The mere mention of retirement conjures up images of contented walks in forests, sun loungers by the pool, days spent browsing farmers markets and antique shops in pleasant Provençal villages.
Such thoughts often turn to feelings of fear, panic and uncertainty about how all these lovely pursuits can be financed.
From my work at APW, I’ve seen many clients who have significant anxiety in this area.
Maybe it’s the small print and waffly language of investment products which hint that returns will not be as generous as expected. This leaves would-be investors anxious, and uncertain about taking the action they need to for their retirement.
There’s no need to panic: by understanding a few important concepts, it is surprisingly straightforward to get started planning – today.
- Nurturing the Garden
At the heart of every happy retirement is an excellent source of sustainable income – a passive income stream. That’s really all investment is, ultimately, and it’s the one and only reason to do it.
The end-game for all investment activities is sustainability. Whether it be pensions, bonds, funds, or property, the key to a secure financial future is one in which the source of wealth is never depleted, but continues to produce income forever.
In fact, this is the definition of true wealth: to have a source of revenue, every year, for ever.
Think of your finances for retirement as a garden in which you are patiently growing fruit trees. It takes years for trees to mature, and today you have enough to eat, so the fruit isn’t needed.
But the day will come, eventually, when you have to rely solely on what your orchard will produce.
In other words – the trees you have carefully nurtured over decades will become your lifeline.
How can you be sure that you have nurtured it well?
- Be Realistic
In planning for the future, a common problem for investors is that they under-estimate their lifespan and the number of years they need to plan for.
Remember that a spouse and children will need to be factored into your planning as well. With healthcare and life expectancy increasing all around the world, people are living longer and this inevitably affects the size of a retirement portfolio.
It’s wise to over-estimate the length of your own retirement, but it’s even more important to ensure that the passive income stream you choose is sustainable and will not become depleted.
While prices will rise with inflation (and that $5 meal will cost $15 in a certain number of years), most experts recommend assuming that, all things being equal, we plan for the future using today’s cost of living.
- Read the Small Print
Many of my clients do opt for pension plans. If you do decide on this, be aware that most pensions are full of unnecessary risk factors.
Apart from the fact that the company managing your funds will be drawing down their own commission (something which can affect the value of the fund significantly over decades), there are hidden risks as well.
Too often, portfolios are overexposed to risk factors that were never properly recognised.
This is why diversification – having a variety of sources – helps reduce the overall risk. A portfolio that combines pension funds with bricks and mortar is an excellent example of this.
After all, we all know what happens when we put all our eggs in one basket.
- Everyone needs to live somewhere
The UK is, and remains, an excellent place to own investment property, because demand outstrips supply and this is not about to change: with immigration, larger families and an ageing demographic all creating huge increases in population, UK rental demand is here to stay.
In fact, this is so acute is this that it’s been recognised by the British Government.
According to the UK Parliament: “Estimates put the need for additional housing in England at between 232,000 and 300,000 new units per year, a level not reached since the late 1970s and two to three times the current supply” (www.parliament.uk , January 2017)
However, with our clients at APW, we find a number of concerns about buying into UK property.
Firstly, there’s the perception among some that the UK property market is all about London, and anything outside the M25 is a less-than-optimal investment. And the London property ladder is expensive to get a foothold on.
Secondly, with Article 50 and Brexit, some investors worry about the future value of British property. However, these worries are misplaced, as I explain here.
The most important message that we try to impress on our clients is that in this retirement garden, income is all that matters. You won’t be living in these properties, after all. The best metric to judge your property investment with is rental yield: that is to say, the amount of rent the landlord will generate as a percentage of the purchase price. And we are seeing that property hotspots in places like Birmingham and Sheffield are yielding 6-7%, which makes them a better investment than an expensive flat in central London that yields closer to 4%.
While a portfolio of rental property is an excellent passive income stream, the question then arises of where to buy.
Regardless whether you’re a first-time buyer or a seasoned buy-to-let landlord, you always want to follow the money.
At APW we look for property hotspots and we’ve identified some excellent developments in the north of England which we believe are great additions to a portfolio. Currently on our radar are the high rental yield areas of Birmingham, Sheffield and Derby, where we offer one and two-bedroom apartments.
Our unique payment plans allow clients to build up a deposit over 24 months which makes this an affordable way to nurture a retirement plan over time. Some of these payments are as low as 1,300 GBP per month.
Of course, whether it’s property or pension funds, the key to a secure retirement starts early.
Focus on your passive income streams and nurture your investments carefully and they will one day bear fruit.