Today, we are less reliant on the state pension and more so on our private pension funds. This means that if you want to maintain your standard of living when you retire, you need to make sure that your pension will support it.
Unfortunately, this is often not the case. In Ireland, the average pension fund is just over €100,000. In most cases, this means that a drop in living standards is inevitable upon retirement.
However, it is never too late to make changes and boost your retirement fund. The first step to learning how to do this is to understand why your pension fund is the way it is.
Here we list the top reasons why your pension fund isn’t as healthy as it could be.
1. You are not contributing enough
Either not contributing enough or regularly enough are amongst the top and perhaps most obvious reasons that many people find themselves with a shortfall in their pension funds.
It is easy when we are younger to convince ourselves that next year or the year after will be time enough to boost our pension contributions. However, for any financial planning to be effective, it is essential to consider the long-term picture and to do this from as early an age as possible. This means stop putting off what needs to be addressed and consider how much and how often you contribute to your fund.
It can be difficult to know how much you need to contribute to achieving the standard of living you hope for in retirement. We can help advise you on how much you should be contributing to fully enjoy your retirement. For impartial advice on your pension fund, why not call us today.
2. Time is of the essence
This was touched on in point number one, but not maximising the use of the time available to build a pension fund is another common reason for a pension fund shortfall.
Time is a major variable that is often not given enough weight when we look at proper financial planning. It is easy to think we have plenty of time but to maximise your pension fund, the opposite is probably true.
A lack of urgency is almost inevitable when we are younger. The problem is many of us carry this with us into our later years. The reality is that to build a large enough pension fund that will cover our needs for potentially 30+ years, time is never plentiful.
As an example – If you plan to retire at 60 and you are 35 now, then 60 may seem a long way away. However, it is only 300 months; for most people, that means 300 pension contributions. Looking at it this way, it suddenly doesn’t seem that far in the future.
It is never too soon to consider your pension fund, now is the time to plan accordingly.
3. Remember to factor in inflation
This is often overlooked, but these days with inflation rates increasing the world over, this is more relevant than ever. Inflation can be devastating to a pension fund if it isn’t factored into your financial plan.
This point is closely linked with the size of your contributions, and once inflation is considered, it makes the steps of contributing enough from as early as possible even more crucial.
To counteract the effects of inflation, you need to build the attrition of the value of your fund into your investment policy. This may mean taking a more aggressive approach to your investing, which is what we will cover next.
4. Consider a more aggressive investment policy
This is not to be confused with putting all your eggs into one high-risk basket, but having some exposure to carefully considered higher risk funds can pay dividends, literally.
One frequent reason that people find themselves with a less than adequate pension fund is a passive and overly safe investment policy.
When you take account of inflation and charges, your investments need to return 3.75% just to retain their value. This is why taking a risk or two with a more aggressive investment policy can help make your investments inflation-proof and able to sustain you throughout your retirement.
A proactive investment policy backed by a deep understanding of current and future market trends will go a long way to making your pension fund inflation proof. If you need any advice about how to formulate an effective investment policy, please call us today.
5. You pay over the top on charges
Charges are a necessary evil. They are what keep the wheels of commerce and investing turning. However, if due diligence is not applied and the charges you are paying are not monitored, then the outcome can be a large dent in your pension fund.
Getting to grips with your charges means closely monitoring your investment statements and, where necessary, questioning the charges applied. It could be that you are being charged unnecessary and excessive charges for the services you are provided with. This is why due diligence should always be applied.
6. You haven’t compiled a financial plan with a clear goal
Compiling a financial plan with a clear financial goal is the foundation of any pension fund. Unfortunately, many of us take a more piecemeal approach to building a pension fund, and this can be a recipe for disaster.
A financial plan allows you to monitor the status of your fund at any point and compare it to a set goal. This allows you to always know whether you are ahead of the game or otherwise and make early adjustments to keep your fund on target.
Measuring the progress of your pension fund is crucial to remain on target.
7. You let your heart rule your head
It is easy to make investment decisions based on emotion rather than cold, hard logic. Successful investors are those that can retain focus on the numbers without being distracted by irrelevant factors.
It is easy to follow trends that are riding high on a wave of euphoria, but boom and bust cycles are often driven by such waves of investment. A good investment policy should always be based on cold decisions that are backed by a deep understanding of the markets.
Can I change things?
If you find that your pension fund is lagging behind your expectations, then don’t worry, you are not alone. At Financial Architects, we have years of experience in helping people achieve their retirement dreams.
We can offer advice on what you need to change and how to change it. If you want to realise the best retirement possible, then call us today and see how we can help brighten your future and set you on the path to a happy retirement.
Financial Architects Ltd t/a Financial Architects is Regulated by the Central Bank Of Ireland.