Retirement guide

When your working years come to an end and your employer’s no longer subsidising things like healthcare, phone bills and wellness memberships; how much will you really need to cover everything in retirement? Conventional wisdom says you’ll need roughly 70-80% of what you currently earn/spend. Research shows most of us are unaware of this and consequently unprepared.

According to Forbes, about 10,000 baby boomers in the USA reach retirement age every day. 25% of them have no retirement savings. And this problem is not unique to the USA. There’s a projected $400 trillion global retirement savings gap by 2050. 

Retirement planning aims to help you make the most of your earning opportunity as an international professional so you can achieve your ideal future.

Retirement is an exciting prospect but you need to start thinking about it long before you plan to retire.

The first thing to do in retirement planning is to identify what you want to achieve in life and what makes you happy.

It could be sailing off into the sunset in the Mediterranean or spending more time with your family, either way you need to have a clear picture in your mind before you start ramping up efforts towards it, so that by the time you are ready to move into whatever you call this new period of life, you have a pretty good idea of what the possibilities and opportunities are.

A common mistake that senior professionals make in the run-up to retirement is focusing too much of their attention on ensuring they have enough money. It’s more important to think about what you really want to do with the rest of your life and plan your finances around your desired lifestyle.

Retirement is about focusing on the things that are important to you, by first identifying what those are. It’s about living a life of purpose. Retirement is not a 30-year long weekend or a permanent holiday. It’s just life, but it’s life on your terms (in fact the Japanese call it 'second life'). 

Retirement requires serious deliberation and you should start that process sooner rather than later.

Financial educator and best-selling author of 'Millionaire Teacher' and 'The Global Expatriate’s Guide to Investing', Andrew Hallam, talks about 12 steps of effective investing to enjoy the best possible retirement, so you never run out of money.

In just 3 questions and 12 steps you’ll discover how to make positive changes today that will have a positive financial impact on your retirement plan for the future.

So let's give it a go...

As a senior international professional, you’re likely to have a more transient life than your friends and family back home, and this can lead to both financial challenges and opportunities.

Challenges include falling outside your home-country’s social support system, including any state pension provision…

Opportunities include potential tax-saving advantages, and greater income generating prospects…

Make positive financial changes today to benefit yourself tomorrow.

It’s all about working out if you’re on track to hit your magic number. 

Step #6:

How much money will you need in stocks and bonds to generate your number without running out of money?

Have you heard of the 4% rule?

The 4% rule is a guide used to determine the amount of funds to safely withdraw from a retirement account each year.

This rule seeks to balance out providing a steady stream of income, while also keeping a healthy account balance that can grow, thus allowing income to be withdrawn for the whole of your retirement.

The 4% rate is considered a realistic rate, with withdrawals consisting primarily of interest and dividends.

Getting back to step #6…

How much money will you need in stocks and bonds to generate your number without running out of money?

Take your post-inflation income gap number from step 5 – for our example it’s £66,060.99 – and work out what that is 4% of …

£66,060.99 is 4% of a pension pot worth £1,651,524.70.

To get your portfolio goal size, simply multiply your post-inflation income gap number by 25.

Are you still with me?  If not, talk to us…

We can help you through the numbers, that’s what we’re here for.

Step #9

Set and share your goals.

With a clear idea of the life you want to get and keep in mind, and an idea of what you need to save to achieve that goal, it’s time to share your goals.

Statistically speaking, we’re more likely to achieve the goals we set when we share them.

Step #10

Track your spending.

It may sound depressing, but it’s unbelievably effective, here’s why:

Tracking your spending will probably be the most painful part of your journey.

Likewise, it’s the most important. Because when you see your own spending on paper — in black and white — you can no longer blame the kids or your busy schedule. You can’t complain that you “just need a raise,” or point to high taxes, the government, or anything else as the source of your woes.

We often create our own prison cells, either out of habit or laziness or because we fail to plan. And when we do, it’s easy to blame everyone else and think that escape is impossible. And that’s why tracking your spending is a crucial piece of the puzzle - it forces you to come face-to-face with the biggest threat to your financial future.

You.

Step #11

Pay off existing high-interest debt before investing

Obviously, paying 15%+ in interest on credit card debt, whilst investing to hopefully earn the average stock market return of 7%, makes no sense.

Clear high-interest debt first…

Step #12

Invest on payday, every payday, and invest right…

Why?

Invest on payday so you’re not tempted to touch the money you’re committing to your future.

Invest every payday to benefit from dollar cost averaging – this helps your money compound over time, without the worry of market uncertainty.

Invest right, in exit-penalty-free, low cost, index funds for the long-term – for the highest possible returns, and the best life in retirement.

