It can be gratifying to build a retirement fund that will take care of both yourself and your partner once you reach the age where you no longer have a job. But the effects of inflation and market crashes will have a severe impact on what the value of your investments will be worth in your later years. All is not lost, however, and by following these six simple steps, you can mitigate how much of an impact the real world will have on your retirement wealth.
The 6 golden rules that will make your retirement fund blossom
- Plan ahead. Before you even begin to consider how much you should be saving each month into your portfolio, you need to evaluate the entirety of the wealth that you already have. There’s not much point in throwing everything you have into your retirement fund until you’ve decided what your retirement goals are and how much money you will require to achieve them. Do you want to concentrate on building a portfolio through investments in property, or would you rather invest in the stock market? What’s your appetite for risk and what commitments have you got now that take priority for your savings? Calculate all this first before deciding how much to invest in your retirement fund.
- Be conservative with how much you expect your investments to make. Although you might have a grand vision that any investments in the stock market will make you upwards of 10% interest every year, if you calculate your required lifestyle on this rate of return you could easily be left disappointed. There will inevitably be years when the markets fail to perform, and if there’s a market crash then any gains from the previous year could be wiped out within a matter of weeks. It’s much better to look at the long-term and estimate a more conservative return on investment. The current thinking is that 7% annual interest is a realistic long-term figure for the stock market, with property historically returning 3-4% over many years.
- Diversify your portfolio. Don’t invest everything into one asset class, such as property or stocks, or you’ll risk losing big sums of cash if there’s a downturn when the time comes to convert your investment portfolio into an annuity. So divide some of your money between different classes such as stocks, bonds, property and your own business if you have one. That way if there’s a collapse in one asset class, the remainder of your money will hopefully remain unaffected.
- Be aware of inflation at all times. The greatest threat to your wealth is the effect inflation will have on it. Inflation is the erosion of wealth in real terms year after year, with an example being the amount of money you would have to spend on a loaf of bread now as opposed to 10 years ago. What this means is that if you have a significant pot of money today, it won’t be worth anywhere near as much in 20 years time. You can combat the ravages of inflation to a certain extent by investing in assets which return more than inflation takes away (with stocks being the prime example), or you can find ways to spend less on similar products. So instead of buying premium brand food, consider cheaper supermarket own-brands instead.
- Minimize tax. Tax is another source of erosion that will deplete the value of the income you receive. Each individual in the UK is currently allowed around £11,000 of tax-free capital gains each year, with any increases over this figure being taxed by the government. This number is continually changing as the government tries to find new ways to make money, so you would be well-advised to take advantage of some of the tax-free shelters that are available to you. First and foremost is the ISA (Individual Savings Allowance) which as of 2017 allows you to save £20,000 completely tax-free each year. Combining this scheme with the stock market in a stocks-and-shares ISA enables you to make the most of any gains from your stock market investments without the government taking any value away in tax.
- Be conservative in your retirement investing. When you’re young, and you have 40 years of work life ahead of you, you can afford to take some risks with your investment money. Small technology and pharma stocks have the potential to reap massive windfalls if the business hits on a successful product. But equally likely, many of these new start-ups will fail either by the lack of management experience, or the product will be superseded by a competitor. Therefore, as you approach your retirement consider moving your stock investments into big, boring, cyclical businesses that have been going for years and are in no worry of going out of business anytime soon. So think Coca-Cola, BP, Apple, Nestle, Ford and the like.
It’s clear that in order for you to make the most of your retirement portfolio you need to position it so that it can weather all economic storms, and this is especially true in the volatile times we’re currently living in. A retirement portfolio should look to achieve two main goals. Firstly it should provide a sufficient income that can pay your living expenses, and secondly, it should preserve as much capital as possible when the markets are swinging wildly. By following the 6 golden rules above, you should at least be able to create a winning portfolio that will see you through your senior years without a whole lot of money worries spoiling the show.