The majority of the population finds financial and investment matters to be confusing, at best, and intimidating. Recent legislative changes, particularly those related to freedom and choice at retirement, have increased the level of intimidation to such an extent that a house-visit by the Kray twins, in their prime, seems like a tea-party in comparison. Recent research by the Pensions Policy Institute (“PPI”) found that “individuals’ intentions around their DC pensions are characterised by high levels of uncertainty”. This uncertainty relates both to when the individuals expect to retire as well as to how they are likely to access their pension savings.
Some 2,500 years ago, Heraclitus said that “the only thing that is constant is change”. Ever-changing personal circumstances do pose a challenge to financial planning, including retirement planning – the focus of this blog. However, why should these changing circumstances be allowed to impede the identification of a goal supported by the development and implementation of a pragmatic financial plan?
The core tenet of such an approach is to set, as early in one’s working life as possible, a goal (in the form of an aspirational retirement date and retirement income) as well as the related implementation plan. Thereafter, the goal and/or plan might be modified as circumstances change. Neither the goal nor the plan is not cast in stone. The cost, and other implications, of each change can be assessed at the point the change is considered. If the benefits of the change exceed the cost, why not then make the change?
A clearly defined plan can be converted into a similarly robust investment portfolio. This portfolio can then be monitored to assess whether the plan is on track or whether changes need to be made. The absence of evaluation metrics leaves investment decisions being made in a vacuum – if you don’t know where you’re going, how do you know if you’re likely to get there?
Savers appear to address the uncertainty they face by wanting to retain flexibility in the way they apply their pension savings. The PPI found that 87% of respondents indicated that it was important to have such flexibility. This flexibility is consistent with being able to modify the plan and/or goal that have been set.
The discipline of creating and implementing a plan will likely increase the chances of the goal being achieved. There is no reason why the goal and/or plan have to be rigid but making changes within a clearly defined framework allows the consequences of such changes to be assessed before deciding whether to proceed. Such a process also creates a natural tracking of the impact of past changes, informing the decision-making process. There is effort involved in setting a goal and crafting a plan to achieve this goal. However, what is the point of setting out on a journey if you don’t know where you’re going?