That’s it!  You’ve now worked your way through the 12 steps to achieving financial freedom and never running out of money in retirement.

But wait…most expats with a QROPS are paying 6.5% in annual charges – if you have a £500,000 pension pot that’s £32,500 of your money being wasted every single year.

STOP.

That money needs to be in your pension, growing for your future.

Whether you have savings, investments or pensions including QROPS, get a diagnostic second opinion of your portfolio now…

See exactly how much you’re losing in fees but much more importantly, discover exactly what you need to do to keep that money in your account.

Request your free portfolio review now – you have nothing to lose, and potentially thousands of pounds to gain.

1) The traditional method is to invest in an income paying equity fund, or portfolio of funds. These funds will invest into dividend-paying companies. These dividends are either paid into the fund, which is then able to produce an income, or paid out as cash to your pension.

2) Another method of generating income in retirement is through investing in a bond fund or portfolio of bond funds. These operate in a similar manner as an equity fund, except rather than owning company shares, the fund owns debt issued by governments, nations and companies. The issuer pays the fund a set rate for lending it money, which generates an income. 

What if we told you, that for people with 40 years until retirement, £10 million is the amount they should be aiming to save?

That’s a lot of money, by anyone’s standards.

But inflation means £10 million may just about cover a comfortable retirement. £1 million will have the same spending power as £306,000 today. £10 million will equal £3,060,000.

Over the course of that retirement – it will shrink again.

Often, retirees don’t consider the impact of inflation on their income. Over the course of your 10, 15 or even 30-40-year retirement planning, the value of each pound in real terms will fall.

This is because the price of most goods and services will rise.

For example, an average inflation rate of 3%, would mean a £500,000 portfolio, after just 10 years, would be worth £375,000 – 25% less than at retirement. 

Factoring in inflation is therefore crucial. 

Growth ensures your portfolio remains of sufficient size to produce the yield you require, as you will also likely be taking an income from this portfolio. 

There are three main things you can do to stop haemorrhaging cash:

1) Work out how much cash you actually need

Planning for how much cash you will need to support your current lifestyle is a very important part of your retirement planning. Start by working out how much you would need to fund your lifestyle for six months or a year and put that money aside. Also, pay off debts where possible, particularly short term debts such as credit cards as these are expensive.

Be realistic – think about what would happen if you were unable to work or lost your job due to unforeseen circumstances or health issues. Don’t leave yourself short.

2) Keep it safe

At AES, we strongly believe that senior international executives like yourself should have their cash in a secure offshore private bank, which provides all the banking facilities you will need, plus a good rate of interest. Money left languishing in low interest local high street banks, is at threat from political or economic turmoil (think Greece, Cyprus or Argentina) and can even be withheld in the event of death or following an accident or emergency.

Opening an offshore private bank account is step one for any senior international professional who is serious about taking control of their future.

3) Invest the rest 

The best way to combat inflation is to invest your money.

To help you get started, we offer a no-obligation, 15-minute discovery call where you can find out how you can best put your money to work.

A life of ease is everyone’s ultimate goal, but with all the talk of longevity and retirement shortfalls, you need to plan your life a little differently, especially if you are a successful international professional and plan to retire early, maybe to go back home.

Everyone wants to know how long they’ll live, but of course, that's impossible. All you can do is prepare for possibly living longer than you ever imagined. After all, 1 in 3 people born today will live to over 100. Clearly, if your investment strategy is unsuitable, you’re badly diversified or exposed to too much risk, your money may run out.

This is why an evidence-based investment philosophy is ideal for those entering retirement (and in fact, for all investors at all life stages). It ensures your wealth is appropriately invested to match your tolerance for risk, and that you are globally diversified via low-cost investments.

Beyond other considerations, such as whether to transfer into a QROPS or not, extra care must be taken when planning how to invest your retirement wealth.

Beware of structured products. They are often sold as ideal investments for pensions because they have capital guarantees and income-producing features. However, when these products fail, and they so often do, they can be catastrophic for your finances.

Below are the most commonly asked questions about investing for retirement that we come across, so you can have a better understanding of what could be the best way forward for you based on your individual needs...

There’s quite a lot to understand before you start looking around for the best funds for your money:

1) Risk –

When it comes to investing it’s broadly correct to say that the more risk you’re willing to expose your money to, the higher the return you could potentially enjoy. Likewise, the lower the risk you’re willing to tolerate, the less significant the gains you may potentially enjoy.

It’s really important to understand your own personal appetite for risk.

At the most extreme end of the scale there are investments where your money is not guaranteed, but where you could enjoy unlimited gains.

