The other day I heard a Kia advertisement on my car radio. The narration listed everywhere you could find out about a car before deciding whether it was the best one for you – magazines, newspapers, web reviews and so on. However, the advertisement encouraged the listener to go to a Kia dealer and arrange a test drive.
Then when I got home an advert for a Vauxhall Astra came on the television. This is the one where people ask for specific features as ‘standard’. At all of the other dealerships, other than the one selling the Astra, the salesman has to say no.
When we buy a car, we buy a package. We start by deciding what sort of car we need; a saloon, a SUV, or even a sports car. Then we narrow our options influenced by the available budget, brand loyalty and marketing influences – ‘What this car says about you’, this includes environmental issues. Finally, we personalise the car by ensuring it has the features we want, which if not standard, can often be added as optional extras.
Moving into retirement, and life during retirement, is much the same. What sort of retirement do you want or need? How will you get from working into full retirement? What are the issues that will affect your retirement? So, can we package retirement as we do with cars? Not quite as there is a big difference.
A car is a tangible item that we can see touch and possibly enjoy. When was the last time you heard retired folk talking about the investment returns on their drawdown fund and how their performance enabled them to have an extra holiday this year? Yet folk of all ages often talk about their cars.
We lose sight that a car in its simplest sense has one purpose, to transport us from A to B. If we are an individual with no family who does not take much luggage on journeys, we will have entirely different requirements to a family who have three children under the age of five and often make journeys of several hundred miles to visit their relatives. These requirements immediately restrict the choice of cars that can be considered.
But within this ‘restricted’ choice there will be a range of options available. However, at the end of the day we buy a package that is most suitable to our needs while meeting the desires we wish for.
When we begin to retire, we have the vehicle that will take us on our retirement journey. That is our accumulated wealth. In its widest sense, this includes State pensions, private pensions and all other wealth including our home. No two people will have the same amount of wealth or wealth components.
We could take that wealth and construct an income plan derived from the drawing down of that wealth. However, retirement is not linear. At the beginning we may continue to work for a reduced income. The State pension may become payable before or after we fully retire. How long will the retirement income have to last? At the end do we want to pass on an inheritance? Will we have to meet any care costs?
It’s already beginning to look complicated. What are the wealth components and how should they be used? If we only have moderate wealth, we may need regular guaranteed income to ensure our minimum living standards are always maintained. We may be fortunate enough to have a defined benefit pension that will meet this need.
Will we move house to a cheaper property realising a sum of money that can be drawn down to provide income over part of our retirement? On the other hand, we may have no wish to move house, but have insufficient wealth to fund our retirement without calling on our housing wealth. In that case what is our pivotal age to start considering the use of equity release?
While working it is common to use our utility value to generate further income to raise credit to pay for cars, home improvements or even holidays. Without a guaranteed stream of income to repay credit, retirement becomes an entirely different proposition. How will you meet these spending spikes? Is it more efficient to take on credit, assuming it is available, in the expectation that your underlying wealth will grow at a faster rate than the rate of interest you are paying? The alternative is the drawing down of some of your retirement wealth. In which case what does this mean for your future income and spending? You may even decide to earmark some of your wealth as a reserve to meet these irregular incidentals.
To avoid calamities, it is necessary to go through these thought processes and many more before the task of selecting financial products to fit the ultimate plan can be undertaken. This selection process will be an ongoing task as one element of wealth expires and another begins to be drawn down. A plan that is intended to remain in place for up to 30 years, or maybe even longer, will by definition require refinement to respond to external changes.
Very few retirees can manage their retirement finances without help. Currently retirement finance does not receive the column inches that motoring does. However, more space is being devoted to it. As consumers recognise the need for retirement income planning, what will be your role in this fast-growing market? After all you may be helping a client obtain that dream car which they did not believe possible.
Bob Champion is chairman of the Later Life Academy (LLA)