We might be living longer, but that is not necessarily good news for our pension pots.
Nigel Murdoch, the managing director at BlackRock Middle East, says it's essential your savings allow you to have a bright future in your golden years.
What's the biggest issue facing retirees?
A radical increase in life expectancy in the West in recent years has prompted a greater focus on whether retirees will be able to live comfortably as they grow older. Thanks to rising incomes and advances in health care, baby-boomer couples in the developed world retiring at age 65 this year have already exceeded the life expectancy forecast in 1947, when post-war babies were expected to live until they reached 63. These newly retired individuals have a 50 per cent chance of living on to 92, meaning that their retirement would stretch for over a quarter of a century, or almost half as long as the time they spent working. These broader lifespans sound great for humankind. However, living longer may prove to be a curse for those individuals with insufficient funds for what could be decades of retirement.
When should you plan for retirement?
It is essential to plan for retirement as early as possible. Statistics show that waiting an extra five years before beginning a pension plan can cut the final value of the accumulated savings pot by up to one quarter 30 years later. The monthly contributions needed to generate the same pot value when the individual reaches 65 may also double if the plan begins when the investor is 45 rather than 35. Investing with a time frame that is as long as possible - ideally over many decades - gives people a better chance of building a nest egg that will sustain a long and pleasant retirement.
What is the best way to invest for retirement?
The volatility of stock markets in recent years, combined with historically low interest rates, is prompting more and more investors to ask: 'So what do I do with my money?' As the old way of investing simply does not work any more, individuals need to consider a diversified approach that embraces many different asset classes.
Can you give examples?
One principle of investment is that the search for income in retirement should really begin with the search for income during the working years. Equities tend to outperform bonds and cash over long time periods, particularly when taking inflation into account. However, equity investors run the risk that their shares can fall as well as rise and the original capital can be reduced or even lost. A less volatile way to invest in equities is to look at those firms that consistently pay a strong and growing dividend, in addition to taking part in any capital appreciation. Particularly during volatile markets, equity income can provide something of a cushion against ups and downs as many of these higher-yielding companies offer secular growth and boast stable cash flows, as well as the corporate discipline to grow or maintain dividends. Alternative investments are also becoming more prevalent given that they provide extra diversification in a traditionally balanced portfolio. These can include real estate, commodities and absolute return funds.
What about cash?
Whatever investors' strategies might be during the run-up to retirement, maintaining large cash stockpiles is not as safe as it might seem. Simple maths demonstrates how devastating the effect can be. For example, hypothetically a 3 per cent inflation rate would erode the purchasing power of €100,000 (Dh474,609) to €47,761 over 25 years. This more than halves the value of an otherwise sizeable lump of money, a return that could have been bettered by investing in global markets. The gift of living longer could turn into misery if it isn't properly planned and managed during the years before retirement. Having a mix of investment options, including possibilities such as investment income outside the pension pot or property rental income, can be a useful solution for staving off what could otherwise be a bleak end of days.
[ fglover@thenational.ae ]