At the safest end of the scale your investment and returns are guaranteed, but the returns are going to be small.

Your unique appetite for risk is one of the most important things for a professional financial planner to know. This can be done by a comprehensive analysis of your current financial position.

If you’re unsure about your own tolerance for risk get in touch with us and one of our professional financial planners will help you turn your lifestyle into numbers and understand what you need to get and keep the life you want.

2) Asset classes –

There are all sorts of different asset classes such as cash, bonds, property, shares and commodities. It’s important to know about the choice available and the pros and cons associated with each.

We have a guide to help you better understand these different asset classes. 

3) Sectors –

Just as there are different asset classes so there are different sectors to choose from. In investing terms a sector is an industrial area of the economy in which companies provide a similar product or service.

An example of a sector is the defensive sector, which would include companies that are thought to be safer in a falling market such as utilities and healthcare firms. Another example is the growth sector, which tends to do well in a rising market. Companies in this sector could include technology or manufacturing firms. 

4) Markets –

Should you invest in an established market or an emerging market? It’s important to understand the pros and cons of each choice and which nations are considered to fall into each market. 

5) How your money is actually spent –

Some of your money will be spent on the actual investment, but some will be allocated to cover fees and charges. Generally, the more complex the fund and the more actively it is managed the higher the costs. Understanding the fee structure of any investment path you choose is critical – you don’t want to be overcharged compared to the potential gains you could enjoy. 

Fees and costs are necessary but if they are too high they can erode the value of your overall investment. Regulated advisers and fund managers are always transparent about their costs. You need to ensure that what you’re going to be charged is reasonable for what you’re gaining. 

6) Exit strategy –

Before you even commit to investing your money you need to have an exit strategy! The best laid plans sometimes change. Can you access your money if you need to? What are the consequences of accessing your money? Some funds lock you in for a specific term and you cannot access your funds until the end of the term without significant financial penalty.

Understand what you’re committing to – and never ever forget you should ideally have enough in cash deposits to cover about 3 months’ worth of essential outgoings.

Investing should be boring.

Ideally, you should set up the right portfolio for you and your goals together with your financial planner – and then leave it alone.

You should spend less time worrying about your financial future and more time doing things you actually love. 

Successful investing comes down to six principles: 

1. Accept the price 
2. Beware of market gurus 
3. Control your costs 
4. Spread your risk 
5. Be disciplined 
6. Stay balanced 

For even better investment results, a systematic investment approach backed by years of Nobel prize-winning research is the best thing you can do for your retirement planning.

Our science-based approach is grounded in economic theory and backed by decades of leading academic research. While other investment managers have access to the same research, it’s the interpretation and application that sets our funds apart. It’s about identifying what works for investors and what can bring them far greater success by capturing the key ‘dimensions’ that exist in the marketplace. 

Systematic investing encourages investors to stay disciplined, maintain a long-term investment horizon and diversify globally – three things everyone can control. These behaviours/actions will allow investors to take full advantage of time in the markets and is the ideal investment strategy in retirement planning. 

While some people aim to retire early, there are others who want to retire overseas. It’s an understatement to say that there’s a lot to think about when planning to retire abroad, it's easy to get confused and bogged down by it.

We wanted to give you some clarity by covering the 5 main categories you need to consider while planning to retire abroad. These include lifestyle, health, money, pensions and property because we know from our own experience that these are the core areas of concern to the majority of us who are planning our new lives overseas. 

1) Lifestyle -

Getting and keeping the life you desire is the most important goal to bear in mind while planning for your retirement. Understanding whether this lifestyle you have built for you and your family can be enjoyed in the country you're planning to retire in, and the financial implications of the same is vital to your future financial well-being. 

Consider whether you want to fully integrate into this new life. Most importantly, you need a professional financial planner to turn your life into numbers to ensure that the cost of living there does not exceed your retirement savings so you can achieve your ideal future.

2) Health - 

Your overall health and well-being and that of your loved one's should always be a primary consideration in your retirement planning process, no matter which country you plan to retire in. Consider how you can protect yourself through a comprehensive insurance plan. 

Looking into access to carers or at-home medical or welfare support in your new nation, in the event you need it in the future, could also help you plan better for unforeseen future life events.

3) Money - 

When you move abroad, at least semi-permanently, you become known as an expat. And for the majority of expats you also become non-resident for tax purposes in your old home nation – it’s at this point in time that the expat advantage exists for you to embrace.

Understanding how to make the most of this advantage can help you protect your wealth. 

Having a professional financial planner by your side will not only help you retire early, but can help you make moves like this more swiftly. All while protecting your wealth and the life you have worked so hard to build. 

