Retirement used to be something to look forward to. A chance to spend more time with loved ones, and to do the things and visit the places you always wanted to. If you were really fortunate, you might even be in a position to give up work five, ten or even 15 years before the state retirement age.
The reality for the vast majority of working Britons is very different today. According to a recent study by HSBC, a fifth of us believe we will never have enough money to retire; a third of people are “not preparing adequately” for their retirement; and, even more alarmingly, another third are saving nothing at all. Britain, the report concluded, must prepare for the 'Age of the Unretired'.
If all that leaves you feeling just a little bit smug, you might want to take a closer look at the precise monthly income your own pension fund is on target to deliver. Research for the Department for Work and Pensions has revealed that those on middle and higher incomes are more likely to face a dramatic fall in their standard of living once they finish work. The highest earners, it warns, will have to delay retirement by an average of eight years unless they sharply increase the amount they are putting away.
The so-called pensions time bomb has been ticking away for years. Until now, the debate about hot to defuse it has always focused on the need for people to save more. And of course we do.
But the problem is now so serious, and seemingly irresolvable, that what far more radical is required. As a nation we need to start looking at pensions, at investing, and indeed the investment industry, in a completely different way.
Here are five key lessons we all need to learn:
1. Retirement can last a long time
Not so long ago, men would typically live about another five years after retiring at 65, women another 12 years after stopping work at 60. It’s not unusual now for retirement to last 30 years or more. The number of centenarians has risen fivefold since the early 1970s and continues to grow. Your pension savings might have to last you rather longer than you thought.
2. Charges look small but matter hugely
Yes, you probably do need to put more in to your pension, but also beware of how much is being taken out. Many policy-holders would be horrified if they realised the full impact that charges have on the value of their pensions. A worker saving for 25 years into a pension with a fairly common 1.5% annual charge, can find when they come to retire that their pension is worth 37.5% less than they were expecting.
3. It’s markets, not experts, that deliver returns
Being surrounded by industry advertising, money sections, financial blogs and business channels has conditioned us into thinking that the way to beat the market is to time its ups and downs, to sell the shares that are about to plummet and buy those that are set to rise. But the evidence shows that market timing and stock-picking are far harder than we imagine, and when fund managers do succeed at it, there is often a larger element of luck than skill. A diversified portfolio comprising low-cost funds that capture entire asset classes makes much more sense.
4. Time is the investor’s friend
We live in an impatient age. The financial industry and the media raise unrealistic hopes of quick returns. But there is a sure-fire way of succeeding as an investor, and that is to start investing early and to harness the power of compounding. The sooner you start putting money away, the better off you will be. And even if it’s too late for you, be sure to persuade your children to allow as much time as possible for their investments to grow.
And remember...
5. Your house is not your pension
We Brits are obsessed with property, and now that house prices are on the rise again, many are choosing to invest in bricks and mortar rather than pensions. Historically, though, equities have produced far bigger returns than property. Houses are about the most illiquid asset of all and, if you are relying on selling your own house to fund your retirement, you will obviously need to find somewhere else to live.