Retirement plans are too important for rules of thumb

Financial Planning is a very personal experience and everyone’s needs are unique. This is especially true when it comes to retirement. Yes, there are some general principles that most people would do well to follow but we must check and adapted these to our own personal circumstances.

‘I’ before ‘E’ except when there’s a feisty heist on weird beige foreign neighbours reinventing protein at their leisure.

The above tweet (a Twitter message) flew across my computer screen recently and caught my attention. Although it doesn’t mention financial planning, it struck a chord with me and made me think.

can I afford to retire early?
Don’t rely on rules of thumb to make important financial decisions

I cast my mind back to the initial reasons for each of our clients’ contacting Forty Two. A high proportion originally came to us at the point of making a major financial decision. They had reached a point in the Long and Winding Road of their financial life where they had to make a choice. We sometimes call this fork in the road a “sudden wealth moment”. For many this was the point of retirement, redundancy or selling a business. In such situations the comfort of receiving a regular secure income is replaced with a lump sum of capital that may need to support us for the foreseeable future or even the rest of our life. The most often asked questions included things like:

  • Can I afford to retire?
  • How much longer will I need to work?
  • Can I afford to retire early?
  • Can I afford to accept an early retirement package?
  • Should I apply for voluntary redundancy?
  • Can I afford to take voluntary redundancy?
  • I have been offered a substantial sum of money to sell my business, should I accept?
  • How much do I need to enjoy a comfortable and secure retirement?

Other clients first approached us after a disappointing investment experience with a previous adviser. They often asked questions like:

  • My investment returns have been really poor, is this down to bad management or just bad luck?
  • Could I get a higher return from my investment portfolio without taking more risk?
  • What level of investment return do I need to achieve?

Unfortunately, many people don’t have a proper framework for assessing the situation and reaching an informed decision. In fact, the majority of people (including many advisers) rely on rules of thumb to make decisions about important, potentially life changing, financial decisions.

When faced with any important financial decision it is vital to carry out an informed analysis and not rely on potentially dangerous rules of thumb. That is why it is so important to have a personal financial plan which includes a detailed lifetime cashflow forecast. A picture paints a thousand words. When we can see the implications of various potential strategies on-screen it often becomes blindingly obvious what the right course of action is. For some of our clients the right course of action was take the early retirement or redundancy package and enjoy life, for some it was to accept the offer to sell their business but for others it was work (and save) a few years longer to ensure a secure retirement.

While ‘I’ might come before ‘E’ in most cases, as the original sentence shows, it is certainly not true all the time. With important financial decisions a proper financial spellchecker is much more robust than a simple rule of thumb.

2 Responses to “Retirement plans are too important for rules of thumb”

  1. Jaymie Maree

    When contemplating retirement the majority of us seem pre-programmed to only consider the far reaching financial implications of never bringing in an income again! But the fact of the matter is that there are many more things to consider if planning on retiring abroad, not to mention the fact that many retirees overseas pick up odd jobs and part time positions advising and assisting other expatriates with their lives and businesses anyway!`

    • Alan Dick CFP

      Alan Dick CFP

      Absolutely, many people we meet have no intention of completely ‘retiring’ in the traditional sense of simply stopping work on a one particular day and drifting off onto the golf course for the rest of their life. That is why it is so important to plan ahead for the life you want over time, including the ‘retirement’ phase (or phases) and build in reasonable assumptions for how much this will cost and how best to fund it. Part time income could easily be part of the plan.


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