Sometimes the costs of life get on top of us, and the older we get the more saving for retirement can seem like a an insurmountable task as the bills pile up.
When you’re young, single and working you often spend more than you should because retirement seems a long way off and no one else is depending on you.
Unfortunately for Keith and Steph, their spendthrift ways have made the purse strings a lot tighter now that they have a family to care for.
Keith’s career in banking came to an abrupt halt in 2009 as his firm rationalised its headcount downward in the wake of the Lehman banking crisis.
And although his wife Steph had a respectable income during her career in recruitment, she is now a full time mother to three children who all go to public school.
So at 45, Keith gets by on a series of ad hoc consultancy roles within the banking sector, but is worried about his career stability. More worrying is that the pair set their current lifestyle up in the good times prior to 2008 and are carrying a large mortgage and eye-wateringly expensive school fees.
To top it all off, they’ve accrued roughly £30,000 in credit card and bank-loan debts and can’t seem to generate enough income to pay these down.
Though no one would wish for their financial woes to be lessened by the sudden death of a loved one, Steph’s mother recently passed away and left her a property worth around £475,000. This property is currently under offer, but the cash is not yet on hand for the couple.
Still, with the imminent sale of Steph’s mum’s property, the couple want to use the cash to get their debts in order and provide more stability in their lives.
Once they’ve paid down some of their debts, they want to build an investment portfolio that can start to see them through retirement.
Jason Witcombe (pictured
), director at Evolve Financial Planning, says the couple certainly shouldn’t despair because they are carrying a heavy debt burden.
Rather, the best thing they can do now is make a start and the sale of Steph’s mother’s house will certainly help put them in the right direction.
What is your financial picture?
“The way we approach a situation like this is to take a detailed look at income, expenditure, assets and liabilities and make some assumptions over how these are likely to change in the future,” Witcombe said.
“That way we can build a graphical projection - many advisers call this cashflow analysis - of what a family’s future financial position might look like. This brings the numbers to life a bit. It would help Keith and Steph to understand how long that £475,000 might last, how much risk they might need to take with it and what is and isn’t realistic in terms of their future income needs and retirement plans.”
“Put another way, if retirement is “B” and we know their current financial position “A”, what does that journey from A to B need to look like,” he added.
What is your risk tolerance?
“It is then important for Keith and Steph to consider how much risk they want to take and how much they need to take,” Witcombe said.
“These are often two different things. Most advisers have some form of risk profile questionnaire but it is important to look at this in conjunction with the cashflow analysis.”
How much should you save for retirement?
The question over how much to save for retirement, Witcombe says, relates back to the couple’s income level and how much they can afford to save.
“For me, the decision around how much, if anything, should go into a pension depends very much on their income levels,” he said.
“Different incomes attract different tax rates and thus different levels of tax relief on pensions and the more that you plan around these levels, the better value for money that you can get from pensions.”
“So, it’s a case of working out the optimal balance between pensions, ISAs and other less tax-efficient investments. Within these wrappers, the choice of funds will depend on the discussions about risk and reward. We focus on keeping the cost of investment to a minimum.”
Witcombe says it is very difficult to generalise the situation Keith and Steph are in, but says having a detailed discussion about their goals, their liabilities and their revenue will help rebuild their lives and direct them on a path that, if they stick to it, should help to provide for the long-term.
Witcombe says the best course of action the couple can take is to speak to an adviser to help them build a plan. While someone with debt may find it difficult to pay an up-front fee to speak to an adviser, Witcombe says they will typically be able to have initial meetings free of charge in order to determine what an adviser can offer them.
“The great thing is that most advisers will offer a free “get to know each other” consultation so Keith and Steph would do well to book a few meetings so they can compare fee structures and the different approaches to investment and financial planning before making a decision,” he said.