“Once you realize that you have identified a passion, invest in yourself. Figure out what you need to know, what kind of experience and expertise you need to develop to do the things that you feel in your heart you will enjoy and that will sustain you both mentally and economically.”
Martha Stewart, American businesswoman, writer, and television personality.
THE LOW DOWN
Now you see it, now you don’t: The future of state pensions
Here’s a shocker: if you’re under 40, you probably won’t receive your state pension until you’re at least 70 years old (if not later). At present, the British government is spending around £108 billion on pensions - a hefty 42% of the entire welfare budget. As the population ages, the government will inevitably need to spend more on state pensions and thus, the retirement age will continue to rise. We don’t know about you, but we don’t really fancy working full-time at the grand ole’ age of 70.
Not to be alarmist, but it’s important you get to grips with state pensions today in order to plan ahead with confidence. We’ve done the heavy lifting for you, and this is how the situation is shaping up to look like:
A new flat-rate, or single-tier, state pension has come into effect for everyone retiring after 6 April, 2016. In essence, this means that if you retired before 6 April 2016, you will continue to receive your basic state pension. Before these changes were introduced, the age at which you could claim state pension was 65 for men, and 60 for women. If you qualified, the maximum basic state pension rate you could receive was £119.30 per week.
The age at which you can claim the state pension is set to rise to 65 for both sexes by 2018; 66 by 2020 and 67 by 2028. You get the drift - the more time passes, the older you’ll need to be to claim your state pension. The maximum you can receive from the new state pension is £155 per week, or £8,060 a year. To qualify for any pension at all you will need to have 10 years of National Insurance contributions. To qualify for the full new state pension, you will need to have 35 qualifying years. Previously this was 30 years.
Speaking of old age, have you ever wondered how the dramatic increase in life expectancy will affect how we plan and live our lives? "The 100-Year Life: Living and Working in an Age of Longevity” by Andrew Scott and Lynda Gratton explores this phenomenon. The authors claim that the traditional, three-stage linear life we’ve grown so used to - education, career and retirement - will be replaced by a multi-stage life with new stages. Fight it all you want, but the reshaping of life in response to our longevity is inevitable, and we need to adjust our skills to financially plan our prolonged future.
Have you given retirement much though? When and how do you think you’ll retire? Looking at how much state pensions will give you, do you think you could have a fulfilled life on it alone? Looking forward to hearing your thoughts!
OFF TO YOU
Preparing for a 100-year life
Did you know that life expectancy increased at the rate of 2 to 3 years every decade? There’s all kinds of implications of living a longer life: we get to spend more time with our families and explore unforeseen hobbies in retirement (have you read about the 89-year-old Russian grandmother brazenly travelling the world? Respect). But there’s also the more complex issue of financially planning our longer future: living for 100 years hasn’t exactly been the norm in previous generations, so we don’t have a clear blueprint to follow. Andrew Scott and Lynda Gratton’s ‘The 100-Year Life’ provides exactly such a blueprint; helping us tackle the exciting but ever so slightly terrifying prospect of living longer than ever.
The key takeaways from ‘The 100-Year Life’:
In order to support a longer life and your financial assets, you will need to work longer and save more. However, while working into your late 70’s may help you have more security, it also creates an imbalance in your other, less tangible assets.
The ‘intangible’ assets reflect your vitality, productivity and transformational abilities. In essence, this means that by simply extending the amount of years spent in the workforce you will tick the box of ‘financial security’ but will probably not be very happy (or relevant). It’s actually quite logical: if you graduate at 21, how likely is it that the skills you learnt then will still apply when you’re 70?
Can you imagine working at one company, or, even, the same industry for 60 years? The sheer thought of spending that long at one place is exhausting. Working for that long is likely to impact your relationships, health and mental well being - and not in a good way. So, what to do?
A multi-stage life approach is one way to solve these conundrums. Take the multiple-career perspective as an example: each career stage will differ in terms of sector and role as well as motivation. You may spend the early years of your career motivated by financial rewards; and towards a later stage, you might want to switch to more socially rewarding work instead.
In short, we’ll need to make sure we take care of our skills and our knowledge (perhaps in the form of re-training, short courses or vocational degrees), our mental and physical health and adapt to rapidly evolving technological advances. It’s time to bid farewell to a linear approach to life, and welcome the era of fluidity!
Have you read the 100-Year Life? Do you think you would be able to adapt to the demands that come with longevity? How do you see your life in retirement?
THE BIGGER PICTURE
Saving from the short to medium term
People aren’t all made the same. We have different motivations, careers and lifestyles, and all this should be reflected in our savings strategies. Determine your savings goals: you may be looking to get on the property ladder (long-term goal) or book an exotic getaway (short-term goal). Tim Bennett, Partner at Killik - an investment management and financial planning firm - put together this instructive video where he discusses saving from the short to medium term.
Short to medium term funds need to be placed somewhere that ticks the following boxes: low in price, liquidity, and default risk.
If you’re looking to save in the short term, you should be able to have immediate access to your account - which means a lower savings rate. You can get a higher interest rate if you put your money away for longer, say, 12-24 months.
Medium term accounts will work harder for your money and (hopefully) get you a higher return.
The potential returns are still significantly lower than longer term options.
It helps to identify your future cash needs in order to maximise your returns. The longer you can lock up your funds, the greater the return.
Don’t forget about your emergency rainy day fund.
Have you considered investing in bonds? This could be a great way to save in the medium-term. Take a look at the video for a great analysis of gilts vs. cash.
*Please note - this is not a sponsored post.*
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We are not certified financial advisers! The articles and information made available on Vestpod are provided for information and educational purposes only and do not constitute financial advice. You are advised to consult with an independent financial advisor for advice on your specific circumstances. Read our Disclaimer here.