Why make a plan?

For many of us, our middle years – our 40s, 50s and 60s – are the most active and diverse of our lives. Many have set up home and had a family, with kids who are on the way through school and moving on to university and beyond, and maybe with responsibilities for ageing parents too. At the same time, we are juggling work commitments and navigating our careers in what for most is the peak of our working lives and earnings. It’s a time of big financial commitments and decisions, and also – if we can find the time – a natural time for reflection about what the future holds as we reach the summit of the climb and begin to see what’s on the other side.

So many questions to consider

However, when we reflect on the next phase, many of us are faced with a lot of questions. For most of us - unlike our parents’ generation - the certainty of a gold-plated pension from an employer we’ve been with our entire careers and paid on a long-established retirement date couldn’t be further from reality. In its absence, perhaps our first question is “when?” When should we consider retiring, or at least taking a step back from the pressures of a full-time, all-consuming career. And when can we do this without taking too much risk of running out of money in old age, when returning to work isn’t an option. Maybe we plan to continue working, but on our own terms. Perhaps we’ll look to work part-time, as a way of staying active and stimulated as we age, as well as supplementing our retirement income. The level of retirement income we should expect is itself perhaps the biggest unknown, since for most of us it will be pieced together from a variety of sources: an assortment of pension pots from different employments; savings, ISAs and other investments; maybe some of our home equity; perhaps rental income from a flat held onto when we bought our current home; possibly, anticipated inheritances; plus an expectation of - potentially further delayed - State Pension income (from age 67, 68 or maybe later).

But many put off tackling them

Given these questions, making a plan for retirement seems like an obvious and sensible thing to do. But puzzlingly, surprisingly few of us have a proper plan to address these questions. Some have a retirement spreadsheet put together a few years back and that we’re not entirely happy with; others may have used a financial adviser in the past to help with investments but not a practical financial plan for retirement.

So, what’s stopping us ?

What then is preventing us from just getting on with the clearly important task of creating a retirement plan? Well, a few things seem to be getting in the way.

Retirement seems a long way off …

Firstly, some of us suspect retirement is a long way off and aren’t keen to discover it’s even further away than anticipated. To have a plan confirm we’ll be working well into our 70s may not seem a great prospect.

…or maybe we aren’t planning to retire at all

In any case, if - as is sometimes suggested - retirement isn’t really retirement anymore, since many of us now look forward to working through what were formerly seen as retirement years, there may not seem to be an obvious trigger for us to create a plan at all. Without a hard retirement date - when we stop work for good - what should our retirement plans focus on ?

Planning seems difficult and we think we don’t have the skills, knowledge or time

Perhaps the biggest challenge for many is the apparent complexity of it all. Few approaching retirement received much in the way of financial education whilst at school or college. Even for those with the interest and aptitude to teach themselves about finance, perhaps through reading the Money sections of the newspapers or online through financial blogs and interest groups, some topics can still appear a real challenge. If understanding the tax implications of the wide range of options now available for taking pensions seems onerous, then for those with a variety of pensions, investments and other potential retirement incomes, the range of choices - and associated implications that have to be understood - can feel bewildering.

Professional financial planning seems expensive, or we have other reservations

Despite the apparent complexity of the task, many of us are nonetheless reluctant to engage professional support, preferring to plan for our futures ourselves. In fact, surveys suggest that well under a fifth of us currently use a financial adviser or would use one as our main source of advice on pensions. The main reasons cited are typically high expected costs, lack of trust in financial advisers and the perception that financial advice is “only for the wealthy”. Some of this perception may come from an apparent focus from some advisers on selling investments, sometimes less-than-clear charging models (often based on a percentage of assets) and a perception of conflicts-of-interest reinforced by high-profile stories of mis-selling of pensions and other investments that hit the newspapers from time-to-time. The industry has tried many things to change perceptions, with some advisers having adopted new, more transparent models that aim to reduce cost and increase value to the consumer. Despite this, the so-called “financial advice gap” largely remains unbridged and recent surveys even suggest it’s getting wider.

