their circumstances. “When an annuitant is unwell, with less life expectancy than usual, there are specialist companies offering larger annuities than many insurance companies offer. For annuities it is always wise to seek help from an experienced IFA, rather than buying the product of a bank or insurance company.” “For larger amounts of money, it’s even possible to take tax-advantaged offshore annuities where an income is drawn and the balance of the fund may be left to the family.” Killik’s Lord cautions retirees of the charges on the contracts that a retiree may put in place. Many contracts available in the offshore market have hidden charges, she says. “You should always ensure that you understand all the charges that are to be applied to your plan on an on-going basis and therefore what return you need to achieve on your investments to cover the charges and provide you with the income or capital growth that you require,” Lord says. Some issues to be aware of: Efficient management of income streams: Unless your retirement fund is tied up into a formal pension arrangement, you are effectively in charge of your own retirement fund, and while this is a great position to be in, it also requires discipline to manage this correctly, and make sure it is delivering the required results for you, says Thomas. “Therefore it is vital that you begin your retirement in the right way – make a plan, work out a budget, but also think about what you want to do in retirement and try and construct a plan that allows you to do the things that you want to do,” he adds. Ramachandran of Barjeel Geojit Securities feels the income utilisation from the retirement pot should at best be up to 80 per cent of the available income. The balance, he says, has to be earmarked for the long term, especially to meet and bear potential inflation and future costs of living. A judicious mix of both short-term and long-term investment plans will have to suitably structured. Too much reliance on property as an asset class to assist with retirement capital and income could become unstuck at times. “Many have been caught out not able to sell their property when they needed to and therefore have capital that they earmarked for retirement tied up in property, or they are relying on the income stream from the rental market but this is only secure if you continuously have a tenant,” said Lord. “You need to be planning for the times that your properties are vacant and therefore not generating an income,” she added. To have a smooth income stream, Ramachandran suggests to look for avenues to augment your income sources. May be after a few months of rest, you could get back to work which has a lesser load. “There is always a possibility of working part time for a years after retirement. One’s experience and knowledge can be put to good use and this can bring in an additional revenue source,” he says. Investment portfolio and risk: There is a need to assess your attitude to risk, then consider what options are available and build a portfolio of investments that you are comfortable with, and then review regularly, says Thomas. “You need to be considering your investment risk profile on a regular basis to ensure that it is aligned to how you are investing and ensuring that you are comfortable with the risk you are taking,” says Lord. On the issue of investments close to retirement or after retirement, opinion seems to be divided between the more conservative and slightly less so. The best way to erode an investment pot for retirement is to expose it to the risks of equities and even more risky investments shortly before retirement, says Gregory. “People in retirement are wiser to look at money-market instruments, bonds and other income producing assets, if all their money is tied up in their pension,” he says. But, as Thomas points out that while people will reduce their risk exposure as they enter retirement, but with the benefit of longevity that many people are now able to enjoy, “you could be retired for up to 30 years, so it may still be appropriate to have some higher risk investments, to generate higher returns to make sure the fund maintains its real value in the future.” Allocation towards an exigencies fund: It is advisable to allocate a small portion of your retirement corpus allocated to meet any situation that may arise from medical emergencies and family occasions and commitments, says Ramachandran. Thomas of Acuma agrees. “In addition to the income requirements, issues like healthcare need to be considered. Unfortunately the cost of healthcare only increases with age, and so this needs to be budgeted for.” For many retiring in countries, where there is no free state medical care as well as even in those where there is state health care, but quality and waiting time are issues, allocation for health assumes high importance. Taxation: With mobile employees crossing the world for work, but perhaps retiring back in their home country at some stage, people need to be aware of the tax position on foreign pensions. For example, says Gregory, you should be aware of the question of whether those pensions will be taxed at source in the country remitting the payment, or are there ways to avoid such taxation? “Certainly a well-informed independent financial advisor will be able to assist in arranging a transfer of pension rights to a jurisdiction which is less taxing than ones which may charge taxes on income, inheritance and other any other taxes the ceding country can dream up,” he explains. Succession: Succession in the event that the pensioner were to die early need to be considered before the time of retirement or as soon as one retires. “Most pensions may pay something to a spouse but pay nothing to a non-dependent member of the family,” says Gregory. “In many circumstances, with the right arrangements, it is possible for all the family to inherit the entire pension pot without any taxes due. This is really important to people who want assets to pass on to the family.” Third-country jurisdiction advantages: In the European economic community, Gregory points out, it is possible to transfer pension plans and pension rights to third country jurisdictions. “Doing so may have considerable currency advantages, and inheritance advantages, and may also have taxation advantages not enjoyed in the country supplying the original pensions,” he notes. Determining the currency of your savings Years before you retire, as you start your retirement planning, make sure you are saving in the currency of the country you are eventiually going to retire. Or at least, when nearing retirement, make sure to convert to your destination’s currency when the exchange rates are favourable. A common issue for people moving into retirement is one of choosing the wrong currency for their savings, says Steve Gregory, partner at Holborn Assets. For instance, he points to Brits moving to Europe to retire in the period between 2000 and 2006 found their sterling currency pensions devalued rapidly against the Euro, resulting in many people returning to the UK. Or as Sarah Lord, wealth planning director at Killik & Co. says many Europeans in the UAE will look to retire in Europe where the currency that they need for day to day living is the Euro. Yet their assets are predominately held in Dirhams or Dollars. “So its important that as you are working towards retirement you should also be saving into the currency for where you intend to retire.”
Posted on: Sun, 18 Aug 2013 19:57:11 +0000
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