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Live long and prosper

Amid increasing life expectancy and rising retirement ages, saving earlier and more effectively is becoming even more important. A multitude of things could combine to produce the perfect storm for people with savings, which may mean having to take more risk.

 

While it’s never a bad thing to have money in the bank, there have arguably been better times to keep it there than today. The average age of the UK population is increasing at such a rate that by 2039, almost a third of us will be over 60. And while the rate of inflation remains low, it’s still outstripping the amount our money can be expected to grow in any bank account.

It’s a depressing situation for those hoping to retire early with a healthy pension, let alone those relying on savings to fund travel, hobbies or other luxuries they didn’t have time for while building a career and raising a family.
 
Fortunately, this gloomy economic climate doesn’t necessarily have to mean working for longer or forgoing a comfortable retirement. What it does mean, though, is that smart saving – and saving now – is more important than ever, explains Rob Jones, Head of London Office & Wealth Planning Director, Sanlam Wealth Planning.

Early birds

“People shouldn’t underestimate the effects of compound growth,” he says. “Generally speaking, for someone looking to retire at 65, the money you put away at 25 is equivalent to the money you put away in your final 15 years of saving put together, because it has so much longer to grow. That’s a very good reason to start saving early, even if you only save small amounts, because it will have a huge impact at the other end.”
 
Jones says it’s all about balancing your current needs with your long-term goals. “It’s important to divide your available money into portions appropriate to your circumstances,” he says. “As a starting point, we would always recommend keeping a small proportion in cash, having a nest egg for emergencies and having a minimum of three to six months’ take-home pay in the bank.
 
“It pays to shop around with your bank or building society accounts, because they each offer different things and, while all rates are not exactly exciting, maximising the best ones always helps.”
 
How much you’re able to save each month will vary from person to person. As a general guideline, though, Jones says a good aim would be to put aside at least 30% of your income: around 5% in cash for short-term needs, 10% for the medium term, 10% for the longer term and the rest earmarked as a protective buffer.

Getting to grips with risk

But, with interest rates at an all-time low and no large increases on the horizon, Jones believes the days of using bank accounts and cash ISAs alone to save for all medium- and long-term goals are long gone. While a bank account will keep your money safe, it won’t be giving you any real return; so, there are other options you should consider that could help your money grow over the long term.
 
“A multitude of things, including all-time historically low interest rates, increases in life expectancy and possible rises in inflation, could combine to produce the perfect storm for people with savings,” says Jones, “which may mean having to take more risk with some of one’s cash.”
 
Accepting a degree of risk with your savings doesn’t mean being reckless. What it does mean is moving some money out of cash accounts and into other asset classes. “This can include a combination of stocks and shares, bonds, gilts or property,” says Jones.
 
The age-old conundrum of ‘risk versus return’ is at work here, but there are ways to at least partially mitigate the risks that come with the prospect of higher returns. “Things like shares, property and bonds have historically given a much better rate of return than cash,” says Jones. “But it’s also important to align that with how much risk – if any – you want to take, and look at ways to mitigate the risk that does exist by investing in a diverse range of companies, asset classes and geographical areas, for example.
 
“Again, investing your money earlier gives you a longer time horizon to weather the ups and downs of market cycles.”
 
Of course, assessing and understanding risk is no easy task – which is why discussing your options with your financial planner is vital. “A lot of people are actually taking more risk than they realise and are not getting paid off for the amount of risk they’re taking,” Jones says. “And the charges and costs are important as well. It’s all very well investing for a better return, but if you’ve got very expensive charges, that will erode your return a lot.”

The shrinking pot

Of course, it’s also important to keep looking ahead. While living longer means more time to spend with our families, travelling the world or playing golf, it may also pay to start thinking prudently about your current outgoings. “People’s income and capital have to last longer now than for previous generations,” Jones says. “There’s nothing surprising about that, but it means that people may have to rethink how much they withdraw each month. Obviously the longer you live, the greater the chance of eroding your pot too early. It’s a real risk.”
 
This is further compounded for savers by the increase in the pension age, Jones explains. “Access to personal pensions is being pushed out. The earliest age at which people could access a pension used to be 55,” he says. “For those who are now 43 and under, that’s now 57 and likely to increase. The normal state retirement age is being pushed out to 67, 68 and beyond. This means that people have to survive on their savings potentially much earlier than they would have had to before, and indeed longer.”

Playing the long game

So, in simple terms, what are the best steps to take to make your money grow more and last longer, so you can enjoy it as you grow older?
 
“Have a think about how you can put different portions of your money in the right places,” Jones says. “You should be comfortable with the amount of risk that each of those portions is taking, but accept that you have to take a little bit of risk to get any sort of meaningful return.
 
“Talk to your adviser regularly to review your ongoing costs, and make sure your investments are still competitive. Reassess how much of your savings you plan to withdraw, and how frequently; and make sure that whatever returns you’re getting, you can minimise the tax you’re paying.
 
“Anyone who can’t afford to lose any money shouldn’t have anything but cash, but anyone who needs a return at least level with inflation has to think about places other than cash. Taking on an element of risk is part and parcel of that.”
 
If you would like to discuss how to make your money last longer, and how much you might need to save to build a comfortable retirement pot, please speak to your financial adviser or Sanlam portfolio manager.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.