It's not clear where we should go for support in creating a plan ourselves

Even though the majority of us seem to prefer to - or have to - plan for ourselves, this hasn’t translated into DIY financial planning being a well-supported activity. Whilst there is a huge amount of relevant information accessible through every available media channel, it can seem fragmented, difficult to navigate and to assimilate into a coherent basis for planning. The government’s MoneyHelper service is a useful resource that can help answer many of our questions, though the tools it provides aim to answer specific questions rather than bringing all our finances together. Individual situations vary, and many have special features for which specific research is required (e.g. from pension providers or HMRC). This has typically meant using a spreadsheet to piece together financial data and research into a plan, though this can be far from straightforward even for those with relevant skills.

Planning seems pointless when things change so fast

In any case, in the current unstable economic environment, we imagine the next change - in tax policy, interest rates, inflation, or the stock market - will invalidate our plans. So, given the time and effort required, why create a plan if it’s going to be out of date almost as soon as it’s created?

So why “grasp the nettle” and get started making a plan ?

Given all these challenges, why should we face up to the challenge of creating a financial plan for retirement? Well, there are lots of compelling reasons. Indeed, behind many of the excuses we find to put off creating a plan can be found the reasons it makes sense to bring it forward and grasp the nettle sooner rather than later.

For our own wellbeing

Even if we are not planning to retire in traditional terms, there is nonetheless a great sense of wellbeing available from achieving an alternative but equally significant goal - financial independence, i.e. when you have enough in savings, assets and expected retirement income to fund your lifestyle for the rest of your life without working. Financial independence means you can continue to work on your own terms, choosing to work because you want to rather than because you have to. Creating a financial plan can help you in achieving the goal of financial independence, recognising when you have achieved it - and so dramatically improve your financial wellbeing - earlier in life.

So that we can provide for the future without needlessly compromising the present

Whatever your intentions for retirement, having a supporting financial plan can help you understand how much you should put aside to meet your goals. Understanding what’s ahead can help us take action to bring our objectives closer, for example changing our spending patterns to save a little more each month, or planning to downsize our home to bring forward financial independence. A plan can also help us build the confidence to avoid working or saving too much unnecessarily. Whilst the common perception is that many people in their 50s will struggle to fund their retirement, it’s also the case some will work longer than they want to, be left with more savings than they need and incur an unnecessarily large inheritance tax bill.

To avoid paying unnecessary tax on our retirement incomes

Making a financial plan addresses head-on our uncertainties of where our retirement income will come from and helps makes sense of the complexity of our financial situation. It allows us to see how pension taxation will affect us and adjust our approach to reduce our lifetime tax bill so we can benefit more from our savings. It can also lets us see the impact of inheritance tax and allows us to make adjustments so we can pass on more as a legacy to our families and good causes.

Because creating our own plans is getting easier, …

And these days, creating your own financial plan is getting easier as more support is made available through new tools coming onto the market, aimed at a consumer audience, that help individuals create their own financial plans. MyFinanceFuture’s Planner is one such tool, aimed squarely at those in the UK who are approaching retirement and looking to create their own financial plan. It makes it easy to get started with planning; aims to cover all your finances; and helps you understand your options, make decisions and build a plan so you can look forward with confidence. The Planner is regularly updated with changes to tax rules and long-term forecasts for inflation, interest rates and investment returns, so keeping plans up-to-date is less of a chore and the impact of changes can be understood.

… is valuable even if we decide to use a professional financial planner, …

Even for those of us who use a financial adviser - or plan to do so - creating an initial plan for ourselves can help identify the questions to ask and enable a better-informed decision on when and how to engage an adviser’s services. Before going through with big decisions, especially irreversible ones with material consequences such as when and how to take pension benefits, it’s prudent to seek professional advice. Having our own plans can help us engage such advice on a one-off (rather than ongoing) basis, helping to reduce the associated costs.

… and even if the environment is constantly changing

Finally, for those put off by the expectation that any plans we make will quickly be invalidated by changes, it’s worth considering that the real value comes in the process of making the plan rather than the plan itself. It’s through the planning process that we gain a better understanding of our situation, our choices and our potential courses of action. This understanding helps shape our thinking and has value irrespective of any changes that might affect a specific plan. It also makes it easier for us to update the plan in response to the changes when the time is right. As Churchill once said: “Plans are of little importance, but planning is essential.”

So why wait … was there ever a better time to get started ?

MyFinanceFuture Services Ltd does not offer regulated financial or professional advice.

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