This month, our personal finance columnist, Mitch Hopkinson, focuses on the difficult subject of mortality and its importance in financial planning to secure a comfortable retirement and to sidestep potential disasters as a result of unforeseen circumstances.
Mitch, a recipient of the ‘Financial Times Independent Financial Adviser of the Year Award’, is Head of East Midlands at deVere United Kingdom, the UK division of deVere Group, one of the world’s largest independent financial advisory organisations.
It strikes me often that life is not long enough, we are in 2015 and still we only have a short period of time in which to enjoy our lives. I have been helping clients with their financial planning for quite a few years now. I help clients to look at their mortality in a number of ways. I will pose some difficult questions which should allow them to pause and consider their lives from a different perspective. I often find that for many, the opportunity to take some time to consider their own life plan is hugely beneficial. So in this article I would like to pose the question, how long have you got left?
Now I hope you start to see what a great question this is, because, you and I don’t know the answer. It is one of life’s joys that we don’t exactly know what life holds in store for us. But for some people, the fact that this question cannot be answered allows them to use it as an excuse not to plan, or worse perhaps, not to realise that time is precious and they therefore do not take the time to ‘carpe diem’ or ‘seize the day’.
One of my clients told me about the concept of mindfulness recently, as it was something that he was learning to have time for, as his life had taken an unexpected twist. He therefore was going to make sure that he took note of each day, and lived in the moment. This is the concept of mindfulness. The twist in his life encouraged him to review other areas of his life, and to ensure that he had sufficient protection in place, so that in the event he was not able to work through illness, he could be satisfied that he and his family were sufficiently protected. You see, for him, his life had taken an unexpected change, owing to the diagnosis of an illness of a loved one.
In this article I will not focus on the need for us all to ensure that we have adequate protection in place, so that we can be certain that if we are ill, or if we die too soon, then we can be assured that we are properly catered for. I will leave that question hanging, for now. It is though, one of the areas that you will quite naturally focus on when you ask yourself the question, how long have I got? So putting that aside, how can you take a realistic view of your life and how long you will live for?
It is certainly the case that many people don’t even consider this question. For those that do, they will start to think about the rest of their life. As an adviser, one of the things I help people to consider is their life expectancy. As part of the process of building a lifetime plan, I will encourage my clients to consider their life and how long they have for their plan. This focus is really important, because you want to ensure that your money does not run out. The last thing that anyone wants is to live life only to find out that for whatever reason they did not plan effectively and so ran out of money in later life. This would be devastating, because it is much more difficult to earn money when you are in your later life. In this instance, picture yourself on your annual holiday and finding out that you have run out of spending money with 3 or 4 days left of your holiday. Most people don’t want this to happen, which is why all-inclusive holidays are so popular.
In order to avoid this, you must get an understanding of how long your money needs to last you, in every eventuality. So pause for a moment and think, how long have I got left?
A good indication would be to look at your close relatives and consider how long they lived for, how old were they when they died? Are there any hereditary, life shortening illnesses in your family? I will regularly ask clients to review their life expectancy by asking them to visit https://www.livingto100.com this site has 40 quick questions that will take about ten minutes to complete, and having done so, it will estimate your life expectancy. Indeed it will provide you with personalised tips on how to live to 100.
So, assuming that you have taken some time out to answer this question for yourself, you will be able to see how long you have left to plan for the rest of your life. Now you know this, you can start the process of asking a whole series of further questions. I would implore you to ask some really deep and thought provoking questions now so that you start to get an idea of what the rest of your life looks like, and what you are going to do with it.
One of the questions you could pose may be what am I going to do with the time I have left? This is where the concept of a bucket list might come in, so go on, put some of those exciting goals on your list and start to tick off your own bucket list. Another really important aspect is to consider how the answer to your question of how long have I got left, affects your future planning. What decisions need to be taken now to ensure that you live the rest of your life effectively and achieve your life’s plan?
This is particularly important for those people who are approaching the point in life where retirement is on the horizon. You see, it is a crucial aspect of this part of life, that you get your planning right. With the advent of the new pension rules, it means that many pre-retirees have far more choice in what to do with their pension funds.
For many, the opportunity to have a defined amount of income for the rest of their lives, will be compelling as it should mean that they will never run out of money, i.e. the ‘all inclusive’ concept. This is the concept of buying an annuity. Here, you exchange a certain amount of capital, for the promise of an income that will never run out for the rest of your life. This is a once only decision, and once you buy an annuity, you have an agreed level of income that will pay out, usually each month. The decision you make, will have been based upon other key factors too, each of which will affect the level of income that can be paid out. If you decide to have an income that carries on for your spouse, this will reduce your income, but give peace of mind to enable you to be certain that income carries on after your death.
However, this may be too restrictive for some, as it does not allow them access to their fund in the early part of their retirement, which is probably the time that they would like to be crossing off many of their bucket list items, when they are fit and able enough to do so.
Having more money early could be very attractive, and an annuity fixes the level of income you receive. But how do you know if you will have enough money left for your old age if an annuity is not right for you?
This is where the concept of a full financial plan will come in, you see, if you plan ahead effectively, you will be able to map out your life and see what your plan needs to achieve in order to ensure that you do not ever run out of money.
One of the key points this will show most people is the length of time they need to have their money invested for. In turn this will give an indication of what growth rates they need to achieve in order for their plan to work effectively. This type of detailed financial planning will show you if there is a viable alternative to simply buying an income for the rest of your life, an annuity, or if there is a valid investment led alternative.
Mitch Hopkinson is a managing partner of deVere United Kingdom, part of the deVere Group, one of the world’s largest independent advisers of specialist global financial solutions to international, local mass affluent, and high-net-worth clients, through a network of 71 offices across the world and more than 1,000 staff. It has in excess of 80,000 clients and $10bn under advisement.