I’m privileged to help a number of clients who have been successful in their careers and/or growing their wealth. Your 50's can often be quite a pivotal decade in your financial life. Thoughts around retirement (or not), leaving or creating a legacy, a changing financial environment (grown up kids perhaps) can all occur during this decade. I’d like to share a number of observations that I’ve made over the years, coming from the ‘trusted adviser’ side of the table.
Just to be clear- on the subject of retirement, for some clients in their 50’s, retirement is the last thing on their mind. In that case sometimes legacy or some kind of search for a greater purpose can be something that occupies clients’ minds and can become something of a driving force. ‘What good can I achieve with all my life experience?’ is often a key question that arises.
In this piece I share 10 observations and things to think about:
1) Compounding. Get on that train....
As an investor, compounding is your friend. As someone wealthy enough to invest and with (hopefully!) a lot of life ahead of them, you ignore compounding at your peril. If you are not already consciously building up an investment pot for your future, now is the time to give that some real attention.
In a recent video, I talked about why investing early and starting the compounding ‘clock’ going is important to young investors. The exact same logic is true in your case. They say a picture tells a thousand words, so here’s one to get you thinking:
In this example, consider 2 investors, both aged 50 and both starting with £100,000 of investments. The first investor (blue line) adds £20,000 per year to the pot, which, for the sake of illustration, let’s say compounds at 10% per annum. The second investor doesn’t worry about adding funds until nearer to their retirement, when he/she plans to ‘cram’ their pension contributions and monthly investing, before partially or fully retiring. In this case, and with the same 10% illustrative rate of compounding, the investor manages to save an enormous £50,000 per year, for the last 8 years before retirement.
Who do you think comes out on top? This is the power of compounding and starting early. Regular investing, at an early stage, nearly always beats a mad rush to add more to your investments at the back end of your ‘prime earning’ years.
In our example, the end values are quite telling. Investor A (blue line) has a theoretical pot worth £1.63m. Investor B (orange line) is at £1.18m. They have both invested the exact same amount of money, just over different time periods, and with significantly different results. That’s a difference of some £451,000.
So, if you haven’t already, think about taking your seat on the proverbial compounding ‘train’...
(This is not a guide to future returns; all return figures are for illustration/example purposes only. This is not a recommendation to invest in any particular securities, nor is it personalised advice)
2) Earnings up, expenditure down?
Estimations of a person’s ‘prime earning years’ vary, but generally the money you earn in your 50’s is seen as a good approximation of your ‘peak’ earnings. For many, this is also the time when children become (slightly!) less financially dependent and mortgage commitments are typically lower than in your 30’s or 40’s. This is something of a generalisation but the broad point I am trying to make here is that you may find you have excess cash flow.
Think carefully about how you use this cash flow. Does it just get spent in day to day ‘nice to have’s’? Or could you do something more constructive with some or all of this excess income? Can you turn this excess income into a store of value (capital) to draw upon in the future?
3) A financial audit can be more useful than it sounds
Audit can be a word that either strikes fear into those who hear it, or may prompt a yawn and more scrolling down. Before you scroll past this point, humour me for a moment longer....
By the time you reach your 50’s you may have accrued a bit of ‘financial baggage’ along the way. By this, I mean things you are paying for or own that you do not necessarily need. Spending some time going through direct debits and regular payments can yield surprising results in my experience. If you have a financial adviser, perhaps a review of any protection or insurance policies you are paying out for may be a worthwhile exercise. Are you still paying for things for other family members? Your children’s Sky TV, mobile phones, streaming subscriptions, or that insurance policy you took out in your 20’s and can’t quite remember what it was for.
If you do manage to free up any regular cash, perhaps re-read point 1) above to see how that could help you in the long term.
4) Pensions: get to know your options
The world of pensions has changed significantly over your working life so far. Different types of pension scheme, different rules and more latterly, changing rules on how much you can contribute to a pension will all have an impact on how much pension income you might have, and where any future regular investing goes.
If you have a wealth manager or financial planner, a chat to clarify your understanding of the current pensions landscape can be very worthwhile. Additionally, it’s worth spending some time thinking about whether you might have any pension savings you might have forgotten about. In 2019 the Association of British Insurers estimated that over 1.6 million pensions, worth a collective £19.4bn, were ‘lost’ – i.e., the pension scheme could not contact the underlying member. Try the Government’s Pension Tracing Service if you think this might apply to you.
Related to this point, an understanding of the different savings and investment vehicles available in the UK can also be very beneficial to your financial future. You don’t need a PhD in financial management but an awareness of the moving parts of the investment and personal finance world can be very useful.
5) Shares in your employer(s)
Many companies like to reward key or senior staff with shares as well as cash. Over time the value of these share awards can really stack up, particularly if the share price of your employer grows significantly over time.