4) Pensions - 

If you have a British pension pot and you’re retiring abroad you have the potential to enjoy even greater investment freedom. You may also be able to transfer your pension into an HMRC-recognised overseas pension scheme. Consider whether your move to retire abroad has any tax implications on your withdrawals or benefits. The key is in understanding where there are double taxation agreements in place, and where retirement income specifically, or foreign sourced income, is taxed at a favourable rate.

With very careful planning you may be able to retire abroad and enjoy your British pension at a significantly reduced rate of tax. You have to select the right country and abide by all qualification rules however – and you should take expert advice before making any decisions.

5) Property - 

If you want to avoid common risks, take your time to get to know a place by renting a property there first. Learn the local language and then take your time to ask, enquire, explore and observe everything you need to regarding the property market. Chances are, if you finally do buy a property, you will pay less for more, and get an overall better and safer deal. 

No other country has a property market as fickle as Britain. While the British market is protected by laws and regulations, it is also a market that booms and busts regularly. Elsewhere in the world there can be regulations and blocks in place, in the form of taxation for example, to deliberately take heat out of a market and prevent this damaging cycle. This can also prevent you making any profit on property bought there however, making it all the more essential to think it through thoroughly so it does not have a negative impact on your retirement plan.

A regulated life financial planner can help plan your finances around your goal to retire abroad and handle the drudgery so you can focus on the things you love.

Your retirement savings have taken you a lifetime to build and, while you may still want to invest, you cannot afford to lose significant sums of money.

You will not get another chance to build your pension savings. There are unscrupulous salespeople out there who are more than happy to take your cash and to invest it into high risk, high commission funds, which often fail.

The only winners in these cases are the salespeople who are paid vast commissions and will then disappear as soon as there is trouble. Before you begin planning your pension investment portfolio, make sure you discuss your attitude to risk with your financial planner.

There are three big considerations you must take into account when setting up your portfolio for retirement:

Income

Generating enough income for your desired lifestyle.

Longevity

Making sure your money lasts through your retirement.

Inflation

Stopping your capital from losing real value.

Mr and Mrs Smith moved to Spain around six years ago with £152,858 in savings to see them through to retirement. They bought a property and set up a small B&B business. In addition to their savings, Mr Smith had a UK pension worth around £425,000, with which he planned to fund their income in retirement.

While in Spain, they were contacted by a financial adviser and took his advice to transfer Mr Smith’s pension into a QROPS to allow “more investment freedom”. So far, so good.

They were in a strong position, with enough to comfortably retire on. Their pension commencement lump sum would have been enough to clear the business mortgage on the property. 

With minimal ongoing costs, they would only need an income of around £15,000 per year to live a comfortable retirement, which the remaining pension pot would have easily provided.

However, their financial adviser had his own retirement in mind. He found it easy to persuade them that a series of structured products was the right way to invest their money. Headline features like ‘capital protection’ and ‘quarterly income paying’ on these products make them sound low risk, as does the fact that they’re underwritten by large well-known banks.

The structured products performed badly. Some of them were linked to individual stocks which plummeted in value, while others were linked to assets such as gold which also fell significantly in value.

Despite the adviser’s promise of capital protection and income payments, the Smiths lost 60% of the value of their pension savings. As a result, their dreams are in tatters and they have had to push their retirement plans back several years as they return to work in the UK to replenish their savings. 

While the decision to transfer into a QROPS is sound enough, extra care needs to be taken as to what your ‘adviser’ invests your cash into.

Mr Jones is a self-made businessman with an independent retail store and has always been sensible and saved hard into his pension, which has grown to £500,000. 

He sold his business at the age of 55, after repaying his mortgage and other outstanding debts. He is afraid of investing his money and losing it, so he leaves his £500,000 pension in cash.

As he wants to use his pension pot as an income, he decides not to take a 25% tax free lump sum, leaving the entire £500,000 available for an income. He decides then to take an annual income of £17,500. 

However, assuming a 3% rate of inflation, after just five years he will have eaten away £100,000 worth of his pension. At this rate, he will have used up his entire pension pot before his 80th birthday and will certainly leave nothing for his family after he dies. 

If he had taken his 25% tax free lump sum, as most people do, he would use up his pension well before his 75th birthday.

Take note: If he invested his money, even cautiously, it would mean he could have helped to protect his pension from the effects of inflation, as a 4% return would have seen him comfortably past his 85th birthday.

No one likes to think about mortality. But the reality is harsh and unavoidable. It can be even harsher for those you leave behind.

Life is a wonderful contradiction. On the one hand, everyone is living longer than ever. On the other hand, more people are dying from accidental deaths, heart diseases and strokes (and from a younger age too).

