When do you want to retire and how do you plan to fund it?
This was recent the title for an essay competition organised by Baille Gifford. This is my submission. It made the final short-list and I won a £25 book voucher. Not too bad?
“As in all successful ventures, the foundation of a good retirement is planning.”In the current economic climate, our financial future is somewhat blurred, forcing us to prepare for retirement at a much younger age. However, with an unstable national economy, rising inflation and huge government spending cuts; it is becoming more and more difficult to do so. As the title suggests, the problem of retirement is split up into two clear sections. When to retire, and perhaps even more importantly, how to fund it.
People are ambitious, we all want to be a millionaire and not have to work, we’ve all had the conversation about what we will do when we win the lottery, and we’ve all dreamed about the luxury lifestyle that comes with it. So why worry about retirement? Well, as much as it pains me to say it, it’s not going to happen is it? We know that its very unlikely that we’ll be able to stop working at thirty, so it makes sense to plan ahead. Just in case.
Everyone is living longer now, with the average life expectancy being 78 for men, and 82 for women. There is a high chance that by the time we seventeen year olds hit retirement, medical advances could allow people to live much longer, and more importantly, stay healthier for longer. So should we anticipate being physically able to work until a later age? If so, we can aim to retire later, giving us more time to financially plan, but also expect to live longer, giving us more time to live the lifestyle we have always dreamed of.
There are also other psychological factors that can affect when we retire. Most jobs today are highly stressful, and retiring could be a way to escape from the pressure of everyday life. This links in with the longevity argument that states people will retire earlier if they think it will enable them to live longer.
Despite these ideas, I think that the financial burden of retirement is pivotal, and often outweighs any other factors. No matter when somebody wants to retire, if they can’t afford to, then they don’t really have a choice.
There are a number of ways that somebody could financially plan for retirement, varying from stocks and shares to pension schemes. All of these methods work in theory, but which is the best? Of course, the word ‘best’ could be misinterpreted, the fact is, we want as much money as possible so my idea of the ‘best’ method, is the one that makes you the most money, with the least risk.
The first and arguably most common method is the good old fashioned pension scheme. The government gives you tax relief on any contributions you make, and you typically pay a certain amount every month. Nice and simple.
After a new legislation, businesses have to offer pension schemes by law. The terms of these schemes vary between employers, but some can be very generous, offering to match any contributions you make. It’s effectively free money. This scheme provides members of the public with some financial security, as well as a quicker way to finance retirement. However, the fact that businesses have to contribute will raise costs, which could then lead to further unemployment.
So why doesn’t everybody have one? The real question here is whether or not you trust the government. With spending cuts on the rise, and a long road to recovery blurring our future prospects, pension schemes are almost certainly going to change. The fact that we are planning for something so far in the future means that if we don’t trust the government, we are ploughing money into a system that shows no real sign of a positive return.
Alternative retirement schemes include property and stocks and shares. If used wisely, these investment opportunities could yield very high returns, but also come with a large amount of risk attached. In order to invest in property, or trade on the stock market, you will need quite a high level of initial capital to make it worth your while. Plus, with unstable house prices, and declining profits within businesses, is now the best time to invest in such methods? I think not.
There is of course a less risky method, but it still requires large initial capital or some sort of loan. With house prices increasing, more people are looking to rent property, as opposed to buying it. This provides an opportunity to buy a property, and then rent it out. This method could provide a constant stream of income, and is quite sustainable in the long run, as you can increase the rent as house prices increase and vice versa.
With all these different schemes it really is hard to pinpoint the ‘best’ method. Instead I would suggest a mixture of all the previous methods. After all, it would be unwise to ‘put all your eggs in one basket’. So why not opt into a pension scheme, invest in the stock market, and rent out a property. The downside to this is quite obviously time and expertise. Chances are that along the line one of the methods will fail, and it will take a lot of time to manage the investments but I think it is definitely worth it. It may take a bit of research and risk, but how much do you value the luxury lifestyle of retirement? How much do you want that holiday home in Spain?
Of course the cost of retirement varies from person to person, and depending on how much money somebody feels they need should heavily influence what scheme/schemes they opt into.
So, to finally answer the above question, of when I want to retire and how I want to fund it, I think it’s quite simple. I’ll just win the lottery, and retire at thirty.
Why not?