I like to keep things simple. I’m a minimalist. That’s reflected in all aspects of my life really. I retain the minimal amount of paperwork for any statements and payslips etc. I have no space for unwanted clutter in my house and even in my filing system.
My wife and I have just one bank account, one savings account and an Individual Savings Account (ISA). They are all in joint names apart from the ISA, which is in my name. You can’t have joint ISA’s.
Both our wages are paid into our joint bank account each month. All the bills are paid out of the same account. This works for us. Managing our finances this way is a breeze. Having only a joint bank account when it’s our birthday or christmas is awkward though. We can see where the presents are bought from and for how much. That is of course unless we pay cash.
I think the arrangement for managing our day to day finances makes sense for most couples in a stable relationship. However, I find when speaking to friends and family that most people like to have seperate bank accounts. Also, the bills are often divided up between the couple, normally with the higher earner paying the mortgage.
There is another benefit to having a joint deposit and savings account, besides convenience. It’s a reason which many people probably don’t think about. In the unfortunate event that one of the spouse’s passes away, the other spouse will still have access to the funds. Those funds will automatically transfer over to the surviving spouse. This avoids issues with accessing the funds and having to deal with probate.
Of course, we have accounts for managing our pensions and a SIP also. They are well documented in this blog. Now, it’s not possible to, nor would you want to have joint pension plans. That doesn’t mean that you shouldn’t take an holistic approach to asset allocation with them or any other long-term savings and investments.
Many people know if their spouse has a pension. But how many people consider their partners assets when constructing a portfolio within their own pension plan? I wonder how many couples have both their pension invested in a UK fund or some other similar class fund?
When I look at our long-term finances, I’m mindful of the asset allocation. Our defined benefit, final salary pensions form the core of our future retirement income. These are the gold plated pensions that we seldom hear about these days. I was very lucky to be in one of these schemes when I left school and have been with the same employer ever since.
Unfortunately, my employer has deferred that scheme now and I am forced to contribute to a money purchase scheme. My wife on the other hand, who works for the NHS is lucky to still be in a final salary pension scheme.
Planning For Retirement Or Financial Independence
Most people when thinking about long-term finances are normally thinking about pensions and retirement. The world has changed and it’s no longer the case that someone has to retire at 60/65. You can also semi-retire or carry on working beyond normal retirement age if you wish. There is one thing that most of us aspire to though and that’s being financially independant.
I was sensible to start saving for retirement as soon as I started work when I was 17. My wife and I have final salary pensions which will already be enough to provide us with a decent income when we retire at 67. When I say enough, I mean that’s enough with the state pension combined.
I am just turning 45, my wife is 43. My intention is to be financially independent by the time I am 57. If I am able to retire, and if I want to retire, even better. I could potentially get access to my pensions when I reach 55. But could we go 12 years living of our private pensions until we get to receive our state pensions? Even if we could, we could potentially risk depleting our retirement funds too early.
Unless I know how our investments are going to perform, between now and when we’re nearing financial independance, it will be a bit of an unknown. Even if we did have enough money to retire at 55/57, would we when it came to it?
Maybe phased out retirement will be a better option? People are living longer these days. If we retire at 57, we could have another 40+ years ahead of us. Could we afford to live that long? Would we worry too much about living that long financially?
When we decide to either wind down or retire, what will we do with our time? Will we have expensive hobbies or go on more holidays? Having a rough idea of what retirement looks like now will help us plan better.
Whilst we may not be able to come up with a definitive income requirement, it should serve as a guide. We can budget and position our assets accordingly.
What Will Financial Independence Cost Us?
For most people, their biggest asset will be the house they live in. Because you require it to live in, most financial planners would not include it in a net worth calculation. Any outstanding mortgage on the other hand would be. Any buy to let properties or second homes are an asset potentially to be included as part of an investment portfolio.
We done a rough budget working out our outgoings, including holidays etc. Our mortgage will be paid off by the time I am 55. If we have no mortgage, we could have a decent standard of living on £30,000 a year (in today’s money). We don’t don’t have a lavish lifestyle but you would need to consider any hobbies or life dreams when budgeting the cost of retirement.
Our final salary pensions and state pensions will be enough to cover our £30,000 requirement from age 67. Therefore, we just need enough income to get us from age 57 to 67. That’s where our Investment Portfolio comes into play.
