May 16, 2020

A pension of limited value

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A key component of good financial management is the ability to control your costs. If you have ever run a business you will know this. Too much overhead and not enough income amounts to going bust. The speed of the insolvency is directly related to the degree of overspending. Family budgets are no different in that they require discipline, something that is dependent on the personal application of each individual. Living within the perimeters of a pension of limited value is the same.

In advising clients in recent years it has been eye-opening on what many deem to be basic expenses. In my view this is paying the mortgage or rent, putting food on the table, clothes on your backs of all and enough to support basic education for the children. Many who I have been advising in recent years have told me that this also includes tennis lessons for the children, golf club memberships, two holidays a year and changing the car every three years.

Without wishing to deprive anybody of what they desire the reality is that such superfluous overspending now, especially on non-essentials, jeopardises future income and the basic lifestyle of the future. It seems that the lessons of the fallout of the Celtic Tiger have not been learnt in some quarters. Don’t get me wrong, I don’t want to be seen as a Scrooge type character but the truth is many did not understand the full implications of their borrowing to fuel their overspending in the Noughties until it was too late. It really should be a case of once bitten, twice shy. Overspending just does not work.

On the other hand, simple accumulation whether through a bank account or a pension product can produce a substantial sum. Einstein is reputed to have declared that “the most powerful force in the universe is compound interest”. For example, a savings of a mere €23 a week earning only 3%p.a. over a 10 year period amounts to a tidy sum of €13,943 after 10 years and €32,762 over 20 years. If the growth rate was 6% then the figures become €16,375 and €46,200 respectively. Saving multiples of €23 on a weekly basis produces pro rata returns. The bottom line is that a consistent approach to savings can pay off and, as such, this can produce a significant future source of income. This consistency will lead to having a pension of large value rather than a pension of limited value.

Saving and spending are only part of the equation. Managing risk is key. One of the other lessons of the Celtic Tiger is that people chased the dreams of others by trying to copy the “Jones” in either purchasing property or gambling with “Contracts For Difference”. Many invested in assets with risks that they did not understand and in many cases compounded that risk with borrowed money. Very few stood back and really gave consideration as to their personal ability to absorb financial losses if the investments went pear shaped. These harsh lessons should not be forgotten. In essence, you should only gamble with what you can afford to lose. Otherwise you need to control risk and invest for the future.

But then what’s an appropriate level of risk. It varies from person to person and is influenced by issues such as time left to when money needs to be spent, tax circumstances, personal health and level of personal expenses.

To determine how all of these interact needs the skills of a financial planner who is capable of forensic analysis of your finances as well as painting a detailed personal picture of your future income and wealth. Only by focusing on your needs rather than the value or benefits of a financial product can you truly appreciate how your future income can be generated and protected.

Warning: The value of your investment may go down as well as up. You may get back less than you invest.
Warning: Past performance is not a reliable guide to future performance.
Warning: These figures are estimates only. They are not a reliable guide to the future performance of your investment.
Warning: If you invest in this product you may lose some or all of the money you invest.
Warning: This product may be affected by changes in currency exchange rates.
Warning: If you invest in this product you will not have any access to your money for the period between now and eventual retirement claim.
Warning: The income you get from this investment may go down as well as up.
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