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By: James McLeod

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August 5th, 2015

Retirement planning: The five biggest pension mistakes everyone makes

Pensions

You are very likely to run out of money in retirement.

Worldwide research from HSBC last year found that the average person will run out of pension savings just half way into their retirement.

While we all like to believe we are different and that we will be OK when it comes to our retirement, the reality is most of us do not spend enough time thinking about it and making proper provision. “You are thinking you will be one of those who have saved enough for your ‘golden years’.  If so, you’re among the majority who think this, but you may not be among those who have actually done so – a minority.”

It may be helpful then to think of it in a different way. When you reach retirement – do you assume you will be spending less and so will therefore have enough? When you think rationally about this does it make sense and tally with what you envisage for your retirement?

retirement planningHSBC’s research actually found more than half of people experience no change in their financial outgoings in retirement, and that 17% in fact found their expenses increase. Does this sound more realistic?

The good news is that there are some relatively simple things you can do to help keep you on track with your retirement planning. Here are five things people often get wrong when saving for retirement:

1) Not taking enough risk

“I don’t want to take risks with my pension.”

We often hear this.

This makes some sense if you are 10 years into your retirement, but if you are 20 or 30 years away from retirement then you definitely want to have risky assets in your pension portfolio. I don’t mean risky as in bought from some dodgy offshore salesman and investing in some obscure corner of the world’s chicken farming industry, I mean funds which buy carefully analysed equities in some of the fastest growing areas of the world – Asia, say, or Latin America.

By taking risk early on in your pension portfolio, you are likely to boost your returns significantly. Being too cautious could see your money barely rise above inflation.

2) Substituting your home for proper pension planning

“I will just release equity from my home when I retire.”

Our home is often the biggest financial asset any of us will ever own and we are rightly proud of it. But we shouldn’t rely on it to support us in old age.

Housing markets, as with all financial markets, move in cycles and you may find, at the point you want to downsize in order to release equity, that the value of your home is much less than you hoped – differences of tens of thousands of pounds can have a huge impact on retirement income.

This is also the investment equivalent of putting all your eggs into one basket and is not a very sensible thing to do.

3) Not saving enough

“I’ll start saving more next year, there’s too much I need to pay for right now.”

Assuming that we will have more cash available in the future is one of the biggest sins of saving (or not saving) for retirement.

The assumption that in future years it will be easier to save is nearly always wrong – each stage in life requires big purchases. Once you have bought a first home, paid for your wedding and paid for thousands of nappies, you are likely to then need cash for university or school fees, your children’s wedding or help with a first home for your children. It’s never the perfect time to save more – you have to be disciplined.

4) Underestimating your life expectancy

“I wish I had started saving earlier or retired later.”

Many people still hold quite an old-fashioned view of retirement – one of planning to reach a set retirement date and not working a day longer.

However, the majority of people underestimate how long they will live and really people should be thinking about being more flexible as the typical 10 or 15 years of retirement is now more like 20 or 25, or more, and particularly so for women. While this is obviously very happy news for everyone and, as medicines and healthcare improve, we can only expect to live longer and longer, it puts a big strain on our finances.

For example, if you planned to have an income of $50,000 per year for 20 years – you may have to make do with an income of $33,000 for 30 years. Make sure when you plan your retirement saving you won’t be stretched to the limit in the future – save more while you can and allow for some contingency.

5) Paying too much in fees

“My pension doesn’t seem to grow from one year to the next.”

Investing costs money – but the fees you pay should not be detrimental to the overall performance of your portfolio. Make sure you are not being overcharged for your pension wrapper or the underlying investments.

AES International are here to help. Why not start by downloading our guide on international pensions.

About James McLeod

James McLeod is Head of Pensions, and as General Counsel to the AES Board is responsible for the controls which bring our clients the peace of mind and security they value so highly.

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