Most of us have car insurance for the likelihood of an accident, theft or breakdown taking place; home insurance to cover the material goods held dear; and medical insurance that protects us during illness.

But if you die prematurely without adequate life cover in place, what would happen to your loved ones? Life cover protects your loved ones so your children can finish college if you’re not around to pay for it and your family can maintain their standard of living without your regular income.

It’s vital to plan for any, and all, eventualities. It’s also important to know that different countries have different laws pertaining to deaths and dues. Loans, fines and credit cards usually need to be paid by surviving family members.

Investments, estates and trusts have long approval processes, meaning it could be months or years before your loved ones are able to access what’s inevitably theirs.

These financial burdens can be avoided. Or, in the very least, alleviated. Today, your premiums are the cheapest they’ll ever be because, right now, you’re at your youngest. 

As you get older, the expected premiums increase every year. So, the earlier you start a protection plan, the less it will cost you on a monthly or annual basis.

Simply by taking action today, you can secure your loved ones’ financial well-being.

In the event of your death, they’ll receive a lump sum to help pay for expenses and maintain their standard of living.

Many of us procrastinate sometimes – even the most productive people, apparently! 

But when it comes to saving for retirement, procrastinating is not advised. Early birds don’t just get the worm - they get five star buffets for almost no effort.

The real cost of procrastination calculated...

Let’s illustrate the cost of procrastination with a story of three fictional couples.

In each case, these couples have always earned the same as the typical UK household.

For example, based on data from the Office for National Statistics they had £6,444 of disposable income per head in 1977.  In 1982, they had £7,435 of disposable income per head.  By 1987, they had £8,565…

These couples are all the same age…

The key difference between them is, they didn’t all begin to save for their retirements at exactly the same time.

In 1977, Sam and Kate were 25 years old.  They decided to save £175 per month (£2,100 per year).  It would have represented 16.29 percent of their annual income.

They bought low-cost mutual funds, putting 70 percent of their money in stocks, 30 percent in bonds.

The couple’s funds matched the returns of each respective market.  In other words, and for the sake of this illustration only, their stock market mutual funds matched the S&P 500. Their bond market funds matched the performance of a broad US government bond index.

But Sam and Kate were lazy!

As their income increased, they didn’t increase what they invested. They just continued to add the same £175 per month.

By 1982, their income had increased to £14,870 per year.  As a result, their investment of £175 per month no longer represented 16.29 percent of their income.  It was now just 14.12 percent.

By 2007, that same £175 per month represented a paltry 7.47 percent of what they earned.

By 2007, the other 2 couples were investing a lot more money than Sam and Kate.  

But that didn’t matter.  These 2 early birds still soared higher.

According to portfoliovisualizer.com, they would have had about £1 million by the time they were 65 years old without ever increasing the monthly amount they invested.

Stuart and Lisa live next door to Sam and Kate.  They didn’t start to invest until they were 35 years old. They invested £600 a month (£7,200 per year) in 1987.

It represented 42.03 percent of their disposable income – ouch.

But, by scrimping so hard, by the time they were 65 years old, they also had about a million pounds. 

Stuart and Lisa had to save much more than Sam and Kate.  As a result, they weren’t able to spend as much of their income on the finer things in life.

When Sam and Kate asked Stuart and Lisa to join them for a South African safari, they couldn’t afford it.  Their monthly retirement savings ate up far too much of their income.

However, at least they were doing much better than David and Sarah!

This couple only began their retirement planning when they were 45 years old.

At age 65, they also had a £1 million portfolio - but to reach that goal, they had become slaves to their savings. The couple saved a whopping £1,800 a month (£21,600 a year).  

Such savings represented 92.79 percent of their disposable annual income. That’s why, to reach their retirement goal, they had to rent out their home and live in their car!

Of course, these are just fictional examples. But the numbers are real! We used actual investment returns between January 1977 and July 2017.

The lesson here is massive – yet simple!

If you procrastinate about your retirement planning and start to invest later, you’ll have to save a lot more money to reach your ideal future.

For example, Sam and Kate began to invest in 1977.  They would have saved a total of about £84,000 to amass £1 million.

Stuart and Lisa started to invest 10 years later.  They would have invested about £216,000 to reach a £1 million portfolio.

David and Sarah didn’t invest until they were 45 years old.  As a result, they had to save about £432,000 to reach their million-pound milestone by age sixty-five.  

If they had started to invest ten years later (at age 55) they wouldn’t have reached that goal – even if they had invested every single penny they earned!

We are not saying you need £1 million to retire. But just to show you the power of investing early and the pain of procrastination.