I recently asked a new client on my Financial Clarity for Expats course why she decided to work with me.
She told me that the section in my Personal Finance Bootcamp course about how retirement really works these days resonated with her.
She told me that she did have an 'old money mindset' and wanted to change before it was too late.
Maybe you are the same?
This is how most people used to retire.
You pay into a pension during your lifetime of earning a salary. The pension amount is taken straight out of your pay so you don’t notice it and your company adds a certain amount too. This could end up total being 10%-20% of your annual salary going into a pension scheme. You might even have been lucky enough to get a final salary pension scheme.
With your pension taken care of, you buy a family home when you are young, stay in that one house and pay the mortgage off over the full term – usually 25 years.
You work for 45 years and retire at 65 – by which time your pension is a generous amount which more than covers your living costs. You’ve paid your mortgage off so now your living costs are low too.
You now have more time and money on your hands than you ever did – so you start going on holiday more, booking cruises and generally enjoying your free time. Life is good.
What’s more common now?
Most people's retirement will look nothing like the 'old' way - despite many people thinking it will.
You change jobs 5 to 6 times throughout your working life - maybe even 10. In the US, it’s predicted the youngest in the workforce will switch jobs up to 15 times during their working life.
Each time you switch jobs you set-up a new pension scheme and end up with lots of small pots scattered around.
You might even take a career break or go self-employed and pay nothing into a pension.
You rarely check the performance of your pension except for a cursory glance at your annual statement before filing it away. Maybe sometimes it crosses your mind that you should review what it’s worth but there is always something else that gets in the way of you doing this.
Corporates are under pressure to ensure pension schemes can cover those in or coming up to retirement, so current company contributions are lower than previous generations too.
You like the idea of buying a house so you decide not to increase your pension or savings contribution to build up a decent deposit. Seems like a sensible thing to do as your parents did it and they seem to be having a very enjoyable retirement free from money worries!
The difference is that you keep upgrading your house as your salary increases, so you never pay the mortgage off, you just keep trading up and getting a bigger mortgage.
Throughout your career, you spend almost everything you earn, but you have some amazing experiences along the way. You believe you have your pension already covered with your work scheme so there is no need to worry about it.
You get to 65 and it’s time to access your pensions. You need to find those all those account details from 5-10 (or more!) company pension schemes. You find that some schemes were put into maintenance mode when you left the employer, which by now could be a mix of 10-35 years ago. You have lots of gaps whilst you waited to become eligible for a company scheme. This means the investment returns have not kept up with inflation and not performed as well as they could have.
The result – your retirement income is much less than you are used to living on.
You have the current house that you purchased but, since you weren’t able to get on the property ladder until your mid-30s, it’s possible that you are still paying your mortgage of until your early 60s. Your parents had paid theirs of by aged 51 so were able to increase their savings as they were no longer paying a monthly mortgage. You are not able to do this.
The state pension has either been discontinued or is much lower than it is at this current time. You had an amazing career, earned a good salary but now you are having to lower your living standards.
Where did it all go wrong? You had a company pension, saved a bit extra each month and invested in a house. You followed your parents model of retirement but the outcome is quite different.
What can you do?
It all sounds like doom and gloom - but it’s not IF YOU TAKE ACTION.
You just need to wake up and realise that what worked one or two generations ago, won’t work for you. It’s just a case of being more pro-active with your money and not burying your head in the sand.
Some simple steps you can take now - work out roughly what kind of pot you need for retirement, then deduct all of your assets – pensions, cash, investments, property, and see if you have a gap.
If you do have a gap, then you start working out how much you should be saving on a monthly basis to reach your savings goal.