In a forthcoming video I will be sharing some thoughts around points to think about if you are in this situation. In summary though, think about your total level of exposure to the business (both in terms of capital value of the shares and the company being your primary source of income). Think about how the company matches with your own plans- i.e., if you are working for a high risk, high reward business, does that suit your investing philosophy and needs? Conversely, if the company you work for is a very stable, mature business and you are pursuing an aggressive growth strategy for your investments, can the two co-exist and still provide for a good outcome?
6) Legacy
As we get older and wiser, we often find time to reflect on the bigger picture and what our legacy might be. By legacy, I’m referring to the impact we make on the world during our lifetime and the difference we can continue to make beyond our lifetime.
Naturally this is something of a broad question, with different meanings to each of us as individuals. This is not a subject you can form a view on in 5 minutes. Take your time, ponder and consider these questions as a starting point:
What is important to you? Examples here might be financial security for your family, or a cause that is close to your heart
Is control important to you? This might have an impact on whether you think about legacy as something you achieve during your lifetime, or whether you leave this to actions taken with your wealth after you have passed away
Who do you want to impact? Sometimes looking at a specific problem isn’t actually what motivates people to help. Sometimes it is more broad- a specific group of people for example. What about people of a certain country? Or a sub-group such as disadvantaged children in the UK? Despite us being a very wealthy country, there is no shortage of people and causes that can be positively impacted by the actions we take with our wealth
7) Use your wealth (of experience)
By this point in life, you have likely built up a significant amount of experience in your chosen field or industry. If you are looking for a new or additional challenge, why not put that experience to good use in another way? What about being a non-executive director for a company that could really do with your skill set? Or a charity where you could make a significant difference?
You have a lot to offer the world because along with any technical knowledge, you have a wealth of real-world experience and contacts too.
8) Accumulation or decumulation?
Accumulation and decumulation are terms used in the wealth management world to describe whether someone is building their wealth, or spending it. Aside from the obvious financial differences associated with the two, sometimes there can be a psychological element too.
If you have traditionally been quite a keen saver, the idea of spending more than you bring in, month after month, can be disconcerting. It can take some time to get used to and, in my experience, some clients take to this ‘decumulation’ approach better than others. It’s worth thinking about this before you get to a point where you might want to retire.
The other element to consider here is your long-term wealth plans. Some clients want to carry on accumulating throughout their entire lifetime, with the goal of passing significant wealth on to the next generation. Some aim to spend their last £1 on their last day on this earth. The two require very different approaches to investing and have very different sensitivities to the inevitable swings in the stock market.
9) All to gain, or lots to lose?
In our 20’s, 30’s and 40’s, many of us have what is known in the investment industry as a high ‘capacity for loss’. This is to say that whilst investment losses are never pleasant regardless of your age, the younger you are, the more you are likely to be able to bounce back. Firstly, you probably have a long investing life ahead of you so you may not need to realise any of your investments any time soon. Secondly, you should have many years of future earnings you can use to 'dilute away' the impact of any earlier investment losses.
Sometimes, when you get to your 50’s, this balance can tip. First of all, you are probably worth a lot more now than you were in your 30’s, so the figures are larger. Secondly, you may not want to carry on working to your current level, in to your 60's and 70's. If you do want to retire in the next decade or so, you might be increasingly more sensitive to losses on investments or perhaps the associated ups and downs of the stock market. In the last 20 years we have had 3 significant downturns in the investment markets (dot com bubble (2000), financial crisis (2007) and COVID-19 (2020). If you were looking to retire just as these events were unfolding, would that have changed your plans?
This point is worth thinking about because it has a large bearing on how your investments should be selected and constructed.
10) What does retirement look like, anyway?
Retirement looks different depending on who you ask. For some, the idea of 100% free time is the ultimate goal. For others, ‘retirement’ actually still means work, but just not the highly stressful, highly paid work they were used to. For example, working for a charity can be quite appealing for many, or part time work for others. In the case of part time work, I often find clients who do this are not doing it for the money- they are doing it for something different, to meet new people and to change things up from the typically fast paced life they have had for some years.
It’s worth putting some time into what you think ‘retirement’ may look like for you, so you can plan accordingly. Think about how much you might need to rely on your lifetime savings and investments for your future. Will they make up 100% of your income? Or just a part of it? Will your spending be the same in retirement as it is whilst you are working? Or slightly or significantly less? If you have some thoughts around lifetime legacies, how will they likely impact your retirement provision?
I hope the points I have raised in this piece have given you some food for thought. Your 50’s can be a pivotal time in life- taking stock of progress so far and importantly, working out the (rough) direction of the next chapter.
All the best,
Louis
The views expressed in this article are my own.
This information does not constitute advice or a personal recommendation.
コメント