A Simple, Low Cost, Diversified Portfolio
I believe some people over diversify their portfolios. They invest in every type of regional fund, and funds in every asset class. I believe you are better off researching and specialising in niche areas and companies. If you over diversify, you may well by duplicating underlying investments without even realising. More importantly, you might not lose much should an investment turn sour, but you won’t gain much either.
I have a money purchase pension with my employer and my wife has a Self Invested Pension Plan (SIPP). My wife has her SIPP invested in a couple of individual highly researched stocks, Burford Capital and Kainos Group. My pension is invested in cash and a global tracker fund which I consider the core component of the Pension Investment Portfolio. Most new money goes into the Global Tracker Fund at the end of the month.
I also have shares in the company I work for, through the Share Incentive Plan (SIP). These shares I can sell tax free after 5 years. They form more of a mid to long-term investment but are included in our Investment Portfolio.
It’s worth noting that we do not include our final salary pensions in the actual Investment Portfolio itself as they are in effect a fixed income asset.
Tracking Assets and Liabilities
If you haven’t already gathered, I track our assets constantly. Yes, I’m obsessed, I admit it. Most people do not need to keep track of their assets to the same degree that I do. But maybe having some idea of your net worth etc., will aid you if your are serious about building and preserving your long-term wealth.
It helps to have a breakdown of your collective assets and liabilities for assessing risk, making investment decisions and planning your financial future. Therefore, you may want to consider tracking and monitoring your finances as one, just as I do.
An Holistic Approach To Managing Risk
For me, having an holistic asset allocation also means having an holistic approach to managing risk. Why would you do one without the other? I’m talking about about two types of risk here to be precise, but they both could negatively impact your overall wealth.
There’s the risk to your health and ability to carry on working and paying the bills. Making sure you have enough life cover, critical illness and income protection cover is often overlooked. However, not being able to work to pay the bills etc. is the biggest threat to all the hard work you have put into building your wealth. This is not something I can go into detail within this article but please do make sure you have adequate cover.
I am the main earner in our household. Therefore, I have ensured that I have enough life assurance, income protection, critical illness and personal accident insurance cover in the event that anything should ever happen to me. I want to know that my wife and kids will be looked after.
I also have life assurance for my wife. Even though I could potentially afford to live without the income she provides, it would be much easier financially without a mortgage.
Then there’s the risk to the overall value of your assets. For example, I have invested my wife’s personal pension into some shares which I have researched well and we are happy to take the risk on. If one of the companies that we have invested in, fails, it would not have a major impact on our overall long-term wealth.
When taking an holistic approach to asset allocation, consider the risks associated with each investment. Consider what percent of your overall wealth are you comfortable putting into any one investment.
Think about what would happen if the company holding the investment went broke. The FSA cover savings up to £85,000 so you may want to consider splitting larger chunks of money across different financial instituions for example.
Positioning Assets and Investments Accordingly
If you are nearing retirement, you need to take a detailed look at your pensions and long-term assets and where they are invested. You’ll need to be positioning your investments for your choice of retirement income option.
If you are likely to purchase an annuity when you retire, you should be phasing out volatility from your pension fund. Ensuring there is less risk of a big dip in value, shortly before taking pension benefits.
You will need to take money out of risky equities and put it into safer cash investments. There could be nothing worse at this time than seeing a stock market correction take a chunk out of your pension pot just as you’re about to dig in.
Hopefully, you’ll have accumulated a sizeable pension fund by this age. If this is the case for you, consider using a Self Invested Personal Pension (SIPP) to exercise greater control over the way in which it is invested.
Our intention is to use our final salary pensions to provide our basic annual income. Our money purchase pensions will be used for early retirement funding and / or as a discretionary fund.
A consideration is to take 25% of our pensions tax free from these funds and put into deposit accounts. We can then drip feed the money into ISA’s as annual ISA allowances allow. The counter argument to doing that is that pension money would be free of inheritance tax.
Final Thoughts – Don’t take unneccesary risks with your wealth
Financial planning can be simple and it can be complicated. I haven’t even touched the surface with regards to managing personal finances. Also, these are just my jotted down thoughts. When it comes to planning for your financial future and long term wealth, do not take chances. A decent financial planner will more than reward you